April 22, 1998



NOTICE OF TERMINATION OF NOTICE OF INQUIRY



 Re: Notice of Inquiry: Examining Regulation of Electric Utilities in the
  Face of Change in the Electric Industry
  Docket No. UE-940932


TO ALL INTERESTED PERSONS:

This report will serve to document the results of the Commission’s Notice of 
Inquiry, Examining Regulation of Electric Utilities in the Face of Change in 
the Electric Industry; close this inquiry; and identify areas where the 
investigation of issues will continue as the Commission moves forward in a 
formal review of its rules specifically addressed in the inquiry.  The purpose 
of this inquiry was to gather information about structural change in the 
electricity industry; to identify the implications of industry changes for 
utility regulation; and to produce recommendations concerning specific rules 
and regulations currently used by the Commission.  In particular, the inquiry 
focused on the Commission’s regulatory rules and procedures concerning 
least-cost resource planning, competitive bidding for resources, and review of 
the prudence of utility expenditures. 

The pace and scope of change in the electric industry has been faster and 
broader than the Commission could have imagined.  While interested persons were 
responding to questions posed in the inquiry, regulated electricity companies 
began bringing a variety of filings to the Commission for approval in response 
to “competitive events,” including special contracts, open access tariff 
filings, and mergers.  To put interested persons on notice how it would adapt 
regulatory authority to the more competitive circumstances facing the state's 
electric industry, the Commission adopted eight principles.  The inquiry 
thereafter focused on ways in which the policy principles could be achieved as 
the electric industry evolves into a more competitive marketplace.

In the intervening two and one-half years, it has become apparent that changes 
in the electric industry will be driven by legislative and economic forces 
beyond the control of the Commission.  In addition, Governor Gary Locke has 
issued Executive Order 97-02 requiring all agencies to review their 
administrative rules, a process that offers the Commission, the electric 
companies, and interested persons an opportunity for a review of the rules 
governing least cost planning and competitive bidding.  

In light of these changes, the Commission is closing the electric notice of 
inquiry. This memorandum summarizes the status of the inquiry and makes 
recommendations for subsequent steps.  

The Commission extends its appreciation to all persons who participated in the 
notice of inquiry, and by that participation informed both the substance and 
quality of this inquiry.  We acknowledge the substantial time, effort, and 
resources dedicated to preparing and filing comments throughout the process, 
and we look forward to continuing an open dialogue with all interested persons 
as the electric industry continues to evolve, and the Commission continues to 
evaluate the tools it uses to fulfill its statutory mission in the face of that 
evolution.

Section I of this report outlines the procedural history of the Commission’s 
inquiry from its inception to the present.  Section II highlights key 
developments related to competition in electricity service that have occurred 
subsequent to the inquiry. Section III summarizes the Commission’s review of 
the areas of specific focus of the inquiry.

I.  Procedural Background

The Commission issued its notice of inquiry (NOI) on December 16, 1994, and 
invited comments and observations of general trends concerning competition in 
the electric industry, and the implications of those trends for regulation.  In 
addition, the NOI solicited comments regarding the Commission’s regulatory 
rules and procedures pertaining to least-cost resource planning, competitive 
bidding for resource acquisition, and review of the prudence of utility 
expenditures.

The Commission received comments from thirty-eight persons.  Seventeen persons 
submitted comments in a subsequent round of reply comments, including three who 
did not respond in the initial comment period.  Commentors represented a broad 
spectrum of electricity interests, including the three jurisdictional 
investor-owned electric utilities (IOUs), the Public Counsel Section of the 
Office of the Attorney General, the financial community, industrial and 
residential customers,

environmental and low-income public interest groups, publicly-owned utilities, 
independent power producers (IPPs), labor, and utility stockholders.  Copies of 
submittals from both the initial comment round and the reply comment phase of 
the NOI are available from the Commission upon request.

