Puget Sound Gets Go-Ahead for Performance-Based Rates
Puget Sound Energy received approval from the Washington
Utilities and Transportation Commission (WUTC) to begin a new
performance-based mechanism for strengthening its gas-supply
purchases and gas-storage practices.
The Purchase Gas Adjustment (PGA) incentive mechanism, which
encourages competitive gas purchasing and management of pipeline
and storage-capacity, aims to benefit both customers and
shareholders of Puget Sound Energy.
"This new approach will provide additional incentive for our
company to effectively manage its gas supply costs," said William
A. Gaines, vice president of energy supply for Puget Sound Energy.
"It also offers the opportunity to include these gas-supply
management activities in our operating alliance with Duke Energy
Trading 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 the
Pacific Northwest because it gives Duke access to all of Puget's
assets, which is about half a Bcf/d of transportation, almost two
million a day withdrawal and injection capacity. probably 20 Bcf of
storage total." This, the anonymous source said, creates one big
In April, Puget and Duke Energy Trading and Marketing agreed to
coordinate marketing and trading activities in 14 western states
and British Columbia. Through the expanded relationship with Duke
Energy Trading and Marketing, Puget participates in a trading
business many times the size of its previous trading operations.
Puget sold 28 million MWh of power last year, and its revenues from
off-system power sales and trading doubled from 1996 to more than
$134 million. Puget sold 28 million megawatt hours of power in
1997. Its 1997 off-system energy sales totaled $134 million.
The trader said he thinks somebody - producers, either U.S. or
Canadian, or consumers - is going to get the short end of the stick
as a result of Puget holding monopoly power. "It just creates such
a large monopoly with the two of them combined. Duke is the largest
industrial marketer in the Pacific Northwest. And Puget Sound
Energy probably is the second largest gas utility in the Pacific
Northwest and relies very much on Canadian supply."
Puget Sound Energy is the first investor-owned utility in
Washington state to receive approval of an incentive regulatory
mechanism for purchasing low-cost natural gas supplies since the
1997 policy was created by the WUTC. The experimental, three-year
incentive system takes effect July 1.
Currently, Puget Sound Energy manages more than 40 gas supply
and pipeline contracts. It purchases gas supplies from producers
primarily in western Canada and the U.S. Rocky Mountains.
The incentive mechanism rewards the utility for its performance
in acquiring gas supplies at the lowest cost but penalizes it for
high costs. There are three components to the gas cost benchmark:
fixed costs for pipeline and storage services; variable costs for
pipeline and storage services; and fixed and variable costs for gas
The gas supply benchmark establishes monthly benchmark costs
tied to average market indexes. Benchmarks applied to fixed and
variable pipeline-delivery and gas storage costs are based on
FERC-approved rates. On a monthly basis, total actual costs will be
compared with the total benchmark cost. The incentive gain or loss
is based on whether actual gas supply and pipeline capacity costs
come under (gain) or exceed (loss) the set benchmark costs.
Incentive gains and losses will be shared proportionately
between customers and shareholders in three sharing blocks. In the
first block, 100% of the first annual $500,000 gain or loss goes to
customers. The second block allocates savings or losses of the next
$26.5 million in a 60%/40% share between customers and
shareholders, respectively. The incremental dollars from any gains
or losses beyond $26.5 million are shared 67%/33% between customers
The benchmark formulas incorporate cost-savings already acquired
by Puget Sound Energy. Under the incentive mechanism, Puget Sound
Energy shareholders begin to benefit when savings surpass the level
already embedded in current rates.
Joe Fisher, Houston