Electricity deregulation jolts Montana industry
Copyright 2000, The Philadelphia Inquirer
September 7, 2000
By Larry Fish, The Philadelphia Inquirer
The gold and silver lodes in the mountain under Butte, Montana, played out early, but for more than a century the "richest hill on Earth" has kept yielding copper and other minerals, apparently without end.
But Butte's last mine, the vast open pit at the east edge of town, closed at the end of June. Even though the price of copper is up, the 325 employees of Montana Resources Inc. were laid off.
The reason: the soaring cost of electricity on the recently deregulated market. Montana Resources suddenly found it was having to pay three times as much for the huge amounts of electricity needed to produce copper, and the mine became a money loser.
Throughout Montana and the Pacific Northwest, cheap and plentiful electricity — much of it produced by the region's mountain-born rivers — has long been taken for granted. Many of the area's basic industries, such as turning wood chips into cardboard or turning bauxite ore into aluminum, grew up around that fact of life.Now deregulation of the electricity market, a move that began in 1997 and was touted as a way to make Montana more competitive, has sent shock waves through its industrial sector.
"I don't think there is a basic industry in Montana that could stay open," with the prevailing price of electricity, said Don Quander, a Billings lawyer who represents a dozen of the state's largest electrical consumers, from oil refineries to smelters.
Deregulation wasn't supposed to work this way, and an executive of Montana Power Co., the dominant utility, calls the present situation "an anomaly." But he and others say that electric bills for the state's residential customers — who have not yet felt deregulation's full effects — may also be headed up.
Montana is not the only Western state to get a shaky introduction to the supposed benefits of electrical deregulation. In California, residential rates in San Diego — the first city totally deregulated — tripled in some cases this summer, sparking calls for a federal investigation of alleged price gouging by utilities.
Officials in Idaho, Washington and Oregon, who fear possible power shortages in their still-largely-regulated states, have been watching nervously. California led the West in the move to deregulation, mainly because electrical rates there were some of the highest in the nation.
Montana, by contrast, enjoyed low rates and exported electricity to the rest of the region for years, leading some to question the wisdom of deregulation.
"We had the sixth-cheapest power in the United States," said State Rep. David Ewer, one of the few Montana legislators to oppose deregulation. "Our electrical rates were 40 percent less than the national average, and half of California's. Nobody in Montana [was] asking for choice."
Even those who support deregulation say they understand that attitude.
"The electrical industry seemed to be one of the few things that government is involved in that wasn't broken, so why did we have to go and fix it?" asked John Hines, an economist with the Northwest Power Planning Council, whose members are appointed by the governors of Montana, Idaho, Oregon and Washington.
But deregulation was strongly advocated by Montana Power, joined by industry officials who felt they were subsidizing low rates for small customers. The 1997 bill was supported by Gov. Marc Racicot, a Republican, and passed easily.
The governor and others say that big changes were sweeping the electrical market, and that Montana needed to act to protect its interests.
The 15 or so largest industries in the state consumed more than 35 percent of all of Montana Power's juice, and the door seemed open for them to look for other sources from which to buy power, said Mick Robinson, Racicot's chief of staff. That easily could have saddled Montana Power's small customers with higher costs.
"I don't think there was any way of stopping those industrial customers," Robinson said.
There were other factors as well.
The biggest was that while Montana's electricity was cheap by national standards, it was more expensive than that of Idaho, Washington or Oregon, where paper mills or aluminum plants compete with Montana facilities.
And looming in the background is the likelihood that the Northwest's historical power surplus is ending.
The hydroelectric dams of the federally financed Bonneville Power Administration bestowed power on the Northwest at rates far cheaper than elsewhere, but they are increasingly unable to keep up with the region's rapid population growth. And proposals to breach some dams to preserve salmon runs makes hydro look uncertain as an answer to future needs.
And partly because of market uncertainties, few new coal- or gas-fired plants have been built in the Northwest, raising the specter of power shortages.
Montana deregulated electricity in stages. The large users were effectively freed to shop around beginning in 1998. Residential customers can postpone any decision on their suppliers until July 2002, and that is what nearly all are doing.
Further complicating matters was the decision by Montana Power to completely exit the electricity business, after helping shape the deregulation act. It sold all of its generating stations to PPL Corp. (formerly Pennsylvania Power & Light) of Allentown, and plans to shed distribution services as well, becoming a telecommunications company called Touch America.
At first, mining company Montana Resources benefited from deregulation, signing a one-year contract for power from Enron Corp. to pay $35 per megawatt/hour, a savings of 15 percent.
A megawatt is one million watts, and Montana Resources uses 43 megawatts each hour.
But when the contract expired this summer, prices on the open market were up to $100 a megawatt/hour, said Steve Walsh, Montana Resources' vice president for human resources.
Walsh said the company briefly experimented with buying its power day by day — he called that "nerve-wracking" — but Montana Resources ultimately concluded it would have to shut down the mine."We're calling it a temporary suspension," in hopes that prices will come down in the fall, Walsh said.
Although the mine is the largest casualty so far in the state, Louisiana Pacific Corp. shut down a plant making liner board — the stock for cardboard boxes — in Missoula, and Smurfit-Stone Container Corp. has turned off a paper-making machine at its nearby Frenchtown plant.
Quander, who is attorney for Louisiana Pacific and Smurfit-Stone, said electrical prices for his clients had increased 500 percent in some cases.
As to why, no one is sure of all the answers. Racicot has appointed a state commission to look for answers, and other investigations are planned in the Northwest and California.
There are a number of factors. The hot, dry weather in the West has boosted the load for air-conditioning at the same time that rivers are low, cutting hydroelectric production.
And California's insatiable demand for power also appears to be bidding up the price paid in the Northwest.
State Rep. Fred Thomas, a Republican active in the Montana deregulation effort, said the drought, not the legislation, was responsible for the escalating rates.
"Everybody wants to say that it is the fault of deregulation, but I think the price still would have shot through the roof," Thomas said.
Quander and many others, however, believe that the current set-up allows suppliers to "game" the system, finding ways to divert power primarily to the highest-paying customers of the moment.
Ewer, still deregulation's opponent, goes so far as to characterize electricity in Montana as yet another "extractive industry" like mining or timbering that takes resources from the state and ships it elsewhere.
Suspicions of market manipulation are so pervasive in Montana that even deregulation proponents say the system won't work until more suppliers enter the picture and more rules are put in place at the wholesale level.
"We have to get a truly competitive market here," Quander said, "or else we are in for a really rough ride."