March 2001 issue

 NWCouncil.org NeWs    March 2001 index

Electricity supplies remain tight, prices high through the winter of 2001

Lingering dry weather, combined with high demand for electricity and high prices for natural gas, continued to keep power prices high on the West Coast in January and February. There is little relief ahead in the spring and summer, weather and energy experts report.

In response, electric utilities throughout the Northwest are taking steps to ensure a reliable power supply at the lowest possible cost. These include aggressive energy conservation efforts and the installation of emergency diesel generators to help meet demand for power. Meanwhile, in early February, the Bonneville Power Administration, which provides about 40 percent of the electricity consumed in the Northwest, declared a power emergency in order to run Columbia and Snake River dams harder than normal for this time of the year. While that will make more hydropower available, it also may cut into hydropower generation later in the year and reduce the amount of water available to aid salmon and steelhead migration in the spring and summer, as required under the Endangered Species Act.

"We are seeking to appropriately balance the needs of fish and electricity consumers during a serious drought," said Steve Wright, Bonneville's acting administrator, on February 13. "Even so, we have employed every means available to minimize deviations from salmon guidelines this year and will continue to do so."

Earlier in February, 10 western governors met in Portland to discuss the energy crisis. Following the meeting, at which the governors listened to presentations by energy experts including U.S. Department of Energy Secretary Spencer Abraham, the governors recommended short-term steps to remedy the immediate electricity crisis and long-term measures to ensure reliable and secure energy supplies (see related story, page 3).

According to the Northwest Power Planning Council, the West Coast electricity crisis is a collision of many events that would cause problems if they happened alone, but which have combined to create "The Perfect Storm" for western utilities during the summer of 2000 and the winter of 2000/2001. According to an analysis by the Council, the key events contributing to the crisis include:

1. The wholesale power market created by California's electricity restructuring is dysfunctional, needs fixing and has affected other western states. Remedies ordered by the Federal Energy Regulatory Commission last November have not had a significant effect.

2. Construction of new power plants and new conservation and renewable resources during the last decade did not keep pace with growing demand for electricity.

3. Below-average rainfall and snowpack in 2000 and so far in 2001 are contributing to poor hydropower conditions in the Northwest. In February, the Natural Resources Conservation Service predicted snowpack runoff would be only 60 percent of normal this year; the elevation of Lake Roosevelt behind Grand Coulee Dam in mid-January was the lowest in 25 years, and the winter of 2000/2001 was shaping up to be the third-driest in 70 years of record-keeping.

4. The price of natural gas, the fuel of choice for thermal power plants in the Northwest, is rising dramatically. In the summer of 2000, the price was double what it was a year before, and by December it was three times the price of December 1999.

5. Some California power plants had to shut down in 2000 for unplanned or scheduled maintenance or because they violated air quality regulations.

6. The loss of flexibility in the operation of the Columbia/Snake river hydroelectric system due to Endangered Species Act requirements has derated the system by more than 1,000 megawatts.

Together, these events sent wholesale power prices soaring to unprecedented levels. Industries and utilities that are exposed to wholesale prices are suffering.

Following its reports to the Northwest governors in 2000 on the reliability of the power system in the western United States and the reasons behind the extraordinary power price spikes, the Council continued its investigation of the power crisis by convening a panel in January representing four Northwest electricity utilities that have been affected differently by the current crisis. The four comprised a cross-section of the region's utility industry -- Tacoma Public Utilities, a large, municipal electricity supplier; Tillamook (Oregon) People's Utility District, a small, consumer-owned public utility; Puget Sound Energy, a large investor-owned utility; and Clark Public Utilities, a large consumer-owned utility.

Here is what panel members had to say:

Tacoma Public Utilities: "We were flying along full speed and suddenly went into a 90-degree vertical dive," Superintendent Steve Klein said. "I don't see anything that will allow us to impact the ground in a solvent way," he added. In Tacoma, Schnitzer Steel curtailed operations, Louisiana Pacific shut down, and Pioneer Chlor-Alkalai is struggling, he said. Pioneer produces chlorine for sewage treatment and components for aircraft fuel; if it stops production, there will be impacts to operations at SeaTac and to local sewage treatment plants, Klein said. The utility implemented a 50 percent rate surcharge, which amounts to a 43 percent increase to residential customers and 75 percent to industrial customers, he said. Industrial customers buying power on the open market are experiencing greater increases. Dry weather is affecting the utility's hydropower operations; Klein said the utility is discussing whether to ask the city to order curtailment -- "a political hot potato," he said. Tacoma spent $60 million for power in December and is facing continuing high prices with cash reserves of $130 million, he said. The utility has located diesel generators with 50 megawatts of capacity, called for conservation, imposed a rate surcharge and is also planning to take on "$100 million in commercial paper" to get through the rest of the winter, Klein said. He said the utility is buying power for $200, $400, or even $2,800 per megawatt hour and selling it for $25. Rate increases to cover costs that high would force businesses to close, he said, and so the utility plans to borrow money to remain solvent. He said the state is realizing a windfall in utility taxes because of the rate surcharges, and he suggested that money could be used to buy conservation.

