Damage lingers from power crisis

By DON McINTOSH, Staff Reporter

Like a tornado, a crisis of skyrocketing electricity prices swept into the Western United States in the summer of 2000, hitting California with bankruptcies and blackouts, and Oregon and Washington with plant shutdowns and high unemployment. And like a tornado, the crisis vanished as mysteriously as it appeared. The price on the electricity wholesale market for 1 megawatt hour (equal to 1,000 kilowatt hours, the amount of energy a large household could use in a month) had gone from $29.31 in December 1999 to as high as $3,250 in December 2000. In April 2001 it was still at $313, but by September it fell to $25, and has stayed within a few dollars of that price since then.

Prices have stabilized for now. But the damage to the economy is lasting, and some utility-watchers say the same causes are in place for the crisis to recur.

The electricity price crisis had several immediate causes. Lower-than-normal rainfall (and the need to divert water to help threatened salmon species) reduced the supply of power Northwest hydro-generators could produce, and a rise in natural gas prices increased the price of power produced by gas-generators.

But in a more important sense, say some electricity experts, the price crisis was the product of a long-term change in electricity generation.

Marc Anderson, a manager at Pacificorp for 17 years, is now the government affairs manager for Electrical Workers Local 125, which represents utility industry electrical workers. He sees the crisis as a product of a switch to markets in the early 1990s.

Under the system in place the previous 40 years, all electricity was produced by regulated monopolies. These monopolies were required to provide power - on demand - to everyone in their jurisdictions. To make sure there was always enough power, analysts predicted growth in demand, and utilities built power plants to ensure sufficient supply. They were allowed to pass the costs of generation and of new plant construction on to consumers, plus whatever profit regulators determined was reasonable.

Occasionally, utilities worked out deals to trade small amounts of power during times of peak demand. One such arrangement balanced California's summer peak with the Northwest's winter peak, saving ratepayers in both areas money by avoiding the need to build new power plants.

This system began to change in 1992 with passage of the Energy Policy Act by Congress. Under that law, conceived of and promoted by the Enron Corporation, "independent power producers" would be allowed to produce power for sale in a newly created "wholesale market." And states would be encouraged to press ahead with experiments in deregulation. The theory was that consumers would see lower prices as the magic of free markets was applied to electricity production.

In practice, regulated monopoly utilities backed off from construction of new power plants, but there was no great price stimulus to convince other companies to make the massive investments required to construct power plants. While demand grew steadily, few new power plants were built, particularly in the Western United States.

Meanwhile, California passed a 1996 deregulation law that took the market logic to new extremes. Utilities were forced to sell off generation capacity to independent power producers, and then forbidden to buy power except through a new hour-by-hour power exchange where prices fluctuated dramatically.

The groundwork was set for a crisis.

It arrived in the summer of 2000 with a drought in the Pacific Northwest, and was exacerbated by the fall with mishaps and shutdowns of several California power plants.

Reacting to the reduced supply, prices on the spot market skyrocketed. Yet it wasn't as if it cost that much more to produce the power that was being sold. Natural gas prices had increased 50 percent, but that didn't explain prices jumping 300 percent. It had more to do with the market. Utilities were required by law to buy enough power to serve their customers. But independent power producers faced no requirement to sell it to them at fair prices. A handful of companies that had moved into the new market - Enron, Reliant, Calpine, Dynegy, Myrant - reaped windfall profits.

And these new "market" conditions created bizarre scenarios: Companies that for 60 years had made money producing aluminum or chemicals now shut down production and made money by reselling power they had bought from the federal Bonneville Power Administration (BPA) in long-term contracts at low, stable rates.

Kaiser Aluminum - less than two months after settling a bitter two-year strike by 1,000 Steelworkers - now made over $300 million by laying off 800 of them and selling government-produced electricity.

Portland General Electric (PGE) arranged similar shutdown/buybacks with several of its industrial customers. All told, about 5,000 smelter workers were laid off in Oregon and Washington. That, combined with the collapse of the high-tech investment bubble, caused recession to hit the Northwest earlier and harder than the rest of the country.

Temporary Spikes Lead to Long-Term Rate Increases

Because power rates are still subject to state regulation in Oregon and Washington, it took time for a year's worth of sky-high wholesale costs to result in retail rate increases. Residential, commercial and industrial electric rates went up, but how much varied enormously depending on how much of its own demand each utility generated, and on what strategies utilities adopted to cope with the wholesale price spike.

