Bellevue, WA-based Puget Sound Energy (PSE) before the end of the year will amend its previously announced $231.3 million general rate case request to reflect the purchase price of the Sumas natural gas-fired generation plant for which PSE paid $30.1 million. It closed the deal last Thursday.
In the works for months, the deal is indicative of two larger trends nationally and globally: the volatility of wholesale natural gas prices are affecting the economic viability of some of the independent operators' generating plants, and local utility providers are having to reassess their generation fleets in the face of higher-than-expected estimates for future demand growth.
As part of its preparedness for a 20-year growth cycle in the Northwest, the Puget Energy utility announced last Monday it had signed an agreement to buy a 125 MW plant in Sumas, WA. PSE signed the contract Dec. 7 with Sumas Cogeneration Co. LP, which is also selling the utility a part ownership in the feeder natural gas pipeline fueling the project from the Westcoast Energy pipeline system.
This is the latest move by PSE in addressing what it has estimated as a need for 2,600 MW of additional generation over the next 20 years, and as part of the plant purchase announcement, the Puget Energy utility said it plans to issue a request for outside proposals in February for up to 1,340 MW by 2015.
With the anticipation that it was close to signing the Sumas deal, PSE said it included its acquisition costs in its recently filed general rate case before the Washington regulatory commission, which will have to approve the plant purchase. Generally, the primary reason cited for the filing rate case was large infrastructure investments by PSE this year and last year that it needs to recover in future retail natural gas and electric utility rates, and Sumas is a prime example of that.
"The recently proposed merger has no bearing on [the general rate case] filing," according to PSE CFO Eric Markell. "The revenues sought by the rate proposal are aimed solely at recovering costs and providing the financial resources PSE needs to ensure safe and reliable service to a growing region."
PSE's filing asks for the new rates to be effective Nov. 1 next year. If approved as requested, the rate hikes would mean a $174.5 million, or 9.5%, boost in electric rates, and a $56.8 million, or 5.31%, increase in natural gas rates. The Puget Energy utility said a typical general rate case takes 11 months to process by the Washington state regulators.
PSE has been purchasing the Sumas plant's output under a 20-year contract since the power plant's opening in 1993. The two companies began negotiating a purchase-sale deal last summer, PSE said, and the move is indicative of Puget's recently announced strategy to own more of its generating units.
Last summer PSE was threatening legal action when Sumas walked away from its supply contract in the face of spiking natural gas costs. Sumas is owned by National Energy Systems Co., which the now-bankrupt Calpine Corp. once helped finance when the cogeneration plant was built in the early 1990s. A Calpine unit still operates and maintains the idle plant under contract.
Located north of Seattle near the U.S.-Canada border, the Sumas plant is a combined-cycle cogeneration facility capable of generating electricity using a natural gas cycle and a steam cycle, PSE said. This process is supposed to provide the utility with higher operating efficiencies, lower fuel costs and lower air emissions.
"Sumas is a good fit for us," said Kimberly Harris, PSE executive vice president for resources. "PSE will acquire an efficient, clean-burning source of power right inside our service area." In addition, the plant is already tied into PSE's utility power transmission grid and comes with what Harris called "direct pipeline access to Canada's main natural gas supply pipeline into the Pacific Northwest -- Westcoast."
During the past 12 months PSE has purchased a nearly new 277 MW gas-fired combined-cycle plant in Goldendale, WA, and signed a long-term contract for 50 MW of wind-generated power supplies from PPM Energy's Klondike II facility in north-central Oregon. In addition, the utility in the last four years has purchased two large wind farms -- Wild Horse and Hopkins Ridge -- in central and eastern Washington state, making PSE the large renewable-based power producer in the Northwest.
Along with a half-interest in the 249 MW gas-fired generating plant in Pierce County, WA, PSE also is constructing the region's largest solar power generating facility, a 500 kW demonstration project located at the Wild Horse wind facility.
PSE's latest planning documents filed with Washington state regulators have identified steady growth in its customer base of 1 million. Some 20,000 customers are expected to be added annually.
Regarding the general rate request, utility officials said there was some "cushioning" of the proposed upcoming increases from the fact that PSE lowered its natural gas rates 13% last October due to wholesale gas prices going down over the past year, and it still hopes to reach an agreement in ongoing negotiations with the Bonneville Power Administration to restore federal power benefits for residential and small-farm customers.
"We are asking the [Washington state regulatory commission] to allow us to recover the investments we have made and will continue to make in our pipes, wires and power supplies to provide the service our customers have come to expect, and to meet the growing needs of the vibrant Puget Sound region," said Markell, who attributed the rising infrastructure costs to global increases in the cost of steel, copper and fuel.
"While our utility serves a remarkably growing and prosperous region, we recognize the strain that rising costs, including energy costs, can place on our most vulnerable citizens. Consequently, this filing also proposes to increase bill-payment assistance to our low-income customers."
In announcing its proposed merger with a consortium of private investors led by Macquarie Infrastructure Partners last October, PSE CEO Stephen Reynolds and his Australian-led private investment partners said they wanted to create a "sustainable model" for the energy industry to allow electric and natural gas utilities to come up with staggering new capital funding levels to meet future infrastructure needs. Reynolds specifically said the deal would not require any change in the rates for PSE.
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