August 5, 1998

Dear Interested Party:

On August 13, we will convene the third of our series of Topic Area Meetings focusing on parts of the study of the state’s electric industry that we are conducting under the provisions of ESSB 6560. This meeting will be designed to elicit your views on section (C) of the study, which deal with the potential for cost-shifting and strategies to avoid inappropriate cost-shifts between and among customer classes. Instructions on how to get to the meeting are attached.

Agenda for AUGUST 13, 1998 Topic Area Meeting: 6560 Study Section C

9:30 -	Introductions – Review Agenda
9:45 -	Clarifying Questions on Data Survey Section I (Part I, questions 4, 5, 8)
10:15 -	Review General Approach to Section C analysis.
11:00 -	Discuss Bounding Analysis of Potential for Cost-shifting (see below).
12:00 -	Lunch (on your own)
1:00 -	Strategies Available to Minimize Cost-shifting.
4:00 -	Adjourn

To help you prepare for the meeting, we describe below a bit more about our approach to Study Task C and how you can contribute ideas and suggestions.

Section (C):

• The potential for cost-shifting among customer classes and among customers within the same class.

Here we plan to describe the basic conditions that could lead to three categories of cost-shifting: shifting of generation related costs, shifting of delivery system related costs, and shifting of state and local tax related costs.

While many definitions of cost-shifting might apply, we propose to focus on cost-shifting that constitutes a departure from the status quo in the distribution of responsibility among customers for the current cost of generation, delivery service and taxes. These are costs which exist today. Changes in the recovery of these costs from customers might lead to their being shifted from one customer to another.

We plan to evaluate the potential magnitude of such shifts through a "bounding" analysis that will estimate the consequences that a major change in cost distribution might have on the residential and commercial classes of service. As a bounding analysis, the purpose will be to estimate the maximum size of the potential, not the probability that cost-shifts of this magnitude would actually occur. This probability will necessarily vary depending on circumstances of each of the utilities. We believe the value of this exercise will be to help policy-makers understand the overall magnitude of costs and potential effects involved, whether or not these are viewed as a "problem" or as "inappropriate". The analysis will not make this value judgment.

Finally, we have chosen to focus the bounding analysis on the potential magnitude of costs that might be shifted from the industrial to the residential and commercial classes. With respect to current utility cost-structure, we perceive this to be the issue of concern in most discussions of cost-shifting. We will not, and could not, in this analysis attempt to evaluate the appropriateness of current cost-structures or the way in which costs are recovered from the various classes in current rates.

For generation costs:

We will estimate the potential based on the assumption that the high voltage, or industrial, service class purchases generation at market prices and any difference between these prices and utility embedded generation costs are recovered from the remaining customers. This analysis will require estimates of the size of loads involved, the market price of power, and the embedded cost of generation. Our information survey requests data on the first two of these from the utilities. We will use the utility-supplied data as one source of information to inform these assumptions. Embedded generation cost data will be taken from the information to be supplied to the WUTC and the State Auditor in response to the direction of HB 2831 (the unbundled cost-study). It is important to note that the potential for cost-shifting estimated in this way could turn out to be either positive or negative, depending on the relationship between estimated market prices and current embedded costs.

For delivery costs:

Following the general approach taken for generation costs, we will estimate the magnitude of embedded costs associated with distribution system delivery of power to the high voltage, or industrial class. Assumptions about the proportion of this class that might physically bypass the utility system will permit estimates of the magnitude of delivery costs that might be shifted. We have asked the utilities to provide estimates of load that might physically bypass delivery facilities and we will use these estimates to inform our assumptions about bypass potential.

Tax related costs:

Most utility retail sales generate both state and local tax revenues. Power sold to customers by suppliers from out of state, or by suppliers not otherwise taxed under the state or local systems would not generate these revenues. We have asked the utilities in our information request, to identify any such transactions of which they are aware. In addition we plan to work with the state Department of Revenue to assess the likely magnitude of this affect.

• Strategies available to minimize inappropriate cost-shifts.

Here, we plan to:

• examine the trends that are affecting conditions that might lead to cost-shifting in the categories evaluated above. These trends will include the proportion of loads already being served at market prices, as well as the impact that changes in retail market structure might have on the potential for the costs estimated above to be shifted.
• discuss strategies and policies that could be adopted to minimize the potential for these costs to be shifted. This examination will include the characteristics of each strategy or policy as they affect the prospects for cost-shifting. As is the case with all of the 6560 study sections, we do not intend to propose or recommend any preferred strategy. Our list of candidates for examination include:
• stranded cost recovery for generation or delivery costs
• establishment of terms and conditions for bypass
• full retail service competition for all customer classes
• rate caps
• distribution territory franchising
• changes to general utility tax structure

How You Can Help

This general framework for the approach to task "C" is the one we described at the July 8, 1998, meeting. In this Topic Area meeting we would like your help through comments and suggestions regarding:

• The general analysis approach. Are there any alternatives or refinements you would suggest.

• Suggestions and recommendations you would make concerning policies and strategies that we should evaluate.

We are looking forward to a constructive discussion of the issues affecting Part (C) of the 6560 study and particularly look forward to your suggestions and comments.

See you on Thursday the 13^th of August.

[If you are not able to attend the meeting, you can provide suggestions and comments on these sections of the study through our general e-mail address – wepg@ep.cted.wa.gov – or by mail]

Sincerely,

Study 6560 web site: http://www.cted.wa.gov/energy/archive//6560 (includes a list of agency contacts, phone numbers and e-mail addresses).

General e-mail: wepg@ep.cted.wa.gov