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Recent New Mexico PRC rate decision has negative implications for El Paso Electric investors

Rate Case Final Report

New Mexico

El Paso Electric

Electric rate increase authorized

Rate Case Final Reports provide detailed analyses of individual rate case outcomes.

See the report >>>

A June 8 New MexicoPublic Regulation Commission, or PRC, electric rate case decisionfor El Paso ElectricCo., or EPE, was negative, on balance, from an investor viewpointaccording to Regulatory Research Associates, an offering of S&P GlobalMarket Intelligence.

In a reportdated July 5, RRA noted that the PRC authorized EPE a $1.1 million base rateincrease premised upon a 9.48% return on equity (49.29% of capital) and a 7.67%return on a $414.5 million rate base. The company had supported a $6.4 millionrate increase based on a 9.95% return on equity (49.29% of capital) and a 7.9%return on a $436 million rate base.

The adopted 9.48% ROE is in line with the average of returnsaccorded electric utilities thus far in 2016, as calculated by RRA, excludingincentive returns authorized in certain limited issue proceedings. For a discussion of rate of returnauthorizations through March 31, refer to RRA's MajorRate Case Decisions Quarterly Update.

EPE chose to employ a historical test year in the instantcase, although state statutes permit the use of test years containing projecteddata. Despite the statute, the use of forecasted test years has proved to beproblematic for other New Mexico utilities in recent proceedings before thePRC. RRA notes that it took more than a year to adjudicate the proceeding, andit appears that the use of a stale test year, combined with rate base and netoperating income disallowances imposed by the PRC may inhibit the company fromearning its authorized return in the first year of new rates. In addition, thecommission rejected EPE's proposal to increase its fixed monthly customercharges for residential customers, which would have provided greater assurancewith respect to recovery of fixed costs.

EPE has indicated it intends to file a new rate case inearly 2017 to reflect in rates additional generation assets that are slated toenter commercial service in 2016, and the company's planned sale of itsinterest in the coal-fired Four Corners plant. However, it is not clear if thecompany will utilize a test year containing projected data in the upcomingcase. Furthermore, it is not certain that the PRC would grant the use of afuture test year in the 2017 rate case.

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RRAaccords New Mexico regulation a BelowAverage/1 rating. Further details regardingthe PRC's order are provided in the June 29 Final Report. For additionalinformation concerning the regulatory environment in New Mexico, refer to RRA'sNewMexico Commission Profile.

For a complete, searchable listing of RRA's in-depth research andanalysis, please go to the SNL ResearchLibrary.

For a fulllisting of Pastand PendingRate Cases, rate case statistics, and upcoming events, visit RRA's Home Page.