Agenda Date: December 31, 1997 Item Number: Docket: UE-971668 Company Name: Washington Water Power Staff: Jim Miernyk, Rate Research Specialist Doug Kilpatrick, Electric Industry Coordinator Heather Laughlin, Regulatory Economist Ken Hua, Revenue Requirements Specialist Thomas Schooley, Revenue Requirements Specialist Recommendation: Issue an order approving the More Options For Power Service II (MOPS II) Pilot Program designed to experiment with a new model for providing customers with a choice of energy service alternatives. Background: On October 1, 1997, Washington Water Power (Company or Water Power) first presented an outline of the MOPS II model during a Commission public meeting in Olympia. On November 24, 1997, the Company filed the MOPS II pilot program with the Commission. Preliminary drafts were presented to Commission Staff, Public Counsel, Department of Community, Trade, and Economic Development, and other interested parties for review prior to the formal filing. Finally, a supplemental filing was received December 19, 1997, incorporating a variety of changes to MOPS II resulting from ongoing collaborative discussions among Water Power, Staff and other parties. If approved, MOPS II would be Water Power’s third customer choice pilot program in Washington. The original MOPS and Direct Access Delivery Service (DADS) retail access experiments have been previously approved by the Commission as limited duration pilots. These programs provide an opportunity for a portion of Water Power customers from nearly all classes to experiment with direct access to alternate power suppliers. The MOPS II would replace the random customer selection portion of the original MOPS program, which the Company was unable to implement because of a lack of alternate supplier participation. The primary difference between MOPS II, and the MOPS and DADS pilots, is the availability of energy service alternatives to customers without customers having to select an alternate energy provider. Water Power, who supports a MOPS II model as a legislative electric industry restructuring strategy in Washington, suggests it would provide customers the economic benefits of market competition for power supply while preserving Northwest low-cost resources. The Company cites additional benefits of a MOPS II model as minimizing hassle and confusion associated with choosing an alternate supplier, avoiding alternate suppliers’ pass through of transaction costs that could limit customer savings, and allowing a higher level of consumer protection. UE-971668 December 31, 1997 Page Two Description of the MOPS II Proposal: Availability The MOPS II program would be made available to approximately 7,800 residential, small commercial, large commercial, and agricultural pumping service customers in the towns of Deer Park, Washington, and Hayden and Hayden Lake, Idaho. The total eligible load is 15.9 aMw. More specifically, 2,256 Washington customers could participate or 5.3 aMw of load. The pilot is for a limited duration of two years beginning May 1, 1998 and ending April 30, 2000. The Company will have four months to educate customers prior to the start of the pilot if the Commission approves an effective date of January 1, 1998. Energy Service Options The MOPS II pilot would allow eligible customers the opportunity to choose from a menu of energy service alternatives. In addition to Traditional Energy Service based on existing retail rates, customers could choose from the following new rate options included on Schedule 17: _ Monthly Market Rate -- Energy service based on potentially variable monthly market prices. _ Annual Market Rate -- A fixed annual energy service rate based on wholesale prices. _ Standard Rate Offer -- A fixed rate, based on the Bonneville Power Administration’s Preference rate (PF), made available to customers who select Monthly or Annual market rates but choose to return to a more stable energy service rate. _ Renewable Resource Rate -- Allows customers the choice of paying an incremental dollar amount per block of Kilowatt-hour consumption on monthly bills to contribute to the operation of renewable resources, including biomass and wind power projects. The Monthly and Annual Market rates are adjusted to reflect delivery to the Mid-Columbia trading hub and include a 0.5 mill/kWh adder as compensation to Water Power for aggregating and purchasing for customers, and for costs and risks related to providing access to market-based pricing. There is also a 2 mill adder for ancillary services. Included on Schedule 17 is a proxy for energy rates embedded in Traditional Energy Service that would allow participating customers to compare the various new energy service rate options to their existing bundled service. Docket UE-971668 December 31, 1997 Page Three Customer Participation Customers taking service under Schedule 17 will assume certain price risks and responsibilities. Examples of the latter include: limitations on switching, commitments to stay with their selection for a full year, and complying with notification provisions. The Company maintains these provisions provide for planning certainty and limit the ability of customers to game the system through selection of the most favorable energy service options. Eligible customers, however, are under no obligation during the pilot to choose any energy service other than what they are currently taking, i.e., Traditional Energy Service. Metering, Power Scheduling, Billing There are no changes in metering or meter reading operations proposed for MOPS II, nor would there be changes to power scheduling operations. Water Power would bill participating customers for both delivery and energy service, but each would be separately stated on customer bills. Delivery Service Rates The proposed MOPS II delivery service rates include charges for transmission and distribution service, administrative and general expenses, and one-half of the Company’s estimated lost margin from implementing the pilot. The rates are based on the same cost-of-service study filed in support of the DADS pilot roughly 20 months ago. That study is based on 1995 results of operations, unadjusted for Commission ratemaking purposes. The MOPS II rates are essentially the same as those developed for the original MOPS pilot except for two changes. First, the transmission component of the rate is based on a state-determined methodology since the Company believes there are no federal jurisdictional issues associated with transmission service under a MOPS II model. Second, the estimated lost margin portion of the rate is lower due to use of a higher market rate of 17.9 mills/kWh in the calculation. The two changes have the effect of lowering delivery service rates from the original MOPS pilot levels. According to Company’s application, use of the proposed delivery service rates for MOPS II is not intended to resolve cost-of-service, stranded cost, or other pricing issues related to electric restructuring, nor is it to be considered precedent setting. Staff agrees, and offers several concerns related to the pilot Delivery Service Rates below under Discussion. Customer Education Water Power is committed to implementing a comprehensive customer education program for MOPS II. The Company proposes developing information for presentation to