Who can best shoulder the risk of power cost changes - you or PGE?

If you read the news you may have seen yesterday’s Oregonian article entitled, “Extra costs pit PGE, customers.” The language is adversarial and the two cases we currently are negotiating with PGE have been, too.

The first, the Boardman case, is PGE’s request for deferral of extra costs incurred because their Boardman coal plant was out of service for several months. This outage cost PGE about $43 million in extra power costs, from having to purchase replacement power, and they asked customers to pay all of that. They’re now down to asking for about $39 million, or 90%, but CUB has said that this number is out of line with previous expectations of what customers should pay.

The Boardman case shows PGE’s desire to shift risk onto customers in a particular way. In a general way, shifting risk has also been one of the thrusts of PGE’s general rate case, now being argued before the Public Utility Commission. A little background: Utility rates are set using power cost forecasts of the coming year. The numbers for power costs are provided by the utility, debated by parties to the case (such as CUB), and the final forecast is decided upon in the annual power costs rate case by the Commission. The overall rates for customers (inluding the Company’s rate of return) is then set in a general rate case.

In their current general rate case, PGE has requested a power cost adjustment (PCA), in which 90% of all costs higher than those forecast should be paid by customers. This PCA proposal is balanced in the sense that customers would also benefit from the PCA if power costs were lower than forecast, but CUB doesn’t support the proposal for several reasons:

1) First and foremost, this PCA would shift the changing costs, the biggest risk of the utility business, onto customers. If we were ever to consider supporting such a change, it would be with the understanding that PGE’s rate of return, the profit they earn for managing said risk, should be similarly decreased. Instead, PGE is asking in this same rate case for an increase of their rate of return.

2) Second, this PCA does not adequately reflect the reality of the time lag that exists in rate-making. “Under a PCA, when I use power today,” explains CUB Executive Director Bob Jenks, “I don’t know what my rate really is. I won’t know for 2 years, until there is a true-up of rates with actual costs. The lag-time in ratemaking is why we need someone to bear the risk of changing power costs, and that someone should not be the customer.”

3) Third, PGE’s proposal has no deadband. Additional costs have almost always been shared between customers and the Company, with the Company absorbing a significant share of the extra costs due to a “deadband,” which is figured based upon a percentage of the Company’s earnings. The deadband could be likened to the deductible on an insurance policy. If something goes wrong the insurance policy holder pays a percentage out of pocket before the benefits kick in. PGE wants the benefits without the deductible. The Public Utility Commission has set a strong precedent of using deadbands, and PGE has even supported deadbands in the past. CUB believes that a deadband of $35 million is appropriate in the Boardman case (out of total annual revenue of about $1.5 billion for PGE).

Power costs go up and down from year to year and season to season. Hydropower was great in the ‘90s and has slowed in some recent years (forgive us the pun) to a trickle. Natural gas prices were low during the ‘90s as well and we all know what direction they seem to be headed. The major problem with trying to shift power cost variation onto customers, with the promise that lower costs will mean lower rates, is that power cost variation is asymmetrical: costs can only go down to near zero, but costs can go up indefinitely, high as the sky, as long as people are willing to pay those unknown future premium costs for power. And let’s face it, most households are not as well able to bear the brunt of large changes in power cost as is a large corporate utility.

Power cost variation is the major risk involved in operating a utility. If PGE wishes to continue to earn a profit for managing the risk of the utility, they have to actually manage that risk, accepting the occasional spikes in their cost that accompany other years of windfall. Shareholders make a profit; they also provide a financial buffer when things don’t go according to plan. We will never support a ratemaking deal which doesn’t understand this trade-off as the baseline.

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