Power Struggle 

Can utility deregulation really work in Montana?

In 1997, Gov. Marc Racicot signed into law Senate Bill 390, which deregulated Montana’s electric energy industry and essentially put an end to the 85-year-old Montana Power Company as we knew it. Three years later, California found itself facing a severe electricity shortage and economic crisis, mainly as a result, critics say, of its own poorly planned utility deregulation. In late 2000, California Gov. Gray Davis issued a public warning to other state governments to think twice before following California down the same ruinous path to deregulation.

For Montana, Davis’ warning came too late.

Whether you agree with deregulation or not, the marketing of electricity as a commodity will have a profound effect on Montana’s industry and families. It’s an effect that we’ve already gotten a taste of in recent months. When the measure was put into effect in July 1998, the first to be thrust onto the open electricity market, and the first to feel the pain of deregulation, was industry. The outcome was an unanticipated and stunning jump in the price of wholesale electricity. As a result, mines and plants were idled and hundreds of workers were laid off, some permanently. Next to feel the effects of a deregulated utility market will be homeowners and small business owners, who must begin looking for their own electricity suppliers by July 2002.

So how did Montana, which for generations has enjoyed some of the lowest electricity prices in the nation, get to this place?

The push to deregulate what has been called the last government-sanctioned monopoly—the $220 billion-a-year electrical industry—initially came, ironically enough, from industry itself. According to the Center for Responsive Politics, deregulation has been a Congressional and industry priority for about a decade. Deregulation of wholesale electricity is not, as its proponents sometimes imply, a Congressional mandate, but rather a Congressional desire.

But this desire found sympathy among politicians, like some in the Montana Legislature, who contend that competition among utilities will result in consumer choice, lower prices and greater efficiency. Deregulation will work, they say, if the market is given enough time to develop. It has worked in Pennsylvania, where customer choice and a growing list of suppliers decreased power bills by $10 a month in some areas. But clearly, it hasn’t worked in California, where the U.S. Secretary of Energy has been forced to step in.

Nonetheless, supporters of deregulation in Montana, chief among them Sen. Fred Thomas, the original sponsor of SB 390, say it can and will work if market development is given enough time and if environmental regulations can be “streamlined” to allow for speedier construction of new generating plants.

But deregulation’s critics are skeptical, contending that the Legislature’s slavish devotion to free market politics will bankrupt a system that was was in no need of a fix in the first place. They point out that electricity cannot be compared to any other commodity that is traded on the market. It is not like wheat or computers or cars. It cannot be stored and there is no substitute for it. Electricity is the lifeblood of society and industry. Without access to affordable and reliable supplies of electricity, people can die and businesses go under. Some critics argue that classifying electricity as a commodity like any other is morally unacceptable.

Above all, the question remains: Can deregulation work in Montana? That, of course, remains to be seen.
Power Failure?

Finding people who can speak knowledgeably about the complex business of generating, distributing and transmitting electricity in markets both regulated and deregulated is difficult. But we found three well-informed Montanans willing to share their views: David Ewer, a former Democratic legislator from Helena; Sen. Ken Toole of Helena, who was elected to the Montana Legislature last November; and University of Montana economics professor Tom Power. All three were early and persistent opponents of deregulation, and so far, they haven’t seen anything to convince them that deregulation is good for Montana.

On one hand, deregulation is frightfully complex, “a hopeless topic,” Power groans. But as Ewer points out, it’s not exactly rocket science either.

Montana for many years has had the sixth cheapest electricity rates in the nation, Ewer says. That’s been good news for big industrial users in Montana, like Columbia Falls Aluminum Company and Montana Resources, Inc., a Butte copper and molybdenum mine. Large industrial users need access to cheap electricity to compete in the global marketplace. Cheap, abundant power also benefited investors who earned a stable, if not impressive, return in a regulated market.

The Montana Power Company, a homegrown corporation established in 1912 and headquartered in Butte, generated power with its hydroelectric dams and gas- and coal-fired electrical plants, and supplied that power to Montanans. Montana power-generating plants, operated by Montanans, in Montana, for Montanans. The relationship was cozy, the power affordable. In fact, it provided precisely what deregulation supporters say they want: cheap, abundant power, allowing Montana’s cash-strapped families to survive the harsh winters, and providing an economic boost to Montana’s relatively few industries.

But in November 1998, following the legislative move to deregulate the generation of power, 13 of Montana Power’s generating plants were sold for $988 million to PP&L Global, a Pennsylvania utility with allegiance not to Montana but to the bottom line, says Power. “We allowed the crown jewels to be sold off at bargain basement prices,” Power laments.