PGE, the utility for most of Portland and the Willamette Valley as far south as Salem, generates only about half of the power it sells. Accordingly, on Oct. 1, 2001, it raised rates 31.6 percent for its roughly 700,000 residential customers, an increase of about $200 a year for an average household. Industrial customers saw an even higher increase - 49 percent - forcing shutdowns at some energy-intensive industries.

Pacificorp, which provides power to 516,000 customers in northeast Portland and in coastal, eastern and southern Oregon, generates 90 percent of the power it sells, mostly in coal-burning plants. Accordingly, Pacific Power residential customers saw no rate increase, and industrial rates increased Sept. 10, 2001 only 2 percent.

The BPA, which provides power to a multitude of municipally-owned utilities in the Pacific Northwest, declared an across-the-board increase of 46 percent on Oct. 1, 2001. That increase could have been much higher, but by making deals with aluminum smelters for extended shutdowns, BPA was able to reduce the amount of power it needed to buy on the market. [See sidebar "Will the smelters ever reopen?" for a smelter-by-smelter rundown.] Then there are the Public Utility Districts, such as Forest Grove, McMinnville, Canby, Eugene, Springfield, Clark County. Rate increases in these varied enormously depending on how much power they produce themselves, how much they get from the BPA, and on the length, amount, and price of long-term contracts they entered into when prices were high.

Terry Leone is executive director of the Public Power Council, a group that represents 114 consumer-owned utilities in the Pacific Northwest. The incredible thing, Leone says, is that the federal government had the power all along to prevent profiteering and the economic damage and dislocation that resulted.

The Federal Energy Regulatory Commission (FERC) had the power to impose reasonable caps on wholesale prices. As prices soared above $100 a megawatt hour, Western governors and congresspeople implored the FERC to use this power, but the agency stalled, arguing that it would be improper to intervene in the workings of the market. Finally, in December 2000, it set a cap of $150 per megawatt hour.

Leone says the cap was too high and too late to avert disaster in the Northwest or in California.

To avoid the bankruptcy of several utilities, the State of California scrapped the requirement that all power be sold hour-by-hour and stepped in with taxpayer money to negotiate purchase of power in long-term contracts. These were seen as a way to rescue the consumer from high prices and volatility; the state inked deals of as long as seven to 10 years duration at rates as high as $90 per megawatt hour. Now, the recession has dropped demand below the amounts the state purchased, forcing it to sell excess power on the market at a loss.

In the last six months, the electricity market has completely reversed itself.

Supplies of electricity are up because of increased rainfall and because several new power plants are up and running. Meanwhile, demand for electricity is down: smelters and other energy-intensive operations shut down and stayed down, while other manufacturers were shuttered by the worsening recession. Even small business and residential use is down noticeably, both because they heeded appeals for conservation and because when the price hikes hit, the pinch caused them to dim out lights.

The storm of high electricity prices has passed, but the recovery will take years. Is there a lesson to be learned? Spencer Abraham, the Bush-appointed secretary of energy, argued in the Jan. 14 Washington Post that the market model was vindicated by the fact that wholesale prices went back down.

That's a view shared by few in the Northwest.

"They refuse to let reality impinge on the validity of their pet theory," Leone said. Leone thinks the price started dropping when FERC started looking into allegations by Western congresspeople that energy sellers were fixing prices by manipulating supplies.

"All of a sudden, FERC started looking into why prices went up," Leone said. "So the Merry Marketeers � started minding their Ps and Qs."

Oregon U.S. Senator Ron Wyden, a member of the Senate Energy and Natural Resources Committee, has joined Committee Chair Jeff Bingaman, D-N.M., in calling for FERC to start acting to protect consumer interests, investigating interstate energy sales to make sure prices are justified.

"State public utility commissioners have no jurisdiction to find out what's behind the wholesale price increase and whether retail customers are being charged reasonable rates," Wyden said.

For Bob Jenks, executive director of the utility consumer watchdog group Citizens Utility Board (CUB), the crisis points to the need to reintroduce effective regulation.

"There is more regulation of the trading of pork bellies as a commodity than there is of trading electricity as a commodity," Jenks said.

The problem, says Jenks, is that regulation doesn't work well if the regulators are appointed by politicians who are captive to campaign contributors. Thus, Jenks points to campaign finance reform as part of the solution.

