Executive Compensation and Corporate Bailouts have been in the national news recently, but they are also a local issue. Many folks may have seen Steve Duin's column in the Oregonian concerning recent controversy over PGE's Executive Compensation. What many readers may not be aware of is that PGE hopes to be bailed out for its lost profits during the current recession. And this bail out is going to come from ratepayers, in the form of a surcharge on our electric bills, not the government.Decoupling -- removing the utility incentive to sell more power as the way to make more money -- is fine, but the devil is in the details. Allowing the utility to reap extra profit from the drop in power sales due to the Great Recession is like giving the Rooster extra chow for the brilliant sunrise -- it's rewarding someone for something they had nothing to do with bringing about.
Like nearly all businesses in the country, PGE is seeing its retail sales fall. Unlike nearly all other businesses, however, PGE may get to make up its lost profits during this recession by tacking them onto our future electric bills. But that is not all - because of the design of the bail out, PGE will actually get to recover more than its lost profits.
This means that when a small business lays off an employee, PGE sees its profits increase. A house that is vacant and on the market for months also increases PGE's profits.
These are the results of a little-noticed PUC decision in January that granted PGE a decoupling mechanism. The theory behind decoupling is to "decouple" the link between a utility's profits and the volume of electricity the utility sells. According to the theory, by eliminating this link, utilities should be more interested in investing in energy efficiency. Because energy efficiency is a cheaper resource than investing in new power plants and reduces electric bills, decoupling should lead to lower costs for customers.
In theory, decoupling sounds good, and the amount of lost profits due to energy efficiency improvements is relatively small. But because decoupling looks at the lost profits due to a reduction in load, it has a much bigger impact during a recession. During a recession, as economic activity falls, demand for electricity falls at a rate that is greater than can be caused by even the most aggressive energy efficiency programs. In the last recession, PGE's one-year reduction in load was more than 8 times greater than we would expect from energy efficiency programs.
The PUC established this new mechanism for PGE's residential and commercial customers with a two-year trial period. The PUC also ruled that any surcharge to make up for lost profits should be no more than 2% per year. But if the lost profits exceed this cap, that excess amount will simply roll over and be charged to customers in the following year. PGE calls this practice a "circuit breaker"; we call it an installment loan.
The current recession is proving to be much worse than the last recession. Unemployment in Oregon reached 11.9% in February, more than double where it was a few months ago. This is much worse than the 8.8% peak unemployment during the last recession in 2002-03. And few economists believe that we have reached bottom yet.
With the decoupling roll-over provision in place, PGE customers are going to be paying for this mechanism for several years. If small commercial customers see load decreases similar to the 2002-03 recession, there will be a surcharge for 3 years. But we know this recession is worse. Based on the strength of this recession, the surcharge could last 5 or more years.
The problem with this decoupling mechanism isn't limited to the number of years that we will be paying for it; we will also be overpaying PGE for their lost profits under this mechanism. When a customer uses less electricity than PGE forecasted, PGE gets to sell that saved electricity into the wholesale market. So, the financial loss to PGE can never be more than the difference between the wholesale electricity price (which PGE gets from selling the saved power) and the retail rate (which PGE would not get because the customer did not use the forecasted amount of electricity).
In recent years, the difference between the price of wholesale electricity and PGE's retail rates has been has been about 3 cents per kilowatt hour (kWh). This means that PGE loses 3 cents for every kWh that its customers do not purchase. PGE's decoupling mechanism, however, pays them 4.6 cents/kWh. Next time you drive by a vacant house or vacant storefront, consider this: PGE is losing about 3 cents for every kWh that would have been used in that house or store, but customers will have to reimburse the company 4.6 cents (plus interest) for each kWh.
Decoupling is not a terrible idea. CUB supported decoupling experiments for electric utilities in the 1990s, but found that decoupling mechanisms had no positive effect on a utility's level of support for energy efficiency programs. Utility investment in energy efficiency actually declined while the utilities were decoupled.
More recently, decoupling proved to be successful for natural gas utilities in Oregon during the 1990s. CUB learned from these experiments, and when natural gas utilities wanted decoupling, we demanded that the decoupling mechanism be directly tied to additional energy efficiency investments. Our proposal was the basis for decoupling mechanism for NW Natural and Cascade Natural Gas. If these utilities cut their energy efficiency investment, they will automatically lose their decoupling mechanisms. In addition, it should be noted that a recession doesn't have the same impact on a natural gas utility that it has on an electric utility.
Last week, CUB made a filing with the PUC asking them to suspend PGE's decoupling mechanism until the current recession is over. We are asking the PUC to fix the mechanism so customers aren't required to overpay PGE for reductions in load when it resumes after the recession. Finally, if the Commission is unwilling to suspend decoupling until the end of the recession, we are asking them to make the 2% rate cap, a hard cap with no roll-over. Under this scenario, PGE would still make about $35 million off this mechanism, without having to commit a dime to additional energy efficiency. (That's bad policy, but better than allowing them to make $50 or $70 or $100 million off of decoupling with no energy efficiency investments).
Finally, we note that decoupling was implemented for an electric utility just as the economy was heading into a recession once before. It was in Maine in the early 1990s. The Maine PUC implemented decoupling for Central Maine Power, and within two years customers owed the utility $52 million. Because of this experience, decoupling is no longer seen as a useful tool in Maine.
Is Oregon going to make the same mistake as Maine, or are we wise enough to correct this mistake before ratepayers spend millions to bail out PGE.
The bottom line is that Oregon suffers greatly compared to its neighbor to the north, where public power districts -- citizen-owned nonprofit power companies -- are much more prevalent. PGE's latest shenanigans (a sweet multimillion dollar sendoff for a 57-year old CEO while plenty of people in Oregon are facing utility shutoff notices) only points out again that we should never expect anything better from a private power company until we take them over and run them for everyone's benefit, rather than just the benefit of the stockholders.
Public power really took off in the Great Depression -- the current return of those hard times would be an excellent time to finish the job and get rid of private power entirely. We are going to be faced with some very difficult challenges in the next few years; getting a grip on climate is going to require a lot more than most people realize. The only way we're going to get through these times successfully is if the power companies can forget the profits of stockholders and worry about the well-being of Oregon, rather than paying lip service to the well-being of Oregon and actually only caring about the profits of stockholders.