On August 14, 1995, the Commission issued a letter summarizing the general 
substance of comments received in the inquiry.  The letter noted that the 
Commission did not have sufficient information, at that time, about the 
emerging context of the industry to either refine existing or develop new 
regulatory tools to address resource planning, resource bidding, and prudence 
determination.  The letter proposed and requested comment on a set of interim 
policy principles to guide the Commission’s decisions during the transition to 
a more competitive electric industry.  Seventeen persons submitted 70 pages of 
comments on those proposed principles.  After considering the comments 
received, the Commission on December 13, 1995, amended and adopted the 
principles as an Interpretive Policy Statement.  The Commission indicated it 
would use these principles to inform judgments about filings and issues brought 
before it as customers and jurisdictional companies adapt to emerging 
competition in the electric industry.  In addition, the Commission informed the 
participants that it would defer decisions concerning regulatory tools 
affecting resource planning, resource bidding, and prudence review until a 
clearer picture of industry structure and regulatory context emerged.  Near 
term focus was placed on factors and processes external to the Commission, 
including rule making at the Federal Energy Regulatory Commission (FERC) and 
developments affecting the role of the Bonneville Power Administration (BPA).

II.  Subsequent Developments

Subsequent to adoption of the policy principles, the Commission addressed a 
number of specific filings, proposals, and issues related to competition in 
electricity service. Power contracts related to special customer circumstances 
were approved for several industrial customers of Puget Sound Power & Light 
Company (Puget).  PacifiCorp filed such a contract for its largest industrial 
customer in Washington.  Puget filed, and the Commission approved, a tariff 
permitting it to offer partially market-based prices to its general industrial 
customer class.  Puget Sound Power & Light Company and Washington Energy 
Company completed a corporate merger into Puget Sound Energy, Inc. (PSE), to 
include their retail natural gas and electric operations.  The Washington Water 
Power Company (WWP) received approval to serve a large industrial customer 
located in Northwest Washington, formerly served by a public utility district, 
as a full requirements customer of BPA; the provision of service has been 
delayed, pending resolution of complex transmission arrangements.

WWP requested and received approval to continue its non-bypassable distribution 
level charge to support conservation and low income weatherization programs.  
PSE received approval for, and implemented, a similar distribution level charge.

Retail open access pilot projects affecting all customer classes are currently 
offered by both PSE and WWP.  PacifiCorp requested and received approval for a 
banded rate tariff to participate in WWP’s retail access pilot for large 
industrial customers. WWP recently received approval to implement a portfolio 
access pilot for residential and commercial customers, allowing those customers 
a choice of energy options without having to change energy service providers.  

In 1996, the FERC issued its Orders 888 and 889 regarding open access 
transmission tariffs and standards of conduct associated with wholesale 
transmission and generation transactions.  These rules have established the 
framework for a competitive generation market, at least at the wholesale 
level.  Several issues arising from FERC’s asserted jurisdiction over rates and 
services pursuant to these Orders are currently pending in federal court.

Also during 1996, the four Northwest governors convened a study group to 
perform the Comprehensive Review of the Regional Energy System.  This study was 
completed in December 1996, with recommendations delivered to the governors on 
the role of BPA and the structure of the region’s wholesale and retail power 
systems. These recommendations asserted that the region’s state and local 
jurisdictions should move actively toward electric service competition at the 
retail level, with appropriate safeguards to protect consumer and public 
purposes interests.  Concerning consumer driven retail competition, the 
recommendations included a strong regulatory role in customer protection 
involving licensing of generation providers, continuing price regulation of 
distribution functions, and consumer information and education.  In addition, 
the report recommended open access pilots to identify problems and solutions 
for delivering the benefits of competition to all customer classes.

In 1997, Governor Locke issued Executive Order 97-02, requiring state agencies 
to conduct a four year review of their “significant” rules.  The Commission has 
developed and submitted a plan and schedule for reviewing its rules.  The 
review of the competitive bid rules (WAC 480-107-060,070) and the least-cost 
plan rule (WAC 480-100-251) is scheduled to be completed by the end of 1999.  
During this review, the Commission will conduct an open process in which 
interested persons will have the opportunity to participate.

