As I write this, the White House is planning another sweeping round of tariffs on US imports. This round follows earlier rounds of tariffs, and tariff reversals, and intra-day tariff rates, since the start of the second Trump administration two months ago.

Here at Halcyon we have not yet taken a close look at tariffs and their discontents for the US power sector, for several reasons. The first is that decades of delegation from Congress to the Chief Executive have given the presidency an almost unique power to impose tariffs without review, unlike many other aspects of trade policy and regulation which devolve to agencies, departments, and Congress. To put it another way, they’re not really matters for our information catalog and its sources: state-level public policy and regulation shaping energy business development and business operations.  

The second reason is that tariffs put more pressure on other sectors almost instantly. Electricity in particular has a very low demand elasticity of price (people continue to pay for it as price increases because it is essential) and it is also regulated in a way that allows costs to be passed from supplier to consumer. Spare a thought for your local auto executive whose vehicle supply chains cross between Mexico, the US, and Canada, and their need to deal with these tariffs immediately, in a way that customers will feel right away.  

Tariffs come to power 

But, tariffs have now arrived for your local power utility too, especially if you live in a state on the northern border. US and Canadian energy markets are highly integrated, thanks to decades of infrastructure and policy. Northern Maine, for instance, is not even connected to the New England grid and can only source power from New Brunswick. New York State imports more than 4% of its power from Ontario; Michigan and Minnesota import from Ontario as well, though in lower volumes. These four states also import zero-emissions power in the form of hydro and nuclear, which aids state climate goals at stable prices.  

The state that I’m watching through Halcyon, though, is far to the west: Washington. In the past month, the state’s two biggest utilities have filed petitions for deferred accounting of the price impacts of tariffs on imported energy, not just electricity, from neighboring Alberta and British Columbia. 

First off: deferred accounting is a very normal thing for utilities. As our advisor and former PUC Commissioner, Sharon Reishus, reminded me: 

“Regulatory deferred asset accounts can and are used for both unexpected and planned activities that are likely to be recoverable in rates. For the utility, the key attribute is that the spending is capitalized and becomes part of the rate base immediately rather than having to wait for whenever recovery in rates might happen. It also provides rate stability for customers so that something like, say, 25% tariffs, are not immediately passed through in rates; recovery can be smoothed out on whatever future schedule the PUC decides is fair.”

And as we read what Avista and Puget Sound Energy have to say about tariffs, you will see why a play for time — so that utilities may come to a full understanding of what they pay, how, and to whom — is so important. 

Here is what Avista says: “energy resources” will face a 10% tariff “justified by the administration as necessary measures to combat the flow of illegal drugs into the United States.” Avista imports 90% of its gas from Alberta and British Columbia; Alberta gas is traditionally very low cost and very liquid in trading terms, and is - and will be! - the lowest-cost option for customers.  

Avista continues:

“As of now the Company does not know whether such tariffs would be reflected in the embedded cost of the Canadian commodity (and therefore flow through the Company’s natural gas Purchased Gas Cost Adjustment Mechanism (PGA)), or would be considered something more akin to an excise tax (such taxes are not tracked in the PGA deferrals).”

And it adds that if the costs are akin to an excise tax, then “Avista does not believe that it should absorb such unexpected expenses beyond its control.” 

Puget Sound Energy is even less certain about tariffs — not just where they are accounted for, but which imports are actually subject to tariffs. Its petition for deferred accounting includes a lengthy and footnoted definition of ‘energy resources’ as it essentially shows its work in trying to determine not just how it accounts for tariffs, but also where they apply.   

Gas tariffs are a given, either when used for power or sold to consumers. Per PSE’s petition, however, electricity is not included in the government’s own definition of ‘energy resources’ which are subject to tariff. And in fact, it contends that it is not clear if tariffs should apply to electricity at all: 

"Further, under the Chapter 27 of the Harmonized Tariff Schedule of the United States, electrical energy is identified as a good, but has a “free” tariff designation and is not subject to the border entry procedures through which Customs Duties are imposed. Public statements from a representative of the U.S. International Trade Commission have suggested that—consistent with historical treatment of electrical energy as an intangible and the complexity of tracking and invoicing interchange of electrical energy across the U.S./Canada border—electrical energy generated in Canada and imported into the U.S. may be wholly exempt from the tariff."

PSE makes the same request as Avista: please let us defer accounting while we determine what is subject to tariffs, and how we should account for tariffs. Together, two major utilities with a combined 1.62 million electric customers and 1.26 million natural gas customers in Washington, Oregon, and Idaho are forced to look through a fast-moving and highly-uncertain trade position as quickly as possible — and their best (and wholly justified) response is to defer their accounting.

Uncertainty is certain

To summarize these two proceedings from the Pacific Northwest:

• Utilities know that tariffs must be paid
• It is not clear on what energy imports they must be paid (gas is certain, but electricity is not)
• It is unclear where tariffs would be collected (they could be included in the price of imports, or treated as an excise tax)
• It is unclear which FERC-approved accounts apply to their collected funds
• And in any event, Avista gets 90% of its gas from one of the lowest-cost, most-liquid hubs in North America and even after a tariff, western Canadian gas is still going to be the lowest-cost option for its ratepayers. Tariffs on Canadian gas, in other words, will not force, or even nudge, the utility towards buying gas from US sources. 

If this seems like a fraught environment for trade and commerce…it is.  An economist might say that today’s trade environment is stochastic: observable and analyzable, but not predictable. But to put it in plainer terms, it is simply very uncertain.  

One of our favorite charts of the month comes from Bespoke Investment Group, which has tracked every single mention of the word “uncertainty” in the Fed Beige Book since 1970.

It does not surprise me to see ‘uncertainty’ mentioned 45 times in the most recent release, but it is still striking in historical context. That’s more so than after September 11, the Global Financial Crisis in 2008, or the start of the Covid-19 pandemic in 2020. By this measure, the US economy has never been more uncertain than it is now.  

But if policies are stochastic, businesses are deterministic, in particular those that provide essential services through a regulatory compact. In times of record uncertainty, access to quality information becomes even more important. It will be fascinating (and demonstrative) to see how things play out for Avista and PSE. If you agree, you can follow these dockets yourself here: Washington Utilities and Transportation Commission Dockets 250133 - Avista and 250135 - PSE (free authentication required).

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