Ann de Rouffignac
OGJ Online
Eight large Washington state industrial companies, among the largest in the US, 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% in 2001.
The companies buy power under a special tariff with Puget Sound Energy 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, Puget Sound, and state regulators in 1996.
Under the tariff established by the Washington Utilities and Transportation Commission, the companies pay Puget Sound 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� filing last week, 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 Puget Sound�s cost of providing electric service to them. Evidentiary hearings before the commission were held 3 days last week in Spokane, Wash. More hearings are expected this week.
Puget Sound 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,� says Grant Ringel, spokesman for Puget Sound. �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 argue Puget Sound is a party as either purchaser or seller in at least 35% 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% 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.
Community impact
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%. It also installed 12 diesel-fired generators and is in the process of installing 8 more to reduce its electric bill. Plastics maker CNC says 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 say 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 says 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,� says 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 says. �It is not clear if anyone would offer such a product in today�s market.�
Tim Hogan, Puget Sound vice-president of external affairs, says 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 Puget Sound Energy customers.
The companies disagree. They say their load is part of the utility's system load and will not require Puget Sound to acquire more electricity resources to serve them.
