Reaffirming the NMPRC’s Discretion: Partial Imprudence Disallowances, Recovery of Undepreciated Nuclear Lease Investments, Deferral of Decommissioning Allocations, and Ratepayer Recovery of Board Governance Costs

Introduction

This commentary analyzes the New Mexico Supreme Court’s nonprecedential decision in New Energy Economy, Inc. v. New Mexico Public Regulation Commission, Nos. S-1-SC-40307 & 40340 (filed Sept. 25, 2025), affirming the New Mexico Public Regulation Commission’s (Commission or NMPRC) Final Order in Public Service Company of New Mexico’s (PNM) 2022 rate case (Case No. 22-00270-UT).

The appeal consolidated challenges brought by New Energy Economy (NEE), the New Mexico Department of Justice (NMDOJ), the Albuquerque Bernalillo County Water Utility Authority (ABCWUA), and Bernalillo County. The disputes centered on four issues:

• Whether the Commission acted unlawfully or unreasonably by imposing only an $84.8 million disallowance as a remedy for PNM’s imprudent Four Corners Power Plant (Four Corners) investments when the excess costs to ratepayers were quantified at $238.7 million.
• Whether the Commission unlawfully allowed PNM a return of and partial return on $96.3 million of undepreciated investments associated with expired Palo Verde Nuclear Generating Station (Palo Verde) leases.
• Whether the Commission acted unreasonably or unlawfully in deferring a decision on who bears any additional Palo Verde decommissioning costs.
• Whether the Commission unlawfully allowed PNM to recover the full costs of its Board of Directors’ compensation, director and officer insurance (D&O), and investor relations expenses.

Applying deferential review in technical ratemaking matters, the Court affirmed the Final Order, concluding that the appellants did not carry their statutory burden to show the order was unlawful or unreasonable. Although the Court emphasized that the decision is nonprecedential and grounded in existing law and substantial evidence, it offers important guidance on the breadth of the Commission’s remedial discretion and evidentiary expectations in utility rate cases.

Summary of the Opinion

• Four Corners imprudence remedy: The Commission lawfully and reasonably imposed a partial disallowance ($84.8 million expressed as an impairment of undepreciated plant), rather than disallowing the entire quantified ratepayer harm ($238.7 million). The remedy, coupled with PNM’s prior agreement to a debt-only return on disputed investments from the 2016 rate case, yielded about $113 million in total disallowance. The Court reiterated that the Commission may impose partial disallowances consistent with just and reasonable rates and supported by substantial evidence.
• Palo Verde undepreciated investment recovery: The Commission lawfully allowed PNM to recover, over time, $96.3 million in undepreciated investments in the expired leases, disallowing a return on the subset ($45 million) incurred after the 2015 imprudence finding, while allowing a return of and on the remaining pre-2015 amount (about $51.3 million). The Commission found the Palo Verde assets used and useful and acted within its discretion to treat the amounts as a regulatory asset with amortization.
• Palo Verde decommissioning costs: The Commission reasonably deferred final action on whether ratepayers should bear any additional decommissioning costs, given the lack of evidence that additional funding was required and the adequacy of trust funds. A merits decision would have been speculative; the issue was not fit for review.
• Board governance costs: The Commission lawfully allowed PNM recovery of the full costs of Board compensation, D&O insurance, and investor relations. The Court found no inconsistency with Section 53-11-35(D) of the Business Corporations Act and concluded substantial evidence supported the finding that board governance benefits customers as well as shareholders. The Commission could depart from a different allocation used in an El Paso Electric (EPE) case, given the PNM-specific record and notice.

