-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PhdIU1ojBKAZ0BGVLgYFWTZMCqrhOD0eQWWCobepoqmgifxVpKWc8G0tMrxgZ21l qVJfsFC3V+dwG5Oe4Ua6FA== 0001085392-01-500050.txt : 20020412 0001085392-01-500050.hdr.sgml : 20020412 ACCESSION NUMBER: 0001085392-01-500050 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011128 ITEM INFORMATION: Other events FILED AS OF DATE: 20011128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUGET ENERGY INC /WA CENTRAL INDEX KEY: 0001085392 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 911969407 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16305 FILM NUMBER: 1800552 BUSINESS ADDRESS: STREET 1: 411 108TH AVENUE N E 3RD FLOOR CITY: BELLEVUE STATE: WA ZIP: 980045515 BUSINESS PHONE: 4254623202 MAIL ADDRESS: STREET 1: 411 108TH AVENUE N E 34RD FLOOR CITY: BELLEVUE STATE: WA ZIP: 980045515 8-K 1 k81127.htm NOVEMBER 28, 2001 PUGET ENERGY 8-K October 23, 2001 ====================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549

FORM 8-K

CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                        November 28, 2001                                             November 28, 2001

________________________________________________________________________________ (Date of earliest event reported)

PUGET ENERGY, INC. (Exact name of registrant as specified in its charter) ----------------------------- Commission File Number 1-16305 -----------------------------

                        Washington                                                          91-1969407
                        (State or other jurisdiction of                                  (IRS Employer
                        incorporation or organization)                             Identification No.)

411 - 108th Avenue N.E., Bellevue, Washington 98004-5515 (Address of principal executive offices) (425) 454-6363 (Registrant's telephone number, including area code) ================================================================================

ITEM 5. Other Events

On November 27, 2001 the Company issued the fololwing press release.

On November 26, 2001, Puget Sound Energy, Inc. (PSE) filed both an electric and gas general rate increase request with the Washington Utilities and Transportation Commission to halt the ongoing financial damage caused by increased power supply and infrastructure costs. The filing request is for a $228 million increase in base electric revenues and a $85.9 million increase in base natural gas revenues. Pending a final order in the rate case process, which is anticipated to be an 11-month process, PSE intends to seek prompt interim electric-rate relief to deal with an under-recovery of electric power costs averaging approximately $625,000 per day.

In the general rate filing, PSE is also proposing a comprehensive plan designed to help reduce future energy price volatility by empowering customers to make informed usage decisions. The plan would provide natural gas and electric customers equipped with automated meters price signals that reflect wholesale costs and would establish adjustable rate and fixed rate pricing options.

The last electric general rate case was in 1993 and the last natural gas general rate case was in 1995. Attached as Exhibit 99.1 is the press release issued November 27, 2001 and Exhibit 99.2 is the direct testimony of William S. Weaver, Chairman, President and Chief Executive Officer in connection with the general rate case.

ITEM 7 Exhibits

Exhibits 99.1 - November 27, 2001 press release on Puget Sound Energy's request for general rate increase.

Exhibit 99.2 - Direct testimony of Wiliam S. Weaver, Chaiman, President and Chief Excectutive Officer of Puget Sound Energy and Puget Energy

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

PUGET ENERGY, INC.

James W. Eldredge

__________________________________

James James W. Eldredge

Corporate Secretary and Chief Accounting Officer

Date: November 28, 2001

EX-99 2 ex992.htm WEAVER TESTIMONY Exhibit 99.2

EXHIBIT 99.2

EXHIBIT NO. ______ (WSW-1T)
REVISED: November 27, 2001
----------------------------
DOCKET NOs. UE-011569
UE-011570
UG-011571

2001 PSE RATE CASE
WITNESS: WILLIAM S. WEAVER

BEFORE THE
WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION

WASHINGTON UTILITIES AND
TRANSPORTATION COMMISSION,

Complainant,

PUGET SOUND ENERGY, INC.

Respondent.

REVISED DIRECT TESTIMONY OF WILLIAM S. WEAVER
ON BEHALF OF PUGET SOUND ENERGY, INC.

NOVEMBER 27, 2001

PUGET SOUND ENERGY, INC.

DIRECT TESTIMONY OF WILLIAM S. WEAVER

I. INTRODUCTION

Q: Please state your name, business address and your position with Puget Sound Energy, Inc.
A: My name is William S. Weaver. My business address is 411 - 108th Avenue N.E., Bellevue, WA
98009-9734. I am currently Chairman, President and Chief Executive Officer of Puget Energy,
Inc., and its utility subsidiary, Puget Sound Energy, Inc. ("PSE" or the "Company").

Q: Please summarize your educational and business background.
A: I received an A.B. degree from Hamilton College in 1965 and a J. D. degree from the University
of Michigan law school in 1968. Following graduation from law school in 1968, I became a
member of the Washington State Bar and joined the Seattle law firm of Perkins Coie. I engaged
in the general practice of law with that firm, first as an associate and then as a partner. I
opened the Bellevue office of Perkins Coie in 1983 as its managing partner. My law practice
focused on regulated industries. I served as a chief counsel to Puget Sound Power & Light
Company from 1980 to 1991 while a partner with my law firm. In 1991, I left private practice
and joined Puget Sound Power & Light Company as Executive Vice President and Chief Financial
Officer, a position I held until 1997 when Puget Sound Power & Light Company merged with
Washington Energy Company. During the first operating year of the merged company, I held the
titles of Vice Chairman and President and Chief Operating Officer. On January 1, 1998, I
became PSE's President and Chief Executive and later became President and Chief Executive of
Puget Energy, Inc., PSE's parent company, when that company was formed. On July 17, 2001, I
became Chairman of the Board of both companies as well.

