2001 Utility of the Year: Puget Sound Energy leads the pack in demand side management

By Pam Boschee, Managing Editor

EL&P proudly announces its 2001 Utility of the Year, Puget Sound Energy (PSE). It has earned this recognition through its Personal Energy Management program, which is the largest time-of-day and comparative time-of-day pricing program in the United States.

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PSE, an electric distribution utility, changed its way of thinking and is now the leader for the rest of the country in terms of demand side management.

California is looking to this northern neighbor to help prevent recurrence of its ugly nightmares. According to Dow Jones, the California Consumer Power and Financing Authority wants to install meters that charge residential consumers more for using power during high-demand hours and let them know at any time how much they are actually paying for their electricity.

That’s what PSE has been doing since it began its pilot program last May. It includes 300,000 residential customers, and the Washington Utilities and Transportation Commission (WUTC) recently approved PSE’s plan to extend the program through 2002 and expand its reach to include 20,000 businesses.

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William S. Weaver, chairman, president and CEO, spoke with EL&P about PSE’s leadership role and plans for the future.

EL&P: What is PSE’s overall market strategy today?

Weaver: Our focus continues to be the same as it was four years ago, and that is to be the best in the energy distribution business. Four years ago we defined the best as best service at lowest cost and then we put in place metrics to gauge our progress. Our performance against those metrics is extremely satisfying.

Technology has played a large role and will continue to play a large role in lowering overall costs and increasing service quality. We’ve successfully invested in a fixed network automated gas and electric meter reading system as well as in the customer and business information systems that are necessary to craft business propositions for our customers around energy usage.

We now have 1,200,000 of our total meters of 1,500,000 that are on the automated system tied into our customer information and billing systems. We could virtually have everybody on right now, but we’re waiting for a signal in our upcoming rate case before we go out to the outlying meters and do them as well.

Also what’s played a role in succeeding in our business strategy, other than just technology, is to use outside service providers for any function which can drive better and cheaper service. Contrary to what a lot of companies in the industry believe, there’s a measurable increase in service quality from outsourcing certain functions.

On the unregulated side of the business, we’re continuing to build profitably our design, maintenance and construction business, InfrastruX. Presently, it has annual revenues of $250 million. And in the next several years it will do a billion dollars worth of business annually.

Also on the unregulated side, we successfully sold our software development company, ConneXt, this past year to Alliance Data Systems [Dallas] and we licensed the principal product of ConneXt, which was our ConsumerLinX customer information system, to ADS in return for a continuing royalty from ADS.

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PSE retains ownership of ConsumerLinX, and ADS will provide maintenance and upgrades to ConsumerLinX and use the product to serve us and its other clients.

I’m pleased that the distribution business is today a favored business, whereas four or five years ago it was the energy trading, marketing side of the business people were all interested in. It looks like current perceptions support our direction.

EL&P: What effect do you think California’s situation will have on deregulation moving ahead in this country?

Weaver: As a company, we’re neither for nor against deregulation or access at the retail level. I think both systems have proven to work around the world. What we are against is the uncertainty that’s being injected into the electric business as so-called public policy-makers fruitlessly debate this issue.

California is being used as ammunition in the debate by those that are opposed to retail deregulation. For that matter, recently I’ve heard that even Enron’s recent business problems are being used for the same purpose. But honestly, neither has much to do with deregulation, which shows how much the participants in this debate are just grasping at straws to support their arguments.

California’s problems were in the first instance a function of not allowing end users to see and pay the real costs of energy. Gray Davis [governor of California] is quoted as saying that he could have solved the problems in 20 minutes if he had just let customers’ rates reflect costs. Finally, [there’s] some straight talk.

I think the whole debate over deregulation is somewhat a waste of time. The proper question is whether end use customers should have choice of energy sources and then bear the real-time costs of whatever they choose. And of course that’s exactly what our company has been facilitating in the installation of all of this technology I talked about. The notion is that we can offer all of our customers that choice and then we’ll bill them the real cost of whatever they choose.

