Public Service Company Of New Mexico Business Information, Profile, and History
Albuquerque, New Mexico 87158
History of Public Service Company Of New Mexico
Public Service Company of New Mexico (PNM) is a utility that generates, transmits, distributes, and sells electricity and natural gas within the state, while marketing some of its excess electrical capacity to regional users. Also the owner of the water company serving Santa Fe, New Mexico, PNM is the largest private employer in New Mexico with headquarters based in the state. The company began to diversify into nonutility ventures in the 1980s and saw disastrous financial results. It stopped these money-losing efforts in 1988, slashed its work force, and planned to sell off all nonutility assets by 1992.
PNM's corporate roots can be traced to the 1880s, when venturesome local entrepreneurs began forming companies to bring electric, gas, and water service to New Mexico's largest communities. Constantly needing additional capital, several of these companies were acquired one by one by Federal Light and Traction, a New York holding company that controlled various public utilities throughout the West and in Arkansas and New Jersey. By the 1920s Federal dominated the New Mexico market with operating franchises in Albuquerque, Santa Fe, Las Vegas, Deming, and Belen.
The first electric and gas operations in Albuquerque, New Mexico's largest city, began in 1882. Local businessmanA. A. Grant obtained a gas manufacturing franchise, incorporated the Albuquerque Gas Company, and secured land downtown near the railroad's coal unloading and storage yard to build a plant. Dr. E. W. Harrison served as president during the company's early years, when it successfully manufactured producer gas--made from nitrogen, carbon monoxide, hydrogen, and coal, or coke--for distribution to local businesses and residences. But continuing leaks and pressure problems in the company's underground pipe distribution network restricted service to a half-mile radius from the plant.
Albuquerque businessman and landowner Perfecto Armijo secured the city's first electric franchise in 1882. Immediately after organizing the Albuquerque Electric Company with Dennis Dennison and A. A. Grant, Armijo sold his interest to them, and Dennison became president. In 1883, just one year after Thomas Edison built the world's first generating station in New York City, electricity came to New Mexico. Two years later a new power plant with a 250-kilowatt generator was constructed. The company was reorganized in 1886 under a new name, the Electric Light Company of Albuquerque, and appointed a new president, A. A. Grant.
In 1895 Grant, who had also served on the board of the Albuquerque Gas Company since its inception, was elected its president as well. Four years later J. J. Henry, president of the Denver-based United States Light and Traction Company, obtained financial control of the two separate companies. Grant remained president of both organizations until 1902, when Henry sold the assets and franchises of his two recently acquired companies for 99 percent of the capital stock of a new Denver-based corporation, the Albuquerque Gas, Electric Light and Power Company (AGEL&P). Henry briefly served as president of AGEL&P until succeeded by William S. Iliff in 1903.
Albuquerque was a growing town with a new streetcar firm, the Albuquerque Transit Company, that, along with the American Lumber Company and 608 other customers, needed more power than AGEL&P's old plant could furnish. To meet the growing demand, Iliff incorporated and became president of a separate Colorado firm in 1904, the Albuquerque Electric Power Company, created specifically to provide and distribute electric power for AGEL&P. Iliff negotiated a series of agreements with the American Lumber Company, whereby it leased land for a new power plant and supplied fuel and water for the boilers. In return, Albuquerque Electric would provide American Lumber with continuous electric service.
Immediate threat of an outside takeover from Kansas City financiers, however, prompted Iliff to propose the merger of Albuquerque Electric, one month after its incorporation, with AGEL&P. Both boards agreed, and in September 1904 AGEL&P secured 60 percent of the financial control of the Albuquerque Electric Power Company. Albuquerque Electric's new power plant, later called Prager Station, opened the following year with a 500-kilowatt generator. The company added a 1,000-kilowatt generator in 1910 and served as AGEL&P's prime power supplier until 1917.
But New York City's Federal Light and Traction Company, a public utility holding company, took financial control of AGEL&P and Albuquerque Electric in 1911. Federal's president, Charles C. Chappelle, became president of both New Mexico firms as well, until succeeded by E. N. Sanderson in 1914. Federal merged its two Albuquerque companies into a new organization, the Albuquerque Gas & Electric Company, in 1917. Sanderson continued as president, and in 1919 Arthur Prager was transferred from Federal's Trinidad, Colorado, properties to become agent in residence.
