High rates threaten NW industrials; companies challenge tariff

By Ann de Rouffignac, OGJ Online Editor

Eight large Washington state industrial companies, among the largest in the United States, want regulatory relief from unprecedented high electric rates.

Huge electric bills have forced some of the companies, including Air Liquide America Corp., Air Products and Chemicals Inc., Boeing Co., CNC Containers, Equilon Enterprises LLC, Georgia-Pacific West Inc., Tesoro Northwest Co., and Intel Corp. to cut production, close factories, and lay off workers. Some have installed temporary diesel-fired generators to reduce electricity costs.

The companies claim their electricity bills have jumped by as much as 300 percent in 2001.

The companies buy power under a special tariff with Puget Sound Energy (PSE) based on the Dow Jones Mid-Columbia Firm and Non-firm indices. The tariff known as “rate schedule 48” was agreed to by the companies, PSE and state regulators in 1996.

Under the tariff established by the Washington Utilities and Transportation Commission, the companies pay PSE for their energy costs, including transmission and distribution, but the commodity portion fluctuates with the index.

The companies claim these prices are no longer “just and reasonable” requiring the commission’s intervention. According to the companies’ recent filing, the Mid-Columbia firm index for on-peak power in January 2001 is expected to be 18 times the price for the same period in 1999.

They are asking the commission to adopt a new rate based on PSE’s cost of providing electric service to them.

PSE opposes reinstatement of the traditional cost-based tariffs. The utility claims the change would shift the costs to the residential and commercial customers.

“We have been amazed at their argument,” said Grant Ringel, spokesman for PSE. “They came and asked for this tariff. And they saved tens of millions of dollars in the first few years. They are being charged rates in a manner they devised.”

The tariff is based on the assumption the index represents a properly functioning competitive market. But the companies say the Mid-Columbia index is no longer representative of a competitive market.

The indices are thinly traded and don’t represent the actual market price of serving the companies. In the filing, the companies argued PSE is a party as either purchaser or seller in at least 35 percent of the transactions reported to Dow Jones which compiles the index.

“PSE’s (Puget Sound) activity still represented 135 MW of the reported 389 MW or 35 percent of the reported market. Such market dominance by a party who has much to lose based on the index prices raises extremely serious questions regarding the validity of the index,” according to the filing.

The companies also object to the use of the highest market price to set all prices for all the companies similar to the much criticized wholesale power market in California.

The high Northwest power prices have created an “economic emergency that threatens the welfare of this state,” according to the filing.

Tesoro has reduced refinery production 20 percent. It also installed 12 diesel-fired generators and is in the process of installing eight more to reduce its electric bill. Plastics maker CNC said high electric bills wiped out its 2000 profits at all its western facilities. The plant curtailed production and is in the process of moving some of its production out of Washington. At least 35 jobs will be lost.

Air Products and Chemicals operates an air separation facility producing industrial gases. The company now operates its plants on a day-to-day basis depending upon anticipated electrical costs for each day. Georgia-Pacific laid off 500 employees at one of its pulp and paper mills until diesel generators could be installed to reduce electric bills. The company has since rehired 250 workers.

The companies said they agreed to assume the risks in a functioning competitive market, but they did not agree to assume the risks if the market was seriously flawed.

Ringel said other companies under the special tariff have not asked for a new tariff, because they used financial hedges to smooth the volatility of price spikes.

“We are not talking about unsophisticated parties here,” said Ringel.

On the other hand, the companies allege hedging won’t solve the problem. They maintain hedging would be required over a very long term to smooth the current and projected future prices. Moreover, they say there are no hedging products offered in this market.

“The ability to hedge is based on the assumption that prices are being set by a properly functioning competitive market, which is not the case,” the filing said. “It is not clear if anyone would offer such a product in today’s market.”

Tim Hogan, PSE vice-president of external affairs, said the companies are trying to shift the consequences of their business decisions to others, in the form of higher rates at the expense of other PSE customers.

The companies disagreed. They said their load is part of the utility’s system load and will not require PSE to acquire more electricity resources to serve them.

Ann de Rouffignac is a power editor for PennWell’s Oil & Gas Journal online (www.ogjonline).
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