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PSC holds listening sessions on proposed NWE purchase of dams

 

By Michael Howell

The Public Service Commission (PSC) held two listening sessions in the valley last week, one in Stevensville and the other in Hamilton, to hear what the public had to say about NorthWestern Energy’s proposed purchase of eleven Montana dams from Pennsylvania-owned PPL Montana. PPL bought the dams from Montana Power following deregulation in 1997. The cost to the ratepayers was held down by contract restrictions until 2002 when the restrictions were lifted and serious rate hikes followed based on fluctuating and volatile market prices. NorthWestern Energy is looking for pre-approval from the PSC for a structured rate increase designed to recover some of the costs associated with the approximately $900 million purchase of the “hydro” assets.

Two members of the five-member commission were present at the Stevensville session, Vice-Chairman Bob Lake and Commissioner Kirk Bushman from Billings. Speaking on behalf of NorthWestern Energy and promoting the deal was Vice-President of Supply, John Hines, who is overseeing the purchase project for the company. Advocating for the public ratepayers was attorney for the Montana Consumer Council, Monica Tranel. MCC is a constitutionally established council specifically tasked with representing consumer interests before the PSC.

“$900 million is a lot of money,” Lake told the small gathering at the Stevensville Public Library. “But it has opportunities to it, it has shortfalls to it, it has everything to it and you will hear all about it.” He said the commission was offering a chance for the public to hear about the deal from both the company’s side and the side of the consumer advocates. But he said the real purpose of holding the 15 listening sessions in various towns and cities in the region served by NorthWestern Energy was to hear what the people themselves had to say about the deal.

“We don’t want to make this decision in a vacuum,” said Lake. He said audio recordings of the sessions would be placed in the record and made available to all the members of the PSC and anyone else with an interest.

Hines said that the company was looking for federal as well as state regulatory approval of the hydropower purchase. He said the company had already received three out of four of the licenses from the Federal Regulatory Commission required to be transferred for the sale to go through. He said the company must also meet anti-trust regulations and in that review, he said, it was found that the deal would probably lead to greater competition in the region rather than less.

Hines said that NW Energy had already made potential employment offers to the 84 PPL employees currently working at the dams and gotten 79 acceptances. He said four of the other employees are retiring.

Hines said the PSC had the authority to pre-approve rates based on future costs and that the proposed deal, “has phenomenal benefits for the public, for Montanans and for the utility.”

He said the company had a seven-year-old contract for power at market price for $54 per megawatt per hour that is due to expire on June 31, 2014.

“We need to acquire substantial amounts of power,” Hines said. He said the company had been looking at market purchases, or buying new types of generation, or buying existing forms of generation, when the possibility of purchasing the dams came up a few years ago.

Hines said the “hydro option” had some great attributes. He called them “environmentally benign.” He said new dams are getting very difficult, if not impossible, to build due to environmental concerns, making already established dams more valuable. He said that no fuel costs for the energy production was also a great asset in what he called a “shift” from coal to natural gas for energy production. He said the price of natural gas will certainly go up.

He said the cost of the project was mostly the purchase price and would be paid up front. He said maintenance costs would be low.

“Finally, there are no carbon emissions,” Hines said. He said that state law required the company to consider carbon emissions as part of its analysis. He said other public utilities in the region all considered rising costs to meet future carbon emission standards, possibly a carbon tax. He said Environmental Protection Agency (EPA) rule changes in the works are already leading to plant closures in the region.

Hines also defended the $900 million price tag, arguing that the price is reasonable and fair according to the analysis of comparables that the company made of other utility purchases. He said PPL was going to sell the dams no matter what and that if NW Energy didn’t buy them some other entity would, whether a hedge fund or another out of state utility.

“The idea that these electrons won’t leave the state is pure hogwash,” he said. “We already have coal being transmitted from Colstrip to the Pacific Northwest. We already have other generation in Montana being transmitted out of state. To think that these electrons produced by hydro are something special and hit the border and bounce back, it just doesn’t make any kind of sense. In fact, I think that PPL already markets some of its hydro out of state.”

Hines touted the longterm stability of production costs in the hydro operations compared to the volatility of market based prices. He pointed to the huge spike in price between December 2012 and 2013. A severe cold snap sent power prices skyrocketing over 300%.

Hines admitted that the up-front costs of the purchase price were going to drive rates up immediately, but in the long run, like in 2021 when carbon taxes may be implemented, the cost of power on the market and the rates needed to purchase it are forecast to surpass the rates tied to hydro production, which are forecast to be fairly stable.

