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Puget Sound Energy customers could end up paying lower rates over the next few years than the utility had initially wanted.

A Thurston County Superior Court judge has decided that PSE, which has more than 1 million customers, did not sufficiently justify rate increases or investors’ rate of return to the state’s utility commission. PSE is the largest investor-owned utility in the state.

Judge Carol Murphy’s opinion calls for the rate plan to be sent back to the Washington Utilities and Transportation Commission (WUTC).

Last year, the commission agreed to unprecedented automatic multiyear rate increases that applied the rate of return to investors approved in 2011, 9.8 percent.

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According to the state Attorney General’s Office, which challenged the plan in court along with the Industrial Customers of Northwest Utilities, that rate was too high based on current market calculations and financial-risk assessment. State law requires that utility rates “shall be just, fair, reasonable and sufficient,” Murphy notes in her June 25 opinion.

Both argued that, with the exception of a couple years in the 1980s, rates had been calculated based on current market conditions and the utility’s actual costs for things such as labor and infrastructure. The PSE rate plan approved last year would automatically keep the 2011 rate of return at 9.8 percent through at least 2016, no matter how much the economy improves.

“You need to update the 2011 number — it’s no longer a fair number because investment returns are going down nationally,” said Simon ffitch, who argued against the rate plan as senior assistant attorney general.

In addition to that, ffitch said investing in utilities is, just like when you play Monopoly, typically a less risky investment that should yield lower returns. He said the PSE rate of return to investors didn’t reflect that “reward follows risk.”

If the rate of return is adjusted to what ffitch said he thinks is a fair rate, customers could collectively save as much as $10 million a year.

But PSE spokesman Grant Ringel says locked-in rate increases and return rates over several years can be good for customers.

“It removes the connection between selling more energy and the financial health of the utility,” said Ringel. “So, if we have a very cold winter and we sell a tremendous amount of energy, there’s no financial benefit to PSE under this new mechanism.”

The practice, which utilities call “decoupling,” is becoming more widespread across the country, said Ringel. And, according to a WUTC release, it removes a disincentive for PSE to invest in conservation and energy efficiency.

Although the judge’s pending order could force the state utility commission to reconsider PSE’s return on equity rates, the commission could decide to keep rates the same if PSE has enough evidence to justify the rate.

According to the WUTC, the multiyear rate plan allowed PSE to increase residential electric customers’ rates by 3.34 percent and natural-gas rates by 1.55 percent last July.

In the next three to four years, PSE may increase rates by a maximum 3 percent of PSE’s annual revenue, with any excess above the 3 percent recovered in the following year.

Alexa Vaughn: 206-464-2515 or On Twitter @AlexaVaughn.

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