Q: What are your responsibilities as the Chairman, President and Chief Executive Officer of Puget
Sound Energy, Inc. and Puget Energy, Inc.?
A: I have overall management responsibility for both companies.

II. PURPOSE AND CONCLUSIONS OF TESTIMONY

Q: What is the purpose of your testimony?
A: My testimony will introduce the Company's November 2001 general rate increase request. This
request is the Company's first for both electric and gas in many years. My testimony addresses
the nature of the Company's request and why the Company is making this filing at this time.

Q: What are the primary conclusions to be drawn from your testimony?
A: The Company's current gas and electric rates fall far short of covering the Company's current
costs of service, including the cost of capital. This situation will continue to deteriorate,
denying the Company the ability to rebuild itself financially, until sufficient rate relief is
granted. The Company needs a rate increase in order to provide service in accordance with
rates that are just, fair, reasonable and sufficient.
PSE is dedicated to being the "best distribution company" anywhere. This has been our
focus since the merger, and it continues to be our focus. PSE is achieving this objective with
initiatives that have enhanced customer service and improved the reliability of the service PSE
provides to customers. PSE has done so while making significant reductions in the costs of
providing such service. However, to continue to provide these benefits for customers, PSE must
have adequate financial strength. Such strength requires timely recovery of costs and includes
rate mechanisms that protect the Company from financial harm it faces, on a daily basis, from
the wholesale energy markets. It means achieving returns adequate to restore investor
confidence and to strengthen the capital structure, and to access the capital markets as an "A"
rated utility. These are the elements PSE needs to rebuild its financial condition and to
enable it to continue to give its customers the highest quality service at the lowest price.

III. REQUEST FOR RATE RELIEF

Q: What is the level of rate relief requested by the Company in this proceeding?
A: For its electric operations, the requested relief is an overall increase of $228 million or
16.5% (exclusive of the current BPA residential exchange benefit and the BPA residential
exchange benefit that will be effective on October 1, 2002). For gas operations, the requested
relief is $85.9 million, or 14.5%, absent PGA adjustments. A request for an expedited interim
electric rate increase will be filed shortly following this request for a general rate increase.

Q: How has the Company managed to survive with rate levels that were set years ago?
A: PSE's ability to extract the cost savings potential of the 1997 merger has been critical to the
Company's ability to sustain the financial results it achieved during the term of the rate
stability plan. PSE achieved these savings while at the same time improving the quality of
service it was providing to its customers. However, recent volatility in the wholesale energy
markets, along with other uncontrollable costs such as taxes and a higher cost of money, has
overshadowed the cost savings extracted from our combined gas and electric distribution system
operations.

Q: How have the interests of customers and investors been served during the term of the rate
stability period?
A: Customers have benefited by PSE initiatives to lower costs and increase the quality of
service. Our customers also benefited from the Company's ability, from time to time, to sell
surplus power into wholesale markets, partially offsetting the Company's under-recovery of
power costs. However, the interests of investors have not fared so well. Investors have, on
average over the rate stability period, suffered because of the Company's inability to earn its
authorized rate of return. This is demonstrated by a review of the Company's Commission Basis
Reports, which show the following:

ROR Authorized
Year End ROR Achieved (Combined gas & electric)
- ----------------------- --------------------- ---------------------------------
12/97 7.84% 8.99%
12/98 9.02% 8.99%
12/99 8.22% 8.99%
12/00 9.63% 8.99%
12/01 (est.) 2.17% 8.99%
(4 years average 8.68% 8.99%
through 12/00 -
actual)
(5 year average 7.38% 8.99%
through 12/01
-estimate)

Moreover, in recent months, the Company's inability to recover its power costs continues to
devastate earnings and erode investors' equity in the Company. Efforts to obtain regulatory
relief have yet to compensate investors for this loss of value.

Q: What are some of the significant factors that have increased the Company's costs of service?
A: For electric service, power costs are the primary factor. Referring to filed Commission Basis
Reports, average net power costs are 44.2% higher for the year ending June 30, 2001, compared
to the rates that were put into effect in 1997 per the merger order. For much of this
five-year period, the Company was able to sell some surplus power into the market to offset its
power costs, thereby affording its customers some insulation from the extremes of market
volatility. However, in June 2001, FERC capped the price of power on the wholesale power
markets, and these prices subsequently fell well below the price cap established by FERC.
Thus, wholesale energy market volatility and price levels resulted in a significant overall
increase in PSE's power costs, and the current wholesale energy market prices do not allow PSE
to offset these costs through surplus sales. As it stands today, PSE is under-recovering its
power costs in the amount of approximately $625,000 per day (and such under-recovery is not
balanced off by cost savings in other areas or by increased revenues). The quantification of
the Company's unrecovered power supply costs is presented in Exhibit WAG-9.
For gas operations, an important factor driving the need for rate relief is the growth
in rate base, which is not surprising for a gas utility which has seen annual growth in
customers averaging over 3.5%.
Additionally, the higher cost of money is also contributing significantly to this
under-recovery for both gas and electric operations--29% of the Company's requested increase is
associated with the higher cost of money. The Company is also impacted by taxes (other than
federal income taxes). The average costs of these taxes have increased 20% on the gas
business, comparing the year ending June 30, 2001, with the year ending December 31, 1994. The
average cost of taxes other than federal income taxes for electric operations increased by 13%
for the year ending June 30, 2001, compared to the rates that were put into effect in 1997.
The low costs of operating our distribution system that management has achieved during
the term of the rate stability plan has led to significant savings, but these savings have not
been sufficient to make up for increased costs in areas that are beyond PSE's ability to
control.

