(4) Regulation and Rates

Regulatory Assets and Liabilities

Regulatory accounting allows PSE to defer certain costs that would otherwise be charged to expense, if it is probable that future rates will permit recovery of such costs. It similarly requires deferral of revenues or gains that are expected to be returned to customers in the future.

The net regulatory assets and liabilities at December 31, 2018 and 2017, included the following:



Puget Sound Energy	Remaining Amortization Period	December 31,
(Dollars in Thousands)	Remaining Amortization Period	2018					2017
Storm damage costs electric	4 to 6 years			118,331					128,508
Chelan PUD contract initiation	12.8 years			90,964					98,052
Environmental remediation	(a)			76,345					81,550
Lower Snake River	18.4 years			67,021					70,975
Decoupling deferrals and interest	Less than 2 years			65,779					98,769
Baker Dam licensing operating and maintenance costs	N/A			55,607					54,817
Deferred Washington Commission AFUDC	10 years			52,029					50,301
Property tax tracker	Less than 2 years			45,621					36,517
Unamortized loss on reacquired debt	1 to 28 years			42,378					39,674
Colstrip 1 & 2 Regulatory Asset	N/A			37,674					127,627
Energy conservation costs	(a)			30,701					35,538
Generation plant major maintenance, excluding Colstrip	4 to 10 years			15,027					17,216
PGA deferral of unrealized losses on derivative instruments	N/A			14,739					26,030
White River relicensing and other costs	3 years			12,966					19,502
Mint Farm ownership and operating costs	6.3 years			12,319					14,319
PGA receivable	1 year			9,922					—
Snoqualmie licensing operating and maintenance costs	N/A			7,407					7,341
Colstrip major maintenance	0.5 years			6,841					8,723
PCA mechanism	N/A			4,735					4,576
Colstrip common property	6.4 years			3,903					4,618
Ferndale	0.8 years			3,316					7,295
Electron unrecovered loss	Less than 1 year			—					3,786
Various other regulatory assets	(a)			14,583					17,382
Total PSE regulatory assets				788,208					953,116
Deferred income taxes^(d)	N/A			(976,582		)			(1,012,260		)
Cost of removal	(b)			(424,727		)			(389,579		)
Treasury grants	20 years			(168,884		)			(205,775		)
Production tax credits	(c)			(93,616		)			(93,616		)
Accumulated provision for rate refunds	N/A			(34,579		)			—
Decoupling ROR excess earnings		—					(18,400	)
Decoupling deferrals and interest		(13,758	)				(7,896	)
Total decoupling liability	Less than 2 years			(13,758		)			(26,296		)
Summit purchase option buy-out	1.8 years			(2,888		)			(4,463		)
PGA payable	1 year			—					(16,051		)
Various other regulatory liabilities	(a)			(7,428		)			(10,544		)
Total PSE regulatory liabilities				(1,722,462		)			(1,758,584		)
PSE net regulatory assets (liabilities)				$	(934,254	)			$	(805,468	)

_______________


^(a)	Amortization periods vary depending on timing of underlying transactions.


^(b)	The balance is dependent upon the cost of removal of underlying assets and the life of utility plant.


^(c)	Amortization will begin once PTCs are utilized by PSE on its tax return.


^(d)	For additional information, see Note 14,"Income Taxes" to the consolidated financial statements included in Item 8 of this report.



Puget Energy	Remaining Amortization Period	December 31,
(Dollars in Thousands)	Remaining Amortization Period	2018			2017
Total PSE regulatory assets	(a)	$	788,208		$	953,116
Puget Energy acquisition adjustments:
Regulatory assets related to power contracts	1 to 20 years	16,693			19,454
Various other regulatory assets	Varies	—			(8		)
Total Puget Energy regulatory assets		804,901			972,562
Total PSE regulatory liabilities	(a)	(1,722,462		)	(1,758,584		)
Puget Energy acquisition adjustments:
Deferred income taxes		608			634
Regulatory liabilities related to power contracts	1 to 35 years	(162,711		)	(174,918		)
Various other regulatory liabilities	Varies	(1,323		)	(1,314		)
Total Puget Energy regulatory liabilities		(1,885,888		)	(1,934,182		)
Puget Energy net regulatory asset (liabilities)		$	(1,080,987	)	$	(961,620	)

_______________


^(a)	Puget Energy’s regulatory assets and liabilities include purchase accounting adjustments under ASC 805.

