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2026.09.25 | TB | Utilities | Puget Sound Energy Returns & CapEx

原标题：Puget Sound Energy – Returns Outlook & CAPEX Plan Stability

#power

Third Bridge · 2026-09-25

Analyst-led • 17 Sep 2026

William Hutto (WH) FP&A Manager at Rhythm Ops LLC

Anthony DeRuijter (AD) — Third Bridge Sector Analyst

Agenda

Key Insights

Introduction

AD [00:00:02]: Let me just start Third Bridge's Interview entitled Puget Sound Energy – Returns Outlook & CAPEX Plan Stability by introducing myself as the moderator. My name is Anthony DeRuijter. I'm very pleased to be joined today by Mr William Hutto, former Finance Manager at Puget Sound Energy. William, thanks so much for joining me today.

Before we begin today's Interview, could you please state specifically I agree or I disagree to the following statement: You understand the definition of material non-public information and agree not to disclose any such information, or any other information which is confidential, during this Interview.

WH [00:00:30]: I agree.

AD [00:00:31]: Could you please introduce yourself before we jump into the interview?

WH [00:00:37]: My name is William Hutto, former Finance Manager at Puget Sound Energy. I was with the company for about three years within the finance department.

Questions

[00:00:52] What is your outlook for PSE's [Puget Sound Energy's] authorised returns? What are the key factors driving your outlook, especially considering how constructive or not the utility regulatory regime is in Washington? I note that the state attorney general is challenging PSE's proposed rate hikes.

WH [00:01:21]: Yes, that's right. I'd say the authorised return is wholly dependent upon the Washington Utilities and Transportation Commission settlements each cycle. I would say, yes, the state Attorney General's challenge, I guess, is the correct term, is certainly noteworthy. Though I think that the company faces challenges from interested parties in all these cycles. From my perspective, it's really no surprise to see such an action from the state Attorney General given all the attention that's on power costs from utilities and specifically investor-owned utilities in the current climate.

[00:02:28] Would you say that the broader affordability concerns and impact on ratepayers is a material ceiling on rate requests in the medium term for PSE?

WH [00:02:46]: Always. I think that's the job of the commission. I think that's the job of the commission is to balance that. I think the commission recognises and has indicated, especially in their prior settlement in 2024, that they're not here to put a company out of business or to really put the damper on plans, but things need to be supported. It's certainly a ceiling. I don't know if it's necessarily an unreasonably low ceiling, but I think the company needs to certainly support all their capital and O&M spend in order to justify their rates. I think that's what this is about.

AD [00:03:40]: It seems the outcome of rate hikes might be down to what PSE does. You talked about O&M [operations and maintenance]. Thinking about improved reliability, is there a sense that affordability pressures mean that the outcome of rate hikes is going to be pretty much external or uncontrollable no matter what the company does?

WH [00:04:17]: I think that's a difficult question to answer. In some ways, it is, by its very nature, a third party's decision on the rates. Yes, but no, I think that PSE has great ability to influence these decisions. I think the commission has made it clear the type of information that it would need to support rate hikes to supporting capital requests and increases in O&M spending. I think that especially in recent years, the commission has been relatively consistent with spend that's been disallowed. I think that the company is sort of getting more attuned to the rhythm of how to present information in a way that makes it clear to the commission why it's necessary. I think that's what it boils down to. I think if PSE submits lazy rate cases, then yes, it's out of their control, but I think PSE certainly has the capability to support all of their requests. No, I would not say that it's out of the control of PSE.

[00:05:57] Anecdotally, it seems most IOUs [investor-owned utilities] are typically getting 70-80% of the requested rate increase that they look for to get approved. Could you apply that to PSE's history that you're familiar with, and whether or not that assumption is accurate, or if it needs to be adjusted in the current environment with elevated affordability pressures?

