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The Low Cost Dilemma

Fortnightly Magazine - February 15 1999

Washington State Studies Electric Competition

Meeting its Dec. 31 deadline, the Washington Utilities and Transportation Commission delivered to the state legislature its "Electricity System Study 6560", a joint effort with the state Department of Community, Trade and Economic Development (CTED) as required by Engrossed Substitute Senate Bill 6560, on retail electrical consumer protection.

The study contains a wealth of statistical information about the state's public and private utilities, including rate and cost comparisons and company-specific analyses of: (a) the most well-funded and successful energy efficiency and demand-side management programs and (b) distribution service reliability, presenting indices for system average interruption frequency and duration. For more details, see http://www.energy.cted.wa.gov/6560/.

As the study notes, Washington's power market is unique - boasting below-average rates without state-issued franchises or other legally mandated inflexible service territory boundaries between utilities. The Bonneville Power Administration also plays a major role.

As Washington Governor Locke has said, "Electrical deregulation is a freight train that will hit the Northwest. The real issue: BPA generates power at incredibly cheap rates. The Northwest preference gives us an edge but users elsewhere want a piece of the action."

Who Gets the Windfall?

One customer coalition, the Industrial Customers of Northwest Utilities, summarized the problem with deregulating below-cost rates.

"We simply can't know the future," commented ICNU. "We may attempt to shape or guide the future, but even that often leads to disappointment when our well-meaning intentions provide a contrary result."

The group noted that "it is possible" for an electric utility with low-cost power (e.g., 1 cent per kilowatt-hour) to allow its customers to participate directly in a higher cost market (2.5 cents) and still retain the benefit of the lower cost resources. The answer, said ICNU, lies in what happens to the excess revenues if the utility has no load to serve:

"If the utility refunds the difference between the market price and its costs to its rate payers - in this instance, the 15-mill difference between the market price and the utility's costs - the rate payers are unharmed by open access.The key is to establish mechanisms to ensure a fair outcome."

BPA: Preference Power for All?

Puget Sound Energy emphasized the importance of energy from the Bonneville Power Administration. Joe Quintana, Puget Energy's vice president for external affairs, noted, "Because the report makes continuation of BPA preferences and benefits a central strategy for Washington, the state should insist that BPA extend benefits to all Washington residential customers equally. ¼ This is important to address now because BPA's power subscription process is underway."

According to Puget Energy, BPA's proposed allocation plan would provide only 1,500 MW of BPA firm capacity or equivalent benefits for the period 2001 to 2006 for residential and small firm customers served by investor-owned utilities, but would allocate roughly 2,000 MW of firm and interruptible power to direct preference customers, despite the UTC's desire to put everyone on an equal footing.

"This must be acknowledged by BPA," added Puget Energy.

On the other hand, the state's association of rural cooperatives warn the UTC and the state legislature

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