California not alone in energy quagmire

By Stuart Leavenworth Bee Staff Writer (Published June 10, 2001)

BUTTE, Mont. -- The last mine in this Gibraltar of copper mining closed in July. The bosses handed out pink slips to Cliff Champeau and 330 other workers, who've had a year to ponder a topic they once ignored: deregulation.

Following in California's footsteps, Montana deregulated its electricity generation in 1997, and over the last year, Big Sky power prices have hit the roof. Unable to afford power through markets they once embraced, Montana industries have laid off more than 1,000 workers. Residential customers now face rate increases of 50 percent or more.

Worlds apart in geography and outlook, Montana would seem to have little in common with California, but the two states share some bonds and blunders when it comes to electricity. Both deregulated. Both got caught in a whipsaw of dry weather and reduced hydro power. And both blame their troubles on big utilities, out-of-state power merchants and their own gullibility.

"Who do I blame? I blame greed," says Champeau, 62, whose unemployment compensation ran out this winter. "There wasn't any electric shortage until deregulation. It didn't do us any good, and it put a lot of people out of work."

As in California, interpretations abound as to what got Montana into this mess. Many say the state's Republican-controlled Legislature was hoodwinked by Montana Power, a once-mighty utility that pushed for deregulation in 1997 and since has transformed itself into a telecommunications venture. Deregulation proponents, on the other hand, say Montana is hurting because of drought and California's power shortfalls, which have pushed up electricity prices across the West.

Whatever their leanings, nearly everyone agrees that Montana faces some dire times if more mines, mills and refineries shut down in the face of high energy bills.

"Montana's economy is in a hell of a lot of trouble," said Pat Williams, a former U.S. congressman who now works at a think tank at the University of Montana. "What little industry we have was attracted here by cheap energy, and now even that is gone."

To some extent, Montana's deregulation debacle has its origins in Butte, a boom-and-bust city that helped produce much of the copper wire used to electrify the country during the early century. Up until the 1970s, Butte was dominated by Anaconda Copper Mining, which controlled banks, newspapers, many politicians and founded the Montana Power Co. in 1912.

With several hydroelectric dams and vast coal reserves, Montana Power could offer some of the West's cheapest power, and it did -- after Montana created a Public Service Commission to regulate the monopoly. By the mid-1990s, Montanans were paying the sixth lowest electricity prices in the country. But the rates weren't low enough for executives of Montana's major industries, who started shopping for cheaper power from independent energy providers.

Convinced it could lose its biggest customers, Montana Power put its muscle behind deregulation. "We wanted to be proactive because we knew it was the right way to go," said Montana Power President Jack Haffey, speaking last week from his office overlooking Butte's snow-capped hillsides and faded downtown.

The company tapped its chief lobbyist, Ed Bartlett (now chief of staff for Gov. Judy Martz), to press for deregulation. Bartlett lobbied Montana's then-governor, Marc Racicot (now a lobbyist for Enron), and the state's Republican-controlled legislature, who introduced and approved the deregulation plan in the final weeks of their 1997 session.

Unlike what occurred in California, a coalition of environmentalists, consumer groups and senior citizens fiercely opposed Montana's deregulation plan, as did many Democratic lawmakers. Nonetheless, it passed 36-14 in the Senate and 78-21 in the House, mostly along partisan lines.

More so than California's blueprint, the bill included some safeguards for consumers. Residential rates were frozen until 2002, and Montana Power was allowed to make long-term contracts to hedge against a flare-up in prices.

Even so, the bill allowed Montana Power to quickly sell off its generation plants, a move that later would prove crucial. Within a year, Montana Power had sold its hydro, coal and other plants to PPL Corp. -- an offshoot of Pennsylvania Power and Light -- for $759 million.

For Montana Power, the deal was a windfall. With an infusion of cash, the company pumped money into Touch America, its telecommunications arm. In two years, Touch America stock tripled, as did the stock options of Montana Power's executives.

Montana's industries also profited, at least for a year or two. Montana Resources, the mining company where Champeau once worked, was able to secure power for about $19 a megawatt-hour in 1998, half what it paid before deregulation.

"At that point, we were very happy," recalls company President Steve Walsh, whose business depends on cheap power to extract copper and other minerals from Butte's nearly tapped-out mining pits.

Then the market went haywire. Starting in 1999, wholesale electricity prices started to rise. Walsh watched while they jumped from $30 to $150 to $300 a megawatt-hour.