Q: Have PSE's rates kept pace with the rate of inflation?
A: No, PSE's rates to its customers have not increased with the level of general inflation.
Comparing the Consumer Price Index (based on All Urban Consumers) from October of 1996 to
October of 2001, consumer prices have increased approximately 12.3%. Over that same time
period, the monthly bill paid by a typical residential electric customer has only increased by
3.7%--less than one-third the rate of inflation. Over that same period, the overall gas rates
(net of PGA adjustments) decreased.

Q: Have other major utilities in the area increased their electric rates over the same time period?
A: Yes. Other utilities in the area have increased their electric rates substantially over PSE's
rate stability period. The table below highlights how other major utilities in the Puget Sound
area have increased their rates in the last year alone.

Utility Percent Increase Effective Date
- -----------------------------------------------------------------------------------
Seattle City Light 1st Hike 9.9% Jan. 1, 2001
Seattle City Light 2nd Hike 18% March 1, 2001
Seattle City Light 3rd Hike 9.3% July 1, 2001
Seattle City Light 4th Hike 10.5% Oct. 1, 2001
- -----------------------------------------------------------------------------------
Tacoma Power Hike 33% Oct. 1, 2001
- -----------------------------------------------------------------------------------
Snohomish Co. PUD 1st Hike 33% Jan. 1, 2001
Snohomish Co. PUD 2nd Hike 18% Oct. 1, 2001
- -----------------------------------------------------------------------------------

Q: If the requested rate relief is granted, how will PSE's electric rate increase compare to
increases at other utilities in the region?
A: PSE's requested 16.5% overall increase, discussed above, has a comparatively modest impact on
customers in relation to the increases of these other regional utilities.

IV. PROPOSED RATE STRUCTURES

Q: Generally, what rate structure is PSE proposing for its gas and electric customers in this
proceeding?
A: PSE is proposing retail rate structures and choices that are very similar for its gas and
electric customers. These proposed rates achieve timely recovery of energy costs and
incorporate dynamic pricing as a means of keeping energy costs lower for our customers and for
the region as a whole. When customers are able to make informed consumption decisions, energy
costs are reduced. These rate proposals include options for customers. The Company is
proposing that customers be allowed to choose between a "tracked" rate, which would reflect the
short-term variations in the Company's energy costs, and a "hedged" rate, which would provide a
known rate for the commodity component of their service over the period of the hedge.

Q: Does PSE wish to expand its Personal Energy Management ("PEM") program beyond the time-of-day
pilot?
A: Yes. The restructuring of the electric wholesale market has created a new environment for
utilities and their customers. The traditional model of flat rates does not provide price
signals to consumers that would encourage them to reduce usage when rates are high. The lack
of consumer response to electricity prices impedes the development of a functioning wholesale
electricity market and tends to drive prices higher rather than lower, particularly with
respect to peak prices. Implementation of technologies and rate structures that provide price
signals to customers will be an important means of addressing such issues.
Expansion of the PEM program to provide real time pricing broadly across PSE's
customer base will provide such price signals to customers. The real time pricing element of
this program will apply to all customers with the necessary metering equipment and
implementation capability. PEM real time pricing would provide customers with two options:
(1) a daily variable rate option that fluctuates based on market prices and other variable power
costs, which will be implemented through a power cost adjuster and subsequently trued-up so
there is no over or under recovery of these elements of the Company's energy costs that are
subject to the adjuster; or (2) a fixed rate option, under which rates will not vary from
day-to-day during the year but will be adjusted annually and will include the cost of locking
in the price in advance. This allows for rates that more accurately reflect the Company's
costs. Over the long run, the real time pricing program will provide significant benefits, as
described in the testimony of Penny Gullekson, Dr. Eric Hirst and Dr. Peter Fox-Penner.

Q: Under PSE's proposal, would all customers have available real time pricing?
A: Yes, eventually. All customers whose meters have the Automated Meter Reading technology that
provides the necessary level of data transmission capability will be on PEM real time pricing.
This type of rate design most accurately matches energy costs (which vary throughout the day
and from day-to-day) to individual, measured, customer usage patterns. The remaining customers
will transition to the PEM real time pricing within the next few years as the technology is
installed.

Q: What are some of the public policy attributes of the rate structure?
A: The Company's proposed rate structure advances many public policy objectives, as stated in the
testimony of Dr. Peter Fox-Penner. Time-varying electric prices, such as PSE's, are highly
beneficial to most customers who have them and to the market place as a whole. Dynamic pricing
encourages reduced consumption during peak periods when power is most costly, when the grid is
under its greatest strain, and often when environmental costs are highest. Importantly,
dynamic pricing programs reduce volatility and price spikes in wholesale power markets. They
use the inherent power of economic incentives to reduce costs, conserve resources, reduce
wholesale price spikes, reduce the potential exercise of market power, increase reliability,
and provide environmental benefits.