Tillamook People's Utility District, Tillamook, Oregon: Manager Pat Ashby said the utility is facing market exposure of $20 million (the utility's annual budget is $11 million). Tillamook joined with several other rural utilities to buy power on the market several years ago, and today their combined power bill has ballooned to $117 million, Ashby said. He acknowledged being "remorseful we took the utility into this," but above all, the money to pay for the power "will be taken from a community that can't afford it."

Ashby said the utility has asked its large customers to discuss cutting back electricity consumption. But they have orders to fill and are reluctant to jeopardize their production, he said. Enhancing flows on the hydro system for generation would help to ease the utilities' stress, and public entities need to consider developing supply, Ashby added.

Puget Sound Energy, Bellevue, Washington: The power situation in the region "is anything but stable," said Bill Gaines, vice president of generation supply. The load/resource balance at Puget, the largest gas and electric utility in the Northwest, is generally in balance, but "we are balanced on a knife edge," he said. "Any perturbation in supply would put us in the position of purchasing in this market, and the opportunities for perturbations abound," he said.

Natural gas prices have shot up in the Northwest, where prices in California set the price for gas at Sumas, on the U.S./Canada border. Gaines said prices have been as high as $40 per million Btu at Sumas, with the average price in December at $12 to $15 per million Btu, Gaines said. Just a year ago the price was about $3.

Puget is operating with a five-year residential rate freeze and has been able to operate within the freeze, he stated. We can request emergency rate relief, and "the way the hydro situation is shaping up looms large in that consideration," Gaines added. Some of Puget's industrial customers demanded the opportunity to go to the market, and since the mid- 1990s, a number of refiners and pulp and paper producers have been purchasing at prices indexed to the daily mid-Columbia market, he said. High prices have caused industrial shutdowns, and some customers have petitioned for relief from that index, Gaines reported.

"We must get the California situation under control," he stated. California is "an energy sink," and officials there "are fiddling while Rome burns," Gaines said. In testimony to FERC last November, Puget advocated interim price caps to stabilize the market but FERC did not impose them, Gaines said. Gaines also expressed concern about the Department of Energy's orders directing utilities in the Northwest to sell to California "without any assurance of payment." California should do what it can before calling on the Northwest - "we may need that water later in the season," he said.

Gaines said he foresees three conflicts looming: the Northwest versus California, power versus fish, and power versus air. These issues have been long simmering, but they will come to the fore in 2001, and they need to be dealt with, he concluded.

Clark Public Utilities, Vancouver, Washington: Manager Wayne Nelson said Clark is not directly exposed to the wholesale market but has felt the effect of rising natural gas prices at its generating plant, which supplies about half the utility's load. The remainder currently comes from fixed-price contracts at about $20 per megawatt hour, which expire in July. Between July and October, when it begins buying from Bonneville, Clark will be exposed to the market.

Clark budgeted $5 per million Btu for 2001, but prices are now $8, with the projections for the rest of the year at $6 per million Btu, according to Nelson. He noted that Clark would not have excess power to sell in 2001. If Clark has to pay $350 or $400 per megawatt hour when it goes to the market to fill its July to October power deficit, it would cost $83 million more than we anticipated, Nelson said. That amounts to a 40 percent rate increase, and the utility probably will finance its purchases for that period, spreading payments over five years, he said. "If we'd known what the market would be like, we would have done things differently," Nelson added. Last week, Clark adopted a 20 percent rate increase to meet the increased price of gas and power from its generating plant. When the BPA contract goes into effect, Nelson anticipates another increase, and "we'll be hard pressed to keep that to a single digit," he said. Before this year's two rate increases, Clark raised rates only three times in the past 17 years, he noted. "We are making a public relations effort for conservation," Nelson said, adding that it is difficult to get people to change their lifestyle with three- to four-cent power.

The panel members agreed that California's regulatory and power-supply problems need to be solved. The panel members suggested the Northwest governors could invoke emergency powers to help stabilize the turbulent power market.