Linc Wolverton thinks there is one major reason why Snohomish County PUD customers have been paying some of the highest power bills in the state:
Panic.
Three years ago, Northwest electricity companies were in the midst of a West Coast energy shortage. They decided the only way to keep the lights on was to sign multimillion-dollar contracts for power at rates four to eight times the normal cost.
The PUD believed that was its only option. So did the Bonneville Power Administration, the federal energy wholesaler that supplies the utility with 80 percent of its power.
Because of that, PUD rates jumped more than 50 percent in 2001. They haven’t gone down since then, except for a small decrease in 2002, even though there is now plenty of lower-cost electricity to be found.
“Bonneville blames the utilities, and the utilities blame Bonneville. They all screwed up, to put it mildly,” said Wolverton, an energy consultant who works with major electricity users in the county, including Kimberly-Clark Corp. and the Boeing Co.
Wolverton said that power planners in their panic forgot that abnormal price spikes are usually followed by similarly large drop-offs.
“There was a whole bunch of panicking in the 2000 to 2001 period,” he said. “I won a couple of nice bets. I figured prices would tumble rapidly, and they actually tumbled faster than I thought.”
But hindsight doesn’t get rid of expensive, long-term energy contracts. That’s the fix the PUD and its customers find themselves in now. And it could get worse. BPA is talking about raising its rates again in October.
Blame it on California.
At least, that’s where the story started in 2001.
As in much of the West, the California economy was booming in the late 1990s. But new power plants were not being built to support the growth.
Searing summers in the Southwest and drought in the Northwest in 2000 sent electricity buyers and sellers scrambling to gain control of the energy markets. Planners feared there wouldn’t be enough power to go around. Electricity prices soared to $300 to $400, $500, and at the very worst, as high as $3,200 per megawatt hour, when just a few years before the same energy could be bought for $20 or less. A megawatt is enough electricity for 600 homes.
For some, the climbing costs were like a modern-day gold rush. The crisis hit not long after the energy markets were deregulated, and some in the business blatantly manipulated prices by holding back power supplies. Energy traders including Enron, Reliant Energy Services and Williams Energy were accused, and in the case of Enron, admitted to manipulating energy prices.
Some, like Williams, agreed to settle out of court with several states, including Washington. The PUD has applied to get $2.9 million from the Williams settlement.
Utilities that were forced to buy electricity on the open market wound up getting stomped. The two largest utilities in California were among the biggest casualties, with one filing for bankruptcy. People there began to live with rolling blackouts, or forced outages.
Keeping the lights on in California cost the Golden State billions of dollars, and arguably helped drive it into a recession that spread across the West, including Washington. According to accounts of the 2000-2001 crisis, energy experts believe the economic hangover from the crisis contributed to California Gov. Gray Davis being booted out of office last year by action-hero-turned-politician Arnold Schwarzenegger.
Closer to home, BPA, the provider of half the electricity used in the Northwest, in 2001committed to deliver vast amounts of power that it didn’t have.
In the years leading up to the crisis, BPA had sold much of its extra electricity to utilities out of the region or directly to manufacturing companies that use a lot of electricity – mainly aluminum manufacturers. It also decided to increase the amount of electricity it provides to the region’s private utilities, a decision the PUD and other public utilities are challenging in court.
Drought in 2001 reduced the amount of electricity being produced by BPA’s network of hydroelectric dams on the Columbia River. The federal energy wholesaler was also hammered by the number of utilities that flocked back to it once electricity prices started spiraling upward.
“Utilities suddenly saw BPA as a safe haven and came running back to the fold,” said Ed Mosey, a BPA spokesman.
BPA, which is legally obligated to provide power to all public utilities that ask it for it, thought it would be able to buy all the power it needed on the open market. But that was before prices shot up to record levels.
To make up for a 3,000-megawatt shortfall, BPA bought electricity during the early days of the energy crisis, and when prices got too high, it paid utilities not to use their electricity, a practice called buy-downs.
“Had we gone to the market rather than do the buy-downs, we would have had to buy $200-plus power and faced a 250 percent rate increase,” Mosey said.
To pay for it, BPA raised its rates by 46 percent in October 2001, an increase that hit Snohomish County PUD and its customers hard. That rate hike was the biggest reason, but not the only reason, the PUD raised its rates in 2001. The PUD gets more than 80 percent of its electricity from BPA and is its largest customer.
Critics say BPA should have taken care of the public utilities first – which they say is what is required by the 1980 Northwest Power Act. Then it could have offered whatever was left over to private utilities and aluminum companies.
“There’s a lot of creative blaming going on by those who say Bonneville overcommitted,” Mosey said. “Had anyone anticipated that the price of power would increase five times over, they obviously would have made different decisions.”
PUD leaders say they have tightened their belts since the energy crisis, but claim BPA hasn’t done its part to cut costs.
Since 1998, the number of PUD customers has grown from 250,000 homes or businesses to 290,000, a 14 percent increase.
Over that same span, the PUD has reduced its employees from 928 to 823, an 11 percent reduction accomplished mainly by not filling open positions. Nonpower costs at the utility have dropped from about $130 million in 1998 to $120 million this year, an 8 percent decrease.
Last year, the PUD brought in Ed Hansen, then Everett’s mayor, as the PUD’s new penny-pinching general manager. He is being paid $200,000 a year to lead the utility down the path to lower rates.
