(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
Ring Fencing In Utah
Regulatory structures protect ratepayers in geography-spanning utility mergers.
with the bankruptcy or potential bankruptcy of MEHC or any of its subsidiaries.
Geographic Diversity Challenges
While there is some regulatory confidence that the near future will continue to be similar to the recent past with respect to MEHC’s financial support to PacifiCorp, the longer term view necessarily is cloudy.
A change in management at MEHC and Berkshire Hathaway eventually may result in a change in the treatment of PacifiCorp away from the current management philosophy. For example, in the acquisition process, MEHC emphasized it was able to take a long view in terms of planning and financing, and was not constrained by short-term stockholder expectations of one quarter or one year. That could change in the future, and regulators may find themselves dealing with a utility operated by a parent that is looking for short-term benefits.
Another type of problem is evolving that may affect PacifiCorp more than some other integrated utilities: geographic diversity. PacifiCorp operates across six western states. These states have significant differences including climate, local resources, economy, and political philosophy. Roughly, PacifiCorp can be divided between its Pacific Northwest service territories (California, Oregon, and Washington) and its inland Rocky Mountain service territories (Idaho, Utah, and Wyoming). The climate in the populated areas of the Pacific Northwest can be generalized as cool, wet, and mild. The Rocky Mountain region can be characterized as dry, with hot summers and cold winters. Further, Utah and Wyoming have significant coal resources and consequently coal has been, and continues to be, the primary fuel source for electric generation; Wyoming recently has been seeing the development of significant wind resources. The Pacific Northwest is blessed with hydro and is developing wind resources. The economies and electric demand of PacifiCorp’s Utah and Wyoming service areas are growing rapidly and this growth is expected to continue. PacifiCorp’s territories in the other states are growing slowly or not at all.
While geographic diversity is often seen as beneficial, the contrasts outlined above create a situation of obvious tension. The Pacific Northwest, which is experiencing slow growth, does not want to pay for the construction of additional power plants to serve Utah. Oregon currently is investigating a proposal that would encourage PacifiCorp not to build by allowing the utility to capitalize purchased power to rate base and earn a return on that purchased power. This proposal also may affect the way PacifiCorp evaluates power bid proposals versus self-build options. 5 People in other states may be concerned that this proposal would have the effect of raising costs and putting system reliability at risk.
An additional difficulty associated with this geographic diversity includes the current concerns with carbon dioxide emissions and climate change. California, Oregon and Washington have enacted renewable portfolio standards (RPS). To date, Idaho, Utah, and Wyoming do not have such standards, and currently there is no national RPS, although that might change. Even among states that have an RPS, there are differences that may cause frictions among the states. For example, a request for proposal for new generation resources may result in two different “lowest-cost” or