Several bills impacting the electric industry were enacted by the Washington 
Legislature during its 1998 session.  One bill requires IOUs to submit 
unbundled cost studies to the Commission, and requires large public utilities 
to file similar studies with the State Auditor by September 30, 1998.  The bill 
also requires these filings to include a report on service quality and 
reliability data.  The Commission and the State Auditor are required to report 
to the Legislature by December 1, 1998, on the cost studies, the reliability 
studies, and an examination of the ways to disclose and label generation fuel 
mix issues.  Another bill requires utilities to adopt certain basic consumer 
information and protection policies.  The bill also calls for a comprehensive 
study performed together with the Department of Community, Trade, and Economic 
Development (DCTED).  A third bill requires utilities to make available 
bi-directional metering equipment for customers who install site specific 
renewable generation equipment of less than 25 kW.

III.  Commission Review of the NOI Comments

Since the initiation of the NOI, the trend toward greater consumer choice in 
electricity service, at both the wholesale and retail level, has accelerated 
and broadened.  As the Commission noted in its August 14, 1995 letter on the 
status of the NOI, this trend derives from federal and regional policy 
initiatives and developments in the wholesale power market.  In view of this 
firmly established trend, the Commission believes that it is necessary to 
consider modifications to existing rules governing resource planning and 
resource acquisition.  These modifications will be addressed in greater detail 
during the review of rules and the rule making process scheduled to take place 
through 1999 as part of our compliance with EO 97-02.

A. Least-Cost Planning Rule

1. Background

This rule, WAC 480-100-251, requires utilities regulated by the Commission to 
file a plan every two years describing the mix of both supply-side and 
demand-side resources that will meet the future needs of customers at the 
lowest cost to the utility and its ratepayers.  Preparation of these plans 
involves forecasting utility loads over a long period (typically 20 or more 
years); evaluating available supply-side and demand-side options for meeting 
that load; and preparing both an integrated resource plan (IRP) to develop the 
lowest cost mix of these supply-side and demand-side resources and a near term 
action plan consistent with the long term plan.

The rule was adopted on May 19, 1987, with the expressed purpose of ensuring 
that each electric utility regulated by the Commission meets its load with a 
least-cost mix of supply-side and demand-side resources.  PacifiCorp and WWP 
complied with the rule by submitting plans every two years.  Puget filed plans 
through 1992; following its merger, PSE’s most recent plan is being prepared 
and is expected to be filed in Spring 1998.

Although a review process is not a formal part of the rule, the Commission and 
Staff review plans for consistency with the requirements of the rule, and 
notify the utilities of any deficiencies or concerns regarding the substance of 
the plan.  While information and analysis included within the plans are 
considered as part of rate making and other proceedings, the Commission does 
not prospectively approve expenditures included in the action plan.

The existing rule was developed in the context of monopoly utility service of a 
bundled product consisting of electricity generation and delivery (transmission 
and distribution).  In this context, the least-cost planning process provides 
an opportunity for the utility’s monopoly customers, along with the public and 
Commission Staff, to influence utility decisions.  As the monopoly service 
provider, the utility acts as an exclusive agent for its customers.  The 
least-cost planning process provides a means for the customers and the public 
to provide input on decisions made by the utility on their behalf.  The rule 
also creates a “level playing field” for evaluating investments in energy 
efficiency and investments in supply-side resources, and a context for the 
utility to evaluate the relative environmental characteristics of competing 
resource choices.

2. Positions of Commentors

The majority of comments in the NOI favored preserving the least-cost planning 
rule and the planning process.  Nearly all commenting persons also offered 
advice about how the rule and practice could be modified to better function in 
a more competitive and less monopoly industry. The only commentor recommending 
the rule be eliminated was PSE, which argued that long term planning is 
unnecessary in a competitive industry.  Both WWP and Pacific supported 
least-cost planning, but argued it should be made less prescriptive and should 
accommodate each utility’s strategy for responding to competitive 
opportunities.  Both WWP and Pacific said planning should function largely as 
an educational process.

The Washington State Energy Office (WSEO), Northwest Power Planning Council 
(NPPC), low income advocates, Public Counsel, environmental advocates, and the 
International Brotherhood of Electrical Workers (IBEW) argued that the planning 
rule should be retained and even strengthened.  They argued that least-cost 
planning is not command-and-control regulation; rather, it provides an 
important framework for balancing issues, making decisions, and explaining 
those decisions.  These groups recommended that the plans developed by 
utilities should be treated more formally by the Commission than the current 
acknowledgment.  Several recommended that the plans be approved -- at least as 
to planning methodology. 