If the Company determines that it no longer meets the criteria for continued application of ASC 980, the Company would be required to write-off its regulatory assets and liabilities related to those operations not meeting ASC 980 requirements. Discontinuation of ASC 980 could have a material impact on the Company's financial statements.

In accordance with guidance provided by ASC 410, “Asset Retirement and Environmental Obligations (ARO),” PSE reclassified from accumulated depreciation to a regulatory liability $424.7 million and $389.6 million in 2018 and 2017, respectively, for the cost of removal of utility plant. These amounts are collected from PSE’s customers through depreciation rates.

Expedited Rate Filing Rate Adjustment

On November 7, 2018, PSE filed an expedited rate filing (ERF) with the Washington Commission. The filing is a request to change rates associated with PSE’s delivery and fixed production costs. It does not include variable power costs, purchased gas costs or natural gas pipeline replacement program costs, which are recovered in separate mechanisms. The filing is based on historical test year costs and rate base, and follows the reporting requirements of a Commission Basis Report, as defined by the Washington Administrative Code, but is filed using end of period rate base and certain annualizing adjustments. It does not include any forward-looking or pro-forma adjustments. Included in the filing is a reduction to the overall authorized rate of return from 7.6% to 7.49% to recognize a reduction in debt costs associated with recent debt activity. PSE requested an overall increase in electric rates of $18.9 million annually, which is a 0.9% increase, and an overall increase in natural gas rates of $21.7 million annually, which is a 2.7% increase.

On January 22, 2019, all parties in the proceeding reached an agreement on settlement terms that resolve all issues in the filing. The settlement agreement was filed on January 30, 2019. The major points covered by the agreement are as follows. The agreed upon rate increases in the settlement are $21.5 million on natural gas and no rate increase on electric which would become effective March 1, 2019. Items that were not specifically identified in the settlement are deemed to offset these ARAM amounts to arrive at the settlement rate changes.

The settlement agreement in PSE’s pending expedited rate change filing provides for the pass back beginning March 1, 2018 of the turnaround of plant related excess deferred income taxes on the average rate assumption method (ARAM) that resulted from the Tax Cuts and Jobs Act based on 2018 amounts in the amount of $6.1 million for natural gas and $25.9 million for electric. The settlement agreement leaves the determination for the regulatory treatment of the remaining items related to the TCJA to PSE’s next GRC:


1)	excess deferred taxes for non-plant- related book/tax differences,


2)	the deferred balance associated with the over-collection of income tax expense for the period January 1 through April 30, 2018 (the time period that encompasses the effective date of the TCJA through May 1, 2018, the requested effective date of the rate change); and


3)	the turnaround of plant related excess deferred income taxes using the ARAM method for the period from January 2018 through February 2019, the rate effective date for the ERF.

The agreement provides that PSE may defer the depreciation expense associated with PSE’s ongoing investment in its advanced metering infrastructure (AMI) investment and to defer the return on the AMI investment that was included in the test year of the filing. The agreement preserves the parties rights to argue that both deferrals should be or should not be recovered in the Company’s next GRC. The rate of return adopted in the settlement is the 7.49% included in the filing. The Washington Commission has suspended the procedural calendar in the proceeding and indicated it will not require a settlement hearing and will make their decision on whether or not to approve the settlement on the paper record in the filing. A ruling by the Washington Commission is expected in enough time to implement rates on March 1, 2019.