Q: Has the WUTC previously addressed the appropriateness of timely recovery of power and gas costs?
A: Yes. Utilities like PSE must have mechanisms to timely recover power costs. If they do not,
they become financially unstable, with higher capital costs commensurate with the risk of
financial instability, and customers pay more and get less. As noted above, all customers on
PEM real time pricing will have two options: a daily variable option that fluctuates based on
market prices, and a fixed rate option, which will be adjusted annually and include the cost of
locking the price in advance. The variable options will be provided with a purchased gas
adjustment ("PGA") mechanism for gas customers, and a daily power cost adjustment ("PCA")
mechanism for electric customers. A PGA is a long-established mechanism to address this risk
for gas customers. A PCA is also a long-established mechanism to address this risk for
electric customers. Historically, Puget Sound Power & Light Company ("PSP&L") had PCAs (ECAC
and PRAM) and PGAs. Similarly, Washington Natural Gas ("WNG") had PGAs prior to the merger
with PSP&L.
PSE seeks to carry forward the PGA for its gas customers and to reestablish a PCA for
its electric customers. A PCA is appropriate where: (i) the cost being recovered is
attributable to an event beyond the utility's control (a "force majeure" event, typically
weather-related risks); (ii) the mechanism is a short-run accounting procedure that reflects
changes in short-run costs affected by the "force majeure" event; and (iii) the customer
receives a benefit of a capital cost reduction.
In this instance, all three criteria are met. First, the costs, which will be
recovered through the proposed trackers, are beyond PSE's control. There is a weather-related
component to the costs PSE seeks to recover through the PCA, and the volatility of the
restructured wholesale energy supply markets is itself weather-related and generally is beyond
the control of utilities like PSE. In the new environment of restructured wholesale energy
markets and the rapid and significant swings in power costs faced by utilities in the West, a
PCA is essential. PSE must face these markets every day. The markets can change rapidly and
dramatically.
The PCA proposed in this proceeding adjusts monthly, and the procedure established
accounts for short-run costs attributable to events beyond the utility's control. Finally, as
addressed in the testimony of Dr. Hadaway and Howard Hiller, the PCA will reduce the cost of
capital for customers.

V. FINANCIAL CONSIDERATIONS

Q: What changes have occurred in Western wholesale power markets since the Company's last general
rate filing?
A: Today's markets bear little resemblance to those that existed just a few years ago. Based on
FERC orders implementing the provisions of NEPA-92 and its Order 888, FERC has allowed entities
under its jurisdiction to sell power at competitive wholesale market rates, thus effectively
scrapping the decades-long cost-based regulation of wholesale electric markets. Since then,
prices have been very volatile and have appeared at times to be disconnected from market
fundamentals.

Q: What has been the impact of this new market environment on the Company's power cost variability?
A: PSE's exposure to power supply risk going forward is substantial: annual net power costs for
the rate year may vary by as much as $243 million. PSE's heightened exposure is the result of:

(i) its dependence on regional hydro conditions,
(ii) the increase in the volatility of western region power prices;
(iii) the deterioration in supply/demand conditions in the West precipitated by limited
growth in capacity; and
(iv) the uncertain ongoing administrative structure of the western power markets as
highlighted by the FERC price caps imposed in 2001.

Q: What circumstances affected the Company's power costs that are not reflected in test year power
costs?
A: The power costs for the test year (July 2000 through June 2001) rates are developed on a
projected, normalized basis--reflecting projected, normalized power costs for the period
October 2002 through September 2003 (the rate year). The effects of the extraordinary
circumstances experienced prior to the rate year are not reflected in the power costs used in
setting rates.

Q: Please describe these extraordinary circumstances and their effect on power costs.
A: These extraordinary circumstances occurred during the period of about May 2000 through July
2001 and included the following:

(i) Market power prices rose (and power supply availability in the region tightened)
dramatically. Natural gas market prices rose as well, but the increases were not as
drastic as the increases in spot market power prices.
(ii) Subsequently during this period, market power prices collapsed even more
dramatically. Natural gas market prices also declined.
(iii) Market power prices experienced unprecedented volatility.
(iv) Hydroelectric generating conditions in the region were the second worst on record.

The cumulative effect of these extraordinary circumstances has been to undermine the
Company's ability to offset escalating basic power supply costs with margins from off-system
market power sales. The Company's basic power supply costs have been and are increasing
substantially (notwithstanding the recent drop in wholesale spot market power prices).
More fundamentally, because spot market power prices generally far exceeded the
variable operating cost of PSE's natural gas-fired generators during the period mid-2000 to
mid-2001, the Company was able to economically operate its simple cycle combustion turbines.
These turbines could generate electricity at a cost far below the then prevailing market
price. During the mid-2000 to mid-2001 period, the Company's simple cycle combustion turbines
operated at a high capacity factor and helped offset the escalation in the Company's basic
power supply costs during a time when a number of other utilities were forced to seek
substantial rate increases.
Faced with extraordinary volatility and high prices in the wholesale market in the
mid-2000 to mid-2001 time frame, the Company also secured fixed price commitments for natural
gas supply for the generation the Company needed to have available for its retail loads.
The ability of the Company to use its simple cycle combustion turbines during the
mid-2000 to mid-2001 period to offset escalating base power supply costs was particularly
important in light of the merger rate stability plan. The volatility and level of wholesale
market prices during that period far exceeded the historic volatility that had been experienced
prior to the Company's merger order in 1997.
The Company's ability to use surplus sales to offset the escalation of the Company's
basic power supply costs unexpectedly changed when wholesale power market prices experienced an
extraordinary decline in the summer of 2001. These events are affecting the Company's power
costs to the point where the Company is currently under-recovering its power costs by an
average $625,000 per day over the 13-month period of September 2001 through September 2002.