Independent power producers (IPP) recommended that planning be retained, and 
that a long-term view of resource development be expected of the utilities and 
be documented in publicly-available resource plans.  

Industrial customers and associations made no specific recommendations 
regarding least-cost planning, except that it should not involve the assignment 
of "environmental costs" that would ultimately be reflected in prices.  As part 
of their general argument in support of open access to non-utility suppliers 
for large customers, the Washington Industrial Customers for Fair Utility Rates 
(WICFUR) suggested that least-cost planning should apply only to the "full 
requirements" customer loads.

3. Discussion

The Commission will consider various revisions to its least-cost planning rule 
during its formal review of rules and rule making process, scheduled to take 
place through 1999.  Where service continues to be provided by a monopoly, or 
by a utility with significant ability to affect the choices of service 
available to customers, the rationale and importance of least-cost planning 
remains.  While the initial steps toward competition in retail service are 
being taken in the electricity service industry in Washington, the industry is 
not effectively competitive in any existing retail markets. The number of 
customers with alternatives to utility electricity supply may expand beyond the 
pilot programs currently offered; however, under any scenario, a large 
proportion of consumers will likely continue to receive bundled, traditional 
utility service for some time into the future.  Even those customers who may be 
able to choose alternative electricity suppliers likely will continue to take 
distribution and other network service from a monopoly utility.

Consequently, while we believe that the least-cost planning process continues 
to be desirable and important, we also acknowledge that modifications to the 
current rule may be appropriate to better reflect the potential influence of 
future  competition.  

The Commission believes revisions to the rule may be appropriate for the 
purpose of focusing its application to monopoly utility-supplied services, 
bundled or unbundled. Consequently, a major emphasis should be on planning for 
generation and energy efficient resources and distribution services for loads 
that continue to be served on a monopoly bundled basis, and only on 
distribution services for those loads to be served on an unbundled basis.  
Additionally, such planning also should focus on maintaining reliability of the 
distribution network.  This framework follows the recommendation made by 
WICFUR, but explicitly extends the scope of planning to include the monopoly 
services of the distribution network.

A number of commenting persons also recommended that the planning process could 
be improved if the Commission were to take more definitive action on plans 
placed before it.  For example, the Opportunity Council argued that the 
Commission should approve actions identified in action plans.  This could 
constitute a form of preapproval of utility actions.  Other persons, including 
Public Counsel and WSEO, recommended that the planning process be strengthened 
by approving the planning methodology and/or the objectives identified in the 
plans rather than specific expenditure levels.

The Commission understands that some persons would like to use the planning 
process to reduce the uncertainty of utility management decisions and 
subsequent regulatory review.  However, the Commission believes that the major 
value of the planning process lies in 1) providing an open process to discuss 
utility decisions; 2) a consistent means for understanding and evaluating 
alternatives; and 3) a document accessible for reviewing and evaluating the 
rationale and bases for utility management decisions.  Development of the plan 
and subsequent review by the Commission cannot and should not substitute for 
actual management of the company’s capital and other assets.  Nor should the 
process substitute for the Commission’s subsequent review in rate cases and 
other proceedings of how those decisions have or have not served the public 
interest.  The planning process should be an information generating tool that 
is flexible, not a rigid and prescriptive tool that constrains either the 
companies from fulfilling their responsibility to shareholders or the 
Commission from fulfilling its responsibility to customers and the public.

Consequently, the Commission believes that it should not modify its review of 
plans to constitute any form of preapproval of utility expenditures.  The 
information generated in plans should continue to be used as an important part 
of the information relied upon by the Commission in rate making or other 
proceedings related to utility service.  In addition, the Commission intended 
the plans’ information to be used by the utilities for their business decisions 
to ensure they provide sufficient capacity, quality, and services necessary for 
the customers who rely upon them in their role as monopoly distribution 
companies.  To ensure that this information is as meaningful and useful as 
possible, the Commission will review the methods employed to develop the 
long-term and short-term plans in greater detail as part of its rule making, to 
ensure that the plans are comprehensive and balanced in terms of aligning 
business decisions with public goals.  The Commission continues to believe that 
accountability for the actions and decisions identified in the plans rests with 
the companies.

