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Experts Say Electricity Rates Not Likely to Fall by John Stucke The Missoulian - July 19, 2000

Panel says more plants needed to lower costs

SPOKANE - Soaring electricity prices that have crippled many industries in the Northwest aren't going away - unless more generating plants are built.

That's the opinion a panel of energy experts gave during a Northwest Power Planning Council meeting Tuesday. Prices may fall a bit later this year, but the market forces that drove power costs are in place and aren't likely to retreat until the supply of power can meet the growing demand, said Murray Margolis, head trader for B.C. Hydro's Powerex.

"Although prices were high ... the market didn't fail," he said. "Power was available to anyone who wanted it at the going price."

But the price is too high for many of the region's industrial customers.

Russ Ritter, a spokesman for the shuttered Montana Resources Inc. copper mine in Butte, traveled to the meeting to better understand the power price spikes. After the meeting, he said the conclusions of the panel may mean the mine will have to stay closed for about three months.

Beginning in May, the price of wholesale electricity began climbing. Then it took off. In April, for example, a megawatt-hour sold for about $25. The average price in June was $120.

An early heat wave, low water levels in dam reservoirs and several major plants taken offline fueled the skyrocketing prices. Since, industry officials have enlisted the help of politicians and the likes of the planning council to investigate what they believe might be unfair market gamesmanship.

Untrue, said Seattle City Light spokesman Jim Harding.

"I don't think anyone is going to find a smoking gun," he told the committee.

The circumstances blamed for the market volatility were, perhaps, intensified by the deregulation of the electricity market. In Montana, deregulation began in July 1998, allowing industries such as Montana Resources and the Smurfit-Stone Container Corp. paper mill in Frenchtown to shop the open market for the best deal.

For the first 20 months, the law seemed to work as the plants brokered better prices. Things have since changed.

Harding said deregulating an industry is the easy part. The difficult part, he said, is creating a competitive market.

Tim Belden, a vice president of Enron Corp., told the panel that higher prices will remain for at least two to four years.

That's how long it takes to build new generation plants. The permitting process, he said, takes two years, followed by two years of construction.

Companies in the Northwest haven't built new generation plants in a decade. And to do so now, under the umbrella of deregulation, is a risk for industry since recovering the investment isn't guaranteed as it was when utilities were state-regulated monopolies.

"If you want (the recent price spikes) to be a speed bump and not the future, we'll have to have more facilities," Belden said. "The problem will get worse in terms of scarcity before it gets better."

To reinforce his statements, he said runoff this year in the Columbia River Basin and in California hasn't been too bad. He offered information showing that the runoff during the previous four years has been far above average.

What does this mean?

"I'd say we've been fooled by great hydro years," Belden said, adding that may have offset consistently rising consumer demand.

None of this was good news for Bob Boschee, Missoula plant manager for Smurfit-Stone.

His plant, with more than 600 workers, buys power at spot market prices. So far, the plant has been able to stay open, partly because of a belief that the price spikes are an anomaly.

Don Quander, a Billings lawyer representing 12 of Montana's largest industrial plants, said each company still supports deregulation of the electricity market. Even though the prices are forcing curtailments and shutdowns, he urged the planning council to continue its investigation of the price spikes.

His clients joined the Montana Power Co. in 1997 to push deregulation through a Republican-dominated state government.

"We now find ourselves in a bit of a crisis," he told the panel. "It is not an anomaly." The Dow Jones mid-Columbia Index had the price of electricity at $90 per megawatt-hour Monday.

While power prices in the Northwest soared during June 27-28, Margolis said, more than 10 companies in the region flowed 4,500 megawatts to California.

He said companies may have been exercising good business judgment by selling power to the highest bidder.

In Montana, the problems are compounded by the state's deregulation law that will force individual households to shop the open market for power in two years. Unless the state Public Service Commission or the Legislature delays residential participation by two years, the people of Montana may be trying to secure a competitive rate much as industry is today.

If this was happening to residential customers, added Boschee, "The outcry would be deafening."

Govs. Marc Racicot, R-Mont., and Gary Locke, D-Wash., have asked the planning council to make its price spike study a top priority.

And both Montana senators, Democrat Max Baucus and Republican Conrad Burns, are calling for investigations to ease industry's financial pain.

In Washington, Sen. Slade Gorton, a Republican, has asked the Federal Energy Regulatory Commission to investigate the sudden spike in power prices.

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