Economics ETDs

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The Public Service Company of New Mexico (PNM) persuaded the Public Service Commission of New Mexico (PSC), in March 1975, to adopt a cost-of-service index (CSI) approach to setting electric service rates as an alternative to setting the service rates through formal rate hearings. This thesis primarily reviews the CSI's impact on the Company and the Commission.

PNM asked for an alternative method of setting service rates because of the electric utility industry's financial crisis in the early 1970s. The rapidly changing, economic environment of this period created severe upward pressure on prices and costs. The inability of regulatory commissions to conduct formal rate hearings quickly enough to relieve this drain on revenues caused the electric utility industry to lose their credit standings on the financial market and, thereby, further increased their costs.

The CSI allows PNM to adjust their electric service rates on a quarterly basis in response to changes in their production costs. The quarterly adjustments are designed to allow PNM earnings from 13.5 to 14.5 percent on their common-equity investment. This system has significant ramifications. The CSI eliminates PNM's financial problems incurred by regulatory lag and test-year determined costs. The service rate adjustments are always made soon after the costs of operation change in either direction. This removes the uncertainty of the Company's future earnings. The CSI implies that the company should remain a financially stable institution in the future.

The implications for the Commission are of equal significance. The PSC is no longer required to perform the responsibility of formal rate hearings. Thus, the PSC has more time to pursue its other equally important regu­latory responsibilities, such as prior certification of new plant construction and new securities. The CSI allows the PSC to perform their regulatory responsibilities more efficiently and effectively.

However, there are several aspects implicit in the CSI concept that warrant concern. By its nature, indexing of costs removes previous incentives to hold costs to a minimum. Also, the CSI may promote other abuses in the forms of excessive expansion or distortion in the capital structure of the Company. Both abuses could raise the cost of electric service. Yet, the CSI does not remove any of the PSC's regulatory control over PNM, including the denial of rate increases. Therefore, through the use of PSC's regulatory power, they can make the CSI perform according to its design. When the CSI operates correctly, it will benefit both the Commission and the Company. If PNM and PSC are operating efficiently and effectively, the consumer will benefit through reliable, quality service.

PNM's first year of operation under the CSI demonstrated that this system does not have any harmful effects on the Company's behavior. In addition, this first year demonstrated that the CSI does not give PNM excessive advantages over the rest of the industry. It is the conclusion of this thesis that such a system is superior to the traditional, formal, rate-hearing process of setting electric service rates.

Degree Name


Level of Degree


Department Name

Department of Economics

First Committee Member (Chair)

Alfred L. Parker

Second Committee Member


Third Committee Member

Gerald J. Boyle



Document Type


Included in

Economics Commons