Washington Commission Tax Deferral Filing

The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. As a result of this change, PSE re-measured its deferred tax balances under the new corporate tax rate. PSE filed an accounting petition on December 29, 2017 requesting deferred accounting treatment for the impacts of tax reform. The requested deferral accounting treatment results in the tax rate change being captured in the deferred income tax balance with an offset to the regulatory liability for deferred income taxes. Additionally, on March 30, 2018, PSE filed for a rate change for electric and natural gas customers associated with TCJA to reflect the decrease in the federal corporate income tax rate from 35.0% to 21.0%. The overall impact of the rate change, based on the annual period from May 2018 through April 2019, is a revenue decrease of $72.9 million, or 3.4% for electric and $23.6 million, or 2.7% for natural gas.

The March 30, 2018, rate change filing did not address excess deferred taxes or the deferred balance associated with the over-collection of income tax expense of $34.6 million for the period January 1 through April 30, 2018 (the time period that encompasses the effective date of the TCJA through May 1, 2018, the effective date of the rate change). The $34.6 million tax over-collection decreased PSE's revenue and increased the regulatory liability for a refund to customers.

As a result of the ERF settlement, the excess deferred taxes associated with non-plant-related book/tax differences, the deferred balance associated with the over-collection of income tax expense and the treatment of the excess deferred taxes associated with plant related book/tax differences from January 1, 2018 through February 28, 2019 will be addressed in PSE’s accounting petition in its next GRC.

General Rate Case Filing

In January 2017, PSE filed its GRC with the Washington Commission. The GRC filing included a required plan to address Colstrip Units 1 and 2 closures, requested that electric energy supply fixed costs be included in PSE's decoupling mechanism, and contained requests for two new mechanisms to address regulatory lag. The Washington Commission entered a final order accepting the multi-party settlement agreement and determined the contested issues in the case on December 5, 2017, and new rates became effective December 19, 2017. The settlement agreement provided for a weighted cost of capital of 7.6%, or 6.55% after-tax, and a capital structure of 48.5% in common equity with a return on equity of 9.5%. The settlement also resulted in a combined electric tariff change that resulted in a net increase of $20.2 million, or 0.9%, annually, and a combined natural gas tariff change that resulted in a net decrease of $35.5 million, or 3.8%, annually.

The GRC also re-purposed the benefit of PTCs and hydro-related treasury grants to fund and recover decommissioning and remediation costs for Colstrip Units 1 and 2. As the Company monetizes PTCs on its filed tax returns, the regulatory liability is transferred to a reserve for Colstrip Units 1 and 2 decommissioning and remediation costs.

Decoupling Filings

While fluctuations in weather conditions will continue to affect PSE's billed revenue and energy supply expenses from month to month, PSE's decoupling mechanisms assist in mitigating the impact of weather on operating revenue and net income. Since July 2013, the Washington Commission has allowed PSE to record a monthly adjustment to its electric and natural gas operating revenues related to electric transmission and distribution, natural gas operations and general administrative costs from most residential, commercial and industrial customers to mitigate the effects of abnormal weather, conservation impacts and changes in usage patterns per customer. As a result, these electric and natural gas revenues are recovered on a per customer basis regardless of actual consumption levels. PSE's energy supply costs, which are part of the PCA and PGA mechanisms, are not included in the decoupling mechanism. The revenue recorded under the decoupling mechanisms will be affected by customer growth and not actual consumption. Following each calendar year, PSE will recover from, or refund to, customers the difference between allowed decoupling revenue and the corresponding actual revenue during the following May to April time period.

