Puget Sound Energy agrees to move more customers from gas to electric heat

About 10,000 Puget Sound Energy customers will be offered financial incentives to switch from gas to electric heat in a pilot program that will help chart a new course for the state’s largest energy utility.

The program is part of rate increase agreements approved last month by the Washington Utilities and Transportation Commission, which also require a phaseout of ratepayer subsidies for new PSE gas hookups.

These two measures, and other rate case settlement provisions, are intended to keep PSE on a path that largely eliminates greenhouse gas emissions from its operations. A 2019 law calls for power utilities to reduce this pollution to net-zero by 2045, and the 2021 Climate Commitment Act sets a tightening cap on them.

The laws require huge changes for PSE, which serves some 1.2 million electric customers and another 850,000 natural gas customers mostly in northwest Washington. PSE will have to move away from natural gas and coal, which in 2020 was used to generate half of the utility’s electricity, and also is expected to slash pipeline deliveries of natural gas to homes and businesses.

As a regulated utility, PSE must have rate increases approved by the utilities commission, which reviews them in rate case proceedings.

The commission also has an oversight role in monitoring PSE’s moves to cut greenhouse gas emission. The most recent rate case was complicated and sometimes contentious as PSE, along with environmental groups, wrestled over how to equitably cut emissions.

“We anticipate that utilities around the country will look to this agreement as a model,” said Jaimini Parekh, senior attorney for Earthjustice, who participated in settlement negotiations on behalf of the Sierra Club, the NW Energy Coalition and Front & Centered.

“We are in agreement with the environmental community that this case really lays the foundation for the company’s transition to clean energy,” said Jon Piliaris, director of regulatory affairs for PSE.

One example of the shift is the $15 million pilot program to offer incentives to switch from gas to heat pumps and other efficient electric appliances. This will get underway later this year in parts of Western Washington where PSE delivers gas and electricity, as well as in Seattle, where Seattle City Light delivers power.

The knowledge gained from this effort is supposed to be used to develop a broader plan for switching more PSE customers off natural gas. PSE plans for its power to increasingly come from cleaner sources, such as solar and wind farms.

Other parts of the settlements call for expanded funding for weatherizing homes of low-income customers to make them more energy efficient and also to develop a plan to offer them discounted rates.

“There’s quite a bit of cost associated with this transition. And so we were very mindful of the impact that would have on customers with less means,” Piliaris said.

Rising rates

The settlement reached last month is intended to set rates for 2023 and 2024 for both PSE gas and electric service.

Under the new rates that took effect last week a typical residential natural gas customer can expect to pay $4.88 more a month in 2023. The monthly bill would increase by $1.33 per month in 2024.

A typical electric residential customer can expect in 2023 to pay $8.73 more. Then, in 2024, that electric bill would increase by another $1.43 per month, according to an analysis by PSE.

Even as the rate case takes effect, a new pricing skirmish has emerged as PSE calculates some of the financial impacts of moving off fossil fuels. In a Dec. 27 post-settlement filing to the Utilities and Transportation Commission, PSE asked for a much bigger 2023 electric rate increase than had initially been agreed upon.

That filing requested another $166.5 million in 2023 revenue from additional electric customers, which utility officials said was largely needed to cover $135 million in additional power costs resulting from compliance with the 2021 Climate Commitment Act.

The Utility and Transportation Commission, in a sharply worded decision released Jan. 6, rejected that request, which it calculated would cause the 2023 rate increase to jump to more than $14 per month for a typical electric customer.

In their order, the three utility commissioners criticized PSE for not submitting this request earlier in 2022 while the rate case will still open.

“This is a substantial and material departure from the rates the Commission determined were equitable, fair, just, reasonable, and sufficient,” the commissioners wrote.

Shifting markets

PSE officials say that the Climate Commitment Act cost calculations could not be fully developed until October, when the Ecology Department finalized the rules to implement the law.

Under the law, many major greenhouse gas emitters must purchase allowances issued by the state Department of Ecology to cover their pollution. They can be bought either at quarterly auctions, beginning this year, or through secondary markets.

PSE and other energy utilities will be provided free allowances, a provision that legislators included in the law to help ease the impacts on ratepayers. These allowances will be used to cover emissions.

The free allowances have been contested by Invenergy, an independent power producer that must pay for allowances. The company filed a lawsuit last month alleging the state gives utilities an unfair advantage when selling power on wholesale markets.

The allowances, even when acquired for free, still represent something of value based on what others are willing to pay for them. And PSE officials say they will assign a “cost” to the allowances that will be included in the overall expenses required to produce power from natural gas and coal.

Piliaris said PSE officials monitor shifting prices in wholesale power markets to determine when to operate the utility’s plants, and when the cheapest option is to buy power from other providers. Once the allowances are included as part of plant operating costs, PSE expects its fossil fuel plants will run less often, and the utility will more frequently buy electricity on the wholesale markets.

That shift will drive a “significant increase” in power costs, according to the Dec. 27 filing.

The commission has left the door open for PSE to continue make the case for an additional rate hike through a new filing. The utility is likely to purse that option.

“We’re still deliberating a path forward, but there will be a path forward,” Piliaris said.