WH [00:06:42]: I definitely agree. I think the 80% is a super broad stroke. I wouldn't necessarily agree that that's something to expect on a go-forward basis specific to PSE. Investor-owned utilities, there's two in Washington State. Those are the only two that operate within the Washington State Commission sort of purview. I can't speak to other states. I'm only familiar with the regulatory environment in Washington, but all that is sort of preface. I'm familiar with rate case outcomes going back to about 2020. I think if you include the 2020-21 rate case outcome, which was considered across the company to be extremely negative. That one in particular was an example of where the commission really favoured the public in terms of not raising rates. Of course, that was due to COVID at the time. As a result, it set the company back financially from a capital planning and an O&M planning perspective. I think that basically, regulatory and finance have spent five going on six years, working to ensure that that never happens again. I think that 2023 rates were increased close to… I don't know, it's tough to say a certain percentage. A lot of the key things that the company wanted in that 2022-23 rate case were approved.

You saw it in massive company-owned wind farms being constructed and new power purchase agreements and that sort of thing. Then in the 2024-25 rate case, I would say, like an even better outcome from a regulatory perspective. I think I'm not going to try to guess at a percentage of dollars requested and approved, but I think the company always includes some stretch goals in there. One example of that is construction work in progress. That was denied. Some other key items were denied. For example, a company likes to include a contingency, essentially a cushion in their O&M that was denied. The company turned around and delivered below budget on O&M that following year. I think that the commission is acting in good faith. I think the company is as well… I would say 80% is certainly low. I would not expect to see those kind of numbers. If they were, it would be definitely measured on things that the company is requesting and maybe not expecting to get, but certainly thinking that it'd be a huge win if they did. I don't know for certain whether the company is going to request construction work in progress again. The commission, like I said, denied it last time around. They did indicate that they would be willing to consider it in the future. I think that's a key lever in the future.

[00:11:01] Without the riders or mechanisms for construction work in progress or accelerated depreciation, does that have a major impact on PSE's CAPEX plan and the overall rate base growth to expect from the company?

WH [00:11:34]: At the end of the day, capital projects are just going to be funded via a different mechanism. If construction work in progress is not approved, then that's just additional dollars that are in that capital account that would flow through to rates. It's just a time value of money question more than anything else, I think. Does it impact the plans and the timing of plans? I don't think so. If anything, it might delay plans, I don't know. The single biggest capital project that was owned and constructed by PSE was delivered under budget and ahead of schedule by, I think, four or six months. You could argue that not having that construction work-in-progress mechanism does incentivise that sort of result, which it's probably net-net good to have projects finished ahead of schedule and in service and serving the ratepayers. Yes, I don't know that it impacts the plan itself, but maybe just the timing and the way in which that funding is required to build. Whether or not additional debt would have to be issued or that sort of thing vs just like recovered in rates along the way. I'm not aware of another project at the scale of Beaver Creek that's broken ground or been made public at this time, but I think that would certainly be impacted by such a decision.

[00:14:30] What's your assessment of the utility's ability to score higher ROEs in future GRC cycles through the medium term? What key headwinds and tailwinds do we need to consider when thinking about that?

WH [00:14:48]: When you say higher, I mean like…

AD [00:14:55]: By higher ROE, I mean not just getting hikes or rate increases that would keep the authorised ROE level, but also even expanding it.

WH [00:15:29]: I'm not sure of the desire to continue with the ROE expansion. I don't see a world in which that ROE climbs 20-30%. I think there's opportunity in achieving the authorised ROE. I think that's a key focus, but I don't know that the company or the commission would pursue a significantly expanded authorised return on equity.

AD [00:16:13]: Do you see potentially the incoming GRCs' contraction?

WH [00:16:21]: I'm not aware that the commission has indicated that that's a priority for them. I think that they recognise that certain levels of ROE is necessary to attract capital. I don't believe they adjusted it downward in the '24-'25 rate case. I wouldn't expect them to do that in the future beyond just disallowing certain mechanisms like CWIP, construction work in progress, and the effect that that has on ROE. I don't necessarily think that a key focus of the commission is ROE compression. I do think that a key focus of the company is fully hitting that authorised ROE vs falling a bit short. Yes, I haven't heard that the company is seeking to significantly expand that. I don't think that the commission would really go for… If we're talking about a few basis points, maybe, but I don't think anything in the 10%, 20%, 30% expansion range is really reasonable or, yes, I don't see that.

