Fresh from a precedent-setting electric rate settlement including a wholesale power cost coverage mechanism, Puget Sound Energy (PSE) of Bellevue, WA, is eyeing a similar natural gas settlement by Sept. 1 in what its executives described as an improved state regulatory climate during a conference call with financial analysts Friday. The utility, which is part of the Puget Energy corporate structure, has a $56 million, or 9.1%, gas rate increase pending with the Washington Utilities and Transportation Commission (WUTC).

As part of the electric settlement a rate of return on rate base of 8.6% for both gas and electric service has been established, but Puget officials refused to give any more details of what the gas settlement might look like in relation to the 9.1% increase now being sought. “It would be premature to go through the gas information at this time,” said CFO Don Gaines.

The utility noted that its natural gas customers received an average 22% decrease in their rates on June 1. The rate cut was in response to a drop in wholesale prices for natural gas.

With the new means of recovering its electric cost of energy with a $40 million cap on what the utility will ever have to absorb without retail rate coverage, Puget Energy CEO Steve Reynolds cited the settlement as a completion of his prime objective when he took over the top spot of the utility holding company earlier this year. For the future, company officials noted the utility will maintain a “net long” strategy on its power purchases, minimizing any short-term or spot reliance for supplies.

Gaines said that the rating agencies have indicated that they most likely will remove the current “negative” outlook designation for the company, but would hold off raising ratings until next year when the company is further along the path of achieving its equity targets.

For Puget’s utility the process in reaching the settlement with more than two dozen parties is “as important as the settlement itself,” according to Kimberly Harris, Puget Sound Energy’s regulatory vice president. The consensual agreement with 28 parties was reached in a little over two months time, she said.

PSE said the settlement will not only help the utility rebound from the financial blows dealt during the 2000-2001 West Coast energy crisis, but will also hand its 945,000 electric customers one of the region’s smallest rate hikes of the past two years. The agreement stems from a collaborative rate-setting process established in March by the WUTC.

“The WUTC staff more than demonstrated the Washington state commission’s preference for conclusions through working settlements rather than litigation,” Harris said. “The (settlement) process will have lasting benefits to the company and our customers” through the extensive communications and working relationships now established as a result.

Several financial analysts prefaced their questions on the conference call by first congratulating the utility for its “reasonable outcome” of what had been an ongoing dilemma — timely and sufficient rate coverage for increasingly volatile energy costs.

In a region that is anticipating some relatively high growth in the next decade, PSE executives said the new process will allow the utility to add resources to keep pace with the growth and get those resources covered in rates (subject to later revision) using a new streamlined, four-month process at the WUTC. In response to a specific question, the utility officials said there are no dollar-amount restrictions on the resources that can be covered through this process.

The agreement asks the WUTC to grant PSE’s first request in nine years for a permanent increase in base electric rates. The settlement specifies an overall 4.6% rate increase, which would generate about $59 million annually for PSE. The hike would increase a typical household’s monthly bill by about $2.70. “If, however, the proposed rate hike takes effect July 1, 2002, as expected, the average household bill actually will go down by about $1.85 per month,” PSE said. “That is because a slightly higher, ‘interim’ electric rate increase that took effect April 1, 2002, is expiring on June 30.”

PSE entered into the negotiations with WUTC staff, the consumer branch of the state Attorney General’s Office, two associations representing industrial users of electricity and natural gas, the Northwest Energy Coalition, the Natural Resources Defense Council, King County, the Co-generation Coalition of Washington, Sound Transit, 12 municipalities served by PSE, advocates for low-income customers, the U.S. Navy, and various large commercial customers of the utility. PSE said the multiparty settlement goes before the WUTC on June 13 with a final commission ruling expected later in the month.

Reynolds said the agreement will help Puget Energy “put the energy crisis behind us and start rebuilding the company’s financial integrity. That’s vital not only to the people who invest their money in Puget Energy, but to the homes and businesses that expect us to maintain a dependable energy-delivery system.”

Reynolds said the agreement includes a power-cost adjustment mechanism that triggers if PSE’s costs to provide customers’ electricity exceed a certain level. The mechanism apportions increases or decreases in power costs, on a graduated scale, between PSE and its customers. In addition, he said the settlement accelerates the start of the requested rate increase — from mid-fall 2002 to a proposed July date — thereby requiring a smaller hike in rates. Reynolds added that the three-month “interim” rate increase that ends June 30 is giving the utility a one-time, $25 million boost in revenue to help offset some of the high power costs PSE absorbed for customers during the West’s energy crisis.

In addition, PSE said the settlement plan is expected to produce financial results consistent with its previously announced earnings guidance for 2002 and 2003.

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