East Jefferson pocketbook shock seen by PSE-funded study if PUD takes over electricity service
By Jeff Chew, Peninsula Daily News
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"The key finding is a PUD takeover of the electric utility will not financially benefit customers in Jefferson County, and may in fact result in rate increases because of high costs and lost economies-of-scale involved in a takeover," said the report made public Tuesday by Bob Bellemare, president and chief executive officer of UtiliPoint International Inc.
UtiliPoint has been working on the report for the past four months, starting shortly after Citizens for Local Power launched a petition signature drive to get the PUD power-service question on the Nov. 4 general election ballot.
Election set Nov. 4
Release of the report comes a day after Jefferson County commissioners called the election after the required number of signatures were certified by the county Auditor's Office.
The county auditor's elections division certified that, of the 2,169 petition signatures presented by Citizens for Local Power in mid-June, 1,650 valid registered-voter signatures were certified.
The PUD now provides water and sewer service to East Jefferson County customers. PSE provides electrical power.
PSE representatives are expected to present their study findings to the Jefferson County PUD commissioners during a briefing session at 3 p.m. today in the Chimacum Grange, 9572 Rhody Drive.
The PUD has contracted D. Hittle & Associates Inc. to conduct its own independent study, findings of which will be ready by August to help voters make their decision, PUD commissioners said.
The company serves more than 17,400 from near Brinnon to Port Townsend.
Bellemare said PSE could accept or reject the findings of UtiliPoint International's report.
UtiliPoint's study states a disclaimer that it is solely responsible for the report's contents, and nothing in it should be construed as PSE's information, opinions or conclusions.
UtiliPoint in the past 25 years has worked on dozens of "municipal takeover attempts," the report states, and Bellemare has been involved in 10 feasibility reports during the past seven years.
"Our study finds that the risks of taking over PSE's electric system are not financially justified," Bellemare said.
"The acquisition of a substantial of electric system in these challenging economic times does not make good financial sense.
"The cost to purchase, operate and maintain PSE's electric system in Jefferson County are significant."
Costs
Bellemare broke out the costs that add up to $77 million, saying the purchase of "hard assets" alone would be $46 million.
Start-up costs are figured at $10 million, he said, with $3 million for legal fees and $15 million for "going concern compensation" — what PUD would pay for the value of PSE assets to generate future income and cash flows.
Because PSE would have to reconfigure its remaining power system and operation practices to ensure the safety and reliability of service to its customers outside the East Jefferson County limits, PSE would have to be compensated for a "severance damage," the report said.
UtiliPoint uses a $2.5 million budget for power system reconfiguration.
He said financing the takeover and then purchasing power in a global market will put customers at risk for paying higher rates than the average cost-based rates of PSE.
Without power generation, he said the PUD would have to serve its load from the open market and attempt to qualify for the limited hydropower from Bonneville Power Administration for reduced "preferential" rates.
Applying for such rates, according to UtiliPoint's report, takes years, and it would likely be 4 to 7 years before Jefferson PUD receives its full allotment of BPA power.
The report states that before receiving BPA power, the PUD must legally form a retail electric utility, condemn and purchase PSE's electric distribution system, and qualify for BPA service.
"Given the length of the process, the likelihood of competing requests and the formation of new tribal entities, which can compete on an equal basis with the PUD, it is uncertain that the Jefferson PUD could ever receive sufficient BPA service to cover its entire load," the report said.
Such a situation would lead to higher rates for Jefferson County customers.
"We respect the community's right to investigate how critical services are provided," said Sue McLain, PSE senior vice president of operations.
"But a government takeover is not the answer to lowering rates or improving service.
"PSE has the employees, experience, economies of scale, and regulatory oversight from the Washington Utilities and Transportation Commission to provide the reasonable rates and level of quality."
Condemnation time
The feasibility study reports that the PUD will likely not be an electrical utility by 2011 because electric utility condemnation cases normally take four to eight years to resolve.
The $77 million cost calculated for PUD to take over the system is exclusive of any severance damages or "stranded cost award," money a utility could argue for in a settlement agreement.
Stranded costs can occur when an asset is rendered useless, or impaired by the taking or purchase of private utility property by a government entity, the report states.
Bellemare said that several issues would have to be worked out, such as which agency would own what, such as transmission lines and substations.
Also, he said, money would have to be borrowed through utility bonds, to buy the system or hire a contractor to carry out services.
Leasing part or all of the system is another option to consider, he said.
Terry Oxley, PSE director of community services, said the study findings gives the company that has served the county about 100 years a platform from which to educate the voters.
He said PSE was not actually threatening a lawsuit against PUD to block the takeover.
Instead, he said, the legal process lies in the condemnation proceedings that he believes PUD would have to take to acquire the PSE assets.
"We really see our role now as having the right information to help people make the right decision," Oxley said at the new PSE office in downtown Port Townsend.
"Let's let the facts carry the day and the public will hold us accountable," Oxley said.
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Jefferson County Editor Jeff Chew can be reached at 360-385-2335 or jeff.chew@peninsuladailynews.com.
Last modified: July 29. 2008 9:00PM