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Why Montana needs to Re-Regulate the Energy Industry

In 1997, Montana privatized energy generation by selling off its assets -- fast-forward six years and Touch America and North-Western are bankrupt. "Nobody wants to eat crow, but slowly, bit-by-bit, we've been putting regulation back into place"
More regulation of energy sought
Jan Falstad, The Billings Gazette, November 4, 2003

After embracing deregulation six years ago, some policy makers are asking the governor to take another big step toward re-regulating Montana's electric system. John Hines, who chairs the governor's energy task force, has written a letter to Gov. Judy Martz recommending at least two key changes.

One change would allow utilities to build power plants and put them in the rate base, which means captive customers pay for the construction. This is the way all utilities were structured before the 1997 deregulation bill passed. The task force also asked Martz to allow utilities to get preapproval from regulators to build power plants. Currently, regulators approve or reject the plan after the process is well under way.

Hines said the changes would help bring stability to electricity prices and supply and that would benefit customers.

Public Service Commissioner Greg Jergeson, D-Chinook, said that while the "devil is in the details" on these complex issues, he generally favors a move toward more regulation. "Nobody wants to eat crow, but slowly, bit-by-bit, we've been putting regulation back into place," Jergeson said.

The biggest first step toward re-regulation, Jergeson said, was when the Montana Legislature required North-Western to supply electricity and gas for its Montana customers. Jergeson said he campaigned for the PSC last year supporting more utility regulation. Montana's energy situation has changed so drastically, he said, that the state needs new regulations that weren't needed before.

A bit of history

Backers of the 1997 restructuring bill argued that by ending Montana Power Co.'s monopoly, competition would force rates lower. That didn't happen. Small consumers like small businesses and homeowners never got to leave Montana Power's grid. Only the largest businesses using the most electricity got to choose suppliers.

Billings businessman Mike Schmechel proposed a coal-fired plant near Broadview that NorthWestern didn't support. He subsequently sued NorthWestern. Schmechel said these proposed changes are a major policy shift, if they become law. "No matter how you look at it, this is re-regulation of generation," Schmechel said.

He said returning to regulation isn't necessarily bad, but he said Montana needs to make sure the utility benefiting from those rules is financially sound. NorthWestern Corp., the successor to Montana Power, filed for bankruptcy six weeks ago. "We can't let a bankrupt utility build new plants because they (Montana Power) blew their money from selling their previous plants," he said. "We might need a new utility to apply these standards to."

After the 1997 law passed, Montana Power surprised the state by leaving the energy business and selling all its assets including the hydroelectric dams. Montana Power transformed itself to a telecommunications company called Touch America in February 2002. But, that move failed and the company is now trying to wrap up its bankruptcy in Delaware.

NorthWestern's bad credit and heavy debt forced it to buy more expensive power on the spot market. It was unable to sign longer-term cheaper contracts.

Commissioner Jergeson said he would rather decide whether a power plant that will be around for a quarter-century or more makes economic sense for the customers than review shorter term contracts to buy power every few years. Instability isn't good for anybody, he said. "Nobody ever imagined utilities going bankrupt before. They almost never did," he said.

University of Montana Economics Professor Tom Powers also serves on the state's energy task force. He said new rules are needed because Montana's energy situation has changed so much. Montana, unlike surrounding states, is partially deregulated, he said, and there is no going back. "We have to put a reliable and stable-priced supply in place, so prices don't suddenly double or triple and bankrupt our business and ruin our household budgets," Powers said.

NorthWestern Spokesman Roger Schrum said his company generally supports these changes The company would support putting new power plants in the rate base, but only if the cost is no higher than buying power from other companies, he said.

The half-built Montana First Megawatts project in Great Falls is an example that preapproval by regulators is essential, Schrum argued. The $140 million project was rejected as too expensive by the PSC after construction was well under way.That problem would have been solved with a yes or no ruling upfront from state regulators. "Without approval on contracts, no one is willing to lend money," Schrum said.

After the 1997 bill passed, PPL Montana bought most of the dams and Colstrip properties. Before deregulation, these were governed by the PSC, which could determine prices. In exchange for being regulated, utilities get to shut out competition and are guaranteed profits. Now they aren't regulated and PPL is free to set prices.

NorthWestern bought MPC's transmission and distribution businesses in February 2002. These continue to be regulated. But NorthWestern doesn't own power plants in Montana to supply its customers, so it has to buy electricity on the open market. NorthWestern filed for bankruptcy protection Sept. 14. Montana's deregulation law never applied to MDU Resources or the rural electric cooperatives.

These proposed policy changes have a long way to go. The energy task force, appointed by Martz last summer, makes recommendations to the governor. If she accepts them, Martz will forward them to the interim legislative committee in charge of energy. Eventually, they may be drafted into a bill for the 2005 legislative session.

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