He said the company took criticism of the initial rate hike seriously and had adjusted the plan, reducing the cost recovery payments by 5.8%, down from $128 million to about $120 million for the first year.

Montana Consumer Council (MCC) attorney Monica Tranel said it was important to keep in mind who was selling the assets and who was buying them. She said both are investor-owned utilities and that the two largest investor groups are the same in both companies. She said the guaranteed results were that “your rates are going up by $400 million in the next eight years. That’s a given.”

“The emotional component of buying back the dams is a fiction,” said Tranel. She said the PSC’s decision needed to be “data based and data driven and eliminate that emotional component of ‘buying back what’s ours’.” She said that when the “deregulation debacle” in 1997 was “a company bill, sponsored by the company, sold by the company and company lobbyists succeeded in getting it through.”

Tranel said that by asking for pre-approval under a relatively new law the company was shifting the risk of its proposal from itself over to the consumers.

Tranel said that MCC objected to the way that projected carbon costs are prefigured into the rates. She said that the company had figured in an estimated $247 million in costs related to a forecasted implementation of a carbon tax. The MCC’s opinion is that this “hypothetical” cost should not be figured into the purchase price. MCC advocates reducing the purchase price by $247 million.

“If and when a carbon tax is imposed, then they can come before the PSC and get compensated for that when it happens,” said Tranel. “Don’t mandate it now so that it is forever engrained into the rates even if it doesn’t happen. If it doesn’t happen, you shouldn’t be paying for it.”

Tranel also cautioned that the utility company was forecasting low maintenance costs over a large number of years and that its budget for maintenance of $8.5 million annually was 25% less than what PPL spent over the last several years. She said that MCC was suggesting that the PSC should hold the company to its predictions and set a cap of $10 million for ratepayer compensation for maintenance costs.

Tranel said MCC also wanted the PSC to make the company stand behind its forecast in terms of depreciation of its assets. She said that the company shows the value of its assets increasing over time. In that case, she said, the ratepayers should not have to bear the cost of decommissioning any dams if that should become necessary in the future.

“We are asking the company to stand behind its numbers and back them up financially. That’s what we are asking the PSC to look at,” said Tranel.

Tranel also noted that the company is asking for a 10% return on its base rate, but MCC is recommending 9% as an adequate and equitable return on the base rate.

The real question, according to Tranel, is, “When is a good deal not really a good deal?”

In response to a question from the audience, PSC attorney Jeremiah Langston clarified that the PSC was being asked to pre-approve future costs that would go into the rate base. He said the commission cannot force any modification of the deal in other respects, such as the price, and cannot dictate what goes into any agreement.

Hines qualified that by saying that changes could happen in the deal due to any decision about the base rate returns, but at some point of low return the company would simply have to walk away from the deal.

Stevensville resident Judy Kline asked, “What is the benefit to the consumer? I’m a property owner. I keep turning my thermostat down instead of up.” She said that she had figures on all her power bills since 2007 and they always keep going up. She asked about the low prices on the spot market versus the price of the dams.

“Ten years ago the prices on the spot market were 3,000% higher than the hydro’s,” said Hines. He said that quantities of power could be locked in for long term commitments, but prices could not. He said the price in long term contracts was always tied to market values through a formula and would change over time. He also said that many contracts these days involve a clause that would allow price increases related to the cost of meeting new environmental regulations.

“We just can’t lock in any long term rates,” said Hines.

Hines went on to say that it was hard for him to believe that anyone could think there would not be any price rises related to carbon influences on the market. “I’m sort of tired about how it has been characterized as a tax,” he said.

Kirk Thompson remarked that state ownership of the dams was placed on the ballot a number of years ago and the public said no. “Now we are being asked to own them again,” he said.

Julie Foster, Director of Ravalli County Economic Development Authority, said that good infrastructure was important to businesses and that they needed reliable and predictable power costs.

“From the economic development standpoint, I hope we purchase these dams,” said Foster.

In response to a question, Hines said that the current cost of power per kilowatt hour in Montana was about 6.4 cents. He said after the transaction it would jump to 6.9 cents. After that it declines, but he could not say how quickly or how much. It would depend upon the depreciation value, which is about $17 million per year.

Ron Klaphake said he saw the proposed purchase as a source for reliable energy in the state and given the world’s quest for energy, the prices are going to continue to go up.

“This source locks in a renewable source at a predictable price, and reliability and predictability are very, very important,” said Klaphake. “It might cost us a bit to get back into it, but in the long term we cannot afford to let this ownership go somewhere else.”

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