Deregulation Has Stung Montanans

Almost a decade after the utility deregulation fad swept through Montana, the state is learning the hard way it isn’t easy to rebuild the broken pieces of a stable, publicly regulated utility once it’s gone.

California got all the headlines for its post-deregulation fiasco in 2000-01 that was topped by energy market manipulation, but it’s Montana that some point to as the poster child for deregulation gone awry. Montana was seen as the only low-cost energy state talked into deregulation.

Although Montana’s plight is unique, it isn’t the only state where resentment to electricity deregulation is growing.

When the old Montana Power Co. came to lawmakers in 1997 with a plan to offer customers a multitude of choices for cheap power, deregulation was seen as inevitable. But power today isn’t cheaper -- it’s far more expensive -- and the other promises made that year now ring hollow.

Montana Power sold off its dams and power plants, and then its utility business, to pursue an ill-timed pipe dream to become a fiber-optic company. It quickly filed for bankruptcy.

The company that bought the utility piece of Montana Power, NorthWestern Energy, filed for bankruptcy protection itself and reorganized.

Along the way, Montana went from having some of the lowest electricity prices in the country to having among the highest in the region.

“It’s almost an unbelievable story when you go through all the events that happened there,” said Ken Rose, a senior fellow at the Institute of Public Utilities at Michigan State University. “It’s much more of a soap opera than in other states.”

Backlash, percolating almost from the day deregulation passed the Legislature, has grown and given birth to more efforts to undo the effects of deregulation.

Separate efforts, such as one from a group of cities looking to buy the utility from NorthWestern, aim to rein in skyrocketing electricity rates and give public officials more authority. But they all face huge hurdles, big price tags or federal approval.

NorthWestern Energy said it couldn’t be held responsible for decisions made by the old Montana Power.

NorthWestern finds itself in a market-based system with no power plants of its own.

Prices will rise as they go up around the country, NorthWestern spokeswoman Claudia Rapkoch said.

“We’re just trying to find out what is going to be the best solution for our customers going forward,” she said.

Options could include changing part of the deregulation law to let NorthWestern build its own power plants, she said.

“It’s a difficult position to be in,” Rapkoch said. “NorthWestern is the entity people get their bills from and they turn a lot of that wrath on NorthWestern. But the drivers of energy prices are due to forces out in the marketplace.”

Montana isn’t alone in trying to figure out how to deal with market-based pricing as the full effects are becoming known.

* In Delaware, Delmarva Power has said that customers can expect a 60% electricity rate increase when seven-year rate caps expire in May. Republican leaders, under election year pressure, are talking about re-regulating the industry.

* Lawmakers in Connecticut say they may revisit deregulation after news late last year of double-digit electricity rate increases.

* Electricity rates in Ohio are expected to rise this year when a provision in that state’s 1999 deregulation law that required discounted rates expires, and consumer advocates are looking for ways to ease the effects.

Many states that passed deregulation put a cap on rates at the time, but many of those caps are about to expire. Montana lifted its price cap three years ago, and electricity rates have gone up about 30% since then.

California’s retail price cap brought huge debts to Southern California Edison Co. and Pacific Gas & Electric Co. when the wholesale price of power soared in 2000. Wholesale prices subsequently fell, rates rose and the utilities regained their financial footing. But California’s electricity system remains an uneasy mixture of regulated and deregulated operations.

It’s becoming clear that rate hikes have been higher in deregulated states than those that bucked the late 1990s trend and stuck with a traditional system, Rose said. Deregulation has now been thrown into reverse across the country, he said.

In Montana, observers say there will never be a way to return to the days of cheap power generated by regulated dams that had essentially already been paid off.

Deregulation “will be a bone in people’s throats permanently,” said state Public Service Commissioner Tom Schneider.

The disintegration of Montana Power, and the regulated, cheap power provided by dams and power plants it once owned, is what bothers people the most. Putting it all back together exactly like it was is impossible.

An offer by five cities to buy the Montana utility business from NorthWestern Energy for more than $2 billion is supported by the public in recent polls.

Backers of the idea say it is important to get the utility under public ownership, and build the base for stable power prices.

But the offer has been rejected by company executives -- even though the largest shareholder has accused executives of spurning the offer just to protect their own jobs. And critics say government ownership would buckle under the weight of the debt used to buy the operations.

There are plans to put an initiative on the ballot in November that would force the new owners of the hydroelectric dams, PPL Montana and Avista, to sell to a public agency but the measure would face voters who rejected the potentially expensive proposition four years ago.

The best hope for stable, regulated electricity prices is an effort by the state to rule that PPL is a monopoly, utilities commissioner Schneider said. Such a decision could force the company to sell electricity at about cost, rather than at rates determined by the marketplace. The Federal Energy Regulatory Commission is expected to decide the issue soon.