NW Natural Rates Going Down, Not Up

The Oregon Public Utility Commission (PUC) ruled in CUB’s favor on a number of major issues in the NW Natural rate case, with the end result being a rate decrease for customers, rather than the company’s proposed rate increase. The combination of the rate case and updated costs of natural gas will leave residential customers with a rate decrease of about 5%.

This rate case has been a big deal for CUB. NW Natural had not filed a comprehensive general rate case in eight years, and we were outraged at its request for an 8% increase for residential customers. It was one of the most contentious rate cases in recent memory in Oregon. After nine months of analysis, five rounds of testimony, four legal briefs, a hearing, and oral argument, the PUC agreed with CUB on many of the major issues and ordered NW Natural to reduce its rates.

NW Natural’s original request was for an increase to base rates of $43.7 million, which would be partially offset by reducing the company’s decoupling adjustment, which allows the company to recover fixed costs even when demand is falling. Instead, the Commission approved an increase to base rates of $8.7 million, which, when combined with the decoupling offset, reduces the utility’s revenues by $6 million. Thus, instead of an overall increase, the company’s customers are getting an overall decrease. Because natural gas prices are also falling, the overall decrease that will show up on residential bills amounts to a 5% decrease. CUB had serious problems with NW Natural’s request to raise rates. NW Natural has been earning above its authorized return on equity (profit margin) in recent years, suggesting that its rates were too high, not too low. In spite of the difficult economy affecting customers’ ability to pay their bills, NW Natural asked for an increase in its allowable profits. NW Natural asked for retroactive recovery of more than $100 million in costs that it had incurred over the last several years, even though the utility was overearning during that period and could have paid those costs out of the overearnings rather than seeking additional revenue. NW Natural was asking to recover costs associated with pipeline investments that had not been properly analyzed in its Integrated Resource Plan (IRP). The company was also asking customers to pay 100% of its share of the Portland Harbor clean up, even though the contamination was caused by the manufacturing of gas from coal and oil, at the company’s facilities decades ago, and not by today’s natural gas operations. Finally, NW Natural was asking to increase its monthly customer charge to $29 over the next three years, arguing that the way its rates were structured created too great of an incentive for customers to invest in energy efficiency.

Some of these proposals were very surprising to us. Utilities are generally prohibited from charging customers retroactively for costs that were incurred in the past. Oregon also has a policy to encourage energy efficiency by limiting fixed monthly charges to the cost of metering and billing. NW Natural was asking for significant policy changes affecting how utilities in Oregon are regulated and that would have set a bad precedent for Oregon’s other regulated utilities would follow.

CUB fought hard on these issues. We hired a nationally recognized expert in utility ratemaking, Hugh Larkin, to help analyze NW Natural’s proposals. Overall, we were very successful.

Profit Margin (ROE) NW Natural asked the PUC to increase its return on equity (ROE) from 10.2% to 10.3%, despite the fact that interest rates are significantly lower than when NW Natural last had a rate case. CUB argued against NW Natural’s position, citing the company’s history of overearning and current economic circumstances, and argued for the ROE proposed by PUC Staff, 9.4%. The PUC reduced NW Natural’s allowed ROE from the current 10.2% down to a future 9.5%.

Retroactive Recovery NW Natural also asked the Commission to allow it to charge customers for more than $35 million in pension expenses and more than $4 million in taxes that were unrelated to current costs, but represented historic costs that the utility had incurred but had previously not sought to recover. CUB fought these charges, arguing that to allow recovery of these costs now would constitute retroactive ratemaking which is generally prohibited in Oregon. CUB also argued that these costs were not related to current service, and that NW Natural was earning above its authorized return on equity when it incurred the costs, so it could have used its overearnings to pay for them. The Commission sided with CUB and rejected NW Natural’s request to charge customers for these costs. The PUC did say it will open a new proceeding to look at how pension costs are recovered for all Oregon regulated utilities in the future. The Commission also denied recovery of the requested tax deferral.

Pipeline Investments NW Natural made investments in two sections of pipeline in the Mid-Willamette Valley, totaling about $13.5 million. CUB opposed adding these investments to ratebase, which would have allowed NW Natural to charge them to customers and to earn its rate of return on them. CUB did this because the company had failed to justify the need for those investments. Utilities are required to complete Integrated Resource Plans to guide their investment plans. NW Natural’s most recent IRP did not choose these pipeline investments as cost effective. The PUC disallowed adding these investments to ratebase.

Portland Harbor Clean Up. NW Natural was once known as Portland Gas Company, and it sold a product called manufactured gas (gas made from coal and oil) to customers in the Portland area. It stopped manufacturing gas in 1956, but the sites it used are now part of the Portland Harbor Superfund site. NW Natural’s costs to clean up the manufactured gas sites are expected be around $120 million. NW Natural has already spent more than $60 million on various aspects of clean up. Because the company filed for deferred accounting to track the already incurred costs, those costs do not fall under the general prohibition against retroactive ratemaking. The company argued that because the current clean up costs are costs required by current environmental laws, customers should be required to pay for the entire amount. CUB argued that most customers were not even alive when the environmental contamination happened, that shareholders were compensated for the business risk associated with manufactured gas at the time that it was being manufactured, that NW Natural is insured against these costs, and that the $64.5 million that has already been spent and deferred was incurred when the Company was overearning. CUB recognized that the size of this liability, if unrecovered from insurance companies, could be difficult for the utility to absorb, so we recommended a 50/50 sharing between customers and shareholders. The Commission rejected both CUB’s argument for 50/50 sharing and the Company’s request to have customers pay for every dollar. Instead, the OPUC is requiring the establishment of an earnings test and a deadband around cost recovery. Subjecting cost recovery to an earnings test generally means that customers cannot be charged if the company is overearning, and a deadband normally requires that the utility absorb some of the costs before charging anything to customers. Because the PUC left the design of the earnings test and deadband to a later proceeding, it is not clear how robust this sharing will be, but it is clear that the Company will have to absorb some of the costs that have already been incurred during a period of overearning.

Overall, CUB is very happy with the results of this case. NW Natural’s initial application constituted a significant overreach on the part of the Company which was asking for changes in decades of policy and precedent. The Company was trying to gouge customers for every dollar it could think of, even though the Company and its shareholders have been doing well even while its customers were suffering through the worst recession since the Great Depression. CUB Staff had to work very hard to make sure the Commission understood that NW Natural’s proposal was unreasonable, even untenable, and the final decision reflects Commission understanding of that fact. And, in the end, CUB will take a rate decrease over a rate increase every day! The Commission will be issuing a longer more comprehensive assessment of its findings shortly. We will keep you posted.

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