Balancing Today’s Rates and Tomorrow’s Needs

An article published last weekend in the Oregonian (“Rates set to jump for Pacific Power, PGE customers in January,” 12/17/2010) talked about the coming increases in utility rates. While the article touched on some important points, it didn’t give the full picture.

No one dislikes rate increases more than CUB does. We actually take them personally. But the issue is really about what we’re paying for versus what we could be paying for.  And that’s what needs a deeper look here.

According to the Oregonian article, “the biggest factor driving the (rate) increases (is) renewable power.” Well, yes and no. Yes, there is the Renewable Energy Standard (RES), a state mandate to have 25 percent of the state’s energy load met by renewable resources by 2025. Yes, the utilities are making investment in new renewable generation resources. Are these investments more expensive? In the early years of the investment, a wind facility costs more than a gas plant but this changes as the wind facility is paid off and gas prices rise.

Over the life of a gas plant and the wind facility, the cost to customer is about the same. In fact, which resource is cheaper will be ultimately determined by what happens to natural gas prices over the next 25 years. Over the last decade, natural gas prices have been extremely volatile. Once a wind facility is built, its costs are known. When a gas plant is built, the future costs are largely unknown.

The region has been through this debate before. Some of the region’s hydro facilities were very controversial when they were built, not because of their effects on fish or rivers, but due to the high initial investment costs. People wondered whether customers could afford all this expensive investment in hydro.

Today, those investments are the base of our power supply in the region. Because hydro has no fuel costs, it provides the Pacific Northwest with rates that are lower than most of the rest of the country. In 15 years, the wind generators will be largely paid off and will be like another generation of cheap hydro power. So customers could pay a little less for a gas plant today, but we’ll likely pay more over time than we will for building a wind resource today.

Also, it’s important to remember that even with the RES, utilities are not required to meet the standard at all costs. The law says that if meeting the RES would push rates to more than 4 percent above what they would have been without the mandate, the utilities can suspend their investments until they can be made below that
“rate cap.”

What Else Contributes to the Rate Increases?

Despite the tone of the Oregonian article, it would be wrong to completely blame the investment in wind for these rate increases. Wind investment is part of this increase, but so is about $1 billion in investment in natural gas generation, upgrades to coal plants (both for PacifiCorp), and smart meters (for PGE). A large part of the increase is for investment in transmission facilities and, while utilities often link the transmission investment to wind, the truth is that the region has not invested significantly in transmission for 20 years, and new transmission is necessary no matter what the source of generation.

While some of the current increase is due to investment in renewables, what we don’t hear in the media discussion about the rate increases is a comparison between the current rate hikes and what rate hikes would exist if utilities made other resource choices. All utility investments cause increases in rates. And Oregon utilities are not simply investing in renewable projects because of the RES. They are investing in generation because they are currently short on the resources to meet future loads. Meeting those loads - as cost-effectively as possible over the long-term - is what is driving these decisions. If there were not rate increases due to renewables, there would be rate increases due to investment in fossil fuel generation.

Another part of the increase for Pacific Power is the cost for the eventual decommissioning of the hydro-generating dams in the Klamath basin. Why take out dams that are largely paid for and generate clean, renewable energy? Because the dams are up for federal relicensing (a process that happens every 50 years). Relicensing is a very expensive process, and in-depth analysis shows that it’s cheaper to decommission the dams and build new resources (again, over the long term) than it is to relicense the dams.

Utilities conduct customer surveys and focus groups. Those show that investing in renewables is popular. Because of this, utilities are quick to link rate increases to renewables, rather than to natural gas, coal, transmission, changes in generation sources, and fancy new meters. But that is disingenuous, because it is the total amount of investment utilities are making in all of these areas that are driving our rates higher.

We Need a Better Process to Look at All Investments

As we said at the start of this article, CUB is unhappy about the rate increases, even though we understand why they are happening. They show a serious flaw in the way utility planning and ratemaking is conducted in Oregon. During the 1990s, Oregon utilities made little investment in their systems. Utilities seemed to all have Enron-envy and were dreaming about how to get rich through deregulation. This led to neglect of the long-term needs of the power system.

Today they are rushing to make up for that period. But our planning process in Oregon does not deal well with multiple investments at one time. We take an individual investment and examine the various alternatives to determine what is the least cost way to achieve that goal (for example, we compare investing $500 million in clean air controls at Boardman with not making that investment and phasing out the plant). Each individual investment is examined in the context of least cost planning.

What is missing in the process is an examination of the timing of those investments and the rate impact of them in total. Should PGE have invested in smart meters and wind generation at the same time? Should Pacific Power have added transmission at the same time it is building wind facilities, a gas plant, and putting a scrubber on a coal plant? The timing of the investments has a large impact on the rate hikes. When multiple big investments are completed in the same year, it’s like stacking pancakes. As ratepayers, we prefer a short stack, but this year the utilities gave us a stack of pancakes that was much greater than our appetites - or our wallets - really wanted.