When PP&L bought the plants, it also agreed to sell that power to homeowners at Montana Power’s government-regulated rates until July 2002. When the contract ends, Montanans must shop around for their juice.

Several potential problems emerge. Though Montanans have a mere 18 months to find their own energy suppliers, none have developed. According to Will Rosquist, a staffer with the state’s Public Service Commission (PSC), the agency that regulates the energy business, five would-be suppliers have been licensed by the PSC: Community Energy of Cut Bank; Energy West Resources of Great Falls; the City of Missoula (for Missoula customers only); SmartEnergy.com, an Internet supplier; and Glacier Energy, a Montana company affiliated with a utility co-op. Though these five suppliers are licensed, they are not actually supplying power to anyone because they cannot beat Montana Power’s locked-in, still-regulated prices.

Power says that potential suppliers may emerge, but they would have a high probability of failure because the costs of marketing power would be too much to bear. The five suppliers currently licensed by the PSC will probably just hang in there doing little until competition sets in in July 2002.

Assuming it ever does. Neither Toole, Ewer nor Power hold any hope that sparsely populated Montana will prove to be a lucrative enough market for any supplier.

Though PP&L owns Montana’s generating plants, the company has no legal or contractual obligation to sell power to Montanans—at any price. Ewer fears that PP&L will instead turn its eye and its marketing to the 800-pound gorilla to the south—California, land of the voracious energy appetite and home to 30 million relatively affluent potential customers. When it comes to buying power, California, with its vast movie, defense, and computer industries, its agri-businesses and ever-growing population, could steamroll right over Montana with its 16 large industrial power users and its far-flung population of 902,000 people.

Californians, in the regulated days, were buying power at approximately 12.5 cents per kilowatt hour, about twice what Montanans have paid, Ewer says. If the market results in an equalization of rates, say 8.5 cents per kilowatt hour, then California rates would, theoretically, come down while Montana’s would rise. “If deregulation means we’d smooth out rates across America, you’d have winners and losers,” says Ewer, who then adds, “I’ve seen four studies from the federal government saying Montana is a loser under deregulation.”

A “quicker” fix, it seems, is the construction of more generating plants.

Ewer presents a scenario that’s not difficult to understand. “If all you do is build power plants and you have a deregulated market that can physically send juice to California, what do you think is going to happen?”

What will happen is that more generating plants will be built in a state that, in a regulated market, didn’t really need more generating plants.

It’s a frustrating solution, critics agree. Montana Power was doing a fine job of generating and distributing electricity. There appeared to be no need for more plants. Now, wholesale power, including that produced in Montana, will be sold to the highest bidder, and that may not be Montana. Quick fix or not, the only realistic solution for Montana, then, is to build more energy-generating plants in Montana—plants Montana already had before deregulation resulted in the PP&L buy-off.
“Streamlining” and Solutions

In addition to the problems imposed on the system of supply and demand, Ewer, Toole and Power also fear that the Montana Legislature will take a hard look at “streamlining” Montana’s environmental laws to build more power plants as quickly as possible.

Power speculates that environmentalists, who need electricity just as much as everyone else, will develop a “fall-back position” when it comes to streamlining environmental laws. Environmentalists might not oppose the construction of more gas-fired generating plants, since there seems to be little choice. In return, though, they’ll want a commitment to conservation efforts and an exploration of renewable resources.

Montana harbors plenty of coal that could be developed, as Sen. Thomas believes, but Power thinks environmentalists will fight any proposals to develop those resources if it means relaxing environmental laws.

“It’s a mess,” Power says of the looming environmental debate. “The very people who are always blaming environmentalists for ruining industry in this state have managed to do it themselves.”

Blaming regional electricity shortages on environmentalists, Toole agrees, “is beyond the pale.” Utilities overbuilt generating plants in the 1980s at a time when conservation was emerging as a viable alternative to increased energy consumption.

If the Legislature is successful in gutting environmental laws in an effort to spur plant construction, the result will be more overbuilding and a new generation of power plants that will take years to build and that will all come on-line at the same time.

In a word: madness.

“There’s no source of electricity that’s as cheap [as the regulated rates],” Power says. What industry wants, he adds, is “help from state government to build new generating capacity.” It is the ultimate irony.

Industry “invented” deregulation, Power says. “It was their bill and they did it in such a way that it wouldn’t threaten Montana Power or Montana Power shareholders. Montana Power got on board and convinced Racicot, et al., that less government was best government. The truth of the matter is that no one saw prices rising this high.”

