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Tri-City Utilities Ponder West-Side Power by Chris Mulick, Herald staff writer Tri-City Herald, March 25, 2001

Two Tri-City electric utilities are expected to take the Bonneville Power Administration's reading of the Northwest Power Act head-on this week when they sign agreements with developers building a gas-fired generator near Tacoma.

The Benton and Franklin public utility districts are expected to approve the power sales contracts this week, and Richland's municipal utility is expected to join early next month, though the city still may decide against it.

The three utilities are teaming with Grays Harbor Public Utility District to contract for as much as 145 megawatts over 20 years from a 249-megawatt power plant being built at the Fredrickson site. It's the same project Bonneville agreed to buy from in 1994, but later backed out of when it appeared low market prices had made the venture too expensive.

Two private developers, West Coast Energy and a company owned by the city of Edmonton, Alberta, have taken over to complete it. The plant, originally developed by Nebraska-based Tenaska Washington Partners, is half-finished and is expected to begin commercial operation in September 2002.

But unless the BPA changes its application of the Northwest Power Act, which Congress approved in 1980, it may deduct power the utilities plan to buy from the project from their allotment of the cheap hydroelectric power the agency sells.

That's because the agency doesn't want customer utilities to sell excess energy to private power marketers who may ship it outside the region, thereby putting more pressure on Bonneville to meet the needs of the Northwest.

In turn, the utilities argue that BPA policy dries up the market they sell to, reducing their returns on surplus sales and making it uneconomical to get involved with the venture in the first place. "This kind of goes in the opposite direction," said Ray Sieler, Richland's energy services director.

In the meantime, the Fredrickson developers want the utilities to commit now so they'll have time to find other buyers if the deals fall through. And the utilities say they'll press on, hoping Bonneville changes its mind.

Utilities try to fill holes

All four Tri-City utilities, including the Benton REA, have signed new Bonneville contracts that will take effect Oct. 1. Each signed an offering that will provide it with a slice of whatever the system of hydroelectric dams and nuclear power plant at Hanford produces at any given time.

Sometimes, that slice will be too large, leaving the utilities with a surplus to sell to the market.

At other times -- such as in January, February, July and August -- the slice won't be enough. The Benton REA plans to meet those shortfalls by buying replacement power on forward markets or by taking out the equivalent of an insurance policy that will pay out in low-water years. The other three utilities plan to fill the gaps with power from the Fredrickson project.

"We don't want to have to depend on the market," said Randy Gregg, Benton PUD's power management director.

Depending on gas prices, power from that plant would cost between 5 cents and 7 cents a kilowatt hour. That's more expensive than what Bonneville likely will charge even if it doubles its wholesale rate for the first couple years of the new contracts.

Bonneville's current wholesale rate is 2.2 cents per kilowatt hour, and Tri-City consumers end up paying about 5 cents per kilowatt hour when transmission and overhead costs are added.

Benton PUD, with an average demand of 220 megawatts, plans to sign up for 40 to 50 megawatts from the Fredrickson project. Franklin, which needs 90 average megawatts, wants 30 from the plant. Richland, an 81 average megawatt utility that may yet back out of the deal, wants 25 megawatts from the Tacoma project.

"We're really going back and forth," Richland's Sieler said.

If the deals go through, it would give the utilities substantial surpluses to sell during times of the year when there's enough water running through turbines on the Columbia and Snake rivers to generate all the power they need.

But under the power act, Bonneville wants them to resell their surpluses in the region at the cost they're buying it for, rather than sell it at market prices.

"It just depends on what assumptions the (utilities) have made regarding how free they'll be to market their surplus," said Ken Hustad, a senior account executive for the BPA. "The key issue is exports."

Utilities will be able to sell expected surpluses a year in advance at any price buyers agree to, though it's not likely those prices will match what utilities could get on the spot market.

The utilities say if they can't sell their surpluses at market prices, they can't turn profits needed to drive down the cost of the spendy Fredrickson power, forcing utilities to charge even higher rates to consumers.

"We base the economics on what the market is," said Franklin PUD Manager Ken Sugden. "The economics, under their interpretation, just don't work out right. Why would we go build a 5-cent resource when the alternative is something less?"

The alternative is ditching the slice of the system contracts and signing a more traditional Bonneville offering that ensures the agency will provide all the power the utilities need all the time. The utilities don't like those contracts because they don't allow them the flexibility to cut better deals for themselves on the rapidly changing market.

Market maneuvering the alternative

The utilities are confident Bonneville will come around. The agency has suggested in recent months its policies keep public utilities from building new generators. But it hasn't officially changed its position so far.

Resolution may result from settlement talks scheduled to resume this week regarding a lawsuit a group of utilities -- including Richland and the Benton and Franklin utilities -- filed last year against Bonneville over its policies.

If Bonneville doesn't change its position, the utilities could decide not to use power from the Fredrickson plant to serve their needs and sell it freely, which Bonneville would allow. They then could use proceeds from market sales to pay for market purchases when they need extra juice.

"Theoretically, those should be about the same," Sugden said of market prices the utility would buy and sell at. "It's just way more complex."

If the utilities agree to the Fredrickson deal, they'll effectively be signaling their intent to stay with Bonneville's slice of the system contract offering. They'd have no need for additional energy contracts with the more traditional "full requirements" contracts.

Though all three already have bought long-term contracts off the market to serve a sliver of their needs before, they've never had to do as much dealing as they will beginning in October. Managers say they're ready.

"We're looking forward to it," Gregg said.