Showdown at the BPA corral
How much consumer electric bills go up next year depends partly on the political savvy of aluminum companies
Monday, April 23, 2001
By TOM DETZEL and Jim Barnett of The Oregonian staff
WASHINGTON -- While California's energy shortage has helped push wholesale electricity prices to record highs for the past year, most consumers and businesses in the Northwest have been spared the brunt of the increase.
That will soon change.
Within weeks, the price of power will be determined in a showdown between the region's biggest supplier, the Bonneville Power Administration, and a group of politically connected aluminum producers that consume more than enough energy to run Seattle.
Publicly, the BPA portrays itself as a victim of circumstances beyond its control: drought, tight power supplies and a ruinous wholesale power market wrought by California's disastrous experiment with deregulation.
But that's only part of the story.
Since the mid-1990s, BPA leaders have made a series of decisions intended at the time to placate three fractious customer groups -- 135 public utilities, six investor-owned utilities and 10 energy-hungry aluminum smelters. Some of those choices have now returned to haunt the agency in the new world of soaring West Coast energy prices, leaving Bonneville financially exposed and facing a choice between sky-high rate increases and Northwest jobs.
By Aug. 1, the BPA must set rates for new contracts that take effect this fall. Officials hope to keep increases below 100 percent rather than landing a wallop of 200 percent or 300 percent that would leave ratepayers reeling across the region.
BPA officials see an easy fix.
By cutting off power to the smelters, BPA could slash demand by 14 percent, allowing the agency to rely on its base of low-cost hydropower and limit wholesale purchases. The region would be spared a convulsion of big power bills, business failures and widespread layoffs.
"If we don't get curtailment agreements with the (aluminum companies), we're looking at a huge rate increase," said Jeff Stier, a BPA vice president in Washington, D.C.
But the aluminum companies hold a trump card. Although they lack a proven claim to BPA power under federal law, they've used connections at the Energy Department, which oversees the BPA, to secure new contracts and a place at the bargaining table.
A resolution to the standoff remains elusive, according to parties involved, with the most likely scenario a showdown that leaves the issue in the hands of the aluminum companies until the last possible moment.
"One thing about the aluminum companies is that they always have the political punch in the end to drive a deal," said Mark Walker, director of public affairs for the Northwest Power Planning Council in Portland. "I've never yet seen them come up empty-handed."
Once a happy marriage
Bonneville and the aluminum plants have not always been at odds.
The industry gained a foothold in the interior Northwest during World War II, when the lightweight metal was needed for wartime production. Power was plentiful, and the jobs were a welcome addition to rural economies.
The factories also served as a reliable outlet for the BPA, which had been created to serve public utility districts. They consumed huge amounts of power, offsetting peaks and valleys in residential and commercial demand. A happy marriage continued -- until deregulation took hold.
By 1995, wholesale market prices had plummeted below the BPA rate, and aluminum companies demanded an exit from their contracts. When Energy Secretary Hazel O'Leary balked, the companies relied on the Northwest's congressional delegation to apply pressure.
In a fateful meeting called by then-Sen. Mark O. Hatfield, R-Ore., O'Leary relented. She agreed to new contracts, good through September 2001, that cut sales to the companies by 40 percent, yet saved the BPA from financial ruin and default on its regular debt payments to the U.S. Treasury.
The episode rocked the BPA and its administrator, Randy Hardy. And it provided a lesson: If the BPA was to survive in a deregulated world, it needed to shake its political vulnerability to a small and powerful group of customers.
Soon after, the four Northwest governors called for a comprehensive review of the BPA and its role under deregulation. The key recommendation: Allocate BPA power by "subscription," a new process designed to encourage customer loyalty, keep rates stable and avoid another financial calamity.
Subscription reinforced the bond between the BPA and its biggest customer group, publicly owned utilities, which have first rights to federal power under the law. It also bolstered the tie between the agency and a third group of Northwest ratepayers, the residential customers of investor-owned utilities.
Those customers have a legal claim to BPA benefits under the 1980 Northwest Power Act. The landmark law set up a "residential exchange" in which the BPA provided cash to utilities to lower rates for residential customers of the utilities, including Portland General Electric and Pacific Power.
Under subscription, the BPA would continue paying cash. But for the first time, it also would provide 1,000 megawatts of power for the utilities' residential customers.
The change was initiated by Hardy's successor, Judi Johansen, who had the support of the region's governors and state utility regulators. But at aluminum company offices, the decision didn't sit well.
Visit to Richardson
Wholesale prices were creeping higher, making BPA power a bargain once again. But with public utilities boosting their take, and with the new commitment to residential customers, the BPA expected to limit the aluminum companies to as little as 500 megawatts, about a sixth of their needs.
Aluminum executives regarded the meager allocation as a violation of the 1980 law, which they interpret as guaranteeing their access to BPA power. Rather than risk losing a court case, they again chose to play their political hand.
This time, they would take their case to a new energy secretary, Bill Richardson, and argue that thousands of jobs hung in the balance.
