NM Gas Co. seeks 11% rate hike

New Mexico Gas Co. is seeking $49 million more per year to cover the utility's projected costs and investments going forward, potentially raising average residential consumer bills by 11% — or about $6.70 more per month — if approved by state regulators.

The company filed for a rate increase on Sept. 14 with the state Public Regulation Commission, setting in motion a year-long regulatory process that could culminate in higher consumer rates starting in October 2024. The actual amount will depend on a detailed PRC review of the utility's real costs and proposed investments, with input from intervening parties in the case through public hearings that will likely take place next spring.

That could include robust opposition from some groups to parts of the utility proposal, such as a request to raise its return on equity, or potential profit margins, from 9.37% now to 10.5%.

Intervention by the Attorney General's Office, environmental groups and other parties in the company's last rate case in 2022 led to an agreement with the utility to slash its requested rate hike at that time from an initially proposed 9.1% hike to just 4.3%, or from the company's originally proposed $5.63 increase on average residential bills to $2.70 more per month.

That rate hike took effect in January. But to help lower the increase in that case, the company said at the time it would postpone some investments in its pipeline system and other infrastructure to reduce revenue needs, while also delaying some hiring and limiting some operational investments to keep expenses down.

Now, however, the utility says those postponed investments — combined with a cascading need for system upgrades to meet state and federal regulations, and to maintain pipeline safety and reliability — mean a significant increase in infrastructure expenses going forward. In addition, inflation has raised costs across the board, and the utility needs to spend additional money to attract more qualified employees because labor shortages due to market competition have left the company with about 90 unfilled positions, said Gerald Weseen, vice president for regulatory strategy and external affairs.

"We strive to keep costs as low as we can, but we're experiencing higher costs in many areas," Weseen told the Journal. "…We understand any increase is hard for customers, and we're always trying to be mindful of that when making requests like this. There will be a public hearing and commentary from interested parties at the PRC, and we'll be in front of the commission to justify the requests we've made."

For now at least, new rates won't hit consumer bills until late next year, assuming the PRC approves them.

But customers will experience higher costs at different times during the year, especially during the winter, when home-heating expenses kick in. By law, the gas company simply passes those fuel costs through to retail consumers, who pay the same price for gas that the utility pays. The actual amount customers pay for that fuel depends on how much they consume in a given month.

Customer rates, in contrast, are set by the PRC, and they only apply to the company's delivery services.

Still, there is some good news going into this winter: a drop in natural gas prices means monthly heating costs will likely be lower this holiday season compared with the last two years, when soaring gas prices pushed customer bills to their highest levels in well over a decade.

Case details

Overall, N.M. Gas is seeking recovery for $278 million in capital investments that it has either already completed or that are now planned or underway.

That includes:

Upgrades and improvements to the utility's 12,400-mile system of pipelines around the state, including testing and replacement of many sections, inspection of lines that are close to underground infrastructure, and installing new equipment to both comply with state and federal regulations and to meet industry standards for safety and reliability.Overhauling the company's information technology, including replacement of its aging customer information system and reinforcing cybersecurity and business functionality.Investment in new technology and equipment to track and access data on pipeline operations and to detect and repair leaks.

Regarding pipeline investments, the company can no longer postpone needed upgrades, given evolving government regulations and industry standards, said Tom Bullard, vice president of engineering, gas management and technical services.

"We did defer several projects in the last rate case and we're picking those up now, and we have more regulations we need to meet," Bullard told the Journal. "We have to keep the system safe and reliable. That's what's driving the capital investments."

The IT investments as well are critical, given the age of the company's systems, Weseen said.

"Our current system is now about 30 years old," he said. "We're doing a complete upgrade of the customer-facing system for billing, management and so forth. And we need to strengthen our cybersecurity capabilities, all of which imply increased costs."

Apart from investments, the utility says inflation in general, plus compliance with "expanding" regulatory requirements, have increased operational expenses. And rising labor costs are taking a significant toll.

"That's created upward pressure on salaries," Weseen said. "We need money available to keep folks, attract new people and replace them."

Excluding fuel costs, company rates are set for the services recorded on customers' bills, including the amount of gas actually delivered to each residential or commercial consumer, plus a "fixed charge," or system access fee, to be connected to N.M. Gas Co.

The delivery rates and fixed charge would both increase under the company proposal, generating a total of $49 million in additional annual revenue for the utility.

Potential opposition

It's unclear what organizations will intervene in the case at the PRC, since most parties are still reviewing the new rate request.

But based on past rate cases, the Attorney General's Office, other consumer advocacy groups, and possibly some environmental organizations may intervene.

"Our primary objective in any rate case is to protect the interests of consumers," AG spokeswoman Lauren Rodriguez told the Journal. "We look forward to examining the rationale of the proposed rate increase."

A couple of N.M. Gas requests could draw particular attention and potential opposition, including the proposed hike in the fixed charge on monthly bills, and an increase in the company's return on equity, or profit margin.

In the 2022 rate case, the utility initially asked to raise the fixed charge on residential bills by $2.25, from $12 per month previously to $14.25. But under the settlement agreement with intervening parties, the company lowered that to just a 40-cent increase, hiking the monthly charge to $12.40 today.

Under its new request, N.M. Gas now wants to raise the residential charge by $3.10, representing a 25% jump to $15.50 per month.

New Energy Economy, a Santa Fe-based environmental and consumer advocacy organization, said it's still reviewing the N.M. Gas proposals, but it will certainly oppose both the increase in the fixed charge, and the company's request to hike its return on equity, or ROE, from 9.37% now to 10.5%.

"If the PRC approves the hike in fixed charges, it would be the highest monthly fixed fee of any utility in the state," NEE Executive Director Mariel Nanasi told the Journal. "In addition, it's inconsistent for N.M. Gas to say that they strive to keep costs as low as possible and then ask for an outrageous return on equity of 10.5%, which is out of line with 35 utilities in the West that have an average ROE of just 8.3%."

Price reprieve this winter

Consumer advocates are paying close attention to both utility service costs and energy prices, given the sharp rise in home-heating expenses nationwide in recent years.

Natural gas prices skyrocketed during the last two winters due to a combination of factors, including a plummet in gas production during the pandemic, extreme winter chills in some parts of the country that drove up demand to keep homes and buildings warm, and then the war in Ukraine, which crippled European supplies and pushed U.S. liquid natural gas exports to record levels, reducing domestic stocks.

Extreme summer heat waves also spiked prices over the last two years as electric utilities fired up natural gas plants so consumers could crank up their air conditioners.

As a result, natural gas prices reached a 15-year high going into last winter. And that, in turn, drove N.M. Gas bills for average residential customers to $211 last January, up from $135 in January 2022, and just $80 in January 2020, the year before the global pandemic broke out.

This winter, however, may be a bit easier on consumers, because natural gas prices have declined significantly, according to the National Energy Assistance Directors Association, or NEADA. In a new report this month, NEADA projected that residential consumers who rely on natural gas — which includes nearly half of all U.S. homes — will spend about 8% less on their home heating throughout the upcoming winter, with average winter-long costs declining from $787 last year to $726 this winter.

"We're expecting a pretty nice drop in natural gas prices," said Tom Bullard. "That's good news."

N.M. Gas projects the wholesale price in November and December to hover around $5 per thousand cubic feet, down from about $7 at the start of last winter.

Still, that remains substantially above pre-pandemic years, when wholesale prices generally ranged from just $2 to $3 per thousand cubic feet.