Friday, April 13, 2001, 12:00 a.m. Pacific

NW utilities get socked the hardest

by Hal Bernton Seattle Times staff reporter

Pacific Northwest utilities are paying the highest prices in the nation for the next-day delivery of wholesale power, according to an analysis of market surveys.

During the three months of this year, the Northwest wholesale market - known as the "mid-Columbia" - averaged $267 per megawatt-hour. That was 16 percent higher than the average price in Northern California and 28 percent higher than the average price in Southern California.

Next-day sales represent the majority of transactions in California and the Pacific Northwest power markets, and help determine the price of wholesale power purchased in long-term contracts.

The Bonneville Power Administration (BPA), Seattle City Light and other regional utilities make last-minute power purchases in this wholesale market to help meet customer demand. The mid-Columbia's high prices have triggered financial hemorrhages that are forcing utilities into wide-ranging rate increases.

Seattle City Light has raised consumer rates by 28 percent this year, and BPA officials Monday said they might have to raise rates by 250 percent or more by Oct. 1.

The analysis was conducted at the request of The Seattle Times by McCullough Research, a Portland-based utility consultant. McCullough computed the averages from daily price surveys compiled by the Energy Market Report, a utility-industry newsletter that tracks regional power markets. It's unclear why the Pacific Northwest wholesale prices are higher than those in California. Power-industry officials say the Northwest market has been stoked by the drought, which has reduced the amount of water available to generate hydroelectricity.

"Is the lack of hydro bidding up the price? You bet," said Gary Ackerman of the Western Power Trading Forum.

Federal oversight of the Northwest power markets is weaker than in California, and some utility officials say that gives marketers more freedom to ratchet up prices. "Here, the power marketers know they can keep the prices up," said Paula Green of Seattle City Light.

Washington state and Oregon politicians have been lobbying the Bush administration for federal intervention. They say the high cost of power already has triggered widespread layoffs in industry and eventually could threaten the financial solvency of some of the region's utilities.

They want the Federal Energy Regulatory Commission (FERC) to impose price caps or at least begin to order refunds to utilities for excessive charges, as the commission has done in California.

At the consumer level, power rates still are lower than those paid by Californians, but they are rising at a rapid clip.

"We have a deepening crisis here, and it demands tremendous involvement," said U.S. Rep Jay Inslee, D-Bainbridge Island.

FERC Chairman Curt Hebert has been willing to consider some regulatory actions to ease prices. But he and governors of eight Western states have opposed firm caps on wholesale power prices, saying such restrictions would discourage investment in new power plants and exacerbate shortages.

Pacific Northwest utilities generate much of their power from hydroelectric projects they control or that are operated by the BPA. For years, hydropower has helped consumer rates in the Northwest rank among the lowest in the nation.

But as demand has grown in recent years, wholesale markets have become increasingly important.

When the BPA and utilities have a surplus of power, they sell it on the markets. In part because of this year's drought, many are buying far more power than they are selling - and racking up losses.

The utilities often buy electricity from a new breed of independent generators: companies that produce power for the wholesale markets but have no retail customers. The market also involves brokers acting as middlemen, buying power from one source and then trying to sell it to another at a profit.

The Energy Market surveys show that the Pacific Northwest market closely tracked California prices through most of last year. In December, as a cold snap in the Northwest and energy shortages in California sent prices to record highs, the Northwest average reached $552 per megawatt hour. In the first three months of 2001 prices eased, but the Northwest market was consistently higher than California's.

The spread reached its highest point in February, when the mid-Columbia prices averaged $280.46 per megawatt-hour compared with $238.31 per megawatt-hour in Northern California and $197.50 per megawatt-hour in Southern California.

The price surveys cover only a fraction of total transactions. But the surveys are intended to be a representative sampling of the markets. For the first three months of this year, they include interviews with California's major buyer, the often secretive state Department of Water Resources.

The regional markets are tied together through a far-flung network of transmission lines that stretch around the West. This enables an Arizona utility to sell power on the mid-Columbia market or a Northwest utility to sell power in California.

During the past year, the market interplay between regions has become more strained.

These problems are partly a result of logistics. California lines occasionally have been too jammed to relay power from the Southwest to the Pacific Northwest.

But the strains also reflect financial problems. Because power marketers have been stung by California defaults on power purchases, they are wary of extending credit to potential sellers in other areas of the West or launching complex deals that involve transferring power through a series of utilities.

These problems are likely to increase, with market forecasts indicating prices of more than $500 per megawatt-hour come summer.

Federal authority to regulate Western markets dates to a 1935 act of Congress that requires all wholesale power rates to be "just and reasonable."

FERC used to uphold that standard by scrutinizing all costs of power production to guard against profiteering. But in the past decade, regulators have allowed the competitive forces of the marketplace to determine just and reasonable rates.

That system appeared to work relatively well until California's attempt at deregulating state utilities led to power shortages and a fierce run-up in markets last spring. Prices soared in all West Coast markets, but California has been the focus of federal investigations.

In the West, California has the greatest dependence on power markets, with utilities pumping billions of dollars into power purchases. In a series of rulings - criticized by California state officials as timid - FERC has sought to bring that market under control:

** On Dec. 15, the federal commission determined California power prices at times last fall were "unjust and unreasonable'' and asked power marketers to submit justifications for any prices higher than $150 per megawatt-hour.

** On March 9, the commission ordered 14 power sellers to refund up to $69 million in possible overcharges to California utilities during January.

** On March 15, the commission ordered two California power marketers to explain instances in which power appeared to be withheld to inflate prices and produce $10.8 million in unreasonable profits.

** On March 16, the commission ordered six power sellers to refund up to $55 million in potential California overcharges for February.

Hebert this week met with Western energy officials in Boise to hear their concerns. But, so far, FERC has balked at ordering refunds in Northwest power markets, saying such a multistate action would be complex, "difficult to administer and outside the scope of the rate investigations in California."

Hal Bernton can be reached at 206-464-2581 or hbernton@seattletimes.com.

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-- Martin Thompson (mthom1927@aol.com), April 14, 2001