The Transformer – Washington regulators' rulings on Puget Sound Energy set national precedents
Washington regulators’ rulings
on Puget Sound Energy
set national precedents
Full decoupling, coal transition power purchase,
greater efficiency and low-income energy funding
On June 25, 2013, the Washington Utilities and Transportation Commission (UTC) issued a package of orders on three different Puget Sound Energy cases, generally in keeping with a multi-issue settlement negotiated by the NW Energy Coalition, PSE and UTC staff, and joined in part by The Energy Project (representing the community action partnerships of Washington).
The settlement and orders address PSE’s expedited rate filing, its proposed purchase of “coal transition power” from TransAlta Corp.’s coal plant in Centralia, Wash., and – perhaps most significantly – electric and gas decoupling to facilitate increased energy efficiency efforts by the utility.
This package of decisions ranks among the most important utility regulatory victories in decades for clean and affordable energy. It paves the way for PSE to boost energy efficiency savings, make low-income families’ homes more livable and facilitate a fair and orderly end to coal-fired power production in Washington state.
This edition of The Transformer summarizes the rulings and outlines the decoupling mechanism, the expedited rate filing and the TransAlta power purchase agreement.
What the orders do
The UTC orders encompass a total of five Puget Sound Energy electricity and natural gas dockets (cases – docket numbers referenced at the end of this paper). Together, they:
- Require PSE to set a pace to exceed its biennial electric conservation targets by 5% or face penalties.
- Increase annual low-income bill assistance funding for gas and electric customers by $1.5 million, bringing the total to $21.7 million a year.
- Boost ratepayer (utility customer) funding for low-income weatherization by $500,000 a year and may provide $100,000 a year in PSE shareholder funds for additional low-income energy efficiency; the latter funds likely would be used to repair low-income homes so weatherization efforts can be more effective.
- Put in place the nation’s first regulatory commission-ordered full decoupling mechanism covering both electric and natural gas operations and most customer classes. This removes a major fiscal barrier to increased energy efficiency savings by PSE customers.
- Establish a rate-plan period — PSE cannot file a general rate case before April 1, 2015, and must file one no later than April 1, 2016. (PSE could still file power-cost-only rate cases in the interim.) Given regulatory lag, this basically leaves the rate plan in effect at least through March 2016 and possibly through March 2017.
- Allow PSE to increase residential electric rates by 3.3% and residential natural gas rates by 1.6% initially, followed by anticipated increases of about 1-2% per year thereafter for both customer groups. The rate plan also covers commercial and industrial customers.
- Authorize PSE’s purchase of coal transition power from TransAlta, subject to ensuring the Commission has a say in terminating or continuing the contract in the future, and requiring reporting of energy sources and jobs data to the Commission.
While the Commission orders generally ratified most of the provisions in the settlement, it is important to note that not all parties in the cases agreed with the settlement. The state Attorney General Office Public Counsel section, the Industrial Customers of Northwest Utilities, the Kroger Co. (representing Fred Meyer stores), and Nucor Steel Seattle opposed the settlement. The Federal Executive Agencies, a party to some of the proceedings, put forward no position on the settlement. Finally, while The Energy Project signed onto much of the settlement, it did not weigh in on coal transition power.
An historic decoupling decision
The Commission enthusiastically endorsed (through Docket Nos. UE-121697/UG-121705) the settlement agreement’s proposal for full decoupling of electric and natural gas rates, calling it “the first utility-supported mechanism that is both generally consistent with, and truly targeted to achieve, this key objective embodied in the Commission’s 2010 Decoupling Policy Statement.”
Decoupling breaks the link between a utility’s power sales and its revenues, eliminating the utility’s incentive to boost revenues by increasing sales and thus its financial disincentive to invest in energy efficiency. Decoupling relies on modest periodic rate adjustments (up or down) to stabilize revenues set by regulators in a general rate case, leaving the utility financially indifferent to how much energy it sells. This is critical: otherwise, utilities face automatic financial penalties when electricity and natural gas sales decline since the unsold kilowatt-hours and therms would have contributed to recovery of authorized nonfuel costs.
In November 2009, the Coalition’s board adopted a set of principles to guide the Coalition’s stance on regulatory incentive and disincentive-removal mechanisms aimed at motivating utilities to pursue and support all cost-effective energy efficiency. One year later, the Commission issued the above-referenced policy statement.
The Coalition, with Ralph Cavanagh from Natural Resources Defense Council (NRDC) as its witness, advocated for full electric decoupling in PSE’s and Avista Utilities’ 2011 general rate cases. Neither was adopted, in part because the utilities did not support the proposed mechanisms.
In October 2012, PSE and the Coalition jointly proposed a new decoupling mechanism to the Commission, and further refined that proposal after work sessions with other stakeholders and the Commissioners.
In the end, Commission approved a decoupling mechanism based generally on a revenue-per-customer calculation with an annual adjustment factor (the “K factor” described below) that increases the allowed revenue per customer over time. Rates may fluctuate up or down, with upward adjustments capped at 3% each year . The Commission required a third-party evaluation of the decoupling mechanism, which will be completed prior to the effective date of rates approved in the next general rate case.
An earnings test will balance PSE’s incentive to control costs, on the one hand, with customers’ interests in preventing windfall profits for the utility. Earnings above the authorized limit will be shared 50/50 between PSE’s shareholders and its customers.