Prager later served as the firm's general manager, became president in 1940, and went on to direct decades of growth in all fields of operation. More powerful generators continued to be installed at the company's Prager Station, and a new power plant was built in Bernalillo, north of Albuquerque. A 46-kilovolt transmission line connected the two cities in 1926, and three years later another 46-kilovolt line--the first aluminum conductor line west of the Mississippi River--linked Bernalillo to Santa Fe.
The company received its first natural gas in 1930 via a pipeline constructed by the Dallas-based Southern Union Company from the San Juan gas wells in northern New Mexico. AGEL&P began distributing this gas to customers through its retail system and installing generators fueled by natural gas.
On September 12, 1946, with the approval of the Securities and Exchange Commission (SEC), the Albuquerque Gas & Electric Company changed its corporate name to the Public Service Company of New Mexico (PNM) and acquired by statutory merger the properties of utilities in other New Mexico cities, including New Mexico Power Company, Deming Ice and Electric Company, and Las Vegas Light and Power Company. The following year, pursuant to Holding Company Act requirements, Federal liquidated, distributing to its shareholders all company common stock, with approximately 65 percent going to Federal's parent, Cities Service Company. In 1948 Cities Service sold this block to the public, making PNM an independent operating utility.
Arthur Prager, who became the new company's president, began his tenure by standardizing company operations. The subsidiaries in Las Vegas, Santa Fe, Belen, and Deming had been run independently with separate presidents and officers, different operating procedures, and little connection to Federal's other New Mexico utilities. Wide scale changes were made to forge the separate businesses into one, more efficient operation.
The next step was to unite the widely separated distribution and transmission systems. New Mexico's phenomenal expansion during World War II, spurred by government defense and research installations like Kirtland Air Force Base, Sandia Laboratory, Los Alamos National Laboratory, and White Sands Missile Range, had led to increased power demands. AGEL&P had created a subsidiary, Stonewall Electric Company, in 1941 solely to construct transmission lines. Ten years later, with PNM's statewide power grid completed, Stonewall was dissolved.
Concentrating on expanding electrical operations, PNM sold its retail gas operation to the Southern Union Company in 1949 for $4 million and entered into a long-term contract for delivery of natural gas to its power plants. Southern created a separate division, the Gas Company of New Mexico, to service that state's customers.
New Mexico continued growing beyond the national average during the post-World War II years, and most of the growth was concentrated in PNM's service area. The state's population increased 38.6 percent from 1950 to 1960, while the franchised area grew by 53.5 percent. New Mexico's economy, based on farming, livestock, mining, oil, and gas, expanded. In addition, outside manufacturers moved into the state, and new industries that required large amounts of power--including uranium mining and milling--arose. Not only did PNM's customer base increase by 58.2 percent during the decade, but these customers were using more power. Average residential household electrical use rose 58 percent from 1948 to 1953.
PNM responded by installing new and larger generators on an almost annual basis and constructing two new gas- and oil-fired power plants near Albuquerque. Generators put into service from 1955 to 1962 produced one and a half times more generating capacity than had been built in the previous 72 years.
D. W. Reeves became president in 1955, and Prager moved up to chairman. By 1960 all of PNM's generating stations used natural gas purchased from the Gas Company of New Mexico for fuel. Rising fuel costs led Reeves to explore the possibility of substituting coal for gas for better economy. The Public Service Coal Company, a wholly owned subsidiary, was formed that year to explore, acquire, and develop coal properties. It later changed its name to the Western Coal Company.
At the same time, PNM was working to connect its power grid with other regional utilities. A new transmission line to the uranium mines in northwestern New Mexico was completed in 1958. By 1963 that line was extended to the Arizona border and connected with Arizona Public Service's system. The next year a second interstate tie was completed with Western Colorado Power.
Regional utilities began coordinating future construction plans. In 1964 Reeves became the first president of Western Energy and Supply Transmission Associates (WEST), an organization serving nine western states. The following year the group announced plans to build a joint power plant, the coal-fired Four Corners Plant in northwestern New Mexico, near PNM's coal leases. PNM acquired a 13 percent ownership in two generating units of the plant, the first step in WEST's ambitious goal of creating 36-million kilowatts of new electrical capacity by 1985 to meet projected demand. Construction began in 1966.