Finally, a number of persons including WWP and PacifiCorp suggest that the two 
year filing requirement for IRPs may be too prescriptive.  Plans may be more 
useful and constructive if they fit the actual time frame of major management 
decisions. PacifiCorp has proposed that information can be made more current 
through plan updates produced and filed in between major resource modeling and 
planning cycles. The Commission believes this notion has merit, and therefore 
will consider changing the filing requirements for various components of the 
plans as it undertakes revisions of the planning rule.

The Commission expects that the role played by Staff in the planning process at 
a minimum will include 1) participating in technical advisory groups; 2) 
reviewing and commenting upon the methods and analytical tools used in the 
plans; and 3) monitoring utility circumstances to determine when, or if, plan 
updates should be required.  Staff should be able to make judgements about 
whether the plan and the action plan are logically and consistently derived 
based upon the planning methodology and analytical tools.  The Commission does 
not expect Staff to make judgements about the advisability or appropriateness 
of any specific utility management decision or project expenditure level.  Once 
a plan is filed, the Commission expects Staff to make an expedited review, 
based upon their ongoing participation in the plan’s development.

The Commission, in its review of plans, will continue to identify the specific 
issues and particular details on which we will request the company to develop 
information and to conduct analysis through the planning process.

B. Competitive Bidding Rule

1. Background

The Commission adopted competitive bidding procedures to implement the 
provisions of the Public Utilities Regulatory Policies Act of 1978 (PURPA) and 
FERC regulations pertaining to sales and purchases of power by electric 
utilities from qualifying small power producers or qualifying cogenerators.  
Through bidding, payment by electric utilities to these qualifying facilities 
(QFs) of “avoided costs” is established through a “market” process, rather than 
an administrative one.  WAC 480-107-060 requires each electric utility to file 
a request for proposals (RFP) every two years, within 90 days of filing its IRP.

In 1989, the Commission adopted rules which require jurisdictional electric 
utilities to solicit bids from generation and conservation suppliers (WAC 
480-107-060,070). These rules had two objectives: ensuring that regulated 
companies do not pay too much for purchased power resources, and ensuring that 
utilities compare opportunities in competitive wholesale markets with the cost 
of utility owned projects. These rules were modified in 1994 to synchronize the 
timing of solicitations with the completion of least-cost plans, and to permit 
negotiation of bid prices.

In 1995, WWP submitted a “compliance” filing in lieu of an RFP which identified 
a request for a zero-megawatt resource block.  In its filing, which the 
Commission ultimately approved, WWP identified no impending need for new firm 
electric resources, consistent at that time with its most recently filed IRP, 
and therefore proposed that the Company forego formal solicitation for new 
resources.  WWP contended it did not wish to send false signals to the 
marketplace causing potential resource suppliers to expend time and financial 
resources preparing bid proposals at a time when WWP was experiencing a surplus 
of both energy and capacity.  In 1996, following the submittal of its IRP, 
PacifiCorp submitted a similar compliance filing in lieu of its RFP for 
precisely the same reasons.

Recently, WWP requested that the Commission grant a waiver of the portion of 
the competitive bidding rule requiring the issuance of an RFP, reiterating its 
claim that the Company has no immediate resource need.  The Commission approved 
that application, but required WWP to file its avoided costs for public 
comment, to preserve compliance with PURPA.

2. Positions of the Commenting Persons

The competitive bidding rule evoked the most criticism of all the regulatory 
tools addressed in the NOI.  The independent generators (IPPs) were the only 
strong supporters of the bidding rule.  The Natural Resources Defense Council 
(NRDC) also supported the rule, and Pacific and the American Wind Energy 
Association (AWEA) recommended establishing “green RFPs” to meet renewable 
targets, which they also recommended.  IPPs argued that if bids do not result 
in a winning proposal, a utility should be held to its bid or its avoided cost 
standard for any subsequent resource acquisition.  A number of persons 
supported elimination of the bidding rule, including WSEO, NPPC, Puget, Mr. 
Rogers, Mr. Warwick, Puget Shareholders, and WICFUR (as to non-core service).  
Generally, the bidding rule process was characterized as “too prescriptive” 
given the number of opportunities now available in the wholesale power market.  
A common theme among commentors was that utilities should not be forced to 
consider non-utility generation and told how to choose between competitive 
options.

