NW's electric plan: New power plants, higher rates, probably

The plan, filed late in December with the state Public Service Commission, is a blueprint of how NorthWestern hopes to line up enough electricity to serve its 310,000 Montana customers in the short and long term.

On both fronts, higher costs appear inevitable, the company said.

"Future electricity costs will be higher, perhaps substantially higher," it said in the plan. "Customers should take higher future costs into account when they make decisions about home construction, insulation, appliance purchases and their consumptive behavior." Yet it's difficult to say how much higher, company officials said recently.

"We didn't put a percentage in there because the market has such volatility," said John Hines, director of energy supply for NorthWestern. "Whatever number we put in would immediately be wrong. There are just so many variables involved." NorthWestern, unlike most major utilities in the region, does not have its own regulated power plants, which would provide electricity based on the cost of production.

That means NorthWestern must buy nearly all the power needed for its customers on the open market, from third-party suppliers. Those prices are higher than cost-of-production-based prices.

NorthWestern has in place long-term contracts or arrangements to provide about 30 percent of the power it needs, starting over the next 18 months.

But two key contracts expire in mid-2007, leaving a huge hole in the electric "portfolio" that has yet to be filled. These contracts, which provide 55 percent of the portfolio's needed power, are with power generator PPL Montana.

PPL owns the Montana Power Co. dams and power plants that used to be part of the utility that supplied customers now served by NorthWestern, and sells that power to the highest bidder.

Residential customers of NorthWestern are paying about $50 per megawatt hour now for electricity, plus another $38 per mwh for delivery costs. The average consumer uses nine to 10 mwh per year.

High-end market prices for electricity in the region hit $125 per mwh last month. Prices have eased off in recent weeks, but still remain relatively high.

The PPL contracts that expire in 2007 charge about $32 per mwh, or well below current market rates. Renewing them now would be much more expensive than their existing price.

Much of NorthWestern's plan talks about how to replace these contracts, in the short and long term. Options listed by the plan include:

- Investing in new coal-fired power plants, or a mix of coal, gas-fired and wind power projects. However, these plants wouldn't start operating until 2010 at the earliest, and probably later.

NorthWestern could finance these plants itself, as part of a long- range plan to rebuild the company as a vertically integrated -- and fully regulated utility. That route would require changes in state law:

- Arranging new "bridge contracts" to buy power starting next year, to tide over the company until the longer-range projects come on line.

- Arranging new contracts with PPL that could act as "bridge contracts" or be for longer terms.

The plan says the company will ask for energy-supply bids later this year or early next year, both for long- and short-term needs.

Public Service Commissioner Tom Schneider, D-Helena, said a pending decision by the Federal Energy Regulatory Commission could force PPL Montana to charge low rates. But that decision can't be counted on, he said.

"You just have to look at the (regional) market price to see that things are pretty grim," he said last week. "There's a huge gap that needs to be filled, and time is running out." Commissioner Brad Molnar, R-Laurel, said he's extremely disappointed that NorthWestern hasn't acted earlier to line up longer-term contracts or power projects.

He believes that the commission, rather than the company, should be managing the contract decisions.

"The way NorthWestern is running this portfolio, there is no real competition," Molnar said. "They put themselves in these boxes. Everything expires at once. They've squandered their time." NorthWestern acknowledges that the timing on contracts is not the best. But the company has arranged several new projects at good prices in the last year, and continues to scour the market for the best deals it can find, officials said.

"We're dealing with anyone who is active in the market," said Bryan Bradshaw, director of energy supply and market operations. "We're just looking for the best price that is reliable, whether it comes from PPL or somebody else."