Things to Come

Jenks thinks the return to lower rates on the wholesale market will result in PGE's regulated rates going down at the beginning of 2003 - after its current more expensive purchase contracts expire. PGE itself is already predicting its rate will decrease 9 percent. CUB will fight to see that it goes even lower.

Will another price crisis occur? Some new generators are coming on line in the Northwest: the Coyote Springs II plant, wind projects in the Columbia Gorge, and a project in Klamath Falls. But a number of power plant projects announced during the crisis have since been cancelled because of falling prices. Some energy experts fear that if the economy rebounds in several years, a low rainfall year could provoke a recurrence of the price crisis.

"With a free market in anything, prices go up and down." Leone said. "If you like the way the stock market goes up and down, that's what you'll get in electricity."

Will job-producing smelters reopen?

Until the electricity price crisis hit in late 2000, nearly a dozen energy-intensive industrial operations in the Pacific Northwest had enjoyed a special arrangement with the federal Bonneville Power Administration (BPA) that for decades provided them with some of the cheapest power to be had. Known as Direct Service Industries (DSIs) these plants agreed to receive a fixed amount of power delivered 24 hours a day and pay just what it cost the BPA to produce. Since almost all the federal power agency's generation is hydropower, they paid only the unretired capital costs of the dams, plus costs for maintenance, operation, and salmon restoration. Nature provides the water and gravity for free.

The arrangement helped the BPA share its costs, and it provided employment to more than 11,000 union workers at a family wage of $15 to $16 an hour, plus benefits.

All that changed when a combination of factors drove up prices on the wholesale market. In addition to the DSIs, the BPA had obligations to 135 public utility districts and six investor-owned utilities. The agency didn't have enough generating capacity to provide all that power itself. While the price had been low, BPA purchases of the extra power had been a minor portion of its overall expenses. But when the price soared to 10 times what it had been, the agency went into crisis mode.

DSIs shut down their operations to resell power, a right they had negotiated in the five year contract that began Oct. 1, 1996. The BPA bargained with each, with varying amounts of success, to share the profits of these resales with the DSIs' workers and with the BPA.

Then, for the new five-year contract that began Oct. 1, 2001, the BPA ended the right to resell. It cut each DSI's allotment of power by 25 percent. It raised the price 46 percent. And it worked out deals with most DSIs to stay shut down a while longer to avoid drastic rate increases for all. In return, the BPA would pay a subsidy, which they were expected to share with their workers.

Today, no DSI is currently taking BPA power, but several could start on April 1. Whether they do will depend on the BPA price, the price they can get for what they produce, and their strategy for surviving the long-term crisis. For aluminum smelters, the problem is that aluminum prices are too low to make aluminum profitably at BPA's rates. The current price is 62 cents a pound; United Steelworkers of America subregional director Jim Woodward estimates it would need to be at 75 cents a pound to make aluminum smelting profitable at current BPA prices.

Like the utilities, the BPA, too, will adjust its price, but it's unlikely to go down much, if at all, says BPA spokesperson Ed Mosey. BPA is suffering one of the many ironies of last year's price crisis: Expecting constant demand, it contracted with the Enron Corporation and other providers to buy power in long-term contracts at higher-than-normal rates. But demand is now down so far, and rains have so fully returned, that the BPA's own generators can now satisfy all of its demand, meaning all that extra power is being sold on the market at market prices, well below what BPA paid for it.

Plus, the agency normally expects to make money selling surplus power during the spring runoff; low market prices mean it will make less money on the sales than was forecasted.

What follows is a plant-by-plant tally of the remaining DSIs in Oregon and Washington: what arrangement they have with the BPA, what their prognosis for reopening is, and how many workers are affected.

* Alcoa: Smelters in Wenatchee and Ferndale, Wash., and Troutdale. Last May, Alcoa shut its Wenatchee and Ferndale smelters and resold 400 megawatts of BPA power through Sept. 30, sharing profits with the BPA and paying workers full wages and benefits.

Now, in the five-year contract that began Oct. 1, BPA promised 300 megawatts at an initial price of $35 a megawatt hour. For the first two years, the BPA agreed to pay Alcoa, the world's largest aluminum producer, $20 per megawatt hour to NOT take this power, for an estimated $65 million a year. As part of the deal, the company committed to paying its workers full wages and benefits. This arrangement will be reviewed in September 2003. During the two-year power cutoff, if the price of aluminum is high enough and Alcoa finds some other source of power cheaply enough, the mills could begin producing aluminum again. The company has reportedly been negotiating with British Columbia Hydropower to provide electricity.

