BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of the Application of ) Puget Sound Energy Inc. ) For Authority to ) DOCKET UE-990284 Implement a Special Contract for ) Electric Service with ARCO Products ) Company ) ORDER APPROVING ) CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) On March 8, 1999, Puget Sound Energy Inc.(PSE or Company) filed with the Commission a Power Sales and Services Agreement (Agreement) with ARCO Products Company (ARCO) requesting approval by the Commission effective April 1, 1999. In making the filing, PSE requested the Agreement be afforded confidential treatment pursuant to RCW 80.04.095. This Agreement supersedes an existing Power Sales Agreement originally filed on May 26, 1995, and approved by the Commission in Docket No. UE-950599 on May 31, 1995. This existing agreement originally would have expired on September 30, 2000. On January 20, 1999, PSE filed with the Commission an amendment to its May 30, 1995, agreement. The amendment proposed to extend the 1995 agreement for six (6) months, from September 30, 2000, to March 31, 2001. This amendment was approved by the Commission on less than thirty-days notice on January 27, 1999. The proposed Agreement is for continued retail electric service to ARCO’s Cherry Point Refinery for the period from April 1, 1999, through June 30, 2012. History On May 22, 1997, ARCO initiated a process of soliciting bids to build facilities to bypass PSE’s electric facilities and secure a supply of power upon termination of the requirements of its existing Power Sales Agreement. The solicitation, in the form of a request for proposals (RFP), sought firm power supplies to meet the full or partial power requirements of ARCO’s Cherry Point Refinery. ARCO’s time line for the RFP indicated it wished to finalize power supply contracts with a winning bidder and conclude transmission arrangements for delivery of the power by December 1997. PSE was provided a copy of the RFP document and encouraged to bid. On December 22, 1998, ARCO signed a letter of intent to purchase electricity as a retail customer of Public Utility District No. 1 of Whatcom County (Whatcom or District). The letter indicated that the parties had agreed the District would commence service to the refinery on October 1, 2000, after expiration of ARCO’s then-current power contract with PSE. The letter agreement stated that since Washington law provided neither PSE nor Whatcom any monopoly right to supply electricity at retail, the District thus had every right to compete to supply electricity to ARCO and other customers. It also stated that Whatcom would acquire at wholesale all electric commodities and ancillary services required to meet the firm electrical needs of ARCO. Specifically, the parties did not anticipate that the refinery would be served by the District as a load under a wholesale, “preference power” contract between the District and BPA. PSE’s newly proposed Agreement with ARCO was negotiated recognizing a potential for significant changes in regulation and the market for energy during its term. The Agreement responds to such changes by providing for certain competitive supply options regarding the energy needs of ARCO’s Cherry Point Refinery and the ARCO Marine Terminal. However, the Agreement provides that ARCO will purchase all of its electricity transportation needs from PSE over the term of the Agreement. At the Commission’s March 31, 1999, open meeting resolution of the matter was deferred pending decision by the Thurston County Superior Court on the legality of the claim of confidentiality of certain contract terms. On April 7, 1999, the Court upheld ARCO’s claim to confidentiality as to Sections 4, 7, and Exhibits A through G of the Agreement. The Commission reconvened on April 8, 1999, to decide the application. Terms of the Agreement The Agreement provides for bundled retail electric service to ARCO during what is called the “Bundled Service Period”. This period is defined as commencing on April 1, 1999, and ending with the earlier of a (a) commencement of a “Bundled Back-Up Period”, (b) commencement of a “Competitive Retail Period”, or (c) end of the term of the Agreement. The “Bundled Back-Up Period” is defined as a period begun by ARCO exercising its option to construct its own power-generation. Upon exercising this option, ARCO has agreed to make certain True-Up payments to PSE. During the “Bundled Back-Up Period” PSE agrees to sell to ARCO all necessary standby and partial energy service. The “Competitive Retail Period” is defined as commencing on any date that ARCO chooses after the occurrence of competitive retail access as defined in the Agreement and the execution of an energy transportation contract between ARCO and PSE for the delivery of competitive power. Again, upon exercising this option, ARCO would make certain True-Up payments to PSE. Section 8 of the Agreement defines what are termed as “True-Up Charge or Exit Fees”. These charges will be paid to PSE in the event ARCO develops on-site generation or if retail access generally becomes available and ARCO opts for new services under an open access environment. Discussion Commission Staff point out that it should be very clear that the “True-Up Charge and Exit Fees” provision in the Agreement is a bilateral agreement between PSE and ARCO, and does not establish any precedent for determining the appropriate regulatory treatment of issues related to stranded costs or what PSE has termed "prior obligations". Also, this provision should not be considered as the first step in establishing the legitimacy of exit fees in retail electric service. Whether these charges are reasonable for retail electric service is highly controversial and raises many issues that have yet to be resolved. Commission Staff have reviewed the Agreement within the context of WAC 480-80-335 and find that it is consistent with the requirements of the Special Contract rule. However, WAC 480-80-335(6) provides that approval of a special contract shall not be “determinative with respect to the expenses and revenues of the utility for subsequent ratemaking considerations.” Approving a special contract does not automatically decide that a revenue gap will be shifted to other customers. Customers without competitive alternatives should not bear sole responsibility for enabling the company to compete. Recovery in rates will be determined in a future ratemaking proceeding. The Agreement and the prudence of the Company’s decisions will be subject to review, in the next general rate proceeding. The difference between rates charged in the Agreement and the tariffed rates that would otherwise be applicable to ARCO can only be recovered, if at all, after a general rate case. FINDINGS 1. Puget Sound Energy Inc. is an electric company subject to the jurisdiction of the Commission. 2. The Agreement for electric service with ARCO filed by Puget Sound Energy is in compliance with WAC 480-80-335. 3. Pursuant to the letter of intent from Whatcom Public Utility District, ARCO has a choice as to their electricity service provider. 4. Approval of this Agreement shall not be determinative with respect to the appropriateness of True-Up Charges and the recovery of stranded costs. 5. WAC 480-80-335(6) provides that approval of a special contract shall not be “determinative with respect to the expenses and revenues of the utility for subsequent ratemaking considerations.” These determinations shall be made in the Company’s next general rate proceeding. 6. After careful examination and giving careful consideration to all relevant matters and for good cause shown, the Commission finds that the Agreement for electric service between Puget Sound Energy and ARCO should become effective as filed on April 8, 1999. ORDER THE COMMISSION ORDERS That the Agreement for electric service to ARCO Products Company filed March 8, 1999, by Puget Sound Energy Inc. shall become effective April 8, 1999. DATED at Olympia, Washington, and effective this 8th day of April, 1999. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION MARILYN SHOWALTER, Chairwoman RICHARD HEMSTAD, Commissioner WILLIAM R. GILLIS, Commissioner