AD [00:18:11]: Are there any key headwinds and tailwinds that you think are going to be driving the future GRC cycles for PSE? We talked about affordability, which I guess is separate from that.

WH [00:18:33]: You're asking about rate case outcomes?

AD [00:18:36]: Yes. Headwinds and tailwinds for rate case outcomes, outside of affordability.

WH [00:18:43]: Yes. I think affordability is the largest one. I think that the things that are in my head are not really rate case outcome related, but more so state-mandated climate target CCA-related difficulties. No, no. I think that's like the big one.

[00:19:27] My understanding is that PSE has had some issues with regulatory lag and under-earning risk due to factors such as extreme weather, fuel volatility, CCA [Climate Commitment Act] compliance costs and weakness in some of the generation fleet, especially hydro. Considering those factors, what are your views on under-earning risk for the company moving forwards?

WH [00:20:05]: This is not a regulatory leaning question. This is an operationally leaning question. Is that right?

AD [00:20:14]: I believe so. It's actually earning the return that's authorised and falling short of that.

WH [00:20:20]: Sure. Yes. I think that I'll start with one of the first items you said, like extreme weather and storm has certainly been a drag. The company does bear some risk. It is shared with the ratepayers via a sharing band mechanism. Essentially, the company pays sort of a USD 10m deductible, so to speak, on the first USD 10m of storm spend and then it's proportionally included and automatically included in rates. That is a known and fixed cost every year. The way that the storm recovery mechanism works, it ends up being relatively stable. The primary pressures are short-term, cash-driven in nature. Gosh, it was either last fall or the prior fall, it might have been two falls ago. There was a really expensive storm that occurred that resulted in USD 50m-some of damages. I'm not going to say there was like a liquidity crisis, but there was definitely a lot of cash being paid out the door in a short amount of time. There's no mechanism to solve for that. I say that I'm not suggesting that there is like a liquidity risk there, but all that to say, I think that the extreme weather side of things is fairly well controlled for.

You mentioned hydro. That is probably where the weather shows up a little bit more. Through power purchase agreements, we do have a significant amount of generation that is hydro-based. On low snowpack years, on drier years, which one could assume would certainly occur over the next 5-10 years, we do pay higher power costs as a result. I think that's a risk. I will say that the company is not building new hydro. They're starting to shift away from it. I think it's something that the company is actively mitigating. I think there will always be some portion of base generation that's hydro. I think fairly significant, given the region. Neighbours to the north in British Columbia rely on hydro for 99% of their power supply. I think it's always going to be there. It's always going to be a risk, but I think it's fairly well mitigated. I would say a low-to-medium risk.

Other areas, I think that labour costs, specifically electric workers, represented employees specifically, those costs are increasing at an extremely rapid rate. In some cases, 10-15% annually. Not every year, but there's deals for the next three, four, five years, and there's multiple 10% increases, 10% or more increases in there. Those costs are massive and hugely impactful. Those are unavoidable. I do think that the company is actively looking to bring in-house a lot of that labour, which should help a bit. Currently, the majority of capital labour from an electrical worker perspective is through a third party, like a single third party that is very closely tied in with PSE. I think certain portions of that, the company is looking to bring in-house in order to save on cost. Again, the company is actively mitigating that, but definitely a risk to achieving authorised ROE. Trying to think of some other areas. Yes. Do you have any follow-ups so far?

[00:26:27] My understanding is that PSE wants to change the power cost adjustment mechanism to cover when the power costs go above the level factored into rates, and have more of a hedge or otherwise insulate itself from constant passing through of that fuel cost on to ratepayers, or at least get that covered. What's your view on the WUTC [Washington Utilities and Transportation Commission] giving the company that mechanism adjustment? If not through that adjustment, are there any other active steps that a utility such as PSE could pursue to have more of a handle on power cost volatility?

