Jun 19 - Albuquerque Journal

We're already paying more for gasoline to run our cars and for natural gas to heat our homes. On the bright side, our electric bills have remained relatively flat.

But not for long.

In the words of PNM chief executive Jeff Sterba, the era of cheap energy is over. So get ready to start paying more for electricity -- and start figuring out how you can use less of it.

Sterba predicts customers nationwide will see their electric rates rise an average of 20 percent over the next five years.

Some regions in the United States have already seen even greater increases.

Regulators in Maryland recently approved a 72 percent rate increase for customers of BGE, which supplies the city of Baltimore. In parts of Texas, customers have seen rates climb between 30 percent and 40 percent over the past year.

A chief reason for the increase nationally is the rising cost of natural gas.

In recent years, environmental concerns led utilities to rely more on clean-burning gas to produce electricity. In fact, about 90 percent of new plants built since the early 1990s use gas.

But production has failed to keep pace, and the price of natural gas has nearly quadrupled since 2002.

"It's a supply-demand issue and I don't see the supply getting any better," said Bob Bellemare, CEO of Utilipoint, an Albuquerque- based utility and energy consulting firm.

Fortunately for PNM's customers, the local utility is not as dependent on the expensive fuel as many other utilities.

Only 2 percent of the power PNM generated in 2005 came from its natural gas plants; 60 percent was from coal and 22 from nuclear.

Sterba said his goal is to make sure Public Service Company of New Mexico's rates stay below the national trend.

But it won't be easy.

In a wide-ranging interview with Journal editors and reporters at the end of May, the PNM president, chairman and CEO said utilities face a double whammy: soaring customer demand coupled with steep price increases on basic commodities such as steel, oil and plastics.

"What we face going forward is a very different scenario" from the past decades, Sterba said.

He anticipates new restrictions on carbon emissions will increase the cost of producing electricity using coal from about 4{ cents a kilowatt-hour to between 7 cents and 8 cents a kilowatthour. Using gas now costs 6.7 cents; Sterba expects that to increase to more than 7 cents by 2008.

Nuclear energy could be produced for less than 5 cents, but the regulatory uncertainty surrounding nuclear power makes it a gamble.

Meanwhile, renewable energy sources such as wind, solar and biomass can cost between 5.8 cents and 19.6 cents a kilowatt-hour.

Sen. Pete Domenici, R-N.M., chairman of the Senate Energy and Natural Resources Committee, agrees that in the short term, customers will face rising costs.

Improved technology could eventually be the antidote, he believes. "We must be resourceful and apply our know-how to the problem," he said in a statement e-mailed to the Journal.

Increased use of renewable energy sources will eventually help utilities curb the effect of higher gas and coal prices, said Jim Owen, spokesman for the Edison Electric Institute, an industry trade group. "But I don't see a major contribution in reducing fossil fuel costs in the next two to five years," Owen said.

Sterba said he hopes to curb PNM's rising costs by expanding the utility's generating capacity using diverse sources.

At the same time he favors a two-pronged approach to reducing the amount of power customers use: new technology and a revamped rate structure that encourages conservation.

Capital spending

Sterba says PNM's capital spending over the next five years -- needed to meet growing customer demand -- will be nearly double that of the past five years. Between 2001 and 2005, PNM spent $815 million; he projected spending $1,439 million between 2006 and 2010.

And he said the company will need to borrow money to build at least one new plant, instead of using shareholder money as it has in the recent past.

The elevated costs stem partly from higher prices for basic materials. For example, the price of steel, used to erect power- line towers and power plants, has doubled since 2003.

Sterba attributed the soaring costs to increased demand for such commodities in fast-growing economies such as China, India and South Korea.

Meanwhile, the U.S. is having to import more coal, uranium and natural gas, causing those costs to rise.

PNM has also seen rapid growth in demand. The company has acquired more than 55,000 new customers since 2000, increasing from 368,000 to 423,000 customers today. At the same time, average customer use has increased from 525 kilowatthours per month in 1999 to 600 kilowatt-hours now.

Air conditioners

That higher demand has created expensive technical problems for PNM.

"Our biggest challenge is the switch-over to air conditioning," Sterba said.

The increased use of powerhungry air conditioners vs. swamp coolers -- which use substantially less electricity -- has frequently overloaded the system.

About 70 percent of new homes have air conditioners, forcing PNM to build more generating capacity to meet peak demand on hot summer days.

PNM has also had to beef up its lines in older neighborhoods as households replace swamp coolers with air conditioners. The company has had to replace hundreds of transformers in recent years, Sterba said.

And that has become more difficult since Hurricane Katrina. Reconstruction in the South has sucked up electrical equipment, leading to a much longer wait for such items as transformers.

Meanwhile, Sterba said, PNM will need to add a new power plant within about 18 months.

And the company recently filed plans with the Public Regulation Commission to expand its natural gas-fueled Afton plant near Las Cruces.

It is also considering bids to purchase power from a solar plant and a biomass plant that burns forest thinnings. Until now, PNM's only renewable power source has been wind.

But biomass and solar have drawbacks. PNM has concerns about a long-term fuel supply for the biomass plant. And the problem with solar generation is its high cost, up to nearly 20 cents per kilowatt-hour, Sterba said.

Generation costs

While renewable energy still costs more than power from fossil fuel and nuclear plants, those costs are catching up.

A new natural gas plant could produce power for about 6.5 cents per kilowatt-hour. A coal plant without carbon emission reduction equipment produces power for 4.7 cents per kilowatt-hour. Adding equipment to reduce carbon emissions would bring the cost up between 7 cents and 8 cents per kilowatt-hour.

A new nuclear plant could generate power for about 4.5 cents per kilowatt-hour. But there are big risks associated with obtaining permits, and concern remains high over handling waste from nuclear plants.

PNM has considered investing in adding more units at the Palo Verde nuclear power plant in Arizona, or in a new nuclear plant that has been talked about in Texas.

Whatever the power mix, new plants will result in higher rates, Sterba said.

Below average

In 2000, when Sterba returned to PNM after 15 months with another company, the utility's electric rates were level with the average among Western states. Rate decreases in 2003 and 2005 have left PNM's rates at 8.03 cents per kilowatt-hour, which is 15 percent below the regional average.

Sterba said the company will ask for a rate increase next year, which would go into effect in 2008. The utility hasn't yet determined the amount it will seek, but Sterba hopes the increase will end up being well below the regional average.

Since PNM is a regulated utility, the state Public Regulation Commission must approve any rate increase. Regulators typically try to keep increases as low as possible to protect consumers, but they have no control over things such as higher steel and oil prices.

Even though Sterba said he believes new power plants are needed, he would like to see the industry adopt new approaches to curbing demand.

That would include using technology to help customers use energy more efficiently.

For example, there is technology available that allows customers to program their appliances to run at offpeak times.

If utilities gave customers incentives to use that technology, it could reduce peak loads and reduce the need to build additional plants, Sterba said.

Utilities in California, where electric rates are about double PNM's, are already considering using the technology.

Sterba said he would also like to see more federal money designated for research on technology to boost efficient use of energy. He has even suggested that industry tax itself to create a research fund for energyefficient technology.

And he believes the rate structure needs an overhaul.

Currently, the amount PNM makes depends on how much electricity its customers use. The more they use, the more the company makes.

He wants a structure that rewards customers for using less electricity.

"We need to shift the model," Sterba said.

(c) 2006 Albuquerque Journal. Provided by ProQuest Information and Learning. All rights Reserved.