Analysis

Precedents Cited and Their Influence

• Zone of reasonableness and the “result, not method” principle
  • Attorney General v. NMPRC, 2011-NMSC-034, ¶ 13: The Commission must balance investor and ratepayer interests within a broad zone of reasonableness (avoiding confiscatory or extortionate outcomes).
  • Mountain States Tel. & Tel. Co. v. N.M. State Corp. Comm’n, 1977-NMSC-032, ¶ 70, invoking Fed. Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591 (1944), and Fed. Power Comm’n v. Nat. Gas Pipeline Co., 315 U.S. 575 (1942): It is the end result that controls, not the specific method used to reach it.
• Deference to Commission expertise and substantial evidence review
  • Socorro Electric Coop., Inc. v. NMPRC, 2024-NMSC-017, ¶ 18: Considerable deference is due on technical ratemaking decisions.
  • ABCWUA v. NMPRC, 2010-NMSC-013, ¶¶ 17-18; N.M. Att’y Gen. v. NMPRC, 2015-NMSC-032, ¶ 9: The Court reviews for substantial evidence and views the record in the light most favorable to the Commission’s decision.
  • Albuquerque Cab Co. v. NMPRC, 2017-NMSC-028, ¶ 8: An order is arbitrary and capricious only if it lacks a rational connection between facts found and choices made or omits consideration of relevant factors.
• Prudent investment theory and partial disallowances
  • PNM v. NMPRC, 2019-NMSC-012, ¶¶ 39-47: The Commission may impose total or partial disallowances for imprudence; the touchstone is reasonableness under the circumstances. The Court rejected a rigid “hold ratepayers harmless” requirement as a matter of law.
  • Citizens for Fair Rates & the Env’t v. NMPRC, 2022-NMSC-010, ¶ 47: Prudent investment is among many accepted methodologies; the ultimate inquiry is whether the overall rates are just and reasonable.
• Used and useful doctrine
  • N.M. Att’y Gen., 2015-NMSC-032, ¶ 22: Investments included in rate base should inure to the benefit of consumers.
  • NMEIC v. NMPSC, 1986-NMSC-059, ¶ 29; Alto Village Servs. v. NMPSC, 1978-NMSC-085, ¶ 15: Used and useful is a factor in rate base decisions and is a factual determination; it does not rigidly control outcomes.
• Change in Commission practice and notice
  • Section 62-6-14(C) (2009): The Commission may change past practices if substantial evidence on the record justifies the change.
  • Hobbs Gas Co. v. NMPSC, 1993-NMSC-032, ¶¶ 7-8; PNM Gas Services, 2000-NMSC-012, ¶ 9: The Commission must give notice and good cause when departing from established methods; it remains bound by its own rules absent justified change.
• Finality and ripeness
  • Citizens for Fair Rates, 2022-NMSC-010, ¶ 27; NMEIC v. NMPSC, 1991-NMSC-018, ¶¶ 24-26: The Court reviews only final decisions; pragmatic finality depends on whether the agency has truly resolved the issue.
• Open Meetings Act briefing
  • Nguyen v. Bui, 2023-NMSC-020, ¶¶ 19-20: Undeveloped arguments lacking analysis or authority will not be reviewed.
• Other cited authorities and context
  • State ex rel. Sandel v. NMPUC, 1999-NMSC-019 (rejecting new meanings imported into statutes); In re Adjustments to Franchise Fees, 2000-NMSC-035, ¶ 4 (vacating Commission Case No. 2761, undermining its precedential value on stranded costs).
  • Statutory guideposts: Section 62-3-1(B) (balancing ratepayer and investor interests); Section 62-8-1 (just and reasonable rates); Sections 62-11-4 and -5 (burden on appellant; Court may affirm or annul, not modify).

Legal Reasoning by Issue

1) Four Corners: Partial Disallowance for Imprudence

No party contested the Commission’s finding that PNM imprudently continued ownership and invested in life-extending capital (including about $150 million for SCR controls) at Four Corners past 2016. The dispute was purely remedial: whether the Commission had to disallow the entire quantified excess costs ($238.7 million) or could impose a partial disallowance.

The Commission relied on expert Dr. Jeremy Fisher (Sierra Club), who quantified excess costs to ratepayers of $238.7 million between 2017 and 2036 (with $115.5 million already realized by 2022). His recommended remedy—disallow a return on 2016-2022 capital and allow only a debt-only return on 2023-2031 capital—translated, per PNM’s calculation, into an $84.8 million pre-tax impairment of undepreciated Four Corners plant. The hearing examiners credited Dr. Fisher’s testimony and rejected other proposed remedies, noting two moderating factors:

• Timing: The prudence issue was fully litigated in 2017 but deferred to the next rate case; the delay was not squarely attributable to PNM or any single party.
• Abandonment attempt: PNM unsuccessfully sought abandonment in 2021; had it succeeded, customer exposure might have dropped substantially. Four Corners remained a certificated resource with ongoing value for baseload and resilience.

