SANTA FE, N.M. (Legal Newsline) - The New Mexico Supreme Court last week annulled and vacated a final order by the state Public Regulation Commission that encouraged utility companies to promote energy efficiency.

The Court, in its July 27 opinion, struck down the PRC's final order due to "the lack of a lawful basis in the record to support its decision."

New Mexico Attorney General Gary King's office and the New Mexico Industrial Energy Consumers appealed separately from the PRC's final order. The Court consolidated those appeals in its ruling.

The April 8, 2010 final order was the PRC's effort to comply with the Efficient Use of Energy Act. The EUEA was amended by the state Legislature, requiring the PRC "to identify and remove regulatory disincentives to a public utility's implementation of energy efficiency programs."

King and Assistant Attorney General Jeffery Taylor represented the Attorney General's Office.

The crux of the PRC's argument is that a rate created under the EUEA does not need to follow the ratemaking principles that must be followed when creating a rate under the New Mexico Public Utility Act.

However, when the PRC sets a rate, that rate must be "just and reasonable," wrote Justice Patricio M. Serna.

The declared policy of the PUA is "that the public interest, the interest of consumers and the interest of investors require the regulation and supervision of public utilities to the end that reasonable and proper services shall be available at fair, just and reasonable rates."

When listing the requirements of the PRC under the EUEA, the Legislature agreed. The balancing language used in the EUEA is "almost identical" to the balancing language used under the PUA, the Court said.

"The Legislature explicitly directs the PRC to identify and remove disincentives to energy efficiency programs 'in a manner that balances the public interest, consumers' interests and investors' interests,'" the Court wrote.

The Court then turned to whether the PRC followed the required balancing test in its final order.

According to the Court, when determining the investor's interest, the PRC takes into account the utility's interest in recovering its prudently incurred costs and earning a reasonable return on its capital investments.

"This encourages and attracts capital and investments so as to provide economic service to the general public and to industry, and protects the utility from a violation of due process and taking of property without just compensation," Serna wrote for the Court.

"The ratepayer's interest, on the other hand, is to be protected from excessive rates that unjustly
burden ratepayers while receiving steady and quality service from the utility."

Here, the PRC concluded that rates created under the EUEA do not need to be cost-based.

"The PRC did not inquire into any of the utilities' revenue requirements, nor any of the traditional elements of the ratemaking process. At the evidentiary hearing, the utilities merely presented evidence on what the impact of Alternative A would be," Serna wrote.

"Without inquiring into a utility's revenue requirements, we fail to see how the PRC could adequately balance the investors' interests against the ratepayers' interests when adopting Alternative A. The PRC's adoption of the adder rates was arbitrary and unlawful in that they were not evidence-based, cost-based, nor utility specific."

The Court remanded the case to the PRC.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.