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F I S C A L I M P A C T R E P O R T

SPONSOR Madalena

DATE TYPED 3/17/05

HB 619/aHENRC

SHORT TITLE Efficient Use of Energy Act

SB

ANALYST Wilson

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

See Narrative

Duplicates SB 644

SOURCES OF INFORMATION

LFC Files

Responses Received From

Environment Department (ED)

Energy Minerals & Natural Resources (EMNRD)

General Services Department (GSD)

Public Regulation PRC (PRC)

SUMMARY

Synopsis of HENRC Amendment

The House Energy & Natural Resources Committee amendment states that the PRC shall take

into account a public utility’s resource planning requirements in other states, and shall authorize

utilities that operate in multiple states to implement plans that coordinate the applicable state re-

source planning requirements. The requirements of this section shall take effect one year follow-

ing the commission’s adoption of rules implementing the provisions of this section.

The amendment also changes a reference of future environmental regulations to anticipated envi-

ronmental regulations.

Synopsis of Original Bill

House Bill 619 amends the Public Utility Act (PUA) to encourage utility investment in energy

efficiency and load management programs by allowing public utilities recovery of reasonable

and prudently incurred expenses for such programs in an expedited manner.

House Bill 619/aHENRC -- Page 2

This bill establishes a policy that public utilities, distribution cooperative utilities and municipal

utilities include cost-effective energy efficiency and load management investments in their en-

ergy resource portfolios and that any regulatory disincentives be removed. The bill stipulates that

the PRC shall consider such investments in efficiency and load management to be an acceptable

use of ratepayer money. The PRC is required to direct public utilities to evaluate and implement

cost-effective programs that reduce energy demand and consumption. Such programs must be

reviewed and approved by the PRC prior to implementation. Public utilities would be required

to get non-binding recommendations on their prospective programs from PRC staff, EMNRD,

Attorney General’s Office and other interested parties. Before approving a utility’s efficiency or

load management program, the PRC must find that the portfolio of programs is cost-effective

and designed to provide every affected customer class with an opportunity to participate and

benefit economically; cost-effectiveness is to be determined using the total resource cost test.

Furthermore, the PRC is directed to act expeditiously on utility requests for program approval; it

must also identify and eliminate any disincentives or barriers that may exist for public utility ex-

penditures on energy efficiency and load management.

Utilities are authorized and required to recover the costs of all approved efficiency and load

management programs through approved tariff riders. Program costs may be deferred for future

recovery through creation of a regulatory asset, provided the deferred recovery doesn’t exceed

specified limits. A tariff rider shall not exceed the lower of 1.5% of a customer’s bill or $75

thousand per year unless there is consent from the customer. Larger tariffs can be approved if

they are cost-effective, just and reasonable. A proposed tariff rider shall become effective 30

days after filing, unless suspended by the PRC for a period not to exceed 180 days. Annual pro-

gram evaluation reports must be provided to ensure program effectiveness. The PRC is author-

ized to modify or terminate a program if it is not meeting intended goals. In addition, the PRC

must make sure there are no cross-subsidies between a public utility’s efficiency and load man-

agement programs and the utility’s supply-side activities.

A large customer may implement a self-directed program. The program must be approved by the

utility or by the PRC program administrator. Once approved, the large customer can get a credit

of 70% to offset the cost of the tariff rider; and the credit can be carried forward. Eligible meas-

ures must have a simple payback of large customer can get a credit of 70% to offset the cost of

the tariff rider; and the credit can be carried forward. Eligible measures must have a simple pay-

back of 1 to 7 years. Projects receiving utility rebates or financial support are not eligible. A

report from an independent third party evaluator must be submitted to the PRC.

This bill has an emergency clause.

Significant Issues

This legislation is the product of a task force composed of representatives of environmental or-

ganizations, energy utilities, state agencies, consumer groups and other interests.

Cost-effective energy efficiency and load management are intended to provide significant reduc-

tions in greenhouse gas emissions, regulated air emissions, water consumption and natural re-

source depletion, and avoid or delay the need for more expensive generation, transmission and

distribution infrastructure.

This legislation encourages public utilities to invest in energy efficiency and load management

House Bill 619/aHENRC -- Page 3

programs for which they will recover their costs through a rate rider mechanism. The legislation

greatly eliminates utility risk associated with the implementing these programs. Utility program

cost recovery will be pre-approved by the PRC and cost recovery guaranteed. Even should a

program not accomplish its goals the utility is to fully recover its reasonable and prudent pro-

gram costs.