The Commission adopted the recommendation. The Court upheld this partial disallowance, emphasizing:

• The Commission’s statutory duty to balance investor and ratepayer interests (Section 62-3-1(B)) within a broad zone of reasonableness (Attorney General v. NMPRC, 2011-NMSC-034).
• PNM (2019) authorizes partial disallowances for imprudence, rejecting a rigid rule that disallowance must always equal the total quantified harm. The “hold ratepayers harmless” language relied upon by appellants came from an Oregon PUC decision and, in context, supported reasonableness—often not total disallowance.
• Used-and-useful is a factor, not a mandate; the Commission found Four Corners continues to carry value for customers.
• Substantial evidence supports the Commission’s remedy (Dr. Fisher’s quantification and remedy model). The Commission drew a rational connection between the facts and its balanced outcome.

2) Palo Verde: Recovery of Undepreciated Lease Investments and Partial Return

PNM historically engaged in sale-leasebacks at Palo Verde with Commission approval, and the Commission spread cost recovery over the units’ operating lives rather than lease terms. In PNM’s 2015 rate case, the Commission found PNM imprudent in extending leases for 114 MW of capacity; that finding was affirmed on appeal (2019-NMSC-012). The leases expired in 2023–2024, leaving $96.3 million undepreciated, of which $45 million was incurred post-2015 imprudence finding.

In a 2021 docket, the Commission created a regulatory asset for the $96.3 million and deferred ratemaking treatment to this rate case. Here, the Commission allowed amortization over twenty years starting January 2024 and disallowed a return on the $45 million incurred after the imprudence finding, while permitting return of and on the pre-2015 portion (~$51.3 million).

The Court upheld this outcome, noting:

• The Commission has discretion to allow recovery of undepreciated, used-and-useful investments via regulatory assets; PNM’s witness explained these investments supported regulatory compliance and ensured availability of service, and remained used and useful.
• Appellants’ reliance on a 1998 Commission order (Case No. 2761) to argue that stranded costs are unrecoverable was misplaced; that order was vacated in subsequent litigation and, in any event, the Commission may change practice with notice and substantial evidence (Section 62-6-14(C)).
• Partial disallowance remains an available remedy for imprudence; the Commission properly denied a return on the post-2015 investments while allowing recovery of amounts prudently incurred before the imprudence finding.

3) Palo Verde: Deferral of Additional Decommissioning Cost Allocation

In 2015 the Commission had entered a blanket disallowance of future additional nuclear decommissioning costs tied to PNM’s imprudence, but the Supreme Court vacated that decision for lack of fair notice and opportunity to be heard (2019-NMSC-012, ¶¶ 62-65). The Commission later directed that the issue “shall be addressed” in the 2022 rate case.

In this record, PNM presented evidence that decommissioning trust funds were adequate and no further funding was required. The Commission deferred decision due to the hypothetical nature of additional costs and the absence of a concrete request or evidence of underfunding. The Court agreed:

• Speculation is not a basis for ratemaking; deferment was reasonable given the evidentiary gap.
• Deferral rendered the matter non-final and not fit for appellate review under pragmatic finality doctrine.

4) Board of Directors’ Compensation, D&O Insurance, and Investor Relations Costs

PNM sought full recovery of board compensation (~$540,000), D&O insurance, and investor relations costs. ABCWUA relied on an El Paso Electric rate case (No. 20-00104-UT) where such costs were split 50/50 between shareholders and ratepayers. The hearing examiners recommended allowing full recovery; the Commission agreed, emphasizing record evidence that competent board governance benefits customers and shareholders and that Section 53-11-35(D) does not preclude allocating these costs to ratepayers.

The Court affirmed:

• Section 53-11-35(D) requires directors to consider shareholders’ interests and permits consideration of customers’ interests; it does not establish a statutory bar to rate recovery of governance costs.
• The Commission may depart from EPE’s allocation where the utility-specific record supports a different outcome; PNM produced substantial evidence (e.g., testimony that governance supports reliability, safety, and affordability, aligning customer and investor interests).

