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Energy Costs Buffet Local Economy by Steve Ernst Puget Sound Business Journal, March 14, 2003

State's longtime energy advantage is evaporating

Eighteen months ago, the Kimberly-Clark Corp. mill in Everett claimed the third-cheapest electricity bill among the company's 20 mills in 35 states. The low power bills pointed to a secure future for the mill's 900 employees.

But today, because of the unprecedented rise in the region's electricity prices, the Everett mill's electric bill has doubled in the past two years and is now the company's third highest.

"This is a real threat to our long-term viability in the region," said Dave Faddis, manager of the 76-year-old mill.

Once awash in cheap and abundant electricity, Washington has lost its historic advantage of having the cheapest electricity rates in the country.

A study completed last month by the state Office of Trade and Economic Development shows that in 1999, prior to the recent energy crisis, Washington had the cheapest residential and industrial electricity rates in the country. It also claimed the second-cheapest commercial rates.

By last year, about 20 states had lower commercial and industrial electricity prices than Washington. An estimated 7 states had lower residential rates.

Kentucky had the nation's cheapest residential, commercial and industrial electricity rates.

The unprecedented climb in regional electricity rates, along with a national spike in prices for natural gas and petroleum, mean energy prices in Washington have reached an all-time high.

In 1999, the state spent an estimated $10 billion on energy. This year the state's fuel bill is expected grow by $5 billion, according to the Office of Trade and Economic Development.

"We expect prices will remain relatively high for a good chunk of the year," said Tony Usibelli, assistant director of OTED.

"We don't see electrical prices coming down anytime soon. Natural gas prices will probably jump around some more. And the price of petroleum is going to depend on the war in Iraq, among other things," he said.

This week the average price for a gallon of gasoline reached an all-time high in Washington, at $1.84 a gallon, according to the American Automobile Association. Washington had the third-highest gas prices in the country, behind California and Oregon.

Meanwhile, natural gas prices surged 38 percent this week to their highest levels in more than two years. Earlier this month, Puget Sound Energy, the state's largest utility, asked state regulators to approve a 21 percent overall increase in natural gas rates.

The $5 billion increase in spending on energy is having an impact on the state's economy, but exactly how big of an impact is still being calculated, Usibelli said.

But it's likely that the extra $5 billion that state businesses will spend this year on electricity, natural gas and petroleum could be reducing the state's economic output by about 2 percent.

"That's $5 billion that was going to be invested in other things," Usibelli said.

While Washington businesses have always been affected by fluctuations of natural gas and petroleum prices, low electricity rates have been the state's hallmark.

Inexpensive hydroelectricity spawned the rise of the aluminum smelters, pulp-and-paper mills and food-processing plants in mostly rural communities around the state.

Now the aluminum industry is in its death throes, and the loss of the state's low-cost megawatts have raised concerns over the long-term viability of the pulp-and-paper and food-processing industries in Washington.

"We are very, very concerned about what this will do to the economy in Washington," said Ken Cannon, executive director of Industrial Customers of Northwest Utilities, a Portland-based lobbing group which represents 36 companies in the Northwest.

The already-historic prices that businesses are paying for electricity are likely to rise again this fall. The Bonneville Power Administration wants to raise the rates it charges utilities and its direct-service customers by 15 percent to help a meet a projected budget shortfall of $1.2 billion through 2006.

The proposed increase is being vigorously opposed by the state's 15 pulp-and-paper mills, which have already been stung by hikes in electricity prices.

"We have encouraged them (BPA) to take an aggressive approach to cost-cutting," Faddis said. "We can't pass these costs on to our customers."

A study completed by Weyerhaeuser Co. in September compared industrial electricity rates offered by 32 utilities in the United States and Canada where the company operates mills.

The cheapest electricity for large industrial customers was supplied by BC Hydro, based Vancouver, B.C., according to the Weyerhaeuser study. Next on the list were the Public Service Co. of Oklahoma, Kentucky Power, Louisville Gas & Electric and SaskPower, which serves Saskatchewan, Canada.

Tacoma Power had the cheapest(?) industrial rates in the state, ranking 19 out of 32 utilities on the list. Other state utilities on the list included; Avista Corp. (21), Puget Sound Energy (23), Grays Harbor County PUD (25), Clark County PUD (26), Snohomish County PUD (29) and Seattle City Light (30).

BC Hydro also provided the cheapest prices to small industrial customers, or businesses that use 1,000 kilowatts during peak load times.

Again, Tacoma Power ranked the highest in the state on the list of 32, at 10th place. Clark County PUD was ranked 20th, followed by Avista Corp. (25), Seattle City Light (26), Puget Sound Energy (27), Grays Harbor County PUD (28) and Snohomish County PUD (30).

At the Kimberly-Clark mill in Everett, the electricity bill is expected to top $20 million this year, from $10 million in 2001, said Faddis.

"This is a very expensive region to do business in. From a tax standpoint it's a very expensive place, and labor costs are high," he said. "An advantage like low-cost electricity used to mean we could offset those costs, but that's no longer the case."