Pacific Northwest Not So 'Pacific' When It Comes to Energy

Having so far withstood record hydro-electric shortages and previously skyrocketing energy prices, Puget Sound Energy nevertheless is dissatisfied, asking the Federal Energy Regulatory Commission to modify its mid-June western wholesale power price mitigation measures that the Bellevue, WA-based combination utility holding company claims are too focused on California.

The regional power planning organization in the area, however, thinks it is more than the federal price caps that may be discouraging some previously planned new generation, including long-term economic prospects turning negative and local citizen or governmental opposition.

Another factor discouraging new gas-fired power plants is the quick emergence of up to 500-700 MW of temporary diesel-powered emergency generation farms throughout the northwest, particularly in the state of Washington where the governor earlier in the year as an emergency measure waived usual air quality restriction for this type generation. Diesel power farm developers include: end-users, independent developers and utilities that want extra megawatts to meet their obligations to serve.

Joining other energy companies in the northwest, Puget Sound told FERC in a July 19 filing that the so-called floating price caps on electricity "threaten to prolong the energy crisis" in the West, resulting in higher energy bills for retail customers.

"The FERC action in June was focused solely on solving the immediate crisis in California," said Tim Hogan, Puget Sound's vice president, external affairs, who noted that it has had "unintended consequences" for utilities in other western states, such as the 37% power cost surcharge that Avista Corp.'s utility has implemented.

In view of Avista's rate increases requested in both Washington and Idaho, Moody's Investors Service last Thursday said it was maintaining a "negative outlook" for Avista's ratings. The rate hike requests are "in direct response to the higher than anticipated build up in energy cost deferrals at Avista, which reached $140 million as of June 30," Moody's said in making its negative comments.

Moving in the opposite direction, Puget last Tuesday announced it had filed with Washington state regulators to lower its overall average natural gas retail rates by 8.3% because of recent drops in the wholesale gas prices. Puget said average residential bills would drop 7% over the next 12-month period, or about $5 monthly, lowering the average monthly gas bill to $72.

Just a few days earlier, on July 19, Puget Sound Energy reported dramatically higher costs for purchased power and natural gas in the second quarter, compared to the same period in 2000, and the same for the 12-month period ending June 30 of this year, compared to the same period last year.

Purchased power nearly tripled ($635 million for the second quarter this year vs. $238 million last year) and natural gas costs more than doubled ($104 million vs. $46 million), according to Puget's second quarter results. Regulators allowed most of the costs to be covered in retail rates, so unlike the situation for some California investor-owned utilities, Puget net income was only reduced slightly for the second quarter and 12-month periods. (For the second quarter, net income of $22.9 million vs. $25.1 million in the same period last year.)

"Despite continuing poor hydro conditions and unscheduled outages at certain of our generating facilities, our company delivered expected financial results through the first half of 2001," said Williams Weaver, CEO of Puget Energy.

The company, however, is arguing at FERC that the western price caps over the longer term will force it to sell excess power at a loss and the controls will discourage future conservation and new generation.

"Already, more than 1,300 MW of planned new generation for the region have been cancelled due to the effects of the price controls," Puget's Hogan said in announcing the request that FERC modify its June 19 order establishing the western price caps.

Some observers speculate, however, that Puget Sound Energy's major concerns with the price caps are derived from their own business operations that include hedged long-term contracts at prices above the FERC floating caps and new generation plants the company is developing that are less economically attractive with the caps.

Jeff King, an analyst with the Northwest Power Planning Council in Portland, OR, said the 1,300 MW might need to have an asterisk after it because it is a much smaller amount that directly has been stopped because of the federal price caps. King keeps a running tally of proposed power plants throughout the Pacific Northwest for the planning unit.

"There were some power projects that have been terminated since mid-June, but I'm not sure whether it was the price caps or the fact that prices have fallen substantially," said King, who noted that the 1,300-MW estimate is two or three times his list of projects that have dropped out recently. King has charted 36 projects, totaling 840 MW, going back to January 2000. Among the reasons for most of these plant projects being abandoned were air quality requirements, loss of cost effectiveness, a decline in recent power prices, new industrial tariffs and local opposition.

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