LETTER TO THE EDITOR: Right now, PUD project is too risky
Published 12:50 pm Wednesday, September 24, 2008
To the editor:
The debate over the feasibility of Island County forming a public utility district (PUD) affects everyone via taxes. The problem is that voters do not have adequate information at hand to decide where their interests lie.
During the last couple of decades my experience as a consultant to both PUD, and their financing entities, leads me to be skeptical that the proposed PUD is a good risk compared to possible benefits. My reservations are based on the following points that I have simplified in the interest of explaining the risk each presents.
Acquiring the existing Puget Sound Energy transmission, substations and distribution systems will be costly; each side in a condemnation must have valuation engineers survey the system and make estimates of the current value of assets to be presented to a decision maker.
The current estimates are highly varied, perhaps as much as $50 million apart.
The point to bear in mind here is that the acquisition costs are paid for over time as principal and interest expenses in addition to purchased-power, system maintenance, management and expansion expenses to be funded each year. The impact of these capital costs on retail rates can vary widely depending on how the valuation issue is resolved. It appears that this variance in retail rates (due to asset values) could be between 15 – 20 percent of the total annual average retail bill. This is a possible deal killer since the risk is substantial that the costs could make the retail rates higher, not lower.
As most island residents know, electrical system maintenance depends in part on the winter weather. Fallen trees and transmission lines are expensive to repair and will require substantial reserves to assure prompt restoration of interruptions. As a rule small systems, such as the island PUD would be, must hired contract services to restore power outages. These are costly services particularly where the contractor is not placed on retainer. These costs could be a serious threat to lower retail rates.
Puget Sound Energy retail rates are said to be high relative the average retail rates of PUD operating in Washington state. So far as I can tell by examining the residential rate schedules of Puget Sound Energy and representative PUD there is a difference in favor of the PUD.
The sticker here is that many of the PUD are purchasing power under a Bonneville Power Administration (BPA) contract system that provides to the PUD wholesale power at costs that are less than the prevailing wholesale power costs on the West Coast, (BPA “preference power”). This pricing policy was first justified based on Congressional intent in the enabling legislation authorizing BPA; and secondly the preference pricing policy was defined in the administrative rules adopted by the Department of Energy and the subsequent legislation of 1937, et seq, 1980, and court decisions of the Ninth Circuit Court.
The problem here is that these wholesale rate preferences (so-called tiered rates) are open to legal challenges both as to legislative intent and the proper interpretation of government rate policy to wholesale customers (both investor-owned utilities and public entities).
Federal courts may find against the preference power program pricing tiers. In this case wholesale power rates might rise substantially.
If that happened the island PUD could be forced into the West Coast wholesale power market to satisfy part or all of its needs, via Puget Sound Energy as the supply entity normally serving the area and the area representative to Northwest Power Planning Council (and power pool). This market could include largely the whole of the BPA service area and nearby regions. The wholesale power rates in this area tend to be volatile, the NWPPC planning entities notwithstanding.
More further removed is the eventually is that BPA (which has delayed the repayment of its statutory costs to the treasury covering its construction) may present its own problems. It is conceivable that customers of BPA may be forced to repay its own debts now long overdue following its 1937 creation. This may be particularly likely if the current public debt structure of the U.S. government continues to weaken.
Power users in the BPA service area could confront power costs substantially above the prevailing West Coast inter-tie wholesale rates. While remote, we must remember that it was only weeks ago that most would have said that the government sponsored mortgage agencies (Fannie and Freddie) covering 75 percent of the home mortgages is the U.S. would never be federalized; but they were just last week.
As a lawyer and economist in the utility business my experience is that wholesale power issues (including organization, management, rate making, litigation and representation in the negotiations) are inordinately costly and will be a burden to the new PUD.
This PUD proposal is driven by good intentions and it is worthy of careful consideration. My feeling is that now is not the time to pursue this proposal given the risks (and costs) compared to the possible benefits possible.
J.W. Carpenter
Clinton