The difference between the approved decoupling proposal and the Coalition’s previous decoupling proposals is the inclusion of a K-factor that increases the Company’s allowed non-energy revenue per customer between rate cases. This adjustment is designed to equalize the revenue PSE collects from customers with the utility’s actual non-energy costs between rate cases. Including the K factor helps avoid expensive and time-intensive annual utility general rate-case filings.
Of rates and regulatory lag
Adding the K factor to the decoupling mechanism provides ongoing rate adjustments to account for non-energy (including distribution system) cost increases between rate cases. This addresses the “regulatory lag” difficulty built into the Commission’s rate-setting methodology for investor-owned utilities.
New rates usually are stale by the time they are implemented, creating near-constant general rate cases. Rate adjustments and new customer revenues never quite catch up with utilities’ rising basic costs.
To deal with this imbalance – often called an “attrition problem” – and regulatory lag, UTC staff recommended in PSE’s latest general rate case a process for expedited or automatic updates of certain aspects of its rates. Such an Expedited Rate Filing (ERF) can be put in place in five months, compared to the 10 months typically needed to complete a general rate case.
PSE’s proposed ERF, filed in February 2013, was approved by the Commission (Docket Nos. UE-130137/UG-130138) as part of the package of rulings. The ERF will be adjusted between now and the next general rate case to reflect the annual decoupling adjustments – including the K factor – scheduled for May of each year.
Coal transition power
In 2010, the NW Energy Coalition and several of its member organizations – including Climate Solutions, Washington Environmental Council and the Sierra Club – negotiated an agreement that will transition the 1,380-megawatt power plant in Centralia, Wash., off of coal, one boiler in 2020 and the other in 2025. Part of that agreement called for legislative amendments to Washington state’s emissions performance standard (EPS), which the state legislature enacted in 2011.
To facilitate an orderly transition, EPS amendments allow utilities to sign long-term purchase agreements for “coal transition power” from the facility. The amendments also established a $55 million fund for local community development and clean energy, requiring the governor to enter a memorandum of agreement (MOA) with TransAlta to specify how those funds would be managed and invested.
Then-Gov. Chris Gregoire and TransAlta signed an MOA at the end of 2011 that included a provision allowing TransAlta to terminate the MOA and stop funding community development and clean energy if it were unable to secure agreements for the sale of at least 500 megawatts of baseload power from the coal plant for a term of at least eight years.
PSE is the first utility to negotiate a contract for coal transition power from TransAlta. In August 2012, PSE asked the Commission to approve a long-term (133-month) contract to buy 1.6 million to 3.3 million megawatt-hours per year. The Coalition intervened in this proceeding, focusing on the greenhouse gas emissions ramifications of the proposed purchase and on the promised funding for local economic development and clean energy from TransAlta. In January, the Commission approved the purchase agreement, with certain reporting conditions.
The Commission’s January order raised additional questions regarding the future of the coal transition power contract. Negotiations between PSE and UTC staff ensued, and the matter was folded into the multi-party settlement discussions. The Coalition, UTC staff and PSE ultimately joined in support of the proposed power sales agreement with some specific reporting requirements, which the Commission has now approved (Docket No. UE-121373).
The ruling requires PSE to obtain Commission approval to continue or terminate the power purchase agreement if TransAlta were to terminate its MOA with the State (e.g., if it were to stop funding community development and clean energy) or if TransAlta were to permanently cease generation at the Centralia coal plant ahead of the 2020/2025 timeline.
The Coalition supported the initial agreement because we put a high value on the certainty of a legally binding phase-out of coal combustion at the plant. Market conditions and future environmental requirements might have led to plant closure regardless, but now the end of coal burning for electricity in Washington state is certain. The Coalition supported the coal transition power contract with in the PSE case because it is in the public interest considering greenhouse gas emissions and the community development and clean energy investments.
Together, this set of rulings marks a significant advance for clean and affordable energy in the Northwest. In addition to establishing a nationally groundbreaking decoupling methodology, it demonstrates — once again — the power of bringing diverse parties and interests together to solve vexing problems that range from closing coal plants, to funding low-income programs, to deepening utilities’ commitment to helping their customers save energy.
While we monitor the progress on these rulings, the NW Energy Coalition, its members and its allies will continue to pursue additional clean energy solutions that work for everyone.
For more information
Decoupling: Docket Nos. UE-121697/UG-121705
ERF: Docket Nos. UE-130137/UG-130138
Coal transition power: Docket No. UE-121373
RCW 80.04.570, RCW 80.80 and RCW 80.82 (laws addressing coal transition power)
Memorandum of Agreement between State of Washington and TransAlta
NW Energy Coalition contacts:
1 In the settlement, PSE agreed to provide $100,000 per year in shareholder funds during the rate-plan period for low-income weatherization. The UTC order did not adopt the settlement but we are hopeful that PSE will honor this commitment.
2 The key objective, according to the Commission is “remov(ing) the so-called throughput incentive, thus promoting PSE’s more aggressive pursuit of cost-effective conservation to which it commits as part of the decoupling mechanisms. With the throughput incentive eliminated, the company will be indifferent to sales lost as a result of the success of its conservation efforts.