Avoiding a Costly Outcome: CUB Notches Capital Cost Victory

Whenever I file a final brief in a litigated case—or when the process otherwise ends—I am immediately eager to read the final decision from the Oregon Public Utility Commission (PUC) to discern whether we at CUB won on our issues. Unfortunately, given the broad range of cases we are involved in at any given moment, the even broader range of cases that the PUC routinely hears, and the fluctuations in timing regarding when the PUC makes its final decisions, I spend a lot of time on the edge of my seat. While I wouldn’t have it any other way, I must say I was able to sit back and let out a cry of joy for a recent PUC decision in which CUB, along with PUC Staff and industrial customer representatives, earned a hard fought, significant victory in a case that will save customers money, and has profound implications for the ratemaking process in Oregon.

The case, UM 1909: Investigation into the Scope of the Commission’s Authority to Defer Capital Costs, may sound innocuous (or opaque) but I assure you, it is important. Its implications are best described in the context of a story. Let me take you back a few years to 2016. The construction of Portland General Electric’s natural gas gem in the Gorge—the Carty Generating Station—was nearing completion. Unfortunately for the company, it overshot its construction capital cost estimates by hundreds of millions of dollars. PGE scrambled to get this money back ASAP. To do so, it filed for what is known as deferred accounting.

Deferred accounting—or deferral applications—enables the utility to track costs (or, sometimes, revenues) as they are incurred for later recovery in rates. While this a common ratemaking tool that we employ regularly to enable utilities to recover unexpected costs necessary to provide service, this particular filing raised a larger philosophical question—does the PUC even have the authority to allow for deferrals for capital costs, such as the costs to build a power plant? Even though the PUC had authorized capital cost deferrals in limited, discrete instances in the past, it had never grappled with the larger question underlying its ability or inability to do so.

From a policy perspective, CUB and the majority of utility experts nationwide have always believed capital costs are most appropriately addressed in a general rate case filing. This is for a couple of reasons.

First, ratemaking is an inherently legislative exercise that must consider the holistic costs that utilities incur to provide service. Under the current regulatory apparatus, utilities are authorized to earn what is known as their “revenue requirement” to ensure they are fairly compensated for operating their system to serve customers. A rate case proceeding takes into consideration the broad gamut of utility costs to calculate the revenue requirement, rather than looking at each cost individually. In a deferral, however, the specific cost is examined “on an island”, i.e. not contextually.

Second, utilities earn a rate of return on capital expenditures and they spread the recovery of those costs over the useful life of the assets in question. These assets are continuously depreciating. Therefore, in the time between when a utility makes a capital expenditure and when it seeks recovery in a rate case, the asset has already begun depreciating. In a rate case, rates are set using a snapshot in time.

Customers pay, in rates, the cost of a capital asset at the time of a rate case. However, they pay this same rate for years into the future—until the utility comes in for another general rate case. Therefore, customers are overpaying for certain capital investments. Ratemaking is inherently imprecise, but we do our best to get it right. The flipside of this same logic: when a capital cost is brought forward for recovery in a general rate case, utility rates are set at then-existing depreciated cost of the capital asset for which they are seeking recovery.

The period between when a utility makes a capital investment and when it files a rate case to recover that investment is known as regulatory lag. This is a well-settled tenet of ratemaking that adequately compensates the utility for its investment. After all, customers are then stuck paying the same price for a capital asset that is continuously depreciating. If customers have to bear one side of the coin, CUB believes the utility should have to bear the other side. This was a central argument of ours in the UM 1909 proceeding. When a utility files for deferred accounting to recover a capital asset, it completely avoids any regulatory lag and gets full recovery for its costs. CUB believes this is bad ratemaking policy.

We were delighted to see the Commission rule that it does not possess the requisite authority to grant deferred accounting applications for utility capital costs. This decision does not just affect PGE’s methodology for recovering costs from the Carty plant; it effectively means that no other Oregon utility will be able to try a similar tactic in the future. Over the years, we have seen the bedrock principles of ratemaking threaten to erode, as utilities continue to explore creative mechanisms to ensure dollar-for-dollar cost recovery while continuously shifting cost and risk onto customers. But this case’s outcome is a significant bulwark against that trend. You can find our arguments in this brief, jointly filed with industrial customer representatives.

While this PUC decision took some time to come down, we are certainly glad the Commission ruled the way that it did. Maybe now I can sit back in my seat.

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