eligible customers through at least the following: direct mailings, news articles in local papers, information on the Internet, town meetings, and a toll free number for customer questions. Docket UE-971668 December 31, 1997 Page Four Pilot Evaluation The Company will submit periodic progress reports to the Commission on a monthly basis beginning August, 1998 through December 1998. Beginning January, 1999, the Company would provide quarterly reports. These reports would include, at a minimum: press releases and articles related to MOPS II; material mailed to customers regarding the pilot; summaries of discussions with customers regarding the pilot; status reports on the number of participating customers by class, and service provided; total load participating under each option; and identification of any difficulties. On October 31, 2000, Water Power will provide a final report to the Commission summarizing major conclusions and observations. Pilot Program Cost Recovery Water Power proposes deferring MOPS II incremental program costs, along with accrual of a return on the balance, for recovery in the next general rate case. The estimated total costs for implementing both MOPS and MOPS II would be capped at approximately $1.16 million on a system basis. Water Power would accrue a return on the balance for no more than one year beyond the MOPS II pilot. If the Company does not file a general rate case within one year following the end of the MOPS II pilot, Water Power would stop accruing a return and begin amortization of pilot program costs over a three year period. One-half of the estimated lost margin from implementing the pilot are included in Delivery Service Rates. The Company proposes absorbing one-third of the actual lost margin, tracked on a monthly basis and calculated based on the difference between estimated embedded production costs and monthly market rates. The remaining 17 percent of actual lost margin would be deferred, similar to incremental program costs. Water Power believes this is appropriate since all customers, in addition to the Company and other parties, benefit from experimenting with the MOPS II model. Staff concerns with this are presented below. Discussion: The MOPS II pilot, similar to the other pilots for Washington Water Power and Puget Sound Energy’s Power of Choice, presents the Company, the Commission, legislators, and others with a compelling opportunity to learn and gain experience with new approaches allowing customer choices of competitive power supply service. This causes the need to balance traditional regulatory ratemaking principles and responsibilities with a broader perspective. Recognizing this balancing act, Staff approached Washington Water Power’s MOPS II filing with the goal of making the program as effective as possible in providing useful information. This was accomplished through on-going discussions, suggested changes in tariff language and design, and seeking certain important commitments from the Company related to customer education and program evaluation. All interested parties agree that the success of the pilot program will be related to the quality of consumer education. Water Power is committed to implementing a comprehensive Docket UE-971668 December 31, 1997 Page Five education program for MOPS II and will provide eligible customers with numerous sources of information to ensure they are able to make informed decisions regarding participation in the pilot and the energy service pricing options available. The Company has also agreed to provide price and environmental impact information to customers through a standardized format, similar to the format developed for Puget Sound Energy’s Power of Choice pilot. Information would include comparable monthly bill estimates for each of the energy service options available under MOPS II along with estimated generation source emissions including nitrogen oxides, sulfur dioxide, and carbon dioxide. With regard to pilot evaluation, Water Power has agreed to work with an independent evaluation firm, subject to budget limitations, for determining measurable goals and indicators of success for the MOPS II pilot prior to implementation. The independent firm will also field surveys and interpret results. Survey scope and design will be a collaborative effort between the Company and interested parties. Staff is comfortable with the agreed upon plans for educating customers and program evaluation, and commits to continue working with Water Power and interested parties on the details as the process unfolds. We are satisfied that the MOPS II pilot program will gather important information to aid in the ongoing evaluation of electric industry restructuring in Washington and should be approved by the Commission. There are clear benefits of implementing the MOPS II pilot program. Staff is, however, increasingly uncomfortable making such recommendations with the lack of appropriate results of operation and cost-of-service data available for costing and pricing unbundled services for the Company’s pilot programs and other regulatory filings. For MOPS II, Water Power asks the Commission to approve rates based on an unapproved cost-of-service study reflecting unadjusted results of operations and relying on a different methodology than the last Commission-acknowledged study in 1985. For a MOPS II model, this cost information is particularly critical since the presentation of embedded energy supply or production costs for Traditional Energy Service provides the benchmark for customers to compare the various energy service alternatives with. Staff is also disappointed with the Company’s proposed treatment of lost margin. As a surrogate for stranded cost, lost margin recovery has proved to be a contentious issue, similar to other pilots for Water Power and Puget Sound Energy. For several reasons, we do not agree with the Company’s proposed treatment of lost margin for MOPS II. First and foremost, we believe it prejudges any legislative approach to stranded cost recovery under a MOPS II model for industry restructuring. Second, without appropriate cost information approved by the Commission for ratemaking purposes, the actual lost margin is speculative. Third, Staff questions whether Washington Water Power would actually realize lost margin under a MOPS II model or any restructuring model that allows the Company to competitively market power supply. Docket UE-971668 December 31, 1997 Page Six Conclusion: Despite the concerns noted above, Staff recommends the Commission issue an order approving Washington Water Power’s MOPS II pilot program and the Company’ s requested accounting treatment of program costs. The benefits of implementing a well-designed pilot designed to gain information on customer choice outweigh the costs of delaying the pilot to resolve the various costing and pricing issues of concern for Staff. At some juncture, Staff believes the Commission should undertake a formal investigation of Washington Water Power results of operations and convene a proceeding to determine costs of providing unbundled services the Company may seek to provide. The latter may be resolved to some extent by Water Power agreeing to participate in a formal proceeding investigating unbundled services and cost-of-service methodology for Puget Sound Energy.