Retail deregulation, or not, is quite irrelevant. I’m amazed we’re spending as much time talking about it as we are. I would rather spend time working on the customer side of it, so they can get what they actually want rather than listening to regulators debate what they think customers should want.

EL&P: What are your planned growth areas for the next five years?

Weaver: We intend to continue to grow the distribution business by looking at ways to do what we do for our existing native load customers in better and cheaper ways. But also, if the opportunities come along-because we’ve had such a successful experience merging gas and electric-we could well do additional consolidations. And, of course, we will continue to grow InfrastruX on the unregulated side.

EL&P: What was PSE’s greatest accomplishment in 2001?

Weaver: Our greatest achievement in 2001 is having built the capability to put in place for virtually all our customers true real-time pricing. We’re the first utility in the world to have that capability, and as of the end of this week [as of November 26], to offer it to our customers.

Our pending rate proposal is going to give customers a choice to receive variable pricing based on energy costs which vary each day as well as different levels of cost during the day depending on whether they’re using on- or off-peak.

Also in our pending case, if customers don’t want the variable rate, we’re going to offer them traditional pricing, which is average rates instead of real-time pricing; but they’re going to pay in addition to the rate the cost of the hedge to go out and get average costs. Assuming the state’s approval, we’re going to have a variable rate that we’ll offer customers, which varies real-time with cost, and a fixed rate. That’s analogous to variable and fixed mortgages. Of course, the fixed rate is expected to cost more in the long run because in effect, a third party will deal with the variability, and customers will be able to see the associated cost.

This is an absolute blockbuster; nobody’s ever done such a thing, and it virtually deregulates the markets to let customers see price signals.

EL&P: Are you anticipating that most customers will go with the variable real-time pricing, or what population might opt for the fixed rate?

Weaver: I think it depends on which one the state makes the default rate. My preference would be if people don’t elect, they get the variable rate because public policy supports it. It’s suppressive of demand and it forces people to make rational usage choices based on the real costs of what they choose.

I would hope that in the long run people would take the variable rate just because they’ll have a much better sense of energy markets and the need to conserve. We’ve very focused on the demand side in our business and always have been here in the Northwest.

EL&P: What was PSE’s greatest challenge in 2001?

Weaver: The perception is that the West Coast energy crisis is over, but the reality is it has just been postponed and there’s still a lot of debris left over from 2000-2001 that needs to be cleaned up. Like all the utilities in the West, we’re burdened with some of that debris, and for us it means we’ve got energy costs that exceed the levels allowed in rates.

But unlike all the other utilities in the West that have had rate increases to take care of this, we’ve not been allowed to raise our rates. We don’t know why. We’ve not had a net increase in electric rates since 1993, and the state so far has turned down our request for emergency increases or deferrals in order to take care of this energy cost problem.

These unrecovered costs [for PSE] are mounting to the tune of about three-quarters of a million dollars a day. Something needs to be done by the state quickly, or we’re going to look exactly like California, which is peculiar given that our state takes pride in insisting it’s not California.

If this problem is allowed to go on for a year, we will have about a $275 million under-recovery.

EL&P: What is the financial status of other utilities in Washington?

Weaver: The other investor-owned utility of any size in Washington is Avista, Spokane. It is now rated junk at the corporate level because it can’t recover its power costs. It did manage to achieve a rate increase, but it didn’t help with the rating agencies because it was simply too little, too late.

Right now, if you look at the bond ratings of the investor-owned utilities in the Northwest, you’ll see the two investor-owned utilities in Washington right at the bottom. Avista’s junk rated at the corporate level, and we’re one notch above junk.

The public agency utilities here, the munis [municipals] and the PUDs [public utility districts], make their own rate adjustments. They’ve had up to 50 percent rate increases to take care of this problem a long time ago-last winter and last fall-whereas the regulated utilities are not allowed to.

Clearly the state is going to have to deal with this anomaly. Whether that eventually means the legislative and executive branches, I’m not sure.

For more information about PSE and its Personal Energy Management program, visit www.puget.com.

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