The Economics Scoop: PGE’s Rate Case UE 294

PGE has filed with the Oregon Public Utility Commission for a 4.3% rate hike that assures them impeccably timely cost recovery for Carty, the new power plant that the company is building and bringing into ratebase (read: the portfolio of capital investments on which a utility’s shareholders earn a healthy return/profit). This comes as a bit of a thorn in the side especially on the heels of two general rate cases in as many years, where PGE has continued to advance its agenda of providing profitable investment opportunities in the sheep’s clothing of resources to meet need. PGE has doubled its ratebase in just five years, bringing it on par with behemoth energy company, Warren Buffet’s PacifiCorp.

What is this need you speak of? Certainly PGE would not build too much power generation? Is there a distorted incentive to do that? All these questions have merit.

Need for resources is a complex concept in Oregon, where a significant amount of PGE’s power supply has been provided for decades through low-cost hydroelectric contracts, known in the industry as Mid-C contracts. After nearly half a century, many of these contracts are expiring, and PGE searched to secure methods to provide power for their customers.

PGE has multiple options when meeting the electric needs of its customers and distinctly chose a long-term investment, rather than a year-to-year replacement. Imagine that you need to buy fuel for your car. You can do what most people do (every week - or two or three - head to the gas station and fill up.) Or, if conditions were really right, you might buy a proper storage tank, purchase the fuel to fill the tank, and then draw out of the tank for the remainder of the year. The first option could be called pay-as-you-go, and does not require any financing or cash up front. The second option, although seemingly unconventional, is exercised with fuels like propane. That option can require up-front costs, debt financing and possibly interest payments, not to mention the cost of the tank itself. These might all be justified if fuel costs are at historic lows and financing is cheap. But what happens if fuel prices drop? How does that tank in your backyard look now?

This capitalized option is more akin to PGE’s ratebased power plant. It spends a large amount of money up front (financed through debt and equity) to provide a stream of power over time, hopefully at a low cost. However, the costs of financing, risk, and overhead can outweigh the savings of low-cost power. In addition, PGE is now (or will be after Carty is complete) heavily dependent on natural gas, which, with potential environmental regulation on fracking and methane, has upside price risk that can result in higher prices for consumers, not lower profits for shareholders.

This is in contrast to Pacific Power, which plans on meeting its growing need for power almost entirely by making market purchases. When a utility buys power through markets and contracts, a dollar spent on power is a dollar’s worth of power that goes to that utility’s customers. However, in the rate-base option, like Carty, it takes approximately $1.14 ($1 + 9.5 cents shareholder return + 4 cents taxes) to provide $1 of power to a customer. We pay the company’s shareholders a premium to prebuild our power needs.

PGE has traded from a diversified approach to serving load, to one that is 94% fixed and internal, and increasingly reliant on natural gas. The customers used to get a larger portion of their energy needs met by energy purchased in the market and through contracts, which saved customers taxes and shareholder profits. This rigid position provides security to shareholders, but what does it provide for ratepayers?

Notice, when comparing the $1 to the $1.14, building a plant in-house only makes sense if that in-house plant can produce power for customers at a lower cost than the market. PGE’s approach relies on this key tenet. Moreover, the customer hopes that sometimes, the in-house power plant can produce power at such a low cost and at such efficient levels that it can sell excess power into the market. This is sometimes the case for PGE’s new gas plants, Port Westward, Port Westward II and hopefully Carty. However, there is a caviat. Given the rate structure in Oregon, even when the power plants produce excess power to sell in the market (known as sales-for-resale) the proceeds from those sales do not go to pay down that burdensome financing.

Since shareholders earn a profit on capital investments like power plants, and a sustained one at that (power plants are put into rates for about 30 years), but do not earn any profits on annualized costs, the company has every incentive to prefer a capital investment over an annual expense. Therefore, if the company has to fill a need and it has a choice to build in-house or purchase outside, it is inclined to lean toward the in-house profit generating option for the benefit of its shareholders. This can be problematic and contrary to the interest of customers who would like to see the lowest cost resource put in place to serve needs. This distorted incentive is concerning to CUB. PGE has demonstrated its dedication to investor interests by continuing to build ratebase until all but 6% of need is met by capital infrastructure.

All of the above discussion assumes a need—a need that must be demonstrated and justified in order to be legitimately filled. CUB is also concerned with the derivation of need. Because of aggressive conservation and energy efficiency, residential load in Oregon continues to remain relatively flat. Again, in PGE’s current rate case UE 294, the Company predicts residential load growth to be less than 1% even though Oregon continues to attract population influx from other states. In the current economic climate, industrial and commercial load growth are driving energy needs in PGE’s service territory, not residential. If load growth cannot be attributed to residential customers, then why should they be made to pay for new resources needed to meet new load?

Think about a pie. PGE’s pie (rate base) has doubled in size, while the appetite (load) of customers remains about the same. PGE is raising its prices to reflect this larger pie, but wages which customers rely on to buy the pie are stagnant.

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