SEATTLE POST-INTELLIGENCER http://seattlep-i.nwsource.com/business/powr231.shtml

Consumers forced to weigh their options With California facing a big rate boost, Washington may turn to self-contained power generation

Saturday, December 23, 2000

POST-INTELLIGENCER NEWS SERVICES

With no fix in sight for high-priced and scarce electricity, some big industrial users in Washington state are considering generating their own power.

And in California, regulators apparently pulled two shaky electric power companies back from a financial brink in their vote Thursday for rate increases that would affect millions of customers across that state starting next month.

Standard & Poor's yesterday backed off its earlier threat to relegate the credit ratings of the Pacific Gas and Electric Co. and Southern California Edison Co. to "junk" status, a move that would make borrowing money difficult, if not impossible.

The unanimous action by the Public Utilities Commission on Thursday means that increases likely would take effect beginning Jan. 4, affecting 10 million customers of PG&E and SoCal Edison. The level of increase has yet to be determined.

Near Bellingham, in Northwest Washington state, Georgia-Pacific West's pulp and paper mill and the BP-Amoco refinery at Cherry Point already are generating small amounts of power themselves, and are exploring ways of producing all their power needs.

Huge increases in the market prices of electricity have spurred some big power-consuming companies to shut down, and hurt a number of others.

Georgia-Pacific and six other companies have asked the Washington Utilities and Transportation Commission to order Puget Sound Energy to provide power at the same rate it charges other industrial customers. The companies currently pay market rates under a five-year contract they had requested from the Bellevue-based utility.

Georgia-Pacific sent most of its 800 Bellingham workers home starting Dec. 9, when power prices hit levels that company officials said would have forced the mill to run at a loss.

Jim Cunningham, mill general manager, said Georgia-Pacific hopes to run some mill operations running on power from portable diesel generators. Already, two tissue machines are operating and part of lignin production has resumed, he said.

Cunningham said he had no estimates of how many workers have been called back, but that employment probably will be close to 350 people by the end of next week, when a third tissue machine is expected back in operation.

Using small diesel generators to produce about 16 megawatts, Georgia-Pacific is able to turn processed wood pulp into paper, using pulp reserves stored at the waterfront mill. However, it would need more power to convert wood chips into pulp -- at full operation, the mill consumes about 40 megawatts.

Cunningham said there appears to be neither a short-term answer nor a long-term strategy for solving the region's power problems. Because of that, he said the most attractive option for Georgia-Pacific is to generate its own power, to ensure a reliable supply and stable price.

At the BP-Amoco Cherry Point refinery, 10 portable generators have been installed to produce a total of 10 megawatts, spokesman Scott Walker said. The refinery uses about 80 megawatts, and more generators are on the way, he said.

The refinery soon should be able to generate about 25 megawatts on its own. BP-Amoco produces diesel fuel at the refinery that can be used to run the generators, Walker said.

Three days of talks between Puget Sound Energy and the seven industrial customers broke off Thursday without results.

"We kind of ran out of things we could talk about," Cunningham said.

Besides Georgia-Pacific, companies taking part in the talks with a Utilities and Transportation Commission mediator were The Boeing Co., Equilon and Tesoro oil refineries in Anacortes, Air Liquide America Corp., Air Products and Chemicals Inc. and CNC Containers.

When the industrial users signed supply contracts with PSE in 1996, market prices were usually below $50 a megawatt. In recent weeks, prices have topped $3,000 and this week were in the $300 to $500 range.

At $300 per megawatt, industrial users are paying about five times the rate that homeowners pay for electricity.

The small diesel generators may be only stopgap measures because of state air-pollution regulations. Walker said BP-Amoco has been told it can run the generators for no more than 90 days a year. Cunningham said he had not yet been told by the state Department of Ecology whether the 90-day restriction would also apply to Georgia-Pacific.

California power companies, which had been prevented from making rate increases they said were necessary to compensate for rising wholesale prices, took their case to state regulators after Wall Street threatened the companies' ability to borrow money. The regulators conceded.

"Retail rates in California must begin to rise," the California's Public Utilities Commission ordered Thursday. "This is crucial in light of the extraordinarily serious financial difficulties the dysfunctional wholesale markets have imposed on the utilities."

However, the commission promised an independent audit of the utilities' books before ratifying its decision Jan. 4.

The two privately held utilities have said they were squeezed by deregulation in the state. PG&E and SoCal Edison blame $8 billion in losses since May on soaring wholesale costs and frozen customer rates.

Commission President Loretta Lynch said wholesale electricity costs had increased fivefold over three weeks.

Consumer groups balked at the commission's decision, saying it paved the way for a bailout to appease investors.

"This is regulation by Wall Street. The commission has prejudged the case and decided, before any evidence has been presented, that the utilities will be granted a rate increase," said Nettie Hoge, head of the utility watchdog group TURN.

But Dan Richard of PG&E said Wall Street's approval was vital to fiscal health and that the losses had wrecked the utilities' credit.

Meanwhile, with electricity imports slowing to a trickle, managers of the state's power grid declared another Stage 2 alert Thursday, meaning that power reserves fell below 5 percent.

This report includes information from The Associated Press.

-- Martin Thompson (mthom1927@aol.com), December 23, 2000