Toole believes that those anticipated rate increases will have unanticipated consequences. No one knows how high rates will jump, but Toole thinks rate increases won’t be immediately apparent until the winter of 2002. The critical time, though, will be summer 2003, he predicts. That’s when farmers who rely on irrigation will feel the pinch. Agriculture in Montana is already on the ropes and high power bills could spell the end for some irrigation-dependant farmers. “I think a lot of irrigators will go broke,” he says. And when family farms go broke, can residential subdivisions be far behind?

Toole and others have an idea for easing the transition to the free market. They have formed the idea of a small buyers electric co-op, which would be the default supplier for small customers. Toole said the PSC rejected licensing the small buyers co-op because it owned no means of transmission. The co-op has sued the PSC in the 9th Circuit Court, though no decision has come down yet.

Toole notes that Enron, the world’s largest energy supplier, has already indicated a willingness to partner with the small buyers co-op. Why would a powerful global corporation want to link up with a rural co-op fighting in federal court for its very existence? Because, Toole says, Enron suspects that “customer choice” will never materialize here. That could put Enron in the position of having the legal, deregulated energy supply monopoly in Montana.

Toole also has a Plan B, which calls for the creation of a state power authority to tap into Montana’s large reserves of natural gas. The state, as owner of the reserves, would be the supplier to small residential and business customers. He envisions a kind of homegrown Montana power company—much like the one we had.

And Toole furthermore promotes the idea of wind-generated electrical plants. The relentless eastern Montana wind could generate 116 megawatts of electricity. (1,000 megawatts can provide power to 100,000 homes.) “Because we’re talking about a small amount of power, it becomes do-able,” he says.

Some critics have also called for state condemnation and takeover of generating plants in Montana, but Toole says that’s not practical. State taxpayers would have to pay market value for Montana Power’s, now PP&L’s, generating plants and dams. A huge rate increase would surely follow such a takeover, he says. “That’s the big flaw in the condemnation approach.”

The state power authority idea is the best of the worst. So few are Montanans in number that the electrical needs of all Montana homeowners and small businesses could be met with a single generating plant, owned and operated by the state.
Of Jobs and Juice

Toole’s solutions for the deregulation problem may be as good as it gets. But he and Power point out yet another irony in the dereg debacle: Regardless of how many good ideas come out of the Legislature, they still amount to nothing more than government solutions to a problem created by government in its effort to cut government.

Meanwhile, back at Montana Resources, Inc. (MRI), more than 300 people have been out of work since last July, when high electricity prices forced a shutdown of the Butte copper and molybdenum mine. MRI spokesman Steve Walsh said the company, which is partly owned by Missoula’s Washington Corp., lost its power contract with Energy West of Great Falls last June 30. The company was paying $35 per megawatt hour before the contract expired. “Since then, we’ve been at the mercy of the market,” he says. On July 9, MRI began its first round of lay-offs, dismissing 322 workers. Eventually, 119 workers were brought back. They worked until Nov. 20 when they were “terminated.” Walsh, who has retained his job, says MRI still believes deregulation will work—once federal government investigators root out those power suppliers involved in illegal market manipulation “gamesmanship,” and once more generating plants are built.

The job layoffs that resulted when Montana industry began buying its power on the open market came during an election campaign that was about nothing more than improving the state’s grim economic situation.

Now, with hundreds of people laid off in a state where replacement jobs of equal pay are rare or non-existent, that economic future seems even grimmer.

It’s almost enough to make a homeowner turn to solar panels. At Sunelco, a solar energy supplier in Hamilton, potential new customers just waking up to the fact of deregulation are making initial inquiries about the price of going solar. Sunelco’s sales manager Tom Bishop says he hasn’t made any sales to jittery homeowners—yet. “Until they start paying bills that are 40 to 50 percent higher, they won’t let loose of their money.”

If it comes to it, Bishop says, homeowners “on the grid” may want to consider the “grid-tie” option. Rather than storing the sun’s energy in batteries, as solar panels do, the grid-tie allows homeowners to tie 10 to 15 solar panels into their power meter. When the panels collect the sun’s energy, the power supplier “buys” the power from the homeowner and the meter runs backward, offsetting prices. At night or on cloudy days, the meter runs forward and the homeowner buys power from the supplier.

“As the cost of electricity goes up, the cost of solar goes down,” Bishop says.

So far, that’s the most optimistic outlook in this gloomy deregulated market.

But Power isn’t that sunny. “We’re all going to be poor,” he says bluntly. Industry will suffer and start-up companies considering Montana will look elsewhere. Purchasing power will go out of state to higher bidders and Montana’s industrial base will take a hit from which it may not soon recover. Says Power: “I have a problem being rational about this because I’m so angry at the gratuitous damage that’s been done to us.”

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