WH [00:27:10]: We saw it play out in FY24 where there was a weather event, nationwide weather event and power costs were extremely high for two or three days, and we spent the next nine months recovering from that. Our power costs never really did recover. Yes, it's an important mechanism. I think that securing more, a higher portion of the load served by PSE's own generation or contracted generation would be a step. You look at the news, they're signing PPAs all the time. Presumably, we'll be continuing to break ground on wind, solar and battery farms as well. I think that the company is actively engaged in that approach to mitigation.

[00:28:35] What's your experience of how thorough PSE is when modelling out its revenue requirement? Would you be concerned that there are moving pieces today – such as fuel volatility, supply chain issues, compliance or regulatory costs – that might not be adequately captured in rate requests and could lead to further under-earning or margin erosion risk for the utility?

WH [00:29:03]: I don't think. No. That process is incredibly detailed down to the single headcount, down to the bolts and screws in the plants. That process, I participated in it and is extremely thorough. There's always a risk of human error, but the company takes it extremely serious. There's lots of levels of review. There's multiple departments involved. There's a lot of eyes and hands in that process, and it's extremely detailed.

[00:30:00] We've seen some IOUs broadly cut planned spending when there's concern around a hostile policy environment or potential under-earning risk vs ROE for factors beyond their control. What's your view on PSE potentially doing the same based on the potential ROE trajectory authorised, and how management is likely to react to any major changes or deterioration in the projected return outlook?

WH [00:30:38]: I think a lot of the level of capital spend is heavily influenced by CCA targets, climate commitment targets set by the state for the utility. Basically, my outlook is that if the commission doesn't fund these activities, then the company is not going to fund them essentially. I don't know what the result is if in 15 years, the targets aren't met, but if the commission doesn't fund the capital requirements to achieve the CCA targets, then they won't get funded. I think the company will try to get creative, but at the end of the day, I don't think… PSE, they are a private company. They're not going to self-fund or donate capital projects to the ratepayers. I think that if these projects don't get funded, something has to break somewhere along the way. It's pretty clear to me that the breakage would be in the CCA target.

[00:32:25] If PSE were forced to cut CAPEX by a hypothetical 10-20%, which priority projects do you think would be deferred? What would be your view of potential impact on rate base growth?

WH [00:32:55]: I think the company would probably cut a lot of their exploratory projects. Hydrogen, for example, would not be… There would be no pilot for that. A lot of the microgrids that are being built around the region would probably be shelved. I think the company would start to focus on a lot of their reliability metrics over funding expensive new infrastructure. I don't necessarily have a great view on the pecking order exactly, but I do think that there would be a lot less investment on… I think the top of the pecking order would be exploratory projects like hydrogen and nuclear and that sort of thing. That would probably be the first types of things to go.

Rate base growth, I don't know that there'd be a massive impact there. The company doesn't seem to be extremely focused on signing large data centres or large load customers like that. I don't think that ratepayers, the commission would go for that. I think the widely held view is that such contracts drive up cost. I just don't think that's something that's being pursued. Of course, you're going to have like small data centres, but I'm talking about the newsworthy ones that you see. I don't see that becoming a thing. I don't think that not having funding for certain capital projects would prevent that because I don't think that's part of the roadmap. I think load is growing steadily and stably, but I don't think that it would swing too much one way or the other based on any commission settlements.

[00:35:53] Given that the WUTC has discretion over PSE's rate recovery on CAPEX, do you have views on what type of projects the commission likes or doesn't like and therefore, where the regulatory lag risk might lie across different project types in the CAPEX plan?

