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Pending Power Grab has Utilities Shuffling by Chris Mulick, Herald staff writer Tri-City Herald, January 1, 2001

Art Garner curiously watched scores of neighbors set a nearby hillside ablaze in Christmas lights earlier this month, defying warnings of an electric blackout.

A million beads of Yuletide fire burned like candles strung from the dozens of gables scattered about his southwest Kennewick neighborhood, gulping precious kilowatts all the way.

Genuinely concerned about skyrocketing energy prices and power shortages, Garner and other ratepayers are wondering why people don't do more.

And it's not just consumers of power but generators, too, that bother Garner. He's upset by reports some of the cheapest energy money can buy has disappeared from the grid because more water is being diverted away from turbines at Columbia and Snake river hydroelectric dams to aid fish runs.

On average, it's about 1,000 megawatts worth -- almost enough power to light Seattle -- going over the spillway.

"Save the salmon?," Garner asked. "Hell, save me."

Although folks like Garner want to get things back to normal, the Northwest's energy picture may never be "normal" again.

Even those fortunate enough to secure some of the cheap power Bonneville is selling can expect significant rate increases in coming months.

All told, the federal power marketer has 11,000 megawatts of energy to sell.

And like children diving for the spilled innards of a piņata -- utilities, aluminum companies and environmental groups are scrambling to get their share, knowing someone will go hungry.

When they're final sometime next summer, the new Bonneville contracts will largely define the Northwest's commitment to restoring salmon runs and determine the economic viability for industries that provide jobs for thousands of workers.

Everybody wants a piece

Public utilities, like the ones serving the Tri-Cities, that buy all their power through long-term contracts with Bonneville and other generators haven't had to buy from the volatile spot market. But no one will be completely insulated once Bonneville's new wholesale contracts take effect Oct. 1.

That's because the system of federal dams and nuclear plant north of Richland no longer produce enough power to meet the demand Bonneville has agreed to serve. Beginning Oct. 1, the agency will have to buy a quarter of its power off the market.

Though negotiations continue and utilities still haven't decided which contract offer they want, it's clear utilities will be paying more for electricity and transmission services. No utility is ready to announce new rates but it appears double-digit increases may be on the way.

"We need to start telling people what's coming," said Chuck Dawsey, manager of the Benton Rural Electric Association. "All these things are stacking up."

The picture has significantly worsened since the BPA began its contract renewal process a few years ago. Originally, the agency said it would reduce its rate of 2.2 cents per kilowatt-hour for its preferential customers -- public utilities and rural electric cooperatives.

But like a back-and-forth arm-wrestling match, momentum slowed, stopped and then shifted in the other direction.

"Not that many years ago, we were talking 2 cents in 2000 and then they said no rate increase. Now this," said Ken Sugden, manager for the Franklin PUD. "That's why I'm saying, 'Hey, let's get this over with before it gets any worse.' "

Rate increases would be inconvenient for homeowners and even more hurtful for the large commercial businesses and industrial sites that are the big power users.

But while public utilities and rural electric cooperatives are supposed to get first dibs on BPA power, others are scrambling, too. The agency also supplies smaller chunks of power to private utilities, which they blend into their otherwise higher-priced power pool, and to aluminum companies who argue they couldn't survive without the benefit of cheap electricity.

Aluminum smelters typically dedicate a third of their budgets to pay their power bills. Several plants already have closed or curtailed operations because of steep market prices they've paid to keep running, putting about 2,000 workers on the streets.

"Especially in aluminum, you can't sustain that type of increase," said Don Brunell, executive director of the Association of Washington Business. "All of a sudden, the economics have turned upside down."

But Bonneville customers aren't the only interests involved. While utilities and aluminum companies worry about getting the best price possible, environmental groups and American Indian tribes are hoping they don't. Both believe the agency needs to amass a reserve fund of $1.6 billion by 2006 to ensure there's enough to pay for salmon recovery programs.

"While the customers of Bonneville enjoy rates at about half the market price, it would be unconscionable for Bonneville to shoulder more financial risk that may ultimately constrain Bonneville's ability to finance the (salmon) mitigation measures," wrote Donald Sampson, executive director of the Columbia River Inter-Tribal Fish Commission, to then-BPA Administrator Judi Johansen in October.

Others also are clamoring for more money for conservation programs and environmentally friendly power plants, such as wind farms. Marc Sullivan, a policy director the Northwest Energy Coalition, argues utilities remain too bent on simply trying to offer the lowest rates possible without regard for needed environmental programs.

"There's still a cultural problem," he said.

Beyond that, all parties want to make sure the agency has enough cash in reserve to make debt payments to the U.S. Treasury for construction of the dams. Failure to pay the mortgage surely would draw strong criticism from lawmakers from across the country who already are eyeing the energy's cheap energy with jealous eyes.

"Everybody wants the power in the Northwest," said John Saven, executive director for Northwest Irrigation Utilities. "We miss a treasury payment and that adds tons of ammunition."

Utilities slice up some risky business

Public utilities and rural electric cooperatives know they don't have to elbow their way to the front of the line at the BPA buffet. They're going to get their fill.

But how contracts are structured will determine how utilities adjust to change in the now topsy-turvy energy industry.

Utilities have approached negotiations with all the strategy of a seasoned Wall Street investor. They want what appears to be the best price they can get but also crave a diversified power portfolio that will provide flexibility in case those deals don't look so good a few years out.

The safe but inflexible route would be to sign a traditional Bonneville contract, essentially a simple block of power at a set price. The base price would never lower, no matter what the market does, though surcharges would be added if the market takes off.

The more flexible choice would be to combine a smaller block of power with a larger chunk under the BPA "slice of the system" offering. Utilities would buy a percentage of whatever the dams and nuclear plant produce at any given time.

That option would require more utility dealing. At times, a utility's slice would be too large, allowing them to sell surplus to the market. At other times, the slice would be too small, and utilities would have to buy from the market. Even those who embrace the slice offering say it's risky.

"The difference is, we manage the risks," said Benton PUD Manager Jim Sanders. "We'll be able to manage the risks for our customers better than Bonneville can."

Under a slice contract, a utility would be responsible for meeting its own needs in a bad water year. Utility managers would begin watching the weather like farmers do.

Rainy weather and a good snowpack in the mountains mean there will be plenty of water to grow crops and spin turbines at dams.

For the most part, there haven't been any bad water years in the past decade. But in the world of hydro-nomics, there's no such thing as a trend.

"It's like playing blackjack, and all the face cards are showing," said Ray Anason, the irrigation manager at Sun Heaven Farms near Prosser. "We know there are going to be dry years coming."

Utility managers say they would likely build reserve funds to cushion the volatility of market dealing if they're forced to buy in a bad year. But those funds could be eaten away quickly if they have to buy when prices are astonishingly high, as they have been periodically since May.

Gary Saleba, a Bellevue-based power consultant, figures a utility with a slice contract could expect supply swings of as much as a 25 percent more or less what they need at a given time under the contract.

Utilities are hoping they can avoid making spendy spot market purchases, hedging the risk by anticipating shortages and buying months in advance at cheaper prices.

Utilities also are considering limiting risk by purchasing a portion of the output of a new gas-fired power plant to back them up. The problem is gas prices are so high it's driving up the cost of the power those plants produce.

Though now is not the time to tip one's hand, it's clear many utilities are ready to dump the slice option in favor of a safer alternative.

"My enthusiasm for slice has waned since we started having these discussions," Saleba said.