Big Issue: Should NorthWestern Energy Buy Dams?

Last week the audience was very small at a public service commission meeting held in Glasgow. Representatives from NorthWestern Energy, the Public Service Commission (PSC) and legal counsel showed up to talk with the audience about some current proposals.

NorthWestern has been looking at purchasing 11 hydroelectric units to bring more stability to its power grid. The purchase comes with a $900 million pricetag, which would affect the rates for current users. The PSC helps to regulate rates and watches out for consumers. The proposed rates would raise around 8.9 percent starting as early as Jan. 2015.

The meeting held in Glasgow on Thursday, April 10, was one of 17 meetings that were taking place in 17 different counties, where rate payers would be directly effected. Public Service Commissioner for District 1 Travis Kavulla started out the meeting by explaining the process, and why the PSC felt the meetings were necessary.

Kavulla stated that a formal hearing would be held in Helena after the public meetings concluded. The formal meeting could last from five to 10 days and would be broadcast on television in Montana. The final decision on whether or not the PSC would allow the purchase and potential raise in rates could probably be expected this fall.

NorthWestern is purchasing they hydroelectric dams from PPL Electric Utilities. Customers of Northwestern would pay for the purchase and the ongoing maintenance and operations costs to keep the dams in working condition. A representative from PSC explained that they aren’t against the purchase but they were more concerned with the additions made to the proposal.

Perspective from PSC

The focus was on what the rate impact on consumers would be for the purchase and maintenance of the dams, and whether NorthWestern was paying a fair market price on the assets. At the meeting they explained that they had consultants and engineers look at the proposal.

The concern was that due diligence was perhaps not being shown. NorthWestern argued that future rates would be lower after a few decades, but a tax on carbon would be added onto rates with the stipulation NorthWestern would be charged a carbon tax by the government. Consumers would start paying for that tax as soon as the purchase of the dam was finalized.

Another argument from the PSC is whether or not future environmental regulations were properly forecast and estimated. The PSC wanted to make sure that the purchase of the dams would end up balancing out the risk over time. While the price tag of $900 million would affect only a portion of profit up front, over time that number would decline annually.

Paul Schultz of the consumer council office said that the transfer risks could put rate payers in a bind if the worst case scenario were to occur.

Consultants, including economists, accountants and specialists in revenue also argued that the purchase would cost more for rate payers in the first eight years. They asked NorthWestern for certain conditions on the purchase, including not charging for the possible future carbon tax until it actually transpires. Something NorthWestern predicted to happen by the year 2021.

“If imposed it will cost more on the rate payers; the company would get compensated for carbon costs,” Schultz said.

There were other concerns about aging facilities that would require further costs to update and maintain. The suggested solution recommended was to allow enough compensation to recover $10 million each year, and if the cost exceeded that, shareholders in the company and the profit would take a hit for the additional costs, over the consumer.

The idea that the company would appreciate over time, instead of depreciate, could end up also causing headaches for rate payers in the future.

“Consumers should be held harmless,” Schultz said.

NorthWestern Energy Rebuttals

Rick Burt, community relations for NorthWestern and a graduate of Nashua, explained that they felt they’ve been doing their due diligence. He explained that over 30,000 pages had been submitted over the agreement with PPL. He said that 85 employees would operate the dams and reservoirs, and that would create more efficiency in energy for NorthWestern.

He argued that if they didn’t make the purchase, someone else could. Perhaps an out-of-state company that would send the power generated in Montana to somewhere else. He said that coal based energy was dying out, and hydro electricity brought cleaner energy to Montanans.

“I believe also that it brings a more stable power source in the future,” Burt said.

He said that the up front initial cost for consumers would be comparable to buying a home, explaining that even homeowners plan for future potential on a purchase. He said that the electrical supply would go up and prices are already rising. The purchase would bring in more reliable rates in the future.

“The dams will provide a stable cost and flow of electricity,” Burt said. “If those electrons leave Montana, NorthWestern will have to import energy back from somewhere else out of state.”

Burt said that he believed that there was a fair balance with rate payers and shareholders. Spokesperson Larcomb said that the original thought of the increase to rate payers would be around 4.2 percent. He said that NorthWestern’s model showed a decrease in rates over time.

Questions from the audience

An employee from NorthWestern and Norval attended the meeting, interested in what types of issues the company might predict if there’s severe drought. While the question wasn’t fully answered at the meeting, a spokesperson from NorthWestern Energy, Butch Larcomb, later explained that the predicted power coming out from the dams and reservoirs is based on the lowest producing years.

Both Larcomb and Burth mentioned that this purchase would help diversify their energy supply. Currently they have coal, wind and natural gas sources. They said adding the hydro energy source could help bring stability.

“It’s an investment in different power options,” Burt said.

A late comer to the meeting had interesting questions on how the purchase was in the best interest of rate payers, and how the carbon tax was an issue. His expressed concern with how de-regulations in 1997 destabilized the market and caused issues for rate payers, and how NorthWestern is basing their future decisions on what might happen in the future instead of what is currently going on. There was also a concern that NorthWestern could buy the hydro electric facilities and then turn around and sell it, causing possible future rises to the rate payers.

NorthWestern representative explained that the company wasn’t looking short term at the purchase. They were hoping for a long term investment and future returns on the investment. The consumer representative said that they weren’t opposed to the company making money, that the concern was the risks involved and how those risks were allocated and how that would affect the consumers if the deal didn’t work out.

“Structure is the focus, more assets could lead to higher costs for the consumers,” Schultz said.

Kelly Fuhrman, the latecomer to the meeting, was curious how the future purchase could cost the rate payers so much. He explained that in his experience with business, the owner ate the initial costs on improvements or purchases. He said that without competition in the energy business, there wasn’t really anyone else to shop around for energy.

“We as rate payers are becoming investors,” Fuhrman said.

He also opposed paying a carbon cost that could happen in the future. He explained that as a current customer, he could move out of state before the tax was even imposed and the money he invested into a non-existent tax was useless.

Schultz agreed with the statement and said that was another point they had discussed with NorthWestern – that spreading some of the investments out for rate payers would make more sense.

For information on the issue, you can file your comments electronically at the PSC website, or view the docket and other information. Go to psc.mt.gov/consumers/comments/ to submit what you think. Those in this area can also contact Kavulla at 406-444-6166. To view the proposal and what the Montana Consumer Counsel has to say about the deal visit psc.mt.gov/Docs/ElectronicDocuments/ and search for docket number D2013.12.85.