Meanwhile, 600 workers at Wenatchee, represented by Steelworkers Local 310-A and four other unions, are working producing carbon, and doing maintenance and plant improvements. Local 310-A President Terry Smart doesn't expect the Wenatchee plant will close permanently.

The Wenatchee plant is also entitled to 23 percent of the power generated at Chelan County Public Utility District's Rocky Reach Dam, enough to run one aluminum smelting potline, but instead of using that power to smelt aluminum, Alcoa worked out a 15-month deal to resell the power and put the proceeds into building new generation. That deal ends Oct. 1, 2002.

At the Ferndale plant, 930 workers represented by Machinists District Lodge 160 continue to receive full wages and benefits. Some are employed in the plants on maintenance projects. Others have been offered early retirement or voluntary severance packages.

Alcoa's Troutdale plant, bought from Reynolds Metals in May 1999, was closed in June 2000, its BPA power allotment transferred to the other two plants. Its 525 workers, represented by the Steelworkers and various unions affiliated with the Portland Metal Trades Council, are in various stages of relocation and retraining, thanks to federal Trade Act Assistance benefits (a federal program of relocation and retraining benefits for displaced workers where trade was a factor in eliminating jobs) but few have found work comparable in pay to what they earned making aluminum.

* Michigan Avenue Partners: A smelter in Longview, Wash. A consortium of investors, Michigan Avenue Partners, based in Chicago, convinced the U.S. Justice Department that Alcoa would be in violation of anti-trust laws if it was allowed to keep a pair of smelters in Longview that it acquired in its 1999 purchase of Reynolds Aluminum. The smelters use a labor-intensive process to produce high-grade aluminum alloys, and Alcoa would be the only company in the U.S. producing that product. So it was forced to sell, and Michigan Avenue Partners, owner of McCook Metals, bought. Since then, McCook has filed for bankruptcy and Michigan has gotten in trouble with its creditors. The Longview smelters closed last summer so that Michigan Avenue Partners could resell its BPA power - netting an estimated $224 million.

It was the first time the plants had ever been completely shut down in their 60-year history. Since Oct. 1, the BPA has been paying the company roughly $20 per megawatt hour to NOT take its 280 megawatt allotment - totaling about $4 million a month.

Under the current BPA arrangement, Michigan Avenue Partners could begin to use 100 megawatts of its power allotment in April, and the full amount in July. For the duration of the closure, the company promised BPA, it will guarantee full-time wages and benefits for its roughly 700 workers.

But that doesn't mean workers are unharmed by the closure. To honor its guarantee of full-time compensation, the company had workers apply for unemployment benefits, then chipped in a supplemental amount. Plus, the company's defined "full-time" wages is 40 hours at the flat hourly rate; most smelter workers earned as much as a third more than that when the smelters were running because of overtime and bonuses for shift work. Ray Pierson, president of 480-member USWA Local 305-A, the largest of the Longview smelters' nine unions, doesn't think the operation will reopen.

The union applied for and won Trade Act Assistance.

* Kaiser Aluminum: Smelters in Tacoma and Mead, Wash.

Kaiser pocketed over $300 million reselling BPA power through Oct. 1 without sharing any of that revenue with its workers or the BPA. The BPA threatened to cut it off from federal power for its lack of cooperation, but backed down. Now, unlike other DSIs, Kaiser is getting no BPA compensation for continued shutting down. For the first year of the contract, the BPA is offering Kaiser an interruptible allotment of power at $35 a megawatt hour. Kaiser can use the power or not. So far, it's not.

Its 800 laid-off Steelworkers at its Mead and Tacoma smelters get only what their union contract provided: Those over 10 years get 70 percent of base pay; the rest get nothing.

* Golden Northwest: Smelters in The Dalles and Goldendale, Wash.

Golden Northwest, like other DSIs, resold BPA power through last October, sharing profits with workers and the BPA, and also pledging to invest in new generating capacity.

The plant at The Dalles now has access to some power from wind generators. There are also plans for a natural gas turbine to be built by 2004. Both plants could restart with BPA power April 1 if the price of aluminum and power allow profitable operation.

Of the 1,050 Steelworkers at its two plants, 570 are covered by the BPA subsidy, with 250 working and the rest getting 40 hours a week pay plus medical coverage. Another 500 are on layoff, and are eligible for Trade Act Assistance, with about 300 of them so far enrolled in the program.

February 1, 2002 issue

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