To bolster their claim, they gained entree to Richardson through an old friend, George Becker, president of the United Steelworkers. Becker arranged a meeting at energy headquarters on April 8, 1999, to which he brought an entourage of aluminum executives and lobbyists.
Richardson had little experience with Northwest energy issues, and his staff had not briefed him fully on the relationship between the BPA and the aluminum companies. So Richardson relied on Becker's word.
"It was Becker who I felt made a compelling case that unless there were fairer rates, there would be massive dislocations" of workers, Richardson recalled.
Rich Glick, an aide at the meeting, watched concern spread across Richardson's face as Becker described the fate awaiting union members. Before Glick could pull his boss aside, the aluminum companies had won Richardson over.
"He made up his mind right when we were in that meeting," Glick said.
Afterward, Richardson ordered Glick and Johansen to find a way to satisfy the aluminum companies without raising rates for other BPA customers.
Within weeks, the BPA came back with a compromise: 1,500 megawatts for the aluminum companies. The BPA would buy the extra power on the wholesale market and blend the cost into its overall rate.
Richardson said it seemed a fair deal to all BPA customers. He was aware of potential problems with California's deregulation plan, he said, but did not think they could result in potentially devastating costs for the BPA in the wholesale market.
"I didn't see at the time that it might have that link," Richardson said.
Customers come running
Meanwhile, the two-year subscription process continued. By the time it closed in the fall of 2000, California's problems had driven wholesale power prices skyward. Public utility customers that once shunned the BPA returned with a fury, signing up for 2,300 megawatts more than before.
The BPA was overwhelmed.
It had at its disposal about 8,000 megawatts, including power from 29 federal dams and one nuclear plant, at an average cost of about $23 per megawatt. But by Oct. 1, 2001, these new demands could force it to buy 3,000 megawatts in a wholesale market where prices sometimes have topped $500.
Despite six years of planning and hard work by governors, congressional representatives and BPA officials, the agency again faced the prospect of missing Treasury payments.
Robert McCullough, a Portland energy consultant who has tracked the BPA for years, said it shouldn't have been a surprise. As a political entity, the BPA lacks the financial and managerial discipline to compete effectively in a deregulated market, he said.
"If they're to be judged politically, they've done a fine job -- they've bent to every political wind," McCullough said. "As an economic agency, they've now found themselves in a very uncomfortable position."
A showdown looms
Now, as the BPA closes in on a final rate decision, it is seeking voluntary cutbacks in demand from all its customers. But tensions among them are rising, and their struggle is moving into the public arena.
The residential exchange is one source of friction. With market rates so high, the BPA says the cost of the residential exchange to the BPA has soared to $1.5 billion next year -- far above the $140 million the agency predicted a year ago.
That has left some public utility managers chafing, even though the relative value of BPA power has risen for all the agency's customers.
"We've backed up and given up a lot already," said Steve Loveland, general manager of the Springfield Utility Board, a 27,000-customer public utility that is cutting power costs by paying its biggest industrial user $4.3 million to shut down.
Loveland's utility has contested the residential exchange in the BPA's ongoing rate case, claiming its benefit to customers of the investor-owned utilities is too high.
"You're looking at a $600 million to $1 billion transfer to them," he said. "Bonneville has engineered this shortage, and they're asking us to bear the lion's share of the response."
Aluminum companies are also on the attack in the rate case, claiming the exchange could net investor-owned utilities $3.4 billion through 2006, or 17 times the value in the previous five years.
But they aren't taking any chances that the rate-setting process will fail them.
From factory floor to the West Wing of the White House, the industry is mounting a political campaign aimed at shaping the outcome of the BPA rate-setting case, which is scheduled to conclude this summer.
The campaign begins in rural smelter towns, where a grass-roots effort is under way. Company officials also are lobbying the Washington Legislature for a resolution backing their cause. And television ads are scheduled to begin airing this week.
The Public Power Council, which represents 120 public utilities, has countered with a survey claiming 42,000 jobs, from farms to factories, would be put at risk if the BPA boosts rates to cover aluminum companies' demands.
But the aluminum companies have arranged a counterpunch: a meeting with Vice President Dick Cheney's energy task force to argue that the BPA is creating an "artificial market" by closing them off and wiping out 10,400 jobs.
"Our leverage continues to be the fact that people don't want to lose a bunch of jobs," said Irene Ringwood, an industry lobbyist in Washington, D.C.
Brett Wilcox, president of Northwest Aluminum, has proposed the creation of "tiered rates" that would allow all BPA customers to buy 75 percent of their power at the BPA's existing low rates and the remainder at market rates.
The BPA has resisted that offer, saying it would amount to an economic death sentence for its other customers while aluminum companies would be able to scale back operations to avoid paying for market purchases.
Instead, the BPA is offering aluminum companies "limited compensation" as an incentive to shut their operations, said Paul Norman, senior vice president for power marketing. So far the companies haven't responded.
And time is running short.
"We only really have until the end of next month to bring this to a conclusion," Norman said.
"That's why this is so urgent."