9/22/2003

KUFM / KGPR

T. M. Power

Making the Most of Utility Bankruptcy

In many ways Northwestern Energy’s bankruptcy filing is a good thing for Montanans. It will allow a viable utility to emerge from bankruptcy free of the failing non-utility businesses that were bleeding away it resources and also free of some electric supply contracts that were outrageously expensive. But that outcome alone will not solve the primary problems Montana electric and natural gas customers face. As Northwestern Corporation is reorganized several other important problems have to be solved if we are going to face reasonable energy prices in the future.

First, we need a stand-alone electric and natural gas utility in Montana that is led and staffed here in Montana, not in some distant location where corporate speculators put their risky business adventures ahead of providing basic utility services to customers. Utility decision-making in Montana is broken, scattered among a variety of people all of whom report to Sioux Falls, South Dakota. No one is in charge here and the staff here is spread way too thin to do a good job. The Montana operations will be the largest part of the utility business that emerges from bankruptcy, and its operation should be centered here.

Second, a rational portfolio of electric and natural gas supply has to be assembled. Northwestern’s weak financial condition and cronyism left over from the last days of the Montana Power regime have thus far prevented the development of such a supply portfolio, leaving Montanans exposed to volatile market price fluctuations and dependent on the monopolist, PPL Montana, that bought all of Montana Power’s electric generation facilities. Electric and natural gas supply has to be put back on a solid basis.

One of the things that makes this development of a rational energy supply portfolio difficult is that energy supply was deregulated as a result of the energy restructuring fiasco of the late 1990s. When that failed, the legislature started piecing together a regulated energy supply framework that is not yet finished.

As a result of this frantic deregulation and then re-regulation, we have not clearly specified who is responsible for what decisions. If all we wanted was low cost energy, we might well leave all of the supply decisions to the utility and judge it periodically against other utilities to see how well it had done.

But although we certainly want low energy prices, we also want other things from our energy supply. Some stability in prices is certainly important so that we can plan our household budgets and not have our businesses forced to shut down due to huge price spikes. We also care about the environmental damage done by different types of energy supply and the transmission systems needed to deliver them. The Montana constitution appears to charge all of state government, including the Public Service Commission, with the provision of a “clean and healthy environment” for Montanans.

Our politicians insist that economic development within Montana is an important objective and that developing more energy production within the state is superior to simply importing all of our energy. The utility and regulators are also concerned about encouraging competitive sources of supply within Montana to tame the monopoly power of PPL Montana.

We are also concerned about the impact of energy prices on low-income households and expect some utility efforts to cushion those impacts.

To the extent that all of these, and more, are legitimate considerations in the choice of energy supplies, trade-offs have to be made among them as an appropriate balance is somehow reached among these multiple objectives. But most of these concerns are really public policy concerns, not private business decisions. Even the price variables, the level of price and the stability of price, have a public policy aspect to them. How much should we pay to increase the stability of prices? That depends on how risk adverse we are. It is not clear that we should leave this decision entirely up to the utility. It is likely to want to focus on minimizing the risk to its stockholders, not the risk to customers. Should we leave it to the utility to guess what the appropriate balance between price level and price stability is and then penalize the utility if regulators think that the utility got that balance wrong? It would seem more appropriate for the regulators to speak for customers on this balancing issue and then hold the utility responsible for implementing the guidelines the regulators provided.

There are multiple public policy issues of this sort that have to be decided as an appropriate energy supply portfolio is put together. It is not clear that a private, profit-oriented, business should be making these calls. Instead, the public, through its regulators, should be providing the public policy guidance, and then we should focus on whether the utility followed that public policy guidance in a business-like and cost-effective manner. We should judge the utility’s performance in normal business terms and judge our regulators on the quality of the public policy guidance they provided.

The Montana Public Service Commission has been working diligently to try to put in place formal processes so that it can provide utilities with exactly this type of guidance. But a full regulatory system is not in place yet and, just as important, those new processes have not been tested yet. This leaves the utility very hesitant to put its money at risk as it pursues new sources of supply. It also leaves the Commission and its staff over-extended and harried. This too is something that should be corrected simultaneously with the utility emerging from bankruptcy.

The bankruptcy of Northwestern Energy gives us an opportunity start over again to create a well regulated and profitable Montana electric and natural gas utility. We should not squander this opportunity.