Q: Has the inability of the Company to fully recover its costs in a timely manner impacted the
Company's financial well-being?
A: Yes. The Company needs to access the capital markets on a daily basis. PSE incurs
construction and operating costs necessary to provide safe and reliable service to its
customers. These costs are presented for the test year in the testimony of Karl R. Karzmar.
However, the Company's ongoing access to capital has been jeopardized and the cost of
available capital is excessive. This is due to significant underearning by the Company because
of excess power costs (i.e., an under-recovery of approximately $625,000 per day) and the lack
of a mechanism to timely recover these costs. As discussed in the testimony of William A.
Gaines, extraordinary circumstances attributable to volatility in the wholesale energy supply
markets have caused the Company's power costs to significantly increase. These costs fall
outside of the test year and, therefore, are not captured in the power costs included in the
revenue requirement presented in this case.
The Company projects a shortfall in power cost recovery of $247 million between
September 1, 2001 and the beginning of the rate year. As a result, PSE's ability to access
needed capital is in a rapidly deteriorating condition, and the cost of available capital is
excessive. This under-recovery is producing declining financial results that fall
significantly further below PSE's authorized rate of return.

Q: How does this harm customers?
A: Customers bear the costs of accessing capital markets. These costs will continue to be
excessive until regulatory action is taken and until the Company succeeds in rebuilding its
deteriorating financial health.

Q: Has this harmed equity investors?
A: Yes. As noted above, the Company's inability to recover its power costs has rapidly eroded
earnings and the market and book value of the Company's equity. This degradation of the
investors' stake the Company, due to lack of sufficient rates, is confiscatory.

Q: What does it mean, generally, to be able to access capital markets on "reasonable terms"?
A: "Reasonable terms" means a cost of debt that is consistent with an investment-grade credit
rating, without a penalty premium attributable to an unacceptable risk profile. Additionally,
"reasonable terms" means that the Company must be able to maintain an appropriate level of
earnings and to raise equity capital at a stock price that is not artificially depressed by the
current inability to fully recover costs and uncertainty as to future cost recovery. The
Company needs to reestablish and maintain financial underpinnings that support an "A" bond
rating. This, among other factors, will allow the Company to raise debt capital at investment
grade costs under most market conditions. It will also provide a financial structure that will
restore equity capital, and allow the Company to reduce debt and rebuild a capital structure
that comports with safety and economy.

Q: How can the Company's ability to access capital markets on reasonable terms be reestablished?
A: The Company needs adequate revenues to rebuild and maintain the financial structure that
supports an "A" bond rating. An "A" rating provides an optimal balance of cost (economy) and
risk (safety), and provides customers with a critical margin of safety during periods of
industry change and uncertain conditions. When negative developments occur, the reaction of
rating agencies in downgrading a company can be dramatic and swift. Due to the lack of a
timely power cost recovery mechanism and the Company's current eroding financial position, S&P
has twice downgraded the Company's credit ratings and Moody's has placed the Company's ratings
under review for possible downgrade. The Company now faces the real risk of falling below the
precipice of investment grade, and thereby risking its access to capital markets. As it stands
today, PSE is one notch away from losing its investment-grade status and becoming "junk."
The Company's proposed rate structures provide, among other things, essential recovery
of power costs. As stated in the testimony of Howard L. Hiller:

My primary conclusion is that establishing a mechanism for ensuring the full
and timely recovery of PSE's ongoing power costs is essential to restoring the
Company's financial integrity. I believe that the recent changes in the
wholesale power markets and the resulting power cost volatility have been of
sufficient severity that this type of mechanism is required. Over the past
several months, the credit rating agencies and financial markets have
exhibited significant concern about PSE's deteriorating financial condition.
Absent a mechanism that provides a framework for recovery of power costs,
PSE's cost of debt will be significantly above that of comparably-rated
investment-grade utilities, and PSE runs the further significant risk of being
denied access to capital as the Company's risk profile deteriorates. Such a
regulatory mechanism is also needed to send a strong signal to the financial
markets that the Commission is aware of the financial challenges facing
utilities in Washington State and is willing to address these challenges
through a balanced approach to cost recovery.
(Testimony of Howard Hiller, page 2.)

Further, in order to restore the Company's financial integrity, PSE is requesting a
capital structure that builds equity, thereby restoring the appropriate balance of safety and
economy. Under the Company's proposal, the Company will achieve its proposed capital structure
by the end of the rate year by issuing equity and proforming into its capital structure an
adjustment to equity of $160.7 million, which is made in lieu of an attrition allowance to
revenue requirements. This adjustment accounts for the financial impact of extraordinary
circumstances attributable to volatility in the wholesale energy supply markets, which has been
eroding substantial equity from the Company.