3. Discussion

As a means of implementing PURPA, the Commission established the bidding rule 
as a preferred forum for avoided cost determination, replacing what was 
previously known as administratively-determined avoided costs.  The Commission’
s intent in establishing a market test for determining these avoided costs was 
to generate bids between PURPA developers that were lower than the 
administratively-determined costs, and to allow the utilities to purchase only 
the supply of resources needed.  The Commission agrees with many of the 
commentors that recent developments in the wholesale market have reduced the 
need for such a test, and that competitive bidding for resources may not fit 
well with the current industry structure.  However, as long as PURPA 
requirements remain in place, the Commission believes this approach is 
preferable to the administrative method when new resources are being acquired.  
The Commission believes the process of bidding should become less 
administratively burdensome, and will re-examine the role of competitive 
bidding in its upcoming rule review, given the status of PURPA at that time.  
In the meantime, the Commission will continue to be flexible in considering 
exceptions to the bidding rule when the utilities face no impending need for 
new firm resources.

C. Prudence Review

1. Background

Each of the IOUs bears the burden of demonstrating the prudence of new resource 
acquisitions to the Commission.  A demonstration of prudence includes a showing 
that 1)  the selection of each resource was necessary and reasonable, 2) the 
costs of acquisition were appropriate based upon what a reasonable board of 
directors and company management decided given what they knew or reasonably 
should have known to be true at the time the decision was made, and 3) the 
costs were regularly evaluated.  The prudence review is currently conducted by 
the Commission exclusively in general rate increase cases.

2. Positions of Commentors

Given the introduction of competitive risk into the industry, most persons who 
provided comments suggested that prudence reviews be made less complicated and 
litigious.  Many (WSEO, NPPC, IPPs, Puget, and industrial customers) proposed 
that resource acquisitions be either pre-approved or convened in a separate 
proceeding closer in time to decisions than a general rate increase case.  WWP 
suggested that specific prudence reviews be replaced with performance-based 
rate making.  Pacific appears to agree, but did not make this specific 
recommendation.  The financial houses generally argued for better management of 
regulatory risk by reducing or streamlining the prudence review process.  Puget 
shareholders argued that the Commission should only review power contracts as 
to “due diligence,” and that this should be accomplished in thirty days.  

The only persons to support the current prudence review process were WICFUR and 
Public Counsel.  Both indicated a willingness to consider alternatives.

3. Discussion

The Commission continues to believe that prudence evaluation remains an 
important tool to ensure that utilities are not indifferent to cost or to the 
consequences of poor decision-making.  General rate increase proceedings were 
established as the forum in which to evaluate prudence, because issues 
pertaining to the need and price of a resource acquisition can only be 
determined in a forum where each decision can be viewed in conjunction with all 
other of the company’s resource decisions.

The Commission believes there is no other currently available forum, sufficient 
in both rigor and scope, within which to make this determination.  For that 
reason, the Commission does not believe preapproval of particular resource 
acquisitions is appropriate, as this would inappropriately shift the risk of 
those decisions from utility management to rate payers.

Consistent with the discussion of the least-cost planning process, the 
Commission does not support any recommendation that would constitute any form 
of preapproval of utility expenditures.  However, the Commission will continue 
to consider suggestions that do not rise to the level of preapproval of 
resource decisions.

With this report, the Commission closes the Notice of Inquiry, Examining 
Regulation of Electric Utilities in the Face of Change in the Electric 
Industry, Docket No. UE-940932.  The Commission defers consideration of formal 
changes to its least-cost planning and competitive bidding rules until its 
upcoming rule review and rule making process, scheduled to take place through 
1999.  We invite and welcome the participation in those rule makings of the 
industry and observers wh