WH [00:36:18]: I don't know that I have a great idea as to what the commission likes, what they don't like. What I can say is that one might wonder whether or not the commission is against funding new gas-fired plants. I don't think that they are. I think the commission is flexible to allow the company to pursue generation that it sees as necessary. The commission allows for certain types of capital projects, including natural gas peakers, to be redacted from filings. Peakers being one of those types of capital projects that can be redacted. I think that the commission does… I think that the public is fairly squeamish when it comes to those types of projects, but I think that the commission plays its role there and front runs some of that. Does the company a solid on that sort of thing. I think the short answer is no, but I don't know that I have great insight into that. They're certainly concerned with the CCA targets, and they're definitely down for more wind and battery projects, but I don't know that they're singling out… For example, we're not going to fund new gas… They're not going to fund coal. That's illegal now, but I don't think that gas is on the chopping block or anything.

[00:38:50] Given that a large amount of CAPEX for PSE is related to Washington's clean energy mandate, what do you think are some of the potential risks there, especially as it pertains to aspects such as cost recovery, under-earning risk, execution and ability to follow through?

WH [00:39:13]: I'm not aware of any penalties that have been publicly made clear with these CCA targets. The largest risk is not meeting CCA targets. I don't know what that risk looks like if it occurs. I think that there's going to be a large amount of capital spent to achieve those targets, probably, certainly more capital than would be spent otherwise. The commission, again, is responsible for funding that capital plan. Again, if they don't, then I think the company will miss their targets on purpose. Under-earning, I don't necessarily see that as a driver of under-earning. I think it's sort of, "You want us to hit these targets? Fund them. If not, then that's your call," kind of thing. I don't think the company is going to allow the proverbial gun to be pointed at their head in that regard.

[00:41:32] What's your view on execution risk on the CAPEX plan as it stands, given aspects such as resource constraints and that CAPEX intensity is rising in the industry for some of the mega utility projects or just utility projects in general? Do you have any thoughts on execution risk and how that varies across different project types?

WH [00:42:00]: It really comes down to cost. I think that the company has secured the CAPEX. It's got stuff locked in for five years as far as large equipment purchases and stuff like that. It's making those purchases very far out into the horizon. A lot of equipment was purchased in 2025 when there's a lot of tax advantages to doing so. Again, there's a point in time at which that runs out, but I think the team that's in charge of that is on top of things. It may get more expensive, but I don't think that it's going to be at risk. Again, come the 2028-29 rate case, it just becomes a situation where the company tells the commission that, "It is what it is. This is what it costs. Are you going to fund it or not? If you're not, what are you not going to fund and we won't do it." Of course, there's negotiation. If we can't build this, can we build it this way, but yes, execution risk is not the concern. I think it's just sticker shock and whether the commission will enable the CCA targets to be met.

[00:44:22] PSE claims to have lower operations expense per customer compared to other utilities of comparable size in the region. Assuming that's true, where do you think that comes from?

WH [00:44:41]: Scale being one. It's the largest in the state. That's definitely part of it. Two, it's forced. I think the company had really had to tighten its belt following that really unfavourable settlement around COVID. In some ways, those numbers show up not so much in reliability of the system, but phone hold times and that sort of thing. I think that the company is extremely diligent about controlling O&M costs. I think the commission is locked in on that as well. They like to see every dollar supported and accounted for, but the company is asking for a large increase in O&M expense. I don't know these benchmark metrics. I was aware that they had the lowest in the country, but I don't know where that lands over the 3-4-year time horizon. I know that it definitely will go up, but yes, core focus of the company is controlling those costs.

[00:46:38] What O&M [operations and maintenance] cost reduction opportunities do you see for PSE? What might be a north star O&M per customer or similar KPI?

WH [00:47:06]: I don't know that I'd be able to give a specific number. I don't have access to the data anymore to really be able to see that, but as far as ways that the company is controlling, I think that in some ways, it will go up due to continued investment in technology. Sort of like modernisation of the fleet of equipment that supports O&M, but I mentioned it earlier, I think part of the electric first response function being brought in-house will save on costs there. Yes. I'd say that's one of the main areas of savings opportunities.