The PRC provided the following:

Utility program cost recovery will be pre-approved by the PRC and cost recovery guaran-

teed. The utility is to fully recover its reasonable and prudent program costs for pro-

grams approved by the PRC. Cost effective programs are expected to reduce the bills of

participating consumers.

The PRC will approve tariff riders within thirty days of filing, if not suspended; other-

wise the tariffs become effective as a matter of law. If suspended, the PRC has up to 180

days to approve a tariff rider proposed by a public utility.

Utilities will be allowed the opportunity to invest in cost-effective energy efficiency and

load management at reduced risk, removed disincentives, and allowed recovery of costs.

The investments will be funded by tariff riders of up to 1.5% of the customer’s bill, but

no more than $75 thousand per year. (Only large industrial customers would experience

the $75 thousand cap per year.) The 1.5% cap can be exceeded if approved by the PRC

and with the advice and consent of the residential and commercial customers’ statutorily-

designated advocate, currently the Attorney General.

While the legislation lists the benefits of energy efficiency and load management in New

Mexico, only public utilities are directed to evaluate and implement cost-effective pro-

grams that reduce energy demand and consumption. Distribution cooperative utilities are

largely not impacted by this legislation, in part because of their higher load factors and

lower energy usage levels. Coops are encouraged to investigate and implement cost-

effective energy efficiency and load management programs but approval and implemen-

tation of such programs continues to remain only with the coop’s governing body. Mu-

nicipal utilities are not regulated by the PRC and are not considered in this legislation.

ED submitted a State Implementation Plan to EPA in December 2003 pursuant to Section 309 of

the federal Regional Haze Rule (40 CFR 51.309). According to this portion of the federal rule,

the state is obligated to report every five years its progress in achieving the renewable energy

goal of 10 percent of the regional power needs by 2005 and 20 percent by 2020. In addition, en-

ergy efficiency projects are reported to the federal environmental protection agency every five

years. Implementation of this bill may help the state achieve energy efficiency goals and better

address visibility goals in New Mexico's national parks and wilderness areas.

EMNRD provided the following:

This bill will facilitate to a significant degree the implementation of energy efficiency

and load management measures in every sector of the New Mexico economy: residential,

commercial, and industrial. Although utility costs for consumers may minimally increase

in the near-term due to the tariff rider, substantial net cost savings to both utilities and

House Bill 619/aHENRC -- Page 4

consumers will result over the long term. Moreover, the cost savings will continue to ac-

crue for the life of the installed efficiency technologies.

In many instances, energy efficiency measures are much less expensive than pursuing

new electric supply generating capacity. In addition, increased efficiency in all sectors

throughout the state will have the cumulative effect of reducing future energy demand,

thereby deferring the construction of new electric power plants in New Mexico. Deferral

of new electricity generating facilities has public health benefits in terms of minimizing

the addition of hazardous air pollutants. Energy efficiency can also help resolve electric

transmission supply constraints.

It is important to note that this bill represents a “consensus” bill that was developed over

several months by a large group of diverse interests, including investor-owned utilities,

rural electric cooperatives, consumer and public interest groups, non-profit renewable en-

ergy and energy efficiency organizations, the Attorney General’s Office, PRC staff,

American Association for Retired People, New Mexico Industrial Energy Consumers,

Association for Commerce and Industry, San Miguel and Mora County Farm Bureau,

New Mexico Conference of Churches and an energy service company. These entities

were appointed and convened by Governor Richardson under the auspices of the Utility

Energy Efficiency Task Force. This bill reflects the consensus of a diverse partnership

indicating broad, strong support for the legislation. To be precise, one investor-owned

utility supported all the provisions in the bill save for the integrated resource plans provi-

sion.

FISCAL IMPLICATIONS

The PRC estimates they will need an additional three FTEs, two Utility Economists and one

Electrical Engineer at a recurring cost of $200 thousand in order to implement the provisions of

this bill. They also believe there may o be additional court reporting fees and contractual services

at an estimated cost of $40 thousand.

GSD believes this initiative could result in higher operating costs for state facilities due to the

differential between the tariff rider, and 70 percent credit for implementing or demonstrating ex-

isting energy efficiency measures. If the energy efficiency measures do not result in reduced

consumption that lowers energy bills, cost will go up by up to 30 percent of the tariff rider.