Q: What credit rating is generally maintained by other entities in the region with governmental or
public service obligations?
A: The State of Washington and the majority of publicly owned utilities in the region maintain "A"
or better credit ratings. The State of Washington taxes residents at levels that enables it to
maintain a credit rating substantially higher than what the Company is requesting in this
proceeding. The general obligation bonds issued by Washington State are rated as follows:

S&P RATING AA+
MOODY'S RATING AA1

The major PUDs and municipal utilities located in Washington State with publicly
traded bonds are also allowed rates and capitalization that support credit ratings at or above
what the Company is requesting. Below is a list of S&P's credit ratings for these entities.

Seattle City Light A+
Tacoma City Light A+/stable
Snohomish County PUD A+/stable
Douglas County PUD AA-/stable
Franklin County PUD A-/stable
Pacific County PUD A-/stable

Q: What cost of equity is the Company proposing?
A: Dr. Hadaway has used several different methods to determine the appropriate cost of equity
capital for PSE. His conclusion is that the fair cost is 13.5% if interim rate relief is not
granted or 11.5% if interim rate relief is granted.
In addition to Dr. Hadaway's recommended 13.5% cost of equity, we have included a
50-basis point incentive adjustment for PSE's excellent operating performance consistent with
the standard established for such adjustments in WUTC v. Avista Corp., Docket Nos. UE-991606,
UE-991607 (Sept. 29, 2000). Such an incentive adjustment is appropriate upon a showing of
truly extraordinary circumstances. The foundation for this adjustment is PSE's success on an
absolute and comparative basis in achieving significant efficiencies and cost savings and
increasing service quality. These achievements are summarized briefly below and in detail in
the testimony of John Shearman, Susan McLain and Penny Gullekson. This adjustment is
calculated on page 15 in Exhibit DEG-4C.
The Company's 50 basis point adjustment to the cost of equity reflects a sharing of
those extraordinary savings between the Company and its customers and is within the range of
equity returns described by Dr. Hadaway. Such an adjustment provides a going-forward incentive
for continued efficiency and innovation, benefiting customers. Conversely, lack of such
incentives encourages mediocrity.

VI. CUSTOMER SERVICE

Q: How do the Company's delivery costs compare to other utilities?
A: PSE is committed to being "the best distribution company." For PSE, being the best
distribution company means providing the highest quality services at the lowest cost. As
described in the testimony of John M. Shearman, PSE's gas and electric delivery costs are among
the lowest in the industry. PSE has achieved such cost savings while consistently delivering a
high level of service to its customers.

Q: How do PSE's delivery cost savings compare to predictions of savings associated with the merger?
A: At the time of the merger, PSE estimated that it would achieve $370 million in merger synergy
savings over ten years. PSE is ahead of schedule to capture that savings, having already
achieved $156 million in savings over the last 3 years. PSE's rapid progress in capturing
merger savings has resulted in test year costs for this rate case being well below the level
that the Company would have presented if we had not been successful in achieving merger savings
so quickly and will result in significant additional savings in the future.

Q: Is the level of such savings exceptional?
A: Yes. As Mr. Shearman describes, the average projected synergy savings which other utilities
projected to be attained in their utility mergers is 8.4% of the combined O&M cost at the time
of the merger. The actual savings that has been realized by companies merging operations
during the same time frame is 1.2%. In contrast, PSE has achieved a savings of 19.5% in 3
years against a target of 4.2%. This is an outstanding result on both an absolute and
comparative basis.

Q: How did combining the gas and electric companies produce cost savings and service quality
improvements for customers?
A: The merger provided an opportunity for Company management to put in place company-wide goals
and objectives and then gauge overall progress in achieving them against measurable, objective
standards, all as Sue McLain describes in her testimony. These goals and objectives were
designed to accomplish our overall purpose of becoming "the best distribution company"
anywhere. "Best distribution company" meant to us "lowest cost" and "highest quality service"
so these were the two principal areas where we placed our emphasis.
Initially, our challenge was to extract the economies of scale resulting from
combining gas and electric operations. In that regard, we did much better than others who were
combining gas and electric companies around the same time. But we quickly realized that the
systems we needed to put in place in order to extract these economies could be designed to
produce whole new, higher levels of customer service. Specifically, automated meter reading, a
highly scalable customer information system and integrated business systems could be used not
only to reduce distribution system costs but could also be used to give customers the
information they need so that they can make the right decisions to use energy most efficiently
and at the lowest costs. This demand management through informed customer choice benefits all
of our customers because it lowers our total costs.
The overall end result we have achieved with the merger has been terrific for customers. Today,
we run one of the lowest cost energy distribution operations in the country and provide a very
high level of customer service which will go even higher when the Commission approves the new
service offerings in this rate filing which will give customers the information and pricing so
that they can choose to use energy in the way that is most convenient and cost-effective for
them. Our pilot program for such customer choice has won praise from those to whom it has so
far been made available. Certainly part of the reason for this customer approval has been
timing. Because of the price excursions in the fuel and wholesale markets over the last
several years, customers now see very clearly the value of making buying decisions based on the
real time costs of energy. For the same reason, the public policy imperatives, as enunciated
by those who make public policy regarding energy, are overwhelming today for real time pricing
at the end user level and for the technology necessary to accomplish it.