The process of utility planning in Oregon needs to recognize that when multiple projects are pancaked on top of each other, even if each investment is “least cost” over the life of that investment, the resulting rate increase can be larger than customers’ ability to absorb it. Utilities have to be directed to manage the affordability of electricity. This may mean that a particular investment in transmission or smart meters or new generation is delayed for a year or two - and the utility profits on that investment are delayed a year or two.

Utility investments must be managed in a way that keeps customers’ bills affordable. A comparison of utility bills versus household incomes show that utility bills are increasing at a rate that is significantly greater than household income. As an example, a decade ago, electric bills represented 1.6 % of the median family income for PGE customers. Today, the bill is approximately 2.6% of median family income. Oregon families simply cannot afford utility bills to increase faster than incomes.

What Got Taken Out of the Utilities’ Original Rate Requests?

Despite our criticism of the inability to consider “pancaked” investments, CUB was successful in chopping various costs out of the utilities’ original rate requests. It’s worth taking a look at what we could have been paying for in each utility’s request.

PacifiCorp: The original PacifiCorp filing asked for a 13.1 percent revenue requirement increase. Going through that filing with a sharp scalpel reduced it to 8.5 percent. Included in the reductions were:

* Maintaining the rate of return (PacifiCorp’s profit) at 10.125 percent - this provided a reduction of $20.3 million to the PacifiCorp requested rate of 10.6 percent;

* The reduction of administrative and general costs to reflect changes in PacifiCorp’s property and liability insurance - this provided a $2 million a reduction;

* A reduction to reflect reduced cost projections for the Populus to Terminal Transmission line - this provided a $500,000 reduction (and this is being further reduced in a recent PacifiCorp filing);

* A reduction in operations and maintenance amounts for wages, benefits, incentives and non-labor escalations - this provided a reduction of $20.9 million;

* A credit for renewable energy certificates that PacifiCorp cannot use in Oregon but can sell to out-of-state entities - this provided a reduction of $2.5 million.

Taken together, these adjustments reduced PacifiCorp’s proposed revenue increase from $130.9 million to $84.6 million.

PGE: PGE’s original filing requested a $157.8 million increase, excluding power costs. The sharp scalpel took out a number of proposed expenses and the request was reduced to $100.2 million. The reductions that made this possible included:

* Setting PGE’s rate of return on equity at 10.0%, instead of the Company’s requested return of 10.5%;

* A reduction in employee compensation of $6.48 million;

* Pension reductions of $10.94 million and $700,000;

* A $1.7 million Advanced Meter Infrastructure credit;

* An Information-Technology-related reduction of $1.47 million;

* A reduction for customer service and transmission costs of $1.28 million;

* Reductions in non-labor components of $2.29 million;

* Capital cost reductions of $5.94 million;

* $1.14 million reduction in the Biglow Canyon wind facility costs;

* Additional wage and salary decreases of $3.5 million;

* Reduction in Boardman fly-ash costs of $2.6 million;

* Miscellaneous other reductions totaling $3.8 million;

* A reduction in storm damage estimates of $3.6 million.

How Does CUB Approach Proposed Rate Increases?

CUB looks at each proposed increase with a skeptical eye and fights vigorously to keep increases in check. Our two staff analysts conduct the in-house analyses and we hire expert consultants to review issues where we are out of our depth. We pare back proposed increases where we believe that’s necessary and actually make fun of those we think are simply ridiculous.

There are times, however, when at least parts of requested rate increases are justified, and this was one of those occasions. The infrastructure build-out is necessary to deal with future load projections, with or without attempts to meet Oregon’s renewable energy goals. As noted before, we have and will continue to advocate for better planning for and better implementation of infrastructure investments. But when it comes right down to it, the infrastructure is needed - but we need to do better managing the timing of the investments.

Don’t Forget about Energy Efficiency

We’ll say a quick word about making sure that your home is as energy efficient as possible. No matter what rates do, there’s no sense in paying for wasted energy. So we encourage all utility consumers, especially low income families, to take advantage of the services offered by the Energy Trust of Oregon and low-income advocacy groups to make energy efficiency changes to their homes. True, some fixes can cost a lot of money but there are many other fixes that can be easily accomplished that will save consumers considerably and reduce the load growth that drives infrastructure build-out and increased rates. To find out more, contact the Energy Trust or your local community action agency (to find your local agency, go to the Community Action Partnership of Oregon’s website.

Conclusion

It’s hard to deal with rate hikes during a terrible recessions, even to fund needed investments. It’s a little like having a mechanic tell you that a new expensive engine on your car will never need oil changes and will save you money in the long run. It’s good to know that you’ll pay less over time but it still hurts now.

While we can all hope for a period of rate stability after these increases, there is no moratorium on utility filings in place for either PacifiCorp or PGE, and it is possible that each may file general rate cases again in 2011. CUB encourages the companies to avoid such a move, but if they determine that they cannot, CUB will be ready once more to ensure that customers are getting the best value for what they pay for.

CUB will continue to make sure that we fight against every unneeded expense in utility rates to keep rates down today, but also make sure that we avoid being penny-wise and pound-foolish by insisting that utilities make the right investments for the future.

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