Four years ago, it seemed like a good idea.
In 1996, Puget Sound Energy agreed to sell electricity to Georgia-Pacific WestnInc. and Bellingham Cold Storage at a variable rate pegged to the Dow Jones Mid-nColumbia Electricity Index, which shows the price at which power and electricitynfutures are being bought and sold each day m the region.
With prices generally below 5 cents a kilowatt-hour into this spring, that was a good deal for G-P, Bellingham Cold Storage and the ARCO Product Co. refinery at Cherry Point which also buys its electricity at wholesale rates.
~Over the past three to four years they’ve saved tremendous amount of money, said Bill Gaines, vice president of energy supply for Puget Sound Energy.
But a spike in prices, this week – above 37 cents per kilowatt-hour – has forced G-P to close its Bellingham mill and temporarily lay off 600 workers, and also, forced layoffs at Trans-Ocean Products Inc., a seafood processor.
The problem is bigger than Bellingham. Two weeks ago, Kaiser Aluminum Corp. said it would reduce capacity at plants in Spokane and Tacoma, forcing about 400 employees out of work, and Vanalco Inc. in Vancouver, Wash., shut down most of its aluminum plant in early June, laying off 450 workers, all due to high electricity prices.
Gaines said about 15 percent of PSE’s commercial customers buy electricity from the utility at market prices. Residential customers buy power at fixed rates.
The state Utilities and Transportation Commission approved the market-rate contracts only after deciding that the contracts did not shift costs onto residential consumers, said Dick Byers, an electricity policy specialist for the commission.
“We had to impress upon the consumers that were going to take the power under these contracts, in this case Bellingham Cold Storage and Georgia-Pacific, that they were taking the risk,” he said.
But this spring, utilities in California gave notice that they were going to be short of electricity and, therefore, would be willing to pay more for power, Byers said.
That caused a panic among people who expected typically low electricity prices at this time of year, because of low demand and high production from hydroelectric dams, and therefore had not made any long-term arrangements to buy power, Byers said.
Gaines noted that many power plants in the Pacific Northwest have shut down for regular maintenance because of the typical supply-and-demand balance this time of year, and four other power plants went offline in emergency shutdowns Monday.nMeanwhile, record-high temperatures on the West Coast are driving up demand, and the snowmelt that usually creates more hydropower this time of year is late, Gaines said.
Western Washington and Oregon baked in record-setting temperatures in the upper 80s to near 100 this week. East of the Cascades, it’s been equally hot, but not at record levels. A cooling trend was forecast for today.
The brief heat wave came at a time when the power supply is low in the West.
The 1,200-megawatt Columbia Generating Station, the Northwest’s only commercial nuclear power plant, shut down automatically on Monday.
“The initial thinking is that a buildup of dust on a bus bar that conducts electricity from the main generator to the transformer yard allowed an arc to form,” said Don McManman, a spokesman for Energy Northwest, the power consortium that owns the plant on the Hanford nuclear reservation in south-central Washington. “When that arc flashed, sensitive instruments within the plant automatically opened circuits to protect delicate instruments, much like a fuse box in your house.”
The turbine tripped, and the reactor shut down. Managers plan to begin the process of bringing the plant back up tonight. In addition to the nuclear power plant, there was a reduction in generation at three coal-fired plants in the West – Centralia in Western Washington, Colstrip in Montana and Jim Bridger Wyoming, which sustained various forms of shutdowns.
All the electricity from the nuclear plant – enough to power three cities the size of Seattle – is sold by the Bonneville Power Administration, a federal power marketing agency that sells about half of the region’s electricity.
BPA has spent up to $25 million, possibly more, to buy enough electricity to meet demand for the rest of the week. Its regional hydroelectric dams are operating at full capacity.
BPA spokesman Perry Gruber said the federal agency had to buy enough electricity to replace the 1,100 megawatts of electricity that is usually produced by the nuclear plant in Hanford.
“It’s’ a short-term solution to a short-term problem,” Gruber said. “It will not affect our power rates at this point.”
Just a few months ago, the four-state Northwest Power Planning Council began warning of possible power shortages, including rolling brownouts, in the event of a long, cool, dry spell in the region, which is heavily dependent on hydropower.
The primary problem has been an increase in growth in the region without an increase in electrical generation capacity – no one is building power plants because the market incentive hasn’t been there, and because of the difficulty of getting new plants approved.
Puget Sound Energy both produces and buys power.
“It varies from hour to hour and day to day,” Gaines said. “Last week, the utility was selling power. This week it’s buying power.”
The Mid-Columbia Index has fluctuated dramatically this month along with several other electricity markets on the West Coast, said Rajat Deb, president of LCG Consulting, an electricity analysis company in Los Altos, Calif.
“Basically, you have wholesale power being traded like any other commodity,” said Ed Mosey, a spokesman for BPA. “When weather conditions are hot and demand goes up in the Southwest and the Northwest, the sellers raise their prices. The buyers pay because they have no alternative.”
On Tuesday, prices in central Washington’s Mid-Columbia Basin market ranged from a low of $300 per megawatt-hour to a high of $900 per megawatt-hour on Tuesday and remained high Wednesday.
In the regulated market, prices this time of year typically would be in the $20 range.
Prices are high in other Western power markets as well. At the California-Oregon border, the low was $600 per megawatt hour and the high was $700. In California at Palo Verde, the low was $450 and the high $600.
“I heard that there were prices that went over $1,000,” Mosey said. “If you need it and need it quickly, sometimes you get stuck with some very high-priced electricity.”
For comparison, wholesale electricity prices in the Gulf Coast region ranged from $28 to $60 per megawatt hour. In the Midwest, thee range was $21 to $48.
Byers, of the state Utilities and Transportation Commission, said that in the short-term, commodity markets for electricity aren’t based on actual cost of the product.
“They’re based on the psychology of the market, they’re based on what people think the cost will be in the future,” he said.
Deb agreed that the prices don’t necessarily reflect reality.
Like stock prices, you cannot always really say what it is,” he said. “It’s like a bandwagon effect.”
Another theory is that the fluctuations at least partly reflect the growing pains of a new unregulated market.
“When a market is just forming and developing, volatility is extreme,” Gaines said. “That’s what we’re seeing in the electricity market.”
The nature of electricity adds to the volatility, Deb said.
“Electricity is a very fickle commodity,” he said. “You cannot produce electricity and store it to be used later on.”
June 29, 2000