Q: Please give some specific examples of what PSE did to obtain cost savings?
A: PSE has also kept its costs low through measures directly impacting efficiencies. For example,
we centralized administrative functions, which eliminated duplicative positions and reduced
office space requirements and other administrative overhead. We have successfully implemented
full-time employee ("FTE") reductions by combining the two prior companies into a synergistic
whole, rather than simply running gas and electric as two separate internal divisions, and by
employing efficient practices in our approach to work processes, including the outsourcing of
some administrative work. PSE has also strategically outsourced distribution operations work.
A number of delivery operations facilities were eliminated, including division headquarters,
service centers, operating bases and warehouses.
PSE combined the pre-merger gas and electric planning processes into a single,
energy-neutral planning and decision-making process that utilizes system data and engineering
modeling tools to identify potential areas of system weakness and to evaluate multiple
solutions from an engineering and financial standpoint. PSE's planning processes help optimize
the utilization of our system so that it is neither over-built nor undersized, keeping gas and
electricity flowing to our customers in a cost-effective manner.

Q: While achieving these savings, has the Company improved the quality of service that it provides
to its customers?
A: Yes. PSE has consistently met the Service Quality Indices ("SQIs") established at the time of
the merger and has gone beyond the SQIs to provide increased service convenience and
reliability to its customers.

Q: What are some of the things PSE has done to improve customer service?
A: Immediately prior to the merger effective date, PSE conducted extensive cross-training of gas
and electric systems, policies, and practices. PSE increased training and implemented a mentor
program, provided increased supervision for off-core-hour staff, and initiated regular
leadership team meetings. The Company increased call center service availability to
24-hours-a-day and 7-days-a-week, and implemented "next generation" integrated technologies,
which provide customers the ability to obtain information or contact the Company through a
variety of means, including fax, e-mail and internet. PSE also implemented technologies that
route customer calls to appropriate customer service representatives and permit the
representatives to quickly assist customers. PSE developed and implemented a highly flexible
Customer Information System that integrates, for both gas and electric customers, extensive
information about customer usage, communications, billing, meter reading, payment arrangements,
and service orders, as well as information about accounts receivable.

Q: What are some of the things PSE has done to improve system reliability?
A: PSE has undertaken several initiatives to improve reliability of our electric system, including
adding the TreeWatch program, implementing an animal protection program, planning the routing
of high pressure gas mains to accommodate future distributed generation technologies, and
implementing a silicon injection technique as part of our underground cable remediation
program. PSE is also working toward condition-based maintenance, rather than schedule-based
maintenance, in our substation facilities.
With respect to the gas system, PSE has ongoing programs dedicated toward improving
gas system safety through eliminating gas leaks, cathodically protecting the system through our
critical bond program, and developing a bare steel replacement program.

Q: What is PSE's PEM program?
A: The PEM Program provides customers the knowledge to better understand and control how and when
they use electricity in their home or business, the ability to help the environment by using
electricity more wisely and efficiently, and the opportunity to save money by using electricity
when overall daily demand for power--and the price of that power--is low.
The Company began to implement PEM features in November 2000 through a time-of-day
pilot program. Since that time, approximately 300,000 residential customers and 20,000
business customers have been billed based on whether they are using power at on-peak or
off-peak times. Approximately 80,000 additional customers have been receiving information
about time-of-day trends and their own personal usage profile for the month, but their bill is
determined by their pre-existing rate. In addition, the PSE Web site provides customers with a
variety of information about their energy usage and tools to assist in planning their energy
usage.

Q: How have customers responded to PEM?
A: Customers have been overwhelmingly positive about the program. In a survey of customers
involved in the time-of-day pilot program, customers indicated that they understand how the
program works and understand their bill information. Over 90% have taken actions to alter
their energy use, including shifting energy use to off-peak periods and reducing use.
Approximately 85% are satisfied with the program and nearly all would recommend it to others.
Although customers have been given the option to "opt off" the pilot program, less than 1% have
chosen to do so, and many customers have requested to be returned to the program or to be added
to the program if the pilot is opened for additional participants.

Q: What are the benefits of the PEM program?
A: The Company is proposing to expand the PEM time-of-day pilot program into a comprehensive real
time pricing program that will include the option of a daily variable rate that fluctuates
based on market prices and other variable power costs, which will be implemented through a
power cost adjuster or a fixed rate that will not vary from day to day during the year but that
will be adjusted annually and will include the cost of locking in the price in advance. PEM's
real time pricing program will permit customers to take control of their energy usage and to
participate in helping to keep their power costs, and therefore rates, lower. PSE has
determined that the estimated net present value of benefits (net of costs) for a ten year
period beginning in the rate year will be positive under most assumptions and has the potential
to produce significant benefits, as described in the testimony of Penny Gullekson.
In addition, the PEM real time pricing program has the potential to provide
significant regional power supply, capacity and environmental benefits, as summarized above and
described in detail in the testimony of Eric Hirst and Peter Fox-Penner.

VII. THE FUTURE

Q: What is PSE's strategy for the future?
A: As described above, we are dedicated to being the "best distribution company" anywhere. This
has been, and continues to be, our focus since the merger.

