Commission Decision in NW Natural Docket Will Cost Customers

The Public Utility Commission (PUC) has issued a decision in a case CUB has been arguing against NW Natural, concerning clean-up of their historic properties. Last year the PUC rejected an agreement on this issue between CUB, NW Natural, PUC Staff, and industrial customers. Unfortunately, their decision will cost ratepayers millions of dollars more than the solution that was proposed in the rejected agreement.

The properties under consideration in this case are two contaminated sites (part of the Portland Harbor Superfund site, in fact) that were once used to manufacture gas from coal and oil. NW Natural believes that current customers should pay for the clean-up, even though many of them were not born at the time the gas was manufactured. The clean-up costs began occurring more than a decade ago and NW Natural has been keeping track of them though a deferral. These costs are expected to continue for another decade or two and may total as much as $450 million, though CUB argued in our testimony that these costs could exceed $1 billion.

This issue was initially raised in the Company’s 2012 rate case, when CUB proposed that the clean-up costs be shared equally between customers and shareholders. The PUC rejected CUB’s proposal as well as the proposals of all other parties in that case and instead ruled:

The majority of Commissioners believe that use of an earnings test (with deadbands) coupled with the Commission’s ongoing prudence review will provide an effective incentive for the company to manage its costs. Further, the majority adopts an earnings test but no sharing mechanism. An earnings test may operate as a de facto sharing mechanism.

The PUC asked CUB and other parties to the docket to weigh in on how to set the earnings test with deadbands. This led to further testimony, and ultimately to a settlement between NW Natural, CUB, and other parties. That settlement did two things: it resolved the issue of who would pay for the “historic costs” or the costs that NW Natural had already paid, and it established a proposal for how to pay for “future costs” going forward.

NW Natural did not want to pay for the historic costs. They had accounted for these costs on their books as a cost they expected to recover. Making them absorb the costs would require them to write-off the cost and the Company did not want to explain a big write-off to shareholders.

This allowed us to craft a deal where NW Natural would not have to write-off very much, but in exchange the Company would absorb more of the future costs. The settlement stipulated that NW Natural would pay $7 million of the historic costs, which totaled $97 million, and customers would pay the rest. For future costs, it proposed establishing an earnings test. NW Natural would contribute to funding the clean-up whenever earnings were considered “reasonable”, even when they were below the authorized level. As their earnings increased, they would contribute a greater share of those earnings. CUB considered this to be a robust mechanism that would guarantee that the Company contributed their fair share.

Unfortunately, the PUC rejected that stipulation. They found the $7 million contribution from NW Natural for the historic period to be too little. One Commissioner dissented, recognizing that the parties were acknowledging a trade-off between the historic period and the future period.

This sent parties back to submit further testimony. Without trading off the past and the future, CUB applied a traditional earnings test to the historic amounts and recommended that NW Natural absorb $21 million.

The PUC decided that applying the traditional earnings test would require too great a write-off for Northwest Natural, and required the Company to write-off $15 million. As far as future costs go, the PUC order requires that customers pay $5 million per year. The insurance settlement then contributes an additional $5 million. If costs are above $10 million in a year, then NW Natural will be required to contribute earnings above its authorized level.

This will result in NW Natural contributing significantly fewer total dollars than the settlement that the PUC rejected. The key difference is that under the settlement stipulation, NW Natural would have contributed to the clean-up whenever earnings were reasonable. Under the PUC order, if NW Natural can manage this project to a budget of $10 million per year, it will contribute nothing. And the trigger to get them to pay is not reasonable earning, but earning above authorized levels.

This is disappointing. When the PUC rejected the stipulation, it was because customers were overpaying for the historic amounts. And while the order reduces the amount that customers will pay for the historic clean-up by $8 million, it also will increase the amount that customers have to pay in the future by tens of millions of dollars. This is significantly worse for customers than the stipulation that CUB negotiated with NW Natural and other parties.

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