Final Decision in NW Natural Rate Case Is A Resounding Victory for Oregon Customers

During the waning few days of 2017, NW Natural Gas Company (NW Natural, or NWN) filed a general rate case, requesting an overall increase of 8.3 percent which represented a $40.4 million overall rate hike to its Oregon customers. Fast forward over nine months, and CUB, along with other stakeholders, has litigated the case in full, conducted discovery, engaged in numerous settlement conferences, written testimony and briefs, and now have a final decision from the Oregon Public Utility Commission (PUC). The result? A hard fought, resounding victory for Oregon ratepayers. After numerous settlement discussions, NWN walked away with a 3.72 percent ($23.4 million) increase in rates—roughly half of what the company initially sought. When the declining cost of natural gas is added in, Oregon residential customers will see a 2.1 percent rate decrease.

The largest drivers in reducing the overall rate increase sought by NWN were a reduction in the company profit margin (Return on Equity, or ROE) and removing rate recovery for capital investments that had not yet become “used and useful” for necessary utility service. NWN had asked for a 10 percent ROE, which would have been higher than any other utility in the state, but the PUC reduced that to 9.4 percent. In Oregon, it is well settled law—and good ratemaking policy—that utilities can only receive cost recovery for investments that meet a presently used and useful standard. That is, a utility cannot seek cost recovery for an investment that has not been put into service. NWN proposed getting rate recovery for projects that will go into service after November 1, 2018 (the rate effective date). CUB pushed back against this, and the PUC’s reaffirmation of its longstanding policy was encouraging.

Apart from a general rate reduction compared to NWN’s initial request, CUB also notched resounding victories in other ratemaking and policy issues addressed in this case. In this case, NWN proposed to make changes to its decoupling mechanism. “Decoupling” is primarily designed to get rid of a disincentive for utilities to invest in energy efficiency. It “decouples” profits from the volume of energy sold by annually truing up the collection of fixed costs so a utility’s profits are not harmed by energy efficiency. Oregon has had decoupling mechanisms on and off since the early 1990s.While Oregon has had energy efficiency-related decoupling for years, NWN proposed to add variations in gas sales related to naturally occurring weather fluctuations to its mechanism. Since this would push additional cost—and risk—onto customers, CUB opposed this change. In the end, we were successful in getting NWN to remove its proposal from the case.

Another big victory for CUB came in regard to how NWN realizes revenues from “optimization” which most other utilities call “asset management.” The basic idea is that a utility should look at its utility assets and see if there are ways to monetize them; this is a common practice. Electric utilities rent space on poles to cable and phone companies. Generally, utilities are expected to do this with the expectation that the revenues will be used to offset rates for the customers who are paying for the assets. NWN began a version of this in the late 1990s that involved using some of the gas it had in storage as collateral for deals by private parties and, at certain times of the year, selling gas in storage to marketers who would replace it later in the year with cheaper gas.

When NWN started this program, there were not many gas utilities that had similar programs. At the time, NWN got permission to keep 33 percent of the revenues as an incentive. In recent years as more gas utilities have developed programs, it has become clear that allowing NWN to keep 33 percent simply provides shareholders a windfall at customers’ expense.

In 2012, NWN had a general rate case and CUB proposed changing the sharing percentage from 67/33 (customers/company) to 90/10. The PUC Staff proposed a similar change. Stakeholders agreed to move this issue into a separate docket, and the agreement set a completion date of December 31, 2013. But the new docket had a series of delays. The PUC Staff changed witnesses and the new witness no longer supported changing the sharing percentage. That docket did not conclude until 2015 with a PUC decision that ordered an independent study of optimization, with NWN, CUB, PUC Staff, and the industrial customers jointly hiring and overseeing a consultant to perform the study. NWN slow-walked the process and the study was finally completed last year. Its conclusion was that there was no good reason for NWN to retain such a large share of the revenues. That study result led to this year’s rate case. CUB, the PUC Staff, and the industrial customers all recommended that the sharing percentage be changed to 90/10.

In the end, we won. It has taken us seven years to get here, but we finally achieved it. This change will provide a few million dollars to customers each year.

Utility rate cases are incredibly complex, and with voluminous testimony, exhibits, work papers, and calculations, there is a lot of technical material to work through to be sure that the utilities are receiving cost recovery only for what is necessary. That’s where CUB comes in. We work diligently and in concert with other stakeholders to rigorously analyze utility proposals. After all, it’s our job to ensure that these monopoly corporations are providing the essential service that Oregonians need at just and reasonable rates.

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