Q: How will PSE achieve this vision?
A: PSE has laid the foundation, with the customer service initiatives discussed above, and with
the other initiatives that have reduced cost and improved service reliability. To achieve this
view of the future, PSE must have adequate financial strength. This includes timely recovery
of costs. It means a rate structure that protects the Company from financial harm it faces, on
a daily basis, from the wholesale energy markets. It means investor confidence, and access to
capital markets as an "A" rated utility. It means a strong capital structure and an actual
return on equity that meets investor requirements. These are the elements PSE needs to be the
"best distribution company" and to enable it to continue to give its customers the highest
quality service at the lowest price.

Q: Does this conclude your testimony?
A: Yes, it does.

EX-99 3 ex991.htm PRESS RELEASE Exhibit 99.1

Exhibit 99.1
                                                                         News Release

                                                                         CONTACTS:
                                                                         -------------
For Immediate Release                                                    Media:    Grant Ringel
- ------------------------                                                           1-888-831-7250
Nov. 27, 2001
                                                                         Analysts: Julie Williams
                                                                                   425-462-3808

Drought, energy crisis finally overtake PSE cost-control efforts; requested increase in general rates, however, partially offset by other savings

Current rates failing to cover power costs by $625,000 per day

BELLEVUE, Wash. (Nov. 27, 2001)-- Puget Sound Energy [the utility subsidiary of Puget Energy (NYSE:PSD)] late yesterday filed a rate-increase request with the Washington Utilities and Transportation Commission to halt the ongoing financial damage caused by increased power-supply and infrastructure costs. The company’s broad plan also gives customers new tools and options to help in the prevention of another energy crisis in the future. Pending a final order in the 11-month rate case process, the company will be seeking prompt interim electric-rate relief to deal with an under-recovery of electric power costs averaging $625,000 per day.

“PSE has not had to ask for a general electricity rate increase since 1993 and a general natural gas increase since 1995,” said Gary Swofford, PSE’s vice president and chief operating officer-delivery. “It is never pleasant to ask for additional revenue. However there is consolation in knowing our success in reducing the operating costs of our energy distribution system is one of the reasons the increase customers will see on their bills next year will be nearly the lowest increase sought by any utility in the region,” Swofford said.

The PSE filing request is for a $228 million increase in base electric revenues and $85.9 million in base natural gas revenues. The impact on residential customers' bills as a result of the general rate case is expected to be offset, in part, by other factors. For electric customers, bills are expected to increase 14.5 percent next year because the rate increase request will be offset by the benefits of a new contract negotiated in 2001 between PSE and the Bonneville Power Administration.

All BPA benefits are passed directly to PSE’s residential and small farm customers. Increases in residential natural gas bills are expected to be approximately 2.5 percent after the expected expiration of a natural gas surcharge.

In the general rate case filing, PSE also proposes a comprehensive plan that will help reduce future energy price volatility by empowering nearly all customers with tools to make informed usage decisions and thereby reduce their bills. The plan will provide natural gas and electric customers equipped with automated meters price signals that reflect wholesale costs and establish new pricing options similar to home-mortgage financing where “adjustable” and “fixed” rates are available to suit a customer’s need.

Customers choosing the adjustable rate option would see their rates, depending on market conditions, move up or down daily on their electric account and monthly on their natural gas account, giving them real-time information about the true cost of the energy they are consuming. “Our pilot Personal Energy Management program has demonstrated that by connecting customers to the real price of their energy, they can react and reduce their use when prices increase,” said Swofford. “Simply put, this plan rewards people for using energy more efficiently,” he added. “We think it’s the basic model the rest of the nation will follow in years to come.”

Customers not wanting an adjustable rate could choose the fixed option for a slightly higher price--to reflect the additional cost of guaranteeing a fixed rate. The fixed rate would be adjusted once per year.

The adjustable and fixed rate options would be added to the company’s successful Personal Energy Management program which today features lower rates for electricity consumed during off-peak hours when the cost of providing their electric service is less. About a third of PSE’s 930,000 electric customers are currently utilizing this time-of-day tool and the general rate filing proposes to extend this to all customers with automated meters.

Personal Energy Management was nationally recognized with the Edison Award this year, the highest award in the investor-owned utility industry and nearly 90 percent of participating customers surveyed said they would recommend the program to a friend.</p> <p>Other factors that have impacted PSE since the last general electricity rate case in 1993 and general natural gas rate increase in 1995 include: In its 11-county service area, the utility has added 278,000 more electric and natural gas customers, 1,015 more miles of power lines, and 1,680 more miles of natural-gas lines. PSE has also has made substantial investments to improve the quality and reliability of service to customers.


                                             PSE Rate Plan

   • Electric Residential Bill: adds estimated $8.99 to average monthly bill, including net effect of BPA
     credit.

   • Natural-Gas Residential Bill: adds approximately $2 to average monthly bill after expected expiration of
     gas surcharge.

   • Overall Revenue: seeks $228 million, or 16.5%, increase in  electric rate-revenue before taking into
      account BPA credit; $85.9 million, or 14.5%, increase in natural-gas rate revenue before taking into account
      expiration of gas surcharge.

   • Extends Personal Energy Management™ program to nearly all PSE customers. Offers new pricing options to
      reduce bills, promote efficient energy use and protect consumers from market volatility.

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