The New York Times, August 21, 2003

Under Deregulation, Montana Power Price Soars

by Jonathan D. Glater

Montana residents used to pay some of the lowest rates for power in the Northwest, but now, some lawmakers lament, they pay among the region's highest. What happened? Mainly deregulation.

Indeed, six years after the local utility, Montana Power, started selling assets as part of the state's headlong dalliance with the national energy market, various companies in its old hometown, Butte, have laid off employees or even closed because power costs so much.

So even as the Northeast painstakingly ponders what role energy deregulation might have played in last week's crippling blackout, a similar soul-searching is in full cry here. And many people are calling for both tougher regulation and at least a partial return to the good old days of homegrown energy suppliers.

"One lesson is that deregulation or restructuring in fact requires a very active and vigilant regulator," said Bob Rowe, chairman of the state's Public Service Commission, which regulates power distribution. "In this case, you have to."

The commission is moving firmly in that direction. Today it voted to require the NorthWestern Corporation, a giant regional power distributor, to disclose how it spreads costs and revenue among its affiliates to make sure the distribution business is not subsidizing other businesses, Mr. Rowe said. It also wants the company to report and meet requirements on how much natural gas it has set aside to meet future demand, as well as on how much electricity it can buy as needed.

Montana's deregulation experiment began with the 1997 legislation allowing the asset sales by Montana Power, which pushed for the changes to allow it to invest in new industries and jettison its stodgy utility properties.

NorthWestern ended up owning the distribution business in Montana, as well as in Nebraska and South Dakota, and that now poses dire problems, because the company is shaky. The commission, in fact, is worried that it will be unable to buy enough natural gas to meet future demand, Mr. Rowe said. The state's consumer counsel asked the commission to consider taking some action because NorthWestern carries more than $1.5 billion in liabilities, it faces a series of shareholder lawsuits and its stock price has plummeted this year.

NorthWestern's financial straits mean it cannot enter into long-term contracts to buy electricity or natural gas, said Roger Schrum, a spokesman for the company, which is based in Sioux Falls, S.D. "Our financial condition has put them in a position to want to more closely scrutinize our workings in the electricity and natural gas supply area," he said, referring to regulators' concerns. "We would like to more clearly understand the role that they want to play."

The commission's effort may prove controversial. While some states have given regulators explicit authority to take an aggressive stance with a utility provider and its affiliates, Montana has not, Mr. Rowe said, though he added, "We always assert that we do have that authority."

Mr. Schrum said NorthWestern had cooperated with the commission in the past and would continue to try to do so. But he cautioned, "We are concerned that they may be overreaching their statutory responsibilities."

Concerns over power and its high cost have simmered for months in this state. In the wake of deregulation, prices have climbed sharply for both electricity and natural gas, but last fall a ballot initiative failed that would have allowed the state to buy back dams sold to a Pennsylvania company, Pennsylvania Power and Light. This would allow Montana to avoid the volatile energy markets, which can spike suddenly and unexpectedly, supporters said.

The sponsors of that effort now say they may well try again, though the next opportunity for a vote would not come until November 2004. They fear that rates will climb yet higher before then — and many state residents have not yet realized how much some rates have already gone up because natural gas use increases in the winter.

"We don't control any supply," said Ken Toole, a state senator and chairman of the Policy Institute, one sponsor of the ballot initiative, and a critic of the rise of the price of power in Montana relative to neighboring states. But to buy back the sources of hydroelectric power — the dams — would require overcoming the marketing muscle of Pennsylvania Power and Light.

"We're very skeptical about whether we win that," Mr. Toole said. Last year, he said, Pennsylvania Power spent $3 million to beat the ballot initiative.

Both Pennsylvania Power and NorthWestern agreed to a cap on rates at the time they bought assets from Montana Power, but that cap expired in July 2002. Montana Power also had a telecommunications business, which is now in bankruptcy proceedings in Delaware.

Montana Power executives argued six years ago that state residents would benefit from paying competitive rates for electricity and natural gas. As market rates have gone up, though, the residents have had to bear the cost, critics of deregulation say.

So far Montana has not experienced the kind of supply problems that plagued California in recent years, although summer fires and storms in the mountains have interrupted service at times and probably will again. Because withstanding such natural events puts a strain on the transmission system, regulators want to make sure it is appropriately maintained, Mr. Rowe said.

Because the company is financially weak, the commission's members worry that NorthWestern will not invest enough in maintenance, which could turn a routine weather-related power failure into something more serious, Mr. Rowe said. That is another reason the commission wants to know what NorthWestern is spending money on, he said, in addition to overseeing prices it charges. Last May the agency allowed a 10 percent increase in electricity prices.

"This has just been a horrible political battle," Mr. Rowe said. Now the commission is boning up on bankruptcy law in preparation for a possible Chapter 11 filing by NorthWestern. A filing would have consequences no one has yet predicted — any more than anyone has predicted the latest development in deregulation here, Mr. Rowe said.