Washington’s Utility Regulation Model Cracks Under Pressure From Microsoft’s Sustainability Policy

While states such as New York and Minnesota are engaged in intensive processes to define the “utility of the future,” Washington has yet to seriously confront the issue.  Recent activity at the Washington Utilities & Transportation Commission (“UTC”), however, suggests that Washington may have to address this question sooner rather than later.  The charge against the traditional utility model is led by Microsoft, which, like many large high-tech companies, has adopted a corporate sustainability policy that mandates aggressive reductions in the company’s greenhouse gas emissions and, ultimately, use of 100% renewable energy.  Microsoft’s sustainability policy has run head-long into the heavy dependence (at least by Northwest standards) of its major electricity supplier, Puget Sound Energy (“PSE”), on fossil-fired electric generation.  The collision has produced cracks in Washington’s utility regulatory model that may presage a fundamental rethinking of the utility business model in this state.

Microsoft’s main campus and a number of other facilities, are located within PSE’s service territory and account for about 50 aMW of load.  But, because PSE relies heavily on coal- and gas-fired generation, serving that load entails significant GHG emissions that are incompatible with Microsoft’s sustainability goals.  And, to follow its desired strategy of acquiring renewable generation to meet its needs – a strategy many tech companies have adopted in markets where they are not tied by regulation to a particular electricity provider – Microsoft was required to find a way around Washington utility territory laws that would otherwise tie it to PSE as its supplier.

The pressure brought by Microsoft to achieve this result was revealed in a recent UTC filing (Docket No. UE-161123), where PSE sought UTC approval of a new “Large Customer Retail Wheeling” tariff, which will allow large, “non-core” customers to obtain their own power supply, rather than relying on PSE’s supply, and to use PSE’s system only to deliver that power supply to the customer’s facilities.   The major sticking point for UTC approval is the proper “exit fee” to charge Microsoft.  PSE asserts that it has incurred significant costs to acquire generation to serve Microsoft, and that those costs should be reimbursed before Microsoft is allowed to seek its own power supply.  PSE claims that the exit fee should be approximately $23 million.  Microsoft, on the other hand, asserts that, by relieving PSE of the need to acquire new resources, it is actually reducing PSE’s costs and that PSE should therefore pay Microsoft an exit fee of between $15 and $35 million.

Once the exit fee issue is resolved, it is likely that a number of high-tech and other companies will follow Microsoft’s lead so that they, too, can acquire their own renewable power supplies.  Hence, Microsoft has produced what may prove to be the first major breach in the regulated, vertically-integrated utility monopoly structure that has predominated in Washington for nearly a century.  If this proves true, Washington now may be forced to reconcile its  regulatory structure with major technological changes such as the rapidly falling cost of many renewable technologies, the strong preference of many of its customers for renewable generation, and the increasingly attractive economics of distributed generation and storage resources, issues that many thought were still years in the future.