12/22/97

KUFM / KGPR

T. M. Power

The Dismemberment of the Montana Power Company

Montana Power shocked the state earlier this month when it announced that it would sell off all of its electric power supply including its hydroelectric facilities, the Colstrip energy park, and its contracts for electricity from other generators. With this sale, the electric side of Montana Power will become primarily a wires company, providing the electric path to customers’ homes and businesses over which other people’s electricity will be delivered.

Although Montana Power may not have realized it at the time, this dismemberment of the utility may have been in the cards as soon as it decided to embrace the brave new world of electric industry competition. Instead of sitting back, adopting a defensive strategy, and waiting to learn the lessons from experiments in electric competition from larger states, Montana Power executives chose to be an active and aggressive player in the restructuring of the electric industry nation-wide. It may have been driven to this strategy by the fear that if it did not adopt an aggressive strategy, it would be swallowed up by one of the West’s larger electric utilities such as Pacificorp or PGE-Enron. Instead, Montana Power chose to be a pioneer in this new competitive world and to drag the rest of the state, ready or not, along with it. Earlier this year the Montana legislature a adopted Montana Power sponsored law introducing full scale electric competition into the state over the next four years. That makes Montana one of only a handful of states to head this direction. Some may wonder why a lightly populated, huge, sprawling state would joint California in this experimental radical electric utility surgery. But that is where Montana Power has led us.

From a long run perspective, part of this move has to be welcomed. The existing regulatory structure led electric utilities to make huge investment errors during the 1970s and 1980s. The enormously expensive, dangerous, and non-functioning nuclear power plants that litter the nation’s landscape were one product. Colstrip 3 and 4 and similar coal-fired energy parks are other examples of unnecessary plants that caused our electric rates to double while gnawing at and poisoning the landscape. Those plants also almost bankrupted Montana Power and other utilities around the nation.

The flaw in the regulatory scheme was that electric utilities’ captive customers were forced to shoulder most of the risk associated with the private investments in generation that utilities were making. Investors, freed of having to face that risk themselves, did not have to insist on careful planning or careful choice of technologies. The results were disastrous investment errors nation-wide. One point of introducing competition in the generation of electricity is to shift the risks of building generating facilities back to the investors where it belongs. The monopolists who control the transmission and distribution wires will no long be able to force their customers to buy power from uneconomic generating facilities because those customers will be free to buy power from cheaper sources.

That is the positive side of the competitive electric industry that regulators and legislators are trying to craft. The negative side for a low cost electricity state like Montana is that in the competitive market we may trade our relatively low cost resources for higher cost sources of supply from, say, California. In addition, given the isolated and relatively dispersed character of Montana’s population, competitive suppliers may not come offering to supply electricity to our homes and businesses. The result could be the worst of all possible worlds: Montana Power is deregulated; it still is the monopoly supplier for most of us; and electricity costs a lot more. O joy! Lucky us! Thanks legislature, thanks Montana Power!

Two important regulatory steps can block that outcome. First, any gains from the sale of Montana Power’s generating facilities have to be flowed through directly to existing customers, not to Montana Power stockholders. Those facilities were built under the protection of regulation and financed by customers’ rates. Just as Montana Power has always called upon ratepayers to support their costly decisions, now any gains from the sale should benefit ratepayers. If this happens, Montanans will not be trading inexpensive generation for more expensive generation. We will keep the cash equivalent of the inexpensive facilities.

The second regulatory step that is needed is to keep Montana Power as the regulated supplier of electricity to customers who are not offered competitive choices or who choose not to choose. Montana Power, of course, would have to go into the competitive wholesale market to obtain power for these customers since it would not have any generation of its own. The Public Service Commission could hold Montana Power responsible for finding as cheap a source of supply as possible, using the emerging competitive market as a reference point. That way all Montanans would get the benefits of the emerging competitive electric markets while retaining protection against the remaining monopoly power of the electric utility.

These two basic public policy decisions will assure that we in Montana are gaining, not losing, as the electric industry proceeds to redefine itself.