[00:48:18] Do you see any O&M inflation risks for PSE – whether they be labour, consumables, materials or other non-power buckets?

WH [00:48:27]: Definitely represented labour, linemen and electricians and gas workers are getting more and more expensive every year, like double-digit increases in pay there.

[00:48:54] Going back to the idea of O&M cost reduction opportunities, my understanding is that PSE is investing in smart metering, grid modernisation and customer-facing digital tools. How do you think about the expected cost savings from those types of initiatives, such as reduced meter reading, labour, faster outage restoration or lower truck rolls and the costs associated with that?

WH [00:49:25]: It's sort of a circle. You're going to save on meter reads. You're going to save on… I don't know that you're going to save on truck rolls, but you're not going to have as many outages if you have better reliability, building redundancies into the grid, but I think that the key is some of the reliability metrics that the company is measured on by the commission. There's a financial benefit to meeting these metrics. I think that's where the benefit lies.

[00:50:21] With the change in federal policies and the fact that renewable ITCs [investment tax credits] for solar and wind were sunset in July 2026, how do you think that would have flown through to PSE and its cost base, or how the company might have otherwise been impacted?

WH [00:50:46]: They bought a ton of that sort of equipment. They safe-harboured a ton of that in 2025. 2025 was like a relatively good financial year. Sort of took some of those budget underruns and bought a ton of equipment. I don't think you'd see that really impact for another two or three years as a result of that, but given the CCA targets, I think the company would be pushing to proceed on those sort of projects regardless of that. Whether or not the commission gets on board with the full price of those projects, that I can't speak to, but I don't see the company changing its strategy as a result. I think it's pretty committed to pursuing those sorts of projects.

[00:52:03] How do we think about the impact of data centres for PSE? My understanding is that it's not a really big load growth driver for the company, given its service area, but are there any negative connotations with data centres in terms of competition for power or forced pass-through of fuel cost inflation to ratepayers because of data centres needing more power elsewhere?

WH [00:52:34]: Yes. I think you're correct. We chatted about this. I think I touched on it a bit earlier. I don't see data centres being a large load growth driver in the service territory itself. That being said, PSE has a number of power purchase agreements from public utilities in counties in Washington State on the Columbia River and that utilise Columbia River dams. Those same counties are seeing large data centre construction. I do think there will be potential price increases related to these when these PPAs renew… As they renew, I think that these counties will consider data centres as an alternative to selling their excess power to PSE. I think that (a) there's going to be a cost increase in these PPAs, and (b) the company might look to bring some of that generation in-house, whether it's through gas, whether it's through wind and solar and battery mix, whether it's nuclear, but I think that's a theme that we'll start to see as these PPAs come up for renewal.

[00:54:19] How should we think about wildfire risk as a catastrophic risk or not to PSE? To what extent is that mitigated or not?

WH [00:54:42]: There's a recovery mechanism built into the rates for wildfire spend. The company has third-party insurance, has spent a significant amount on third-party insurance. A lot of the infrastructure is not self-insured. The company is investing a ton of money. I think it's a big risk. It's a cross-departmental huge area of focus. Has it been a huge impact to infrastructure or ratepayer communities in the past couple of summers? I think we're close to being out of the woods for 2026, but yes, it's certainly a risk. We've seen other utilities get massive lawsuits as a result. I think that PSE has learned a lot of lessons from those other utilities' mistakes and has a lot of the latest technology employed to mitigate wildfire. Yes, spending a lot of money. The commission is super friendly to doing so. Yes, definitely got our best people on it.

AD [00:56:20]: With that, I will bring it to a close there because that's all my questions for today, but just wanted to say thanks so much for joining me and sharing your insight.

WH [00:56:27]: Yes. Thanks so much. It was a pleasure.

AD [00:56:30]: It was. Thanks so much, and have a great rest of your week.

WH [00:56:33]: Yes. You as well.

AD [00:56:34]: Bye now.

Transcription ends at 00:56:36 of the recorded material