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December 21, 2007

CUB Wishes You and Yours a Happy Holiday Season

Today is the eve of the 2007 Winter Solstice, the center point of our season of cold, dark and (here in the Northwest) wet. It is a good time to reflect on the central purpose of our work through the Citizens' Utility Board, which is keeping necessary utility services -- including heat, light, and communications technology-- affordable and sustainable.

As 2008 approaches, we here at CUB hope that you and your family have plenty of the light, the warmth, and the connection with family and friends that we all need during the cold winter months. We also hope that the New Year brings us more opportunities to work with you in achieving the goals we share for fair and clean energy, and affordable (and privacy-protected) telecommunications.

A very happy holiday season from all of us here at CUB to all of you.

Bob, Jason, Jeff, Karen, Shannon & Lowrey

Posted by Oregon CUB at 10:59 AM | Comments (0)

December 19, 2007

Governor Kulongoski Speaks Out Regarding BPA Residential Exchange

Oregon's Governor Ted Kulongoski spoke recently at the December 2007 meeting of the Northwest Power and Conservation Council. His comments were clear, concise, and spoke to a few issues CUB holds to be extremely important.

He reiterated a basic principle under which CUB has long operated: "Oregon agrees that conservation and renewable resources are the foundation of our energy and economic future." He spoke about the Renewable Energy Standard of 2007, which he first proposed last year, and on which CUB took a leading role, in bringing it to fruition as SB 838.

He went on to talk for several minutes about "one of my greatest frustrations: the sharing of the benefits of the Columbia hydroelectric system." He said that the issue is often discussed in terms of "public vs. private power." But as the Governor said, there is another way to look at it: "The reality is that families have little discretion in who they buy their power from. And currently some families are not getting a fair share of the Columbia hydro system benefits and as a result are paying significantly higher electric bills. As you know, I am referring to the BPA residential exchange program..."

Governor Kulongoski spoke of his letter to the Bonneville Power Administration in August and his wish to see any future exchange agreements meet the principles of meeting historical averages of value and including an inflationary adjustment. Unfortunately, he said,"The recently reported utility agreements that I've seen and heard talked about meet neither of my principles. Under the agreement the rate credits drop under the average historical levels to around 10-12% of the system value, and they are flatlined for 20 years. Based on projected future system value, by the end of the contract, these credits will only represent about 2% of BPA value. So as Oregon's governor, I am looking at a proposal where three fourths of the State's families will essentially be getting no benefits from the Columbia hydro system within 20 years. Frankly, and as I said in my letter, I think this is unacceptable, and I believe that this Council should also believe the same. I ask that you join me in calling on BPA and our regional utilities to reconsider their proposal. At a minimum, any proposal should contain a mechanism to maintain the sharing proportions as time moves forward."

CUB supports the Governor in his call to ask the BPA and the region's utilities to create a proposal that is more genuinely fair to all those involved. We appreciate his knowledge and activism on behalf of a truly fair resolution regarding the residential exchange.

Posted by Oregon CUB at 01:44 PM | Comments (0)

December 06, 2007

CUB Opposes Putting All of Natural Gas Purchase Risk onto Customers

The natural gas market has seen some major changes in the past 20 years. From a rapidly awakening generalized concern regarding global warming and the carbon dioxide emissions of fossil fuels, to the more specific and radical price volatility that occurred in the wake of Hurricane Katrina, the price for natural gas has been subject to major changes unknown in previous decades. How utilities purchase natural gas and forecast those costs into customer rates is a matter of (occasionally heated) discussion in a current Public Utility Commission case, UM 1286, the Purchased Gas Adjustment case. The current system was implemented, oh, about 20 years ago, and there are those who say it should be updated for a changing market in a changing world. CUB filed Opening Comments in 1286 this week with our own proposed changes.

