Saturday, December 5, 2009

Beartooth Vigilance Committee Weighs In

The following editorial was recently written by Arleen Boyd, a member of the Beartooth (cooperative) Vigilance Committee. Hat tip: C.B.

Part I: BEC members face high priced power, debt
It’s been nearly a year since Beartooth Electric Co-operative members were hit with a steep rate hike, and some members still question the decision-making that led to the increase. This is the first in a four part opinion series exploring concerns about electricity rates, power generation, and the future of rural electric cooperatives.

Beartooth Electric Cooperative electricity charges may be the highest in Montana. Beartooth members’ residential rates dramatically exceed those of their close neighbors who receive electricity from NorthWestern Energy, even though Department of Energy records show co-op rates running below those of investor owned utilities like NorthWestern for the past 30 years.

An October electric bill for a residential customer using 1000 kilowatts shows bundled supply and delivery costs (total electric bill) of 9.36 cents per kilowatt hour for NorthWestern and 13.50 cents per kilowatt hour for Beartooth, not including Beartooth’s monthly surcharge. Adding the surcharge, which covers the member’s share of approximately $40 million spent on the failed Highwood coal-fired generation plant, brings the Beartooth cost to14.38 cents per kilowatt hour.

For Beartooth: one source of wholesale power, recurrent price increases

Beartooth Electric Cooperative is a member of Southern Montana Electric Generation and Transmission Cooperative (Southern) which sells wholesale power to five member cooperatives and Electric City Power in Great Falls. Beartooth recently signed a contract to buy power from Southern through 2048.

A statewide survey conducted last year reported that Southern, Beartooth’s sole electricity supplier, charged its member cooperatives the highest power rates of any generation and transmission cooperative in Montana. In 2009 Southern raised the rate it charges member cooperatives five times. Members have been told to expect another increase in January 2010.

Southern buys power from Western Area Power Administration, Bonneville Power Administration, and PPL Montana. With the BPA contract expiring in 2011, Southern signed a contract in March to buy additional electricity from PPL Montana. Southern and Beartooth have not shared the terms of that contract with co-op members, but PPL reports that a majority of the electricity it generates is sold through fixed-priced, long-term competitive contracts. PPL says, “That means that our prices do not change during the term of the contract — no matter what the market does.” NorthWestern Energy also buys power from PPL.

Southern buys inexpensive power from WAPA and Bonneville and predictably priced power from PPL. Beartooth and Southern have not explained why the recurring increases in electricity rates have apparently been unanticipated.

A risky and expensive strategy

Tim Gregori, General Manager of Southern, has announced plans to build a 120-megawatt gas-fired power plant. He projects a cost of $100 million for phase-one of this project, calling that low compared to the $1 billion price tag for Southern’s failed coal-fired plant.

A revealing Standard and Poor’s credit report evaluates the proposal: a $270-million project with three phases of 40 megawatts of power each. The first two phases come online in 2011 and the third in 2012. Delivering a BBB rating, S&P notes management’s lack of experience in plant operation, execution risk in the power supply strategy, and above average retail rates. Favorable factors include a stable customer base and lack of regulation in Montana, allowing the company to set rates as it wishes.

Interest costs for the project are not yet known, but the spread between the best A-level ratings and BBB, one of the worst, suggests a double digit rate which would nearly triple the amount required to repay a 30-year, $270-million loan.

If $270 million was borrowed through a 30-year loan using the S&P analysis ($270 M) at a 10 percent interest rate, the monthly payment would be $2,370,000, racking up $583,289,000 in interest, for a total cost of $853,289,000 over 30 years.

Using a $250 million estimate with lower interest rate of 8 percent, the monthly payment would be $1,835,020, generating $410,607,432 in interest, for a total of $660,607,432 over the lifetime of the loan.

Last week one more concern for members and potential investors arose when an audit ruled that $9.1 million of what Southern had booked as assets related to the original Highwood plant were impaired. The $9.1 million must be written off by the member cooperatives.

A good idea for Beartooth members?

Gregori says building this plant will secure members’ power supply. Beartooth President John Prinkki says that financing the new plant will absorb Beartooth’s short-term debt for the failed Highwood plant, eliminating the current surcharges by stretching the payments over a long-term loan. Prinkki cites the NorthWestern Energy plan to build a similar plant as evidence that building a plant is a good idea.

NorthWestern plans to build a 200-megawatt gas-fired plant at Mill Creek for regulation services and firming. Regulation service and firming plants keep the transmission grid in balance by matching electric generation with electric load on the system on a moment-by-moment basis.

Since Southern does not generate baseload power, it needs neither regulation services nor firming capacity, the standard uses in our area for gas-fired plants. If Southern wants to build a gas-fired baseload plant, Gregori and Prinkki should explain that unusual strategy to Beartooth members. NorthWestern’s 332,000 Montana customers will share the costs for its plant. Assessments for Southern’s plant will go to fewer than 50,000 ratepayers.

More power than needed?

Gregori and Prinkki assert that the PPL contract will meet members’ needs through 2019. Currently Southern does not use all the power it buys from PPL and is selling it back to PPL at 85% of the market rate, which is lower than Southern’s contracted rate.

Co-op members are about to become sellers of electricity – indebted sellers of electricity. With the new Highwood project co-op members will pay for construction and operation of a plant in addition to paying for their electricity. They will pay that extra cost to generate power they do not need in order sell it into an uncertain market.

Beartooth members have been given no information indicating a financial benefit from this plan or how it falls within the cooperative’s charter. The leaders who kept members in the dark about the failed Highwood coal plant need to meet with members, justify this project, and answer the following questions:

Why and how will a new loan absorb the old Highwood debt?

What is the Beartooth share of the $9.1 million write-off?

Where are the cost/benefit analyses for the buy versus build power strategies?

What are the anticipated operating costs for the plant?

What overhead will Southern and Beartooth pay to manage development and implementation of a power plant?

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