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Puget Sound Gets Go-Ahead for Performance-Based Rates

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 monopoly.

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 supplies.

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 and shareholders.

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

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