Agenda Date: March 31, 1999 Item Number: 2D Docket: UE-990284 Company Name: Puget Sound Energy, Inc. Staff: Doug Kilpatrick, Electric Industry Coordinator Hank McIntosh, Regulatory Consultant, Energy Roland Martin, Regulatory Consultant, Energy Ken Elgin, Case Strategist Recommendation: Issue a Complaint and Order suspending the Power Sale and Services Agreement naming rates and conditions for electric service between Puget Sound Energy and ARCO Products Company filed in Docket UE-990284. Background: On March 8, 1999, Puget Sound Energy (PSE or Company) filed with the Commission a Power Sales and Services Agreement (Agreement) with ARCO Products Company (ARCO) requesting approval by the Commission prior to 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 the electric facilities of PSE 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 Docket No. UE-990284 March 31, 1999 Page 1 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. Proposed Agreement: Regulatory Division Staff’s (Staff) understanding of the currently proposed Agreement between PSE and ARCO is that it is structured to provide ARCO with equivalent electric service as was contemplated in the ARCO/Whatcom letter agreement. That is, through the Agreement, PSE is pricing electric commodity for ARCO using the market at Mid-Columbia as an index. This is essentially what Whatcom would have done when it said in the letter agreement it would use competitive bids or market analysis “designed to pass the benefits of competitive power markets to District customers” including ARCO. PSE has stated that its 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. 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. Standards for Approval and Other Considerations: The chapter in the Washington Administrative Code (WAC) covering special contracts for electric service is WAC 480-80-335. This rule, and previous Commission Orders (e.g. UG-901459 and UG-930511) make clear specific conditions for its application. Under WAC 480-80-335, a special contract must: •be accompanied by such documentation as may be necessary to show that the contract does not result in discrimination between customers receiving like and contemporaneous service under substantially similar circumstances and provides for the recovery of all costs associated with the provision of the service. Prior Commission’s Orders require that special contracts: •provide for the recovery of costs associated with the service plus provide some contribution to margin; •not prejudice the competitive business relationship between customers with the special contract and those without; •imply other ratepayers will receive lower rates (eventually) with the contract than without; and •result from effective bargaining. Cost Recovery: Staff analysis indicates that the special contract rate proposed by PSE is sufficient to cover the incremental cost of this load, costs associated with existing facilities specifically built to serve ARCO at its Cherry Point Refinery, and provide additional margin to offset the cost of common facilities and expenses of the Company. We believe this contract will provide both short-term and long-term benefits to existing customers. Effective Bargaining: Following discussion with both PSE and ARCO and based on the results of the contract, it is evident that effective negotiations are what produced the proposed contract. Exact determination of ARCO’s maximum willingness to pay, as in many such cases of special contract evaluation, is difficult to determine. However, based on information ARCO was willing to disclose, Staff is convinced that PSE’s offer is reasonable. Review of the current bypass alternative for ARCO leads Staff to believe a competitive advantage exists independent of Commission action. The issue evaluated thus becomes one of assessing the impact of one provider or the other rendering service. Staff concludes there is an incremental advantage if PSE provides these services because it has adequate existing facilities now serving the customer. Future Ratemaking: The Commission has also addressed the ratemaking impacts of special contracts. In its Fourth Supplemental Order Approving Special Contract between Cascade Natural Gas and BP Exploration & Oil, Inc. in Docket No. UG-930511 the Commission reaffirmed that ratemaking considerations were separate from contract approval. In that Order the Commission stated: “Approving a special contract does not automatically decide that a revenue gap will be shifted to other customers. WAC 480-80-335(6). As noted in the WWP order, 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.” That order also affirmed that a special contract will be subject to review for the prudence and recovery of the Company’s decisions in the next general rate proceeding. Ratemaking considerations also arise in this docket as a result of Section 8 of the Agreement that provides for what are termed “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. It should be very clear, however, that this provision 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". This provision should also 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. Staff recommends the Commission explicitly state that approval should not be taken as a recognition that these types of fees are appropriate nor that PSE has any legitimate claims to stranded costs. Discrimination: A critical requirement of the rule governing consideration of special contracts is for the Commission to find that the proposed rates and terms of service are not unduly discriminatory. The required analysis looks to all relevant facts and circumstances related to similarly situated customers receiving like and contemporaneous service. In order for the Commission to complete this analysis fully, it is necessary for the public to be aware of the rates PSE proposes to offer ARCO for the term of the Agreement. Public policy also favors disclosure of the entire Agreement, as do specific statutory provisions that require rates to be open to public inspection. Unfortunately, PSE has designated these rates confidential pursuant to RCW 80.04.095. In an effort to remedy this situation and provide the public access to the terms and conditions of service under the Agreement, the Commission informed PSE on March 19, 1999, that it would release the Agreement to those seeking to know the terms of service. On March 23, 1999, the Commission received a formal public records request for the Agreement from attorney Melinda Davison. On March 26, 1996, Thurston County Superior Court Judge Christine Pomeroy issued a temporary restraining order restricting the Commission's ability release the Agreement as a public record. The Court further ordered briefs on this issue to be filed on April 5, 1999, and oral argument on April 7, 1999, for a determination as to whether the proposed contract for service is proprietary and not subject to disclosure. Unless suspended by the Commission, however, the contract will become effective on its own terms on April 7, 1999, absent a broad and complete discussion of the issue of rate discrimination. Recommendation: Staff is concerned that other parties are unable to participate in the evaluation of the special contract between PSE and ARCO. As a result the Commission cannot hear fully about the terms and conditions of service in order to resolve the issue of rate discrimination. Therefore, Staff recommends the Commission issue a Complaint and Order suspending the Power Sale and Services Agreement between Puget Sound Energy and ARCO Products Company filed in Docket UE-990284. Following the Court’s determination on the release of the confidential information, Staff may then have additional information to consider in developing its final recommendation to the Commission.