Stable and reliable are two words that haven’t been used to describe Montana’s power scene in nearly a decade. In an effort to turn that gloomy scenario around, five Montana cities recently banded together in a bid to buy out NorthWestern Energy. Though the company quickly rejected the $2 billion offer, Montana Public Power Incorporated (MPPI) has now taken the proposal to the company’s shareholders, and on Aug. 18, NorthWestern’s largest stockholder said it was seriously evaluating the bid.
The proposal is billed as an opportunity to repair past mistakes and ensure that Montana power customers fare better in the future. In those terms, few would argue that’s a bad idea. But some veteran players in Montana energy say that crucial aspects of the plan simply aren’t worked out, and they’re hesitant to move ahead until those issues are resolved.
“We’ve been through two restructurings that had catastrophic consequences. A third restructuring is being proposed with almost none of the details worked out,” says Tom Power. “You’d think that unless we were incredibly slow learners, we would want to look before we leap.”
Power, an economist at the University of Montana who’s served since the mid-’80s on advisory committees, first for Montana Power and then for NorthWestern Energy, says he’s a longtime proponent of public power, but he’s concerned that two key aspects of the plan—how the company would be structured to ensure public representation and how it would be regulated to ensure fair treatment for ratepayers—have yet to be addressed.
Missoula Mayor Mike Kadas, chairman of MPPI, says the concerns of Power and others are both important and resolvable. He says the time to address them will come if and when NorthWestern’s stockholders choose to proceed with the sale.
Kadas says MPPI was encouraged by the recent announcement that HMC Investors, which owns 23 percent of NorthWestern’s stock, was evaluating the proposal.
MPPI, formed by the municipal governments of Missoula, Bozeman, Great Falls, Helena and the consolidated government of Butte-Silver Bow, offered to buy the Montana portion of NorthWestern’s utility in 2004 for $1.26 billion but was turned down. The new $2 billion offer, which includes assumption of more than $800 million in debt, would purchase the entirety of NorthWestern’s electricity transmission and distribution utility, which serves 617,000 customers in Montana, South Dakota and Nebraska. If the deal goes through, MPPI plans to sell the non-Montana assets to the South Dakota Power Co., a group similar to MPPI.
Past and future
The bid to buy back Montana’s power network comes in the wake of nearly a decade of fallout following two restructurings, during which Montana energy customers have steadily seen their power bills increase. In 1997, the state Legislature passed and Gov. Mark Racicot signed a controversial plan to deregulate Montana Power Co., which had generated and supplied electricity and natural gas to thousands of Montanans for more than 80 years. After deregulation, Montana Power quickly got out of the power generation business by selling off its dams and coal-fired power plants. Then, in 2002, Montana Power made a move to enter the telecommunications business and sold its remaining transmission and delivery assets to NorthWestern, which had been operating a utility in South Dakota and Nebraska. Within a year, both Touch America (the remains of Montana Power) and NorthWestern had filed for bankruptcy in the face of massive debt and falling stock; NorthWestern emerged from bankruptcy in November 2004.
Kadas says he expects to know whether the handful of NorthWestern’s major shareholders, whom he describes as “vulture capitalists” who bought into the struggling utility in hopes of turning a quick buck, are committed to pursuing the transaction within a month or so. At that point, the Montana Public Service Commission (PSC)—charged with regulating private utility companies—would have to approve the sale. Although MPPI’s ultimate plan is to operate as a public utility, current Montana law has no provisions to govern public utilities and MPPI would start its life as a private company. Kadas says after acquiring the utility, MPPI would transition into a private nonprofit company, which would release it from the obligation of turning a profit and paying income taxes, allowing the public utility to use that savings to pay off debt, invest in infrastructure and keep rates steady for Montana’s 300,000 customers.
Down the road, Kadas says, MPPI’s goal is to have the state create statutes to provide for public utilities and develop some form of regulatory body similar to the PSC, which regulates only private utilities.
In the short term, the company’s priority would be to invest in infrastructure and the workforce that maintains that infrastructure, says Kadas, adding that NorthWestern has reduced its Montana workforce by 5 percent in the last three years. MPPI has committed to charging rates at or below those charged by NorthWestern, and Kadas says he believes a public company would be in a position to reduce rates from what they’re otherwise likely to be in five to 10 years.