Hansen has pushed for more cuts, but points out that there is only so much the utility can do when two-thirds of its budget goes toward buying power.
“We’re continuing to work hard to hold the line on costs within the district,” Hansen said. “We don’t see that same level of concern and effort at Bonneville.”
While the PUD’s costs have gone down since the energy crisis, BPA’s have gone up. The federal agency’s bill for nonpower costs grew from $1 billion in 1998 to more than $1.8 billion this year, according to BPA’s annual reports from those two years.
BPA’s Mosey argues that the agency’s nonpower costs have stayed steady at $1.8 billion a year during that span, and that costs to maintain the network of power lines that deliver power to the region should not be included.
BPA increased its total number of employees from 2,768 in 1998 to 3,176 in 2003, a 15 percent increase.
Mosey said the agency has been adding new employees to support an ongoing upgrade to Northwest transmission lines, which have been taxed by the region’s steady growth. He said investments in transmission lines do not affect electricity rates.
He also said BPA’s staff is aging, and the utility must start training new staff.
The PUD’s biggest mistake during the energy crisis was not finding a replacement for its share of a coal-fired power plant in Centralia, said Jim Lazar, an Olympia-based energy consultant who has worked for the PUD. Other utilities replaced their shares, but the PUD didn’t, he said. It opted to play the market.
The plant provided the PUD with about 9 percent of its energy in 1999.
Not replacing Centralia meant the PUD had to go looking for electricity on the market – the place where electricity is bought and sold moment by moment – at a time when prices were climbing to record highs.
PUD commissioners Cynthia First and Kathy Vaughn said they wanted to find replacement power before the supply problems hit, but said then general manager Paul Elias failed to give them options.
“I brought up many times that we needed to replace Centralia,” said Vaughn, who added that PUD staff at the time thought it was safe to play the market. “I didn’t’ see any sense of urgency from staff or the other commissioners.”
First said the utility made the best decision it could at the time.
“The market was being totally manipulated,” she said. “Who could have anticipated the extent of the market manipulation that would occur? We were forced to sign contracts that were found to be criminal.”
Things began to go downhill when the PUD, fearing that it wasn’t going to have enough electricity, signed three expensive contracts at the height of the energy crisis. The price of that power ranged from $105 to $150 per megawatt hour – previously unheard-of rates for long-term contracts.
Today, the same contract can be purchased for $35 per megawatt hour or less, but the PUD is stuck paying these three high-priced contracts until they expire:
Commissioner Dave Aldrich, who was swept into office in 2002 amid voter anger over rising power costs, said one of the worst things about the PUD’s rush to sign the high-priced contracts was that the utility really didn’t need the energy.
PUD customers normally use about 700 megawatts of power, but the utility’s contracts provided 900 megawatts. The utility has been forced to sell the excess at a loss.
The PUD was not the only utility in Washington to be shell-shocked by the energy crisis. Seattle City Light and Tacoma Power were also among those who had to raise rates because of the crisis. While the PUD reacted by signing long-term, high-priced contracts, Tacoma Power raised rates to cover the cost and Seattle City Light borrowed money to buy power on the open market.
The PUD’s management of the public’s money has undergone increasing scrutiny in recent years. In 2002, a scandal erupted that contributed to the firing of Elias, the former general manager. Customers were outraged to learn that the utility paid about $750,000 to a California management consultant. Much of that was for travel and lodging expenses that many in Snohomish County saw as extravagant.
There has since been no replay of the consultant flap, and a close review of the checks the PUD has written since then shows a tighter rein on expenses. Still, the amount of money in play can be staggering. On one check-writing day in early July, for example, the utility wrote more than $8.6 million in checks, most of them for electricity purchases.
Now, the region’s utilities are focusing on getting BPA to lower its rates.
In the midst of a dry year in the mountains that feed the Columbia and Snake rivers, BPA is planning to raise its rates by about 5 percent in October. That increase would put the federal agency’s rates at their highest level since the energy crisis. BPA also is pursuing a 6 percent rate reduction that could offset the increase.
A group of BPA customers, including Snohomish County PUD, has come up with a list of cuts they believe BPA could make that would allow it to cut its rates by as much as 14 percent in October, which would allow the PUD to lower its rates in turn.
“There’s a lot of people working really hard to get Bonneville to lower its cost,” said Steve Marshall, an assistant general manager at the PUD.
The PUD would like to see BPA stop making early payments to the U.S. Treasury – money that the energy wholesaler pays the government for the cost of building the Columbia River dams and the nuclear power plant that it controls. It would also like BPA to delay investments it wants to make in the transmission lines that deliver power to the Northwest.
Mosey said BPA must invest in the transmission system to keep the power on as the region grows, saying people in the Northwest could have lost power a year ago if BPA hadn’t recently built a new transmission line to serve the Puget Sound area.
Vaughn said the PUD will continue to lean on BPA, and as the agency’s largest customer, has no problem leading the fight to bring down wholesale power rates.
“We’re fighting tooth and nail to get the rates down,” she said.
In the end, it’s the pricey cost of electricity that’s to blame for the high rates, and until the high-priced contracts that BPA and the PUD signed are fully paid for, rates won’t go down.
“It’s as if the pig is making its way through the anaconda,” said Aldrich, the PUD commissioner. “Once it gets through, the future looks bright.”
Reporter Lukas Velush: 425-339-3449 or lvelush@heraldnet.com.
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