Puget Sound Energy received approval from the WashingtonUtilities and Transportation Commission (WUTC) to begin a newperformance-based mechanism for strengthening its gas-supplypurchases and gas-storage practices.

The Purchase Gas Adjustment (PGA) incentive mechanism, whichencourages competitive gas purchasing and management of pipelineand storage-capacity, aims to benefit both customers andshareholders of Puget Sound Energy.

“This new approach will provide additional incentive for ourcompany to effectively manage its gas supply costs,” said WilliamA. Gaines, vice president of energy supply for Puget Sound Energy.”It also offers the opportunity to include these gas-supplymanagement activities in our operating alliance with Duke EnergyTrading and Marketing.”

One western-area trader found a lot to dislike about the deal.”From my perspective, it’s the worst thing that could happen in thePacific Northwest because it gives Duke access to all of Puget’sassets, which is about half a Bcf/d of transportation, almost twomillion a day withdrawal and injection capacity. probably 20 Bcf ofstorage total.” This, the anonymous source said, creates one bigmonopoly.

In April, Puget and Duke Energy Trading and Marketing agreed tocoordinate marketing and trading activities in 14 western statesand British Columbia. Through the expanded relationship with DukeEnergy Trading and Marketing, Puget participates in a tradingbusiness many times the size of its previous trading operations.Puget sold 28 million MWh of power last year, and its revenues fromoff-system power sales and trading doubled from 1996 to more than$134 million. Puget sold 28 million megawatt hours of power in1997. Its 1997 off-system energy sales totaled $134 million.

The trader said he thinks somebody – producers, either U.S. orCanadian, or consumers – is going to get the short end of the stickas a result of Puget holding monopoly power. “It just creates sucha large monopoly with the two of them combined. Duke is the largestindustrial marketer in the Pacific Northwest. And Puget SoundEnergy probably is the second largest gas utility in the PacificNorthwest and relies very much on Canadian supply.”

Puget Sound Energy is the first investor-owned utility inWashington state to receive approval of an incentive regulatorymechanism for purchasing low-cost natural gas supplies since the1997 policy was created by the WUTC. The experimental, three-yearincentive system takes effect July 1.

Currently, Puget Sound Energy manages more than 40 gas supplyand pipeline contracts. It purchases gas supplies from producersprimarily in western Canada and the U.S. Rocky Mountains.

The incentive mechanism rewards the utility for its performancein acquiring gas supplies at the lowest cost but penalizes it forhigh costs. There are three components to the gas cost benchmark:fixed costs for pipeline and storage services; variable costs forpipeline and storage services; and fixed and variable costs for gassupplies.

The gas supply benchmark establishes monthly benchmark coststied to average market indexes. Benchmarks applied to fixed andvariable pipeline-delivery and gas storage costs are based onFERC-approved rates. On a monthly basis, total actual costs will becompared with the total benchmark cost. The incentive gain or lossis based on whether actual gas supply and pipeline capacity costscome under (gain) or exceed (loss) the set benchmark costs.

Incentive gains and losses will be shared proportionatelybetween customers and shareholders in three sharing blocks. In thefirst block, 100% of the first annual $500,000 gain or loss goes tocustomers. The second block allocates savings or losses of the next$26.5 million in a 60%/40% share between customers andshareholders, respectively. The incremental dollars from any gainsor losses beyond $26.5 million are shared 67%/33% between customersand shareholders.

The benchmark formulas incorporate cost-savings already acquiredby Puget Sound Energy. Under the incentive mechanism, Puget SoundEnergy shareholders begin to benefit when savings surpass the levelalready embedded in current rates.

Joe Fisher, Houston

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