On December 5, 2017, the Washington Commission approved PSE’s request within the 2017 GRC to extend the decoupling mechanism with several changes to the methodology that took effect on December 19, 2017. Electric and natural gas delivery revenues continue to be recovered on a per customer basis and electric fixed production energy costs are now decoupled and recovered on the basis of a fixed monthly amount. The allowed decoupling revenue for electric and natural gas customers will no longer increase annually each January 1 as occurred prior to December 19, 2017. Approved revenue per customer costs can only be changed in a GRC or ERF. Approved electric fixed production energy costs can also be changed in a power cost only rate case (PCORC). Other changes to the decoupling methodology approved by the Washington Commission include regrouping of electric and natural gas non-residential customers and the exclusion of certain electric schedules from the decoupling mechanism going forward. The rate test, which limits the amount of revenues PSE can collect in its annual filings, increased from 3.0% to 5.0% for natural gas customers but will remain at 3.0% for electric customers. The decoupling mechanism will be reviewed again in PSE’s first rate case filed in or after 2021, or in a separate proceeding, if appropriate. PSE’s decoupling mechanism over- and under- collections will still be collectible or refundable after this effective date even if the decoupling mechanism is not extended.

On December 31, 2018, PSE performed an analysis to determine if electric and natural gas decoupling revenue deferrals would be collected from customers within 24 months of the annual period, per ASC 980. If not, for GAAP purposes only, PSE would need to record a reserve against the decoupling revenue and regulatory asset balance. Once the reserve is probable of collection within 24 months from the end of the annual period, the reserve can be recognized as decoupling revenue. The analysis indicated that $0.8 million of electric deferred revenue will not be collected within 24 months of the annual period; therefore, an adjustment was booked to 2018 decoupling revenue. The previously unrecognized decoupling deferrals of $20.8 million at December 31, 2016, were recognized as decoupling revenue in the year ended December 31, 2017.

Storm Damage Deferral Accounting

The Washington Commission issued a GRC order that defined deferrable storm events and provided that costs in excess of the annual cost threshold may be deferred for qualifying storm damage costs that meet the modified Institute of Electrical and Electronics Engineers outage criteria for system average interruption duration index. In 2018 and 2017, PSE incurred $25.4 million and $30.4 million, respectively, in storm-related electric transmission and distribution system restoration costs, of which $15.1 million was deferred in 2018 and $21.6 million was deferred in 2017 to a regulatory asset. Under the December 5, 2017 Washington Commission order regarding PSE’s GRC, the following changes to PSE’s storm deferral mechanism were approved: (i) the cumulative annual cost threshold for deferral of storms under the mechanism increased from $8.0 million to $10.0 million effective January 1, 2018; and (ii) qualifying events where the total qualifying cost is less than $0.5 million will not qualify for deferral and these costs will also not count toward the $10.0 million annual cost threshold.

Environmental Remediation

The Company is subject to environmental laws and regulations by the federal, state and local authorities and is required to undertake certain environmental investigative and remedial efforts as a result of these laws and regulations. The Company has been named by the Environmental Protection Agency (EPA), the Washington State Department of Ecology and/or other third parties as potentially responsible at several contaminated sites and manufactured gas plant sites. In accordance with the guidance of ASC 450, “Contingencies,” the Company reviews its estimated future obligations and will record adjustments, if any, on a quarterly basis. Management believes it is probable and reasonably estimable that the impact of the potential outcomes of disputes with certain property owners and other potentially responsible parties will result in environmental remediation costs of $42.7 million for natural gas and $8.8 million for electric. The Company believes a significant portion of its past and future environmental remediation costs are recoverable from insurance companies, from third parties or from customers under a Washington Commission order. The Company is also subject to cost-sharing agreements with third parties regarding environmental remediation projects in Seattle, Washington and Bellingham, Washington. The Company has taken the lead for both projects, and as of December 31, 2018, the Company’s share of future remediation costs is estimated to be approximately $32.2 million. The Company's deferred electric environmental costs are $14.1 million and $17.6 million at December 31, 2018 and 2017, respectively, net of insurance proceeds. The Company's deferred natural gas environmental costs are $62.2 million and $63.9 million at December 31, 2018 and 2017, respectively, net of insurance proceeds. In the GRC which became effective December 19, 2017, the Company had its third party recoveries and remediation costs incurred as of September 30, 2016, net of a portion of insurance, approved for amortization and inclusion in rates.