For more than 50 years the cost of electricity had been declining as demand increased. Technological advances and greater demand led to larger and more efficient power plants. The average customer's cost had dropped from 2.66 cents per kilowatt-hour in 1946 to 1.84 cents in 1964. Meanwhile, by 1968, existing homes were using more than twice as much energy as in 1953, and new homes consumed up to five times as much.
George Schreiber became PNM's third president in 1966, when Reeves took over as chairman. The next year Albuquerque, PNM's largest market, gave the company a new 25-year electrical franchise. The Four Corners Plant became operational in 1969, and PNM announced plans to construct with Tucson Gas and Electric Company another coal-fired plant in the same region. Called the San Juan Generating Station, it would have state-of-the-art pollution controls, and PNM would own a 64 percent interest.
New Mexico continued growing in the 1970s. Among the United States, it ranked seventh in total mineral production, first in uranium, third in copper, fourth in natural gas, and sixth in oil, extractive industries that required vast amounts of power. Coal was regaining popularity as a cheaper substitute for more expensive fuels like gas and oil, and the state had known reserves of nearly 300 billion tons. For 15 years the local uranium industry had been growing steadily, now its electricity use was doubling every year.
PNM took advantage of the growing need for its services. Work began on the San Juan plant in 1970. The company's 1972 construction forecast was astronomical--$252 million in new utility plants would be spent over the next five years, almost equalling the value of already existing facilities. The Public Service Land Company, a subsidiary of PNM, was created that year to secure land and water rights for future power plants. It was later named to Paragon Resources.
Rates rose when the New Mexico Public Service Commission (PSC) approved a ten percent rate increase in 1972, along with a fuel adjustment clause to counter rising energy costs. But since customer rates could not include the cost of unfinished construction projects, PNM sought additional capital on Wall Street, joining the New York Stock Exchange (NYSE) in 1972.
Even though the first unit of San Juan came on line the following year, PNM and four other regional utilities made plans to build Palo Verde, the nation's largest nuclear power plant, in Arizona. Based on PNM's projections for electric power demand, the PSC approved its participation in the project in 1975; construction began the next year.
Rapid cost escalations from this ambitious construction schedule led state regulators to approve PNM's proposed cost-of-service indexing in 1975. The brainchild of executive vice president Jerry Geist, this controversial method allowed periodic automatic rate adjustments according to company expenditures, providing a guaranteed percentage of return to shareholders.
PNM was the fastest-growing and most profitable electric utility in the country during the late 1970s. From 1974 to 1980 its rates rose 120 percent, while 85 percent of its power came from coal-fired plants, which could be run more cheaply than those using gas or oil, and its coal subsidiary provided much of the fuel.
Geist became president in 1976 and began diversifying the company's assets into nonutility businesses, hoping to cash in on the Southwest's booming economy, provide more uses for the increased electric power it would soon be producing, and create profits beyond the reach of regulators. Sunbelt Mining Company was formed in 1979 to provide coal for PNM generating plants. Meadows Resources, created in 1981, became involved in southwestern land development, various telecommunications companies, a Chicago savings and loan, a fiberboard manufacturing plant, and venture capital investments.
For a time all went well. The San Juan plant was completed in 1982, Meadows Resources and the Bellamah Land Company were making money on their joint housing developments, and PNM negotiated the sale and leaseback of its Palo Verde interest, generating additional cash flow. Geist's apparent successes and innovative style made him an industry leader and darling of Wall Street financiers as PNM's stock price soared. He was named chairman of PNM in 1982.
But state lawmakers were wary and passed a 15-month moratorium on further diversification that same year. It was lifted in 1983, when PNM agreed to end its controversial cost-of-service indexing. Two years later PNM acquired the Gas Company of New Mexico from Southern Union as part of a price-fixing suit settlement by Southern.
As the 1980s wore on, clouds were beginning to appear on PNM's horizon. New Mexico and the entire southwestern economy was slowing down, the regional real estate market began collapsing, and demand for power was nowhere near what had been anticipated. In 1986 the uranium industry actually used less than six percent of its projected power need. Reduced sales meant each kilowatt hour sold had to pay for a greater share of the costs of the company's new generating plants and transmission lines.