Natural gas utilities have traditionally procured their coming year's supply of gas through one of three ways: outright purchase and storage; contracts for guaranteed future delivery (costing whatever the market charges at that future date); or hedged contracts, wherein a third party takes on the financial risk of a significant increase in the future cost of natural gas, but for a fee. These hedging fees can, for a large gas utility over a number of years, run into the millions of dollars. It is the position of the PUC staff that Oregon utilities have been relying on hedging too much.

In the current system, when costs exceed the amount that was forecast -- and charged to customers in rates -- customers pay between 67% and 80% (depending on the utility) of the variation in cost, beginning with the first dollar of variation. This sharing of cost between customers and the company (the shareholders , to be exact) is widely held to be an acceptable way to manage the risks of unforeseen changes in cost in the realm of utility regulation. How and when those costs are shared is the crux of the matter, and it is here that CUB parts company not only with the utilities themselves, but also with PUC staff. Staff suggests that customers should pay for 100% of extra costs, above what was forecast, but with increased regulatory oversight of the purchase process (to trim out some of that aforementioned hedging). We respectfully disagree that this is a good idea.

CUB thinks that natural gas utilities should "have some skin in the game." We want gas utility managers to be worrying about the cost of natural gas; we pay them for their expertise, and we expect them to manage the supply and the cost of that supply more carefully if they know that they will bear a certain percentage of any increased costs. Furthermore, we don't think the company should be able to hand the unforeseen costs over to customers starting with the first dollar.

So CUB came with a three-step process for sharing that is similar to what we've recommended for Oregon's major electric utilities.

1) We start with a review of the utility company's earnings to ascertain whether they are within a "reasonable zone" of their expected earnings. Assuming the utility is allowed a 10% Return on Equity (ROE, aka profit margin), and if they are within 1% of that ROE (9-11% ROE), then no cost variations should be passed along to customers

2) Make sure that a deadband exists around the cost variation, so that the utility is expected to absorb a certain amount of normal changes in cost. This gets rid of the practice of charging customers for the first dollar of unforeseen costs. After all, managing the normal variation of commodity costs is not only an accepted risk of doing business, but is also why we pay the utility an ROE to begin with. The size of the deadband increases with the size of the utility, and is asymmetrical so that the company must absorb twice as much change in additional cost before charging customers as is necessary in decreased costs for a refund to go to customers (after all, it is more likely that costs would go up than down).

3) Finally, where there is extraordinary variation in cost, outside the deadband set for normal variation, customers would share the cost variation at 90%, with the company expected to absorb the other 10%. If costs are down, perhaps due to a warm winter and low demand, then customers would receive 90% of the variation in the form of a refund. Sharing ends when the company has been brought back within its reasonable earnings zone.

CUB feels that this is a good distribution of the risk of volatile gas markets: the company carries the burden of normalized risk, while the broad shoulders of a wide customer base are on hand to share the burden of a truly extraordinary change in gas prices. We certainly hope to see the Commission agree that taking all of the risk away from the utility and placing it on customers is inappropriate; the utility, which has control of gas purchasing, should share the risk of price volatility. 'Cuz that part of the equation isn't going away.

GAS FACTS
In developing our analysis, we studied Oregon's natural gas prices in comparison to the national average and prices in other Western states. Oregon's commodity gas prices were lower than the national average price for natural gas, and with the exception of an atypical year in 2002, lower than most other Western states' prices.

Natural gas is going up in price, partially because the demand for it is rising. Some reasons for increasing demand include: it is cleaner-burning than most other heating options (i.e., oil heat, wood heat, coal-generated electricity); is more efficient to burn directly to heat water for your tea or heat a house than to generate electricity and run it through the grid to your house to do the same; and is increasingly being used to generate electricity, which increases demand on a somewhat limited supply.

All fossil fuels, including natural gas, release carbon dioxide when burned; we appreciate the opportunity provided by NW Natural's Smart Energy program to contribute toward carbon offsets on their customers' gas bills.

Posted by Oregon CUB at 03:49 PM | Comments (1)