For GSD in Santa Fe, looking at electricity costs only, with annual expenditures of $1.5 million,

the tariff rider will be $22,500 (lesser of 1.5 percent of electricity bill or $75,000). If GSD paid

for improvements, or could prove all energy efficiency measures are exhausted, the credit will

result in an annual increase in utilities of $6,750 (30 percent of $22,500).

GSD has three large user agreements, and dozens of regular consumer meters, which will not be

eligible for credits.

ADMINISTRATIVE IMPLICATIONS

This bill requires the PRC to direct public utilities to evaluate and implement cost-effective pro-

grams that reduce energy demand and consumption. Programs proposed by utilities will be re-

quired to seek PRC approval prior to implementing programs or recovering costs through a rate

House Bill 619/aHENRC -- Page 5

rider. Public utilities will be required to report annually on the programs implemented and the

PRC has to reconcile the tariff rider based upon recovery of the reasonable costs of the utility’s

programs.

Public utilities will submit to the PRC an annual report, prepared by an independent program

evaluator, for measurement and verification of the utility’s energy efficiency or load manage-

ment programs. The PRC will need to review and evaluate that report to determine modification

or termination of energy efficiency or load management programs. Public utilities will also

submit to the PRC annual reports of self-directed programs for customers.

The review of such submissions will be highly complex and technical. PRC hearings will in-

volve expert witnesses and large volumes of data. The PRC will effectively be required to make

a wide range of determinations involving such matters as natural gas price forecasts for up to 40

years, the cost of coal-fired power plant retrofits, the likely future cost of developing technolo-

gies. PRC pre-approval of programs will effectively select some technologies and some provid-

ers and necessarily eliminate others.

The review of such submissions will be highly complex and technical. PRC hearings will in-

volve expert witnesses and large volumes of data. The PRC will effectively be required to make

a wide range of determinations involving such matters as natural gas price forecasts for up to 40

years, the cost of coal-fired power plant retrofits, the likely future cost of developing technolo-

gies, etc. PRC pre-approval of programs will effectively select some technologies and some

providers and necessarily eliminate others.

Distribution cooperative utilities are largely not impacted by this legislation. Coops are encour-

aged to investigate and implement cost-effective energy efficiency and load management pro-

grams but approval of such programs remains only with the coop’s governing body and not the

PRC. Costs are to be recovered through general rates. Annual reporting to the PRC of programs

or measures that promote energy efficiency, conservation or load management are required by

the distribution cooperative utilities. While reporting is required it is for informational purposes

only. PRC oversight will be minimal.

The PRC must find that the portfolio of programs is cost-effective and designed to provide every

affected customer class with the opportunity to participate and benefit economically. The PRC

will be responsible for the determination of the cost-effectiveness of energy efficiency and load

management measures using a total resource cost test. Benefits are to be measured by class of

customer rather than individual customer.

The legislation requires public utilities supplying electric or natural gas service to customers to

file an integrated resource plans with the PRC. The PRC will likely need to develop an IRP Rule

to structure the utilities’

The PRC must find that the portfolio of programs is cost-effective and designed to provide every

affected customer class with the opportunity to participate and benefit economically. The PRC

will be responsible for the determination of the cost-effectiveness of energy efficiency and load

management measures using a total resource cost test. This will ultimately be debated exten-

sively in proceeding before the PRC and will require proper staffing

House Bill 619/aHENRC -- Page 6

DUPLICATION

HB 619 duplicates SB 644.

TECHNICAL ISSUES

The PRC notes that this bill considers the investment in municipal utility investments in energy

efficiency and load managements in its findings but contains no substantive reference or inclina-

tion that such investments should be considered by municipal utilities in the state.

OTHER SUBSTANTIVE ISSUES

The PRC states that current law is as follows:

Existing PRC rule Energy Conservation Programs for Electric and Gas Utilities requires

utilities to identify viable alternatives available to them and consider all programs that are

cost effective in meeting their needs for new electric generation or gas transmission ca-

pacity including energy conservation and demand side measures. This will apply only

when a utility is constructing new facilities.

Currently utility programs to encourage and facilitate the installation of energy conserva-

tion measures and renewable resources measures can be treated as a current expense of

providing utility services and charged to all ratepayers of a utility in the same manner as

current operating expenses of providing utility services, or charged to the residential cus-

tomer for whom the activity is performed.

DW/sb:yr:njw:lg