In addition, PNM's expenses were running out of control. Pollution control systems at the San Juan plant ended up costing $600 million, nearly half of the facility's total price tag. Construction delays and cost overruns at Palo Verde raised PNM's price tag for its 10.2 percent share from a budgeted $360 million to $1.2 billion. When the plant finally came on line in 1986, it was plagued with safety violations and excessive downtime. Even worse, revised projections showed that New Mexico customers would not need its power until the 21st century.
PNM was not alone. The entire Southwest was plagued with an overcapacity of electricity, which then depressed wholesale power prices. PNM proposed to solve some of these problems with a novel restructuring plan, splitting itself into a generating company and a distributing company, each under the control of a holding company that would replace the current PNM. In doing so, PNM hoped to take advantage of tax breaks, less regulation, and increased flexibility on rates to counter rising costs. The proposal was ultimately rejected by the state PSC in 1986. Opponents feared that PNM was trying to skirt state regulatory authority. A revised plan put forth the following year was withdrawn from consideration in 1988 after the company realized it had no chance of receiving approval.
Still, the company recorded record profits of $151 million in 1986, and its stock rose to an all-time high of 39.75 a share early the next year. Then the dam broke. PNM's diversification efforts began hemorrhaging money and attempts to pass the Palo Verde costs on to its customers were thwarted. In addition, the company's stock nosedived to 12.63, and its bonds were devalued to junk status; PNM ended 1988 in the red. With losses totaling $241 million, PNM cut its dividend to 48 percent and laid off nearly 800 employees, 20 percent of its work force. The company ended the year by announcing it would begin selling all of its nonutility subsidiaries.
Things did not improve in 1989. Though PNM posted a profit, it suspended its common dividend indefinitely, reorganized to write off $200 million in bad investments, and cut Geist's salary to one dollar for the year. Bellamah Community Development, PNM's largest single non-utility investment, filed for bankruptcy, while holding $400 million in real estate in the Southwest. In addition, Albuquerque voters passed an amendment requiring competitive bidding by power suppliers when PNM's electrical franchise expired in 1992. To top the year off, shareholders began suing the company for mismanagement.
Geist resigned in 1990 amid a flurry of news reports highlighting his diversification debacle: $10 million in Bellamah bonuses paid to PNM executives; $4.5 million in PNM payoffs to Bellamah's two partners to prevent a lawsuit; utility money used to guarantee Meadows Resources' real estate loans, a violation of the Public Utility Act. A PNM special internal committee estimated that $210 million was lost in its diversification efforts. The company sued Geist and two other executives from its diversified subsidiaries the next year, seeking the return of $5 million in bonuses, fees and retirement benefits. But 12 months later it dropped the suit due to mounting legal costs, after having already spent $3 million.
John Ackerman, former president of the Gas Company of New Mexico, became PNM's new president and chairman. Charged with restoring its public image, Ackerman stressed the company's rededication to its core business--providing public service. As a show of good will, electric and gas rates were frozen for three years starting in 1991.
Restoring profitability and finding customers to use its excess power were PNM's two biggest problems. Though the company posted a small $13.5 million profit in 1991, excess capacity alone created a financial drain of 86 cents per share. While it cost PNM 4.5 cents per kilowatt hour to produce electricity at its coal plants, and 9 cents per kilowatt hour at Palo Verde, it could only sell the excess energy for 2 cents per kilowatt hour in the saturated southwestern power market. And falling natural gas and oil prices made power generated from such plants cheaper than from PNM's coal and nuclear power facilities.
Despite being called one of 'the dismal four' struggling southwestern utilities by Bert Kramer, a utility analyst for Paine Webber who was quoted in the New York Times, PNM has taken some positive steps. Shareholder lawsuits were settled, multiyear contracts were signed to supply power to three regional utilities, and a small interest in its San Juan power plant was sold to the city of Anaheim, California. Electrical sales grew by 1.8 percent in 1991, and its Sangre de Cristo Water Company, which serves Santa Fe, received an Environmental Excellence Award from the Environmental Protection Agency (EPA). In August 1992 PNM signed a preliminary 15-year electrical franchise agreement with the city of Albuquerque, whose customers represent 45.4 percent of its total electric operating revenues.
Principal Subsidiaries: Sunterra Gas Gathering Company; Sunterra Gas Processing Company.
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