The Real Problem in Montana’s Energy Utility Mess

The financial news about Northwestern Energy Company, the electric and natural gas utility serving a big chunk of Montana, continues to worsen. Since taking over the remnants of the Montana Power Company a year and a half ago, Northwestern’s stock has fallen from about $22 per share to 85 cents. 96 percent of the utility’s stock value has evaporated. Its cash flow is so meager compared to its expenses that it has had to delay paying its property taxes. Electric and natural gas suppliers are demanding upfront payment before they will deliver anything to Northwestern. If the cash flow problems get much worse, Northwestern may not be able to purchase the electricity and natural gas its customers need.

This mess is actually a tangle of several quite different problems.

First, if Northwestern Company does file for bankruptcy, that will not threaten Montana electric and natural gas supplies. In fact, bankruptcy might assure those supplies. The only viable business in the larger Northwestern Company is its utility operations centered in Montana. The bankruptcy court would work to assure that that viable business core was protected while the non-performing businesses and lower priority debt are shed. During bankruptcy, Northwestern’s normal energy suppliers would be required to continue to serve the utility.

But securing a reasonably priced supply of natural gas and electricity may well be a problem both before and during bankruptcy. Until the utility actually files for bankruptcy, anyone who supplies electricity and natural gas to Northwestern risks not getting paid. That makes suppliers hesitant to deal with Northwestern. This is especially true of long-term supplies such as those from new facilities in the state. Before a potential electric generator is willing to invest hundreds of millions of dollars in a facility, it wants to be sure it has a customer that can pay for the output. Right now Northwestern is not such a customer. As a result, investors are hesitant to commit funds that support long-term energy supplies. Northwestern, therefore, is pushed towards the short-term market where energy is purchased on a daily, weekly, or monthly basis and suppliers get paid relatively quickly. The problem with that market is that is can be very volatile with energy prices shooting up periodically. In a bankruptcy setting, the utility might well also rely exclusively on those potentially high-priced markets. Our electric and natural gas prices could become very unstable making budgeting for winter energy bills very difficult or, for low and fixed income households, impossible.

There is another wrinkle to this that is only loosely linked to Northwestern’s current financial situation. Northwestern does not make any money off of supplying us with electricity and natural gas. It makes all of its money off of its investment in the pipes and wires that deliver that energy. It carries out its energy supply function on a not-for-profit, public-interest basis. It did not ask to do this task. The legislature imposed this default supply obligation on it as the legislature tried to pick up the pieces after its disastrous experiment in utility deregulation.

Although the utility is not allowed to make any money off of its energy supply activities, it has to undertake substantial risk to obtain that energy supply. It has to play hourly, daily, monthly, and multi-year markets and, potentially, invest money in new sources of supply. After engaging in these complex transactions, it has to go to the Montana Public Service Commission and ask for rates to be set to cover the supply costs it incurred. The Montana Public Service Commission can and has said ”no” to tens of millions of dollars of those costs on the grounds that they were not prudently incurred. So the risk is real but there are no profits allowed to compensate the utility for carrying that risk.

This is not a business like arrangement. It provides the utility with no incentive to do a good job and no compensation for carrying the risk associated with complex markets. Nothing good can come from this particular arrangement.

The important point is that even if Northwestern can escape bankruptcy or even if the bankruptcy court finds a “knight is shinning armor” to take over the utility, the energy supply problem will remain.

Montanans have a right to have dedicated professionals craft an energy supply portfolio that carefully balances competing public interest objective: low cost, stable prices, environmentally responsible, supportive of competitive supply opportunities, state economic development, etc. Northwestern employees have been struggling to figure out just how to balance these public interest criteria while not risking their stockholders money while doing so.

The fact is that our efforts in Montana at utility “re-regulation” have not yet fixed the damage done by de-regulation. The crucial energy supply piece of the puzzle remains in limbo, putting a good part of Montana’s population and economy at serious risk.