Impact and Practical Implications

• Remedial flexibility in imprudence cases
  • This decision reinforces that the Commission can calibrate remedies to fit the facts, including partial disallowances that balance harm, deterrence, and ongoing system value. Parties should focus on building a robust record quantifying harm, demonstrating ongoing usefulness, and addressing moderating factors (e.g., timing, intervening regulatory events like failed abandonment efforts).
• Recovery of undepreciated nuclear lease investments
  • The Court confirms that undepreciated investments associated with expired leases can be recoverable through regulatory assets where the assets were used and useful and the recovery pattern arose from Commission-set depreciation schedules. Labeling amounts “stranded” is not dispositive; evidence and context drive outcomes.
• Decommissioning costs and evidentiary thresholds
  • Efforts to pre-allocate hypothetical future decommissioning responsibilities are unlikely to succeed absent concrete evidence of underfunding or specific requests. Parties should bring trust valuation analyses, funding status, and actuarial projections if they seek immediate allocations.
• Board governance costs
  • Allocation is utility-specific and evidence-driven. Utilities should document customer-facing benefits of governance (risk oversight, reliability, compliance). Opponents should counter with evidence of shareholder-centric activities or propose principled allocation frameworks tied to concrete cost drivers.
• Administrative law lessons
  • Substantial evidence and clear briefing matter. Undeveloped Open Meetings Act claims will not be addressed on appeal. Moreover, because the Supreme Court may not modify NMPRC orders (Section 62-11-5), appellants should tailor remedies at the Commission level, where the factual record is made.
• Nonprecedential but instructive
  • Although the decision is nonprecedential (Rule 12-405 NMRA), it is a practical roadmap for how the Court reviews complex ratemaking records and how the Commission’s balancing and methodology flexibility are safeguarded when supported by substantial evidence.

Complex Concepts Simplified

• Prudent investment theory: A ratemaking principle barring customers from paying for utility costs incurred through negligent, wasteful, or bad-faith decision-making. Remedies can include total or partial disallowances.
• Used and useful: For inclusion in rate base, assets should be used (or their use reasonably forthcoming) and beneficial to the public. It is a factor, not an absolute rule; the Commission weighs it with other considerations.
• Return of vs. return on: “Return of” is recovery of the original investment (depreciation or amortization). “Return on” is the allowed profit (rate of return) applied to the undepreciated balance.
• Regulatory asset: An accounting mechanism that allows recovery of certain costs over time (e.g., undepreciated amounts for assets no longer in service), smoothing impacts on rates.
• Stranded costs: Investments not fully recovered because market or regulatory changes render assets uneconomic. Whether recoverable depends on jurisdictional law and case-specific facts.
• Debt-only return: A reduced return limited to the utility’s cost of debt, not its full weighted cost of capital, often used as a remedial measure for imprudence.
• Certificated resource: A utility asset authorized by the Commission to serve customers. Certification signals continuing service obligations and, often, ongoing customer value.
• Impairment (in this context): A regulatory reduction (not necessarily an accounting impairment under GAAP) of the undepreciated plant value used to effect a disallowance in rates.
• Substantial evidence: Evidence that a reasonable mind could accept as adequate to support a conclusion, considering the record as a whole.
• Arbitrary and capricious: Agency action lacking a rational connection between the record and the decision or omitting crucial considerations.
• Zone of reasonableness: The acceptable band for rates that are neither confiscatory (too low for investors) nor extortionate (too high for consumers).
• Finality and ripeness: Courts review final agency actions; speculative or hypothetical questions are deferred until issues are concrete and evidence is adequate.
• Open Meetings Act (OMA): New Mexico’s transparency statute for public bodies; appellate courts require developed argument and authority to consider OMA challenges.

Conclusion

The Supreme Court’s affirmance underscores the enduring principles that govern New Mexico ratemaking. The Commission’s mission is to deliver just and reasonable rates by balancing ratepayer and investor interests, and courts review that work with deference when supported by substantial evidence. Within that framework:

• Partial disallowances for imprudence remain lawful and appropriate when calibrated to record evidence, system value, and deterrence considerations.
• Recovery of undepreciated nuclear lease investments can be allowed via regulatory assets where assets were used and useful and the recovery pattern reflects prior Commission depreciation policy; stranded-cost labels do not control outcomes.
• Speculative allocations of potential decommissioning costs will be deferred absent concrete record evidence of underfunding or need.
• Board governance costs may be recovered from ratepayers where the utility-specific record demonstrates customer benefits and alignment of interests.

While nonprecedential, this decision is a comprehensive reaffirmation of the Commission’s flexibility to tailor remedies, modify practices with notice and evidentiary support, and ground its decisions in pragmatic, record-backed judgment—an approach the Court will sustain so long as the end result is just, reasonable, and tied to substantial evidence.