FEC, Pacificorp swing power deal

August 9, 2001

FEC, Pacificorp swing power deal

by Richard Hanners

Flathead Valley residents will see a rate increase of about 14 percent for electrical power this fall, rather than 60 percent, 100 percent or more as worst case scenarios forecasted several months ago. The increase is on top of a 29 percent rate hike in April.

The last piece of the power puzzle was plugged in when the Flathead Electric Cooperative signed a 63-month block power contract with PacifiCorp for 70 megawatts at an average price of $43.12 per megawatt-hour, Co-op General Manager Warren McConkey announced Aug. 2.

The PacifiCorp power contract, which accounts for about half the Co-op's supply, was scheduled to change from a fixed rate to a market rate based on the Mid Columbia Index beginning Oct. 1. The Mid Columbai Index has averaged above $250 per megawatt-hour for much of 2001 but has come down significantly in the past month. It was about $55 per megawatt-hour Aug. 1.

"Resolution of this contract has been a long time in coming," McConkey said at a press conference Aug. 2. The Co-op has been working with PacifiCorp, the Bonneville Power Administration and others since June 2000 to create a new power supply contract, he said.

"The value of a fixed-priced over a market-priced resource is enormous," McConkey said. "We have a stable future and not a volatile up and down future."

He said drought combined with California's experiment in deregulation was driving up market prices.

McConkey credited the efforts of Gov. Judy Martz, Flathead Valley legislators and the state's congressional delegation "as instrumental in helping forge this agreement."

The rate increase will apply only to energy charges, and the basic monthly residential charge, which pays for the Co-op's fixed costs, will remain at $21.

Based on a 14 percent rate increase and 750 kilowatt-hour usage, the Co-op's residential delivered cost including the basic service charge will be 7.91 cents per kilowatt-hour, according to Co-op figures. That means a typical residential load of 1,100 kilowatt-hourse per month will cost about $8.75 more per month.

This compares with 8.47 cents for the median Montana Electrical Cooperative Association price, 7.43 cents for the current Montana Dakota Utilities price and 7.12 cents for the current Montana Power Co. price.

When combined with industrial and commercial customers, the Co-op expects the average cost of delivered power to its customers to be about 6.88 cents per kilowatt-hour. If adjusted for inflation over a 20-year period, the Co-op's cost of delivered power would be about 8.03 cents per kilowatt-hour, according to Paul Polzin at the University of Montana's Bureau of Business and Economic Research.

Exact rate increase figures for the different customer classes will be announnced by Sept. 1, McConkey said. The effect of conservation efforts by customers reacting to the rate increase, called "price elasticity," was unknown at this time, he said.

A loss of one percent in load means a loss of $9 million in revenue, McConkey said, meaning rates might have to go up 10 percent. In short, if customers conserve power they could actually end up paying more for their power.

The signing of the PacifiCorp contract completes the Co-op's power supply protfolio. Earlier the Co-op signed an agreement with BPA for 54 megawatts of power at $32 per megawatt-hour in a load-following contract.

Judi Johanson, PacifiCorp's CEO, said in a press release, "We are pleased that we were able to provide Flathead Electric and its customers with some protection from the uncertain wholesale market without having to unduly affect our sutomers in other states. The fact that this particular agreement benefits a community that we served for many years makes it all the more gratifying."

McConkey said PacifiCorp benefits from the deal three ways. The contract provides PacifiCorp with stable long-term revenue and provides the credit assurance of BPA. The deal also provides PacifiCorp with some political capital.

One of the big winners as a result of the new PacifiCorp deal is the Co-op's biggest customer, Plum Creek Manufacturing Co. The company's medium density fiberboard plant in Columbia Falls is a large consumer of power, and the ocmpany will soon begin operating a brand new $69 million Thinboard line that is also a big power user.

The Co-op faced an uphill battle in its negotiations with PacifiCorp. The defaulting of large electric utilities in California made power generators wary of signing long-term fixed-rate contracts with utilities, McConkey said. The Co-op has credit problems, he admitted, and has reported a net loss for the past two year,s but it has never missed a pyament for anything.

To get around the Co-op's credit problem, BPA agreed to purchase 54 megawatts of the 70-megawatt block power contract from PacifiCorp and then resell it to the Co-op. The remaining 16 megawatts of the 70-megawatt contract is attributed to the Plum Creed MDF plant load.

"Bonneville's help in assuring our credit guarantees was an important aspect of this agreement," McConkey said.

Earlier this year BPA raised the issue that the MDF plant might be a "new large single load" and therefore governed by different rules, according to the 1980 Northwest Power Act, and even ineligible for power from BPA.

The issue arose because the Co-op purchased PacifiCorp's Pacific Power & Light distribution system in 1998, which included Plum Creek and the MDF plant. To get around that problem for now, the Co-op and BPA agreed to keep power for the MDF plant separate from the rest of the block power contrac.t

Sen. Max baucus helped the Co-op and Plum Creek in their negotiations with BPA by contacting BPA Acting Administrator Steve Wright