The Washington State Green Energy Leadership Plan Report, released October 21, 2010, identified four areas where it found Washington State might be able to achieve leadership in emerging segments of the future green economy. As we discussed in an earlier post, for two of those areas – combined energy efficiency, green building and smart grid projects, and renewable energy optimization and smart grid deployment – the Report said there was an essential legislative action that would be required if we were to actually achieve leadership. That was that Washington needed to amend its current regulatory scheme in which the Utilities & Transportation Commission (UTC) makes a “prudence” determination after the investment is in service, which determines whether a utility will be allowed to recover on an investment.

Acting on a pro bono basis, Graham & Dunn drafted legislation called for by the Report, and it was introduced by State Representative Deb Eddy as HB 1268. Last Wednesday the House Technology, Energy & Communications Committee held a hearing on the bill. The testimony – mostly opposing the bill – illustrated why changing entrenched processes is so hard, and why adopting an energy policy that actually leads to a significant change in the way we use fossil fuels is never likely to happen by consensus.

The Leadership Plan Report started by saying that Washington should not kid itself; it does not currently have a leadership position in green energy development. Most of its actions to date have focused on importing technologies from elsewhere to install them here. Leadership and the economic rewards from leadership will come from developing and manufacturing technological advances here that we can export to the rest of the world. The Report identified combined energy efficiency, green building and smart grid projects, and renewable energy optimization and smart grid deployment as fields where Washington could potentially achieve a leadership position because those are areas where Washington already has significant intellectual capital at work. But the Report said that achieving leadership will require not only people who develop the new technologies and systems that implement them. It will also require demonstration that they can be commercially viable, and that requires that they be commercially deployed. To do that, one or more Washington utilities will have to invest in the new smart grid technologies. It is there that the UTC’s post-investment prudence review is a significant deterrent, because it presents the possibility that after the fact the UTC could decide that some or all of the investment cannot be recovered through sales of electricity to customers. Corporations are simply not likely to make risk investments in which, along with the ordinary risks of investing in new technology, they face the prospect of a third-party regulator second guessing the prudence of the investment long after it is made.

HB 1268 attempts to address those impediments by allowing a utility to come to the UTC before making an investment to get UTC approval that the investment is prudent and the proposed cost, and therefore can ultimately be recovered if the investment is put into service. If a utility subsequently goes over its original budget, the burden will be on the utility to persuade the UTC that any additional amounts it may have spent were prudently spent. If the investment is never completed or the equipment is never put into service, then the amounts spent would be for the utilities’ shareholders to bear.

If that seems logical, it didn’t meet with a lot of support.

The UTC started the objections. The UTC has recently released a policy statement on how it will treat investments in renewable generation resources that utilities are required to make under I-937. I-937 sets standards for the portion of the utilities’ generation capacity that must be renewable over time. The UTC policy statement says that the UTC will consider granting pre-investment approval of the type of investment to meet I-937 requirements (i.e., a wind farm rather than a solar farm), but not the dollars to be invested. The amount of the investment that will be deemed prudent will not be determined until the investment has been completed and the resource can be put in service. The UTC wants to let its policy statement work. It argues that it has rarely, if ever, actually turned down an investment, and that its rejection of amounts spent has been for good reason.

There are at least two problems with the UTC’s argument. First, its policy statement only applies to the generation resources that are governed by I-937. Investment in smart grid technologies would not be covered by the UTC policy statement. Indeed, one of the touchstones of the UTC’s standard for “prudent” investments is that the investment be “needed” – that without the investment the utility might not be able to adequately serve its customers, either now or in the future. In a world with ever-increasing power demands, utilities may always be able to justify more generation capacity. But, if we came to a period when demand for electricity fell, as we may have, there might never be a “need” as the UTC has defined it for smart grid investments at all. Smart grid investments are designed to reduce the amount of electricity that needs to be generated to meet a fixed demand. They could in fact reduce the amount of greenhouse gas emissions required, not just stem the growth of greenhouse gas emissions. But under the UTC standard for prudence, that may never be approved. And it is highly unlikely that a utility would be willing to be the first to take the plunge – make the investment in smart grid technology now, and find out later whether the UTC accepts it as prudent.

Second, while it is correct that the UTC has seldom rejected an investment as imprudent, it has given full voice to various groups that sought to have investments rejected. And the investments it has approved have generally been of technologies with proven track records. The nature of technological leadership is that utilities would have to invest in technology that is new – where there was no UTC precedent to rely on in their corporate decision making. The nature of corporate decision making is that it is highly unlikely that corporate officers would take the risk of investing in technology that the UTC has never approved, only to wait until it is too late to reverse course to find out whether the UTC will approve it.

Public counsel and the spokesman for industrial customers were next to speak in opposition. Their concern is that utilities not be allowed to make investments that customers must pay for without the third party review and the contested process of post-acquisition prudence review. As the representative of public counsel said, “we want to be able to argue that the utility should not have made this investment; it should have invested in something else.” Their arguments present the direct counterpoint to the UTC’s argument that it has rarely disapproved an investment as not being prudent, because they demonstrated that every investment will have to face the gauntlet of customer objection, regardless of the likely outcome. If Washington wants utilities to help it demonstrate leadership, it simply cannot expect utilities to invest in new technologies and only later learn whether consumer voices will prevail in claiming that the investment should have been different.

The utilities themselves were a little more conflicted in their approach – with Puget Sound Energy opposing the bill and Avista Corporation supporting it with reservations. Puget Sound Energy objected because under the bill it would have to wait until the investment was actually put into service before starting to recover the investment in rates. It wanted to be able to start recovering rates when the investment was made. There is clearly a balance between the risks that should belong to shareholders versus the risks that should belong to customers. In the state where WPPSS still holds the record for the largest municipal bond default in U.S. history, it seems highly unlikely that we will ever obligate utility customers to pay for investments that are stopped mid-construction.

These are all valid arguments. Consumers have a legitimate right to be concerned about utilities taking risks. The UTC has worked long and hard to balance prudent decision-making with the needs for progress. But in the end, the testimony against the bill illustrates why clean energy leadership may well be beyond the grasp of Washington State unless the Legislature is willing to move forward with an energy policy and to make the changes needed to implement that policy, without all the conflicting views having come to consensus. Leadership is not safe. It includes risks. Energy leadership will require a willingness to take some risks in order to achieve the breakthrough technologies that have the potential to reduce greenhouse gas emissions before the consequences of greenhouse gas emissions are irreversible. If Washington does not take those risks, one must hope they will ultimately be taken elsewhere. Those will be the places that will have the ability to export their developments to us.