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Energy deregulation “a debacle” in Montana

From The Missoulian, September 29, 2013:

The announcement that NorthWestern Energy will buy 11 hydroelectric dams on Montana’s major rivers will finally bring one of the worst public policy decisions ever made to an end.

On the up side, it means that Montana will once again have a vertically integrated, regulated utility to serve its hundreds of thousands of customers. On the down side, it means we’ll be paying twice for the same dams and generators we paid for when the former Montana Power Company owned them.

The story begins back in 1997, when Republican Gov. Marc Racicot teamed up with Bob Gannon, the CEO of MPC, to jam a utility deregulation bill through the Republican-controlled legislature. Instead of providing time for careful consideration and debate by introducing the long and complex measure early, the legislature had to suspend its own rules in the final weeks of the session to allow for the late introduction of the massive bill. In a classic case of what can come from single-party control, minority Democrats put up a good struggle, but it was ultimately futile.

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The Republican logic, if you can call it that, hinged on the belief that more competition in the utility market would ultimately result in lower energy prices. The fatal flaw, however, was that Montana already had the sixth-cheapest power in the nation and the lowest rates in the Northwest. In truth, we had little to gain but much to lose – far more than anyone suspected when the bill became law in April.

What was never discussed during the truncated debates was the possibility that MPC, which employed thousands of Montanans and was considered a very stable investment, would use deregulation to sell off all its energy assets. By December, however, CEO Gannon announced that they would do just that and pour the revenue into a new telecommunications company called Touch America.

To make a long story shorter, Gannon sold the dams to Pennsylvania Power and Light, the gas fields and lines to other entities, and liquidated the Montana Power Company. Montanans were aghast that an out-of-state entity would now control not only most of the dams on our major rivers, but would also own the very senior water rights, giving them legal rights to shut down most irrigation in the Upper Missouri River Basin in a severe drought.

But the disaster was just beginning and soon MPC’s stock plunged from $63 a share to mere pennies, wiping out lifetime investments of those who formerly thought of the regulated utility as virtually risk-free. Touch America went bankrupt, however, so perhaps there is some semblance of justice in the world.

The pain didn’t stop there, unfortunately. Without the regulatory power to keep rates at near the cost of production, NorthWestern Energy, which bought MPC’s transmission lines, was forced to buy power on the open market. The Republican free-market competition never materialized due to the limited customer base and significant transmission infrastructure. As a result, customers saw their electricity rates go from the lowest in the region to some of the highest.

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Slowly but surely, NorthWestern has been acquiring and building its own generation capacity, seeking to stabilize long-term power costs instead of relying on the often-volatile energy market. The Public Service Commission once again regulates the rates NorthWestern charges its customers, as it did with the former MPC.

Acquiring the dams will take Montanans back to a saner and more stable energy supply. Moreover, it will mean those all-important water rights that are appurtenant to the dams will be under the control of a western corporation – not one from the East Coast.

Unfortunately, the $900 million it will take to re-acquire the dams will, once again, be passed on to consumers. Ironically, in the old regulated system, the costs of building and operating the dams were “rate-based” – meaning MPC simply passed on those expenses as “cost of production.”

Nonetheless, it seems prudent that Montanans will once again have clean hydroelectric production that doesn’t rely on the price of various fuels or market forces. The deal still has to be approved by the Public Service Commission and the Federal Energy Regulatory Agency, which is expected to happen by the end of next year.

The lessons Montanans learned from the deregulation debacle were hard and expensive. But perhaps they’ll be worth it if future Montanans are more skeptical when smooth-talking governors, corporate CEOs, and their minions in the legislature try to talk us into deregulation as a free market panacea.

George Ochenski writes a weekly column for the Missoulian’s Monday Opinion page. He can be reached at oped@missoulian.com.