All that time, Montana Resources tried to secure long-term contracts, but none was available at prices the company could afford, Walsh said. Finally, when prices hit $620 a megawatt-hour in June of last year, the company was forced to shut down and lay off nearly all its work force.

"We went to work one day, and suddenly it was over," said Champeau, a second-generation miner who had worked at Montana Resources for 14 years. "They told us they couldn't afford the power. We got two weeks' notice."

Many residents say the shutdown was the biggest blow to Butte since Anaconda closed its smelter and mines in the early 1980s. After those layoffs, unemployed workers raised funds and built a beacon of hope on a hillside -- a 90-foot statue of the Virgin Mary.

"I don't know what is going to happen to this town," said Champeau, who went from a $40,000-a-year salary to a job working as a security guard for $5.50 an hour. Many of his friends and fellow workers have scattered to mines in Wyoming and Nevada, he said.

Other towns have also been hard hit by energy prices. In Missoula, the Smurfit Stone paper mill cut back production in March and laid off 100 workers, on top of 25 it previously had let go.

In northwestern Montana, Columbia Falls Aluminum Co. is paying 600 workers to stay home this year so it can sell its power -- provided cheap by the federal Bonneville Power Administration -- on the open market. So far, the company has earned $384 million through such deals, which are raising eyebrows in Congress.

As the shutdowns have multiplied, business groups and others have besieged Martz, the new governor and a former Olympic speed skater who inherited the crisis from Racicot, her political mentor.

Critics say Martz has been slow to grasp the enormity of the crisis, a barb once leveled at California's Gov. Gray Davis.

"It's ironic that you have a similar situation in both states," said Shane Hedges, Martz' spokesman and policy director. "In California, you have Republicans blaming a Democratic governor for not fixing the problem, and in Montana, you have the same thing, except that Democrats are blaming a Republican."

Made up largely of ranchers and businessmen, Montana's part-time Legislature labored over the power crisis during most of its recent session, which ended in April. About 45 bills were introduced, but only a handful passed, including one that sets up a public power authority that can invest $500 million in new generation.

Some lawmakers also pushed for an excess profits tax on PPL, the company that bought Montana's power plants. The bill was killed on the final day, but it may have helped bring PPL to the bargaining table. Under a deal announced the day the bill was killed, PPL will provide Montana with 500 megawatts for five years, at a price of $40 per megawatt-hour.

Along with Martz, Montana Power officials say the state is getting a bargain. "If you got that in California, people would be doing back flips down the streets of San Francisco," said Haffey, the company's president and chief operating officer.

Consumer groups and others, however, say the state is getting a raw deal -- with ratepayers paying the price. Under the proposal, which still must be finalized by PPL and Montana Power, a typical Montana household can expect its power bill to rise 50 percent, from $50 to $75 a month.

As a result, Martz and her allies face a budding revolt in Montana. Labor groups and others are drawing up a referendum to overturn the 1997 law. Democrats are airing radio attack ads against Republicans, hoping to regain control of the state House and Senate.

Even some former advocates of deregulation, such as Montana Power, have come out in favor of re-regulating the state's power grid.

"Electricity is a commodity we can't live without," said Walsh, president of Montana Resources. "We depend on it from the time we wake up to the time we go to bed."

Hedges, the governor's spokesman, says Democrats and others are overreacting, pushing solutions that are worse than the problem. Two weeks ago, Montana's Public Service Commission reasserted its authority to regulate Montana Power's rates. That, in turn, has created a scenario in which the utility could end up being forced to buy power at a higher price than it can recoup from ratepayers -- similar to what happened in California.

Bob Rowe, a Public Service Commission member from Missoula, said he hopes the commission and Montana Power can negotiate a solution before the issue ends up in court. But Hedges said the commission risks either scuttling the deal with PPL or bankrupting Montana Power.

"We won't let it happen," said Hedges. "The governor is committed to avoiding the kind of situation that happened in California."

Along with other state officials and analysts, Hedges expects the backlash to recede once wholesale power prices drop, as they are starting to do. Others, however, say Montana's faith in markets has been seriously shaken.

"For 15 years, Montana has become increasingly anti-government and more free-market," said Williams, the former congressmen. "We keep forgetting that time and again, the government has saved our butts."

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The Bee's Stuart Leavenworth can be reached at (916) 321-1185 or sleavenworth@sacbee.com.

http://www.capitolalert.com/news/capalert01_20010610.html

-- Martin Thompson (mthom1927@aol.com), June 10, 2001