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January 24, 2001

California's Energy Crisis Roils Other Western States
By Robert Gavin, The Wall Street Journal

Energy Crisis Is Going to Spread From West to East ... Weiss comments

LOS ANGELES - California's energy crisis is spilling over into other Western states, driving up their power bills, throwing people out of work and threatening to ruin one of the region's economic advantages: low energy costs.

Western states buy power from the same wholesale electricity market as California, and utilities from the Canadian to the Mexican borders are buying power, albeit in smaller amounts, at the same prices that have pushed their California counterparts toward bankruptcy.

Tuesday, Idaho Power Co., a Boise, Idaho, utility, became the latest example of how the market has gone haywire, announcing that power purchases since April have exceeded projections by $121 million, and it may require a 24% rate increase from its 395,000 customers in Idaho and Eastern Oregon.

Tacoma Power, a municipal utility in Tacoma, Wash., says it will burn through a $130 million reserve and run out of cash by spring, despite a 50% rate surcharge it imposed on its 150,000 customers last month. Tillamook People's Utility District, a small utility on the Oregon coast that buys about 20% of its power on the wholesale market, estimates it will spend an amount equal to its annual revenue on those purchases.

The Tohono O'odham Utility Authority, which serves the Tohono O'odham Indian reservation along Arizona's border with Mexico, says it will have to recover an additional $1 million -- on top of a 30% rate increase last summer -- from its 13,000 customers to cover the California-driven price spikes, though unemployment on the reservation is estimated at more than 20%. "It's just obscene," Charles Wiese, the utility's general manager, says of the power prices.

Idle Workers and Plants

Meanwhile, industrial customers with contracts tied to the wholesale market have been hit even harder. Across the Northwest, smelters, paper mills, chemicals makers and mines are slashing production and idling their workers rather than pay prices that at times have soared to $5,000 a megawatt hour -- more than 100 times the historical highs.

"What's at stake is the economic competitiveness of the West," says Gov. Mike Leavitt of Utah, where the state's largest utility, Utah Power & Light, a subsidiary of PacifiCorp, of Portland, Ore., is proposing a 19% rate increase. "There are only a few things that can shut an economy down and one of them is lack of electric supply."

Many utility officials fear the worst is yet to come. An unusually dry winter in the Northwest -- November and December were the third driest on record -- has significantly reduced water flow over hydroelectric dams, and thus the production of electricity. Hydroelectric generation typically accounts for about 70% of the Northwest's power, and this winter's shortfall of electricity has sent utilities such as Tacoma Power to the spot market to meet demand.

The first hints of a regional power crisis appeared last summer, when California's demand surged during a stretch of hot weather. Power costs for industrial customers with market-based contracts quickly doubled and tripled, forcing short-term layoffs and stoppages of production by companies.

For example, Bellingham Cold Storage, a refrigerated warehouse operation north of Seattle, turned away customers, shut down half its operations and temporarily laid off 270 workers until it obtained cheaper power from Avista Corp., a Spokane, Wash., utility, in a deal brokered by Washington Gov. Gary Locke.

Many expected the power crunch and prices to ease this winter, when California demand typically slackens. Instead, the market went from high price peaks of short duration to higher peaks of long duration.

Mark Crisson, director of utilities in Tacoma, says the market typically peaked in the $30 to $35 a megawatt range. In mid-December, the utility faced costs of $3,000 a megawatt hour, and for the first time in its 30-year history, cut power to its industrial customers. "There was no warning," Mr. Crisson says.

Rising Demand

To be sure, the Northwest is partly to blame for the problems besetting the region. Though California's laggard generating capacity and deregulation scheme have taken the brunt of the criticism, power demand in the Northwest has risen 24% over the past decade, while the region has increased its generating capacity by only about 4%, according to the Northwest Power Planning Council.

Regardless of the cause, the crisis is rippling through the area's economy. In Montana, where the power market for industrial users was deregulated 30 months ago, Montana Resources Inc. shut down its mining operations near its Butte headquarters and laid off about 300 workers because of exorbitant energy prices. Montana industries buy their power in the same California-driven wholesale market.

Pioneer Americas Inc., of Houston, has cut production at its Tacoma chemical manufacturing plant in half, but so far has avoided layoffs, says Larry Landry, the plant manager. The facility gets about half the power it needs under regulated rates, and the rest from the spot market.

"A lot of people are focused on the energy crisis, but we are already into the next generation, an economy crisis," Mr. Landry says.

As the energy crisis spreads throughout the West and cripples businesses, the entire U.S. economy will suffer. The U.S. economy is already mired in a deep economic slowdown. An energy crisis of this magnitude could destroy any chance of recovery in the near term.

The state of California makes up nearly 15% of the gross national product of the entire U.S. and is ranked the sixth largest economy in the world. So when its citizens can't afford to spend beyond the bare necessities, the entire U.S. economy faces being dragged into recession. On top of that, the energy crisis plague is spreading to surrounding states as well.

High energy bills are forcing manufacturers to halt production and lay off scores of workers. That, in turn, will force consumers to tighten their belts and stop putting money into the economy. As one source quoted in the Wall Street Journal said, we are quickly moving from an energy crisis to an economy crisis. And a lack of cheap energy could hobble our economy for years to come.

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