Devils and details
Kadas says critical issues like MPPI’s governance and outside regulation will be hashed out through a public process and the PSC approval process.
“We’ve purposefully held off because it deserves a public process,” Kadas says. “We would have to find a way to ensure that everyone in the service territory has representation.”
The current structure, with one representative from each of the five participating cities sitting on MPPI’s board, won’t suffice because cities like Billings and Kalispell, and dozens of towns and rural stretches between, don’t have a say in decision-making.
PSC regulation is another major issue yet to be resolved. Gerald Mueller, who’s worked for the state on energy issues since the ’70s and now facilitates two advisory committees to NorthWestern, points out that although the PSC has authority to regulate MPPI, its leverage largely comes from its ability to refuse rate increases when questionable decisions are made, an act known as a “disallowance.” In the case of MPPI, though, there would be neither equity nor shareholders to absorb resultant losses, with uncertain consequences for the PSC’s leverage over the utility.
Power seconds the concern: “Some might say it’s the worst of all worlds. The PSC doesn’t really have any tools to control it, and the citizens can’t control it either.”
Kadas’ response to the disallowance issue is threefold: First, “We’re pretty confident we can have a much better relationship with the PSC than NorthWestern has had.” Kadas thus hopes to avoid disallowances altogether. Second, the company would build reserves as profits develop to plan for such an event; and third, the financing plan has enough padding to allow for unpredictable turns in the market.
Greg Jergeson, chairman of the PSC, says approval of MPPI’s purchase would be guided by one overriding theme: conditions for customers would have to be better—or at least no worse—than they are under the current ownership. He says MPPI would need to document the potential assets and liabilities as well as costs and revenues in order to prove the viability of the proposal. Issues like governance would also be taken into consideration, Jergeson says.
But it’s not exactly clear when governance issues will be resolved. Since the PSC is interested in all aspects of the company, Kadas says, the matter would be addressed in part through their approval process. But Jergeson says, “The more complete and the more questions that are answered in the proposal itself, the better. Anything that is not addressed in the proposal that would somehow need to be hammered out later is simply going to delay the process.” That process, he says, is certain to be lengthy, since a multitude of parties—everyone from individual customers to the Montana Consumer Council to environmental groups like the Montana Environmental Information Center—have stakes in the outcome and will want to have their say. The fact that the move from investor-owned utility to public utility has no precedent in Montana adds to the complexity, and the stakes are high that it be done right, Jergeson says.
Questions and answers
Mueller and Power say they don’t want discussion about MPPI’s structure and regulation to wait until the sale moves farther along.
“I’m not comfortable going through with this and then trying to figure out how the governance structure ought to work,” Mueller says. “Unfortunately, this reminds me of the last time we made major changes to the utility. It was made without sufficient thought, at the last minute, without significant public involvement.”
Power worries about buying a pig in a poke: “I think a lot of people who would support public power might be encouraged to oppose public power because we don’t know what’s going to come out the other end.”
Kadas responds that figuring out those details is premature at this point: “I think there are horses and carts here. We understand it is an issue that many people are interested in and we want to have a full public discussion. But we believe that it’s very hard to have that discussion until it is clear that a purchase is imminent, because no one will pay attention until we know this is going to happen.”
Kadas says he’s concerned that some of Montana’s most experienced and respected thinkers in the power realm aren’t won over yet. “Yes it does concern me. I have talked to most of those people and committed to resolving the issues they’ve raised,” he says. “That’s an absolute, firm commitment—not just from me but from MPPI.”
Kadas’ leadership of MPPI will last at least through April 2006, when his two-year term ends, and at that point a new Missoula mayor will nominate a chairman for the next term. Kadas says he’s interested in staying involved with the project and that he hasn’t ruled out the possibility of staying on should he be reappointed.
Kadas clearly believes in the viability of the proposal, and he says if given the chance, MPPI could improve Montana’s energy picture: “What we have to offer is stability. Our interest is in making sure we have a system that provides cost-effective, reliable energy.”
Power and Mueller would like to think that Kadas is right, but they know all too well that past tinkerings have gone catastrophically awry, and they’re worried about that happening again: “Good people doing things for the right reasons doesn’t always produce good results,” Mueller says.