Montana’s largest utility diversifies its energy mix with hydropower

 

Montana’s largest utility company, NorthWestern Energy, is moving to diversify its energy mix – an increasing trend in the industry. Seeing the regulatory noose tightening on coal, and questioning the long-term promise of natural gas, the company recently announced plans to buy Montana’s 11 hydroelectric dams from their Pennsylvanian owners. By adding 630 megawatts of stable hydro to a portfolio of wind, coal and natural gas, NorthWestern is fortifying itself for a future when energy prices could be higher and more volatile.

Pennsylvania Power and Light Montana (PPL) currently owns Montana’s hydro dams and a share of its largest coal-fired power plant. But PPL is pulling out of the state, and Montana’s electricity provider is using the opportunity to build its power generating capacity, rather than buying energy on the open market from out-of-state companies.

KerrDam.jpg
Kerr Dam on Montana's Flathead Reservation is one of 11 dams that NorthWestern Energy plans to buy in 2014. Photo by Sarah Jane Keller.

The lead-up to this new development goes back to 1997, when Montana began its ongoing experiment with utility deregulation, which promised consumers more choices and lower rates. But switching from state controlled electric rates, to power purchased on the open market actually led to higher bills for Montanans. It also killed the state’s utility, Montana Power Company, which sold its 11 hydroelectric dams and some of its coal-fired power plants to PPL, and its utility to South Dakota-based NorthWestern. Montana Power finally went bankrupt trying to become a fiber-optics company.

Now, the results of the deregulation experiment are in. With low energy prices, it’s too hard for a power dealer like PPL to turn a profit in Montana, so the company is seeking refuge in regulated states. NorthWestern is reassembling ownership of Montana’s utility infrastructure, building something more similar to the stable monopoly that Montana Power Company once was.

But NorthWestern isn’t taking full ownership in the state’s coal-fired power plants. They will maintain their stake in Montana’s Colstrip 4 power plant outside Billings, which it shares with PPL and several other companies. With hydro in the mix, NorthWestern doesn't appear interested in helping PPL dump their shares of Montana’s coal-fired power plants. Meanwhile, PPL is mothballing a separate coal-fired power plant near Billings in 2015.

It’s another example of a company saying “no thanks” to more coal – an increasingly common story in the West as even mining companies decline to bid on new public lands coal leases (a first in Wyoming), coal-fired power plants head for the dust bin, and utilities look to diversify their energy portfolios.

The $900 million dam deal, if regulators approve it in 2014, could lead to an initial five percent rate increase for Montanans, but more long-term rate stability, NorthWestern’s President and CEO Bob Rowe told the Missoulian. With half of its generating capacity in wind and hydro, NorthWestern will be less vulnerable to “fuel risk” and “environmental risk,” he said.

In other words, if natural gas is cheap now, there’s a chance that it may not be in the future. The "environmental risk" Rowe's referring to is the tightening regulations on coal-fired power plants, like the U.S. Environmental Protection Agency’s recently proposed carbon dioxide emissions rules for new power plants. New coal-fired power plants would need expensive carbon capture and storage technology to meet the emissions limits (and rules for old plants could be on the way).

NorthWestern’s decision is a positive development for the state, according to Pat Smith, a Montana representative of the Northwest Power and Conservation Council. “The one thing we know about the energy future is that it could change, and it could change pretty drastically on short notice,” he said. “(Hydropower is) a clean resource, it’s a low cost resource, and it’s a dependable resource for the future.” (Assuming the water their is still enough water to pass through the turbines, which is more of a worry in the Colorado River Basin than in Montana.)

NorthWestern isn’t the only Montana company that sees a bright future with hydro. In 2010, the Confederated Salish and Kootenai Tribes in northwestern Montana formed Energy Keepers, Inc. to purchase and operate PPL’s hydro dam at the outflow of Flathead Lake.

The tribes have been trying to gain control of it since it was built on their land against their will in 1938. They’ll be able to buy it in 2015 when the dam’s license is up for renewal, making them the only U.S. tribe to own and operate a hydro dam.

Considering Rowe recently described the dams as the “absolute ideal resource” for Montana, if anything, NorthWestern’s decision is a sign that the Confederated Salish and Kootenai Tribes are on the right track by operating their own hydro plant. There could be plenty of buyers for the power generated by Kerr Dam, if other regional utilities are thinking like NorthWestern.

Sarah Jane Keller is a High Country News editorial fellow.

Heather Noble
Heather Noble Subscriber
Oct 10, 2013 08:29 AM
I'm confused. Your article says that rates went up when the power plants were sold to PPL, and that the rates will go up 5% now when the power plants are sold back to NorthWestern, but that PPL is not making (enough?) money in this deregulated market. So did rates go DOWN at some point in between? Or are utilities just raising their expectations about how much they should make?
Sarah Jane Keller
Sarah Jane Keller Subscriber
Oct 10, 2013 01:05 PM
Hi Heather, Thanks for your interest. Yes, consumer rates have been steady, or gone down since deregulation. And overall, consumers are somewhat sheltered from fluctuations in the wholesale electricity market. However, wholesale electricity is cheap right now (think natural gas), and my understanding is that it's harder for power producers like PPL to turn a profit where rates aren't regulated.

This story from the Missoulian helps explain the situation: http://missoulian.com/news/[…]11e2-bc4a-001a4bcf887a.html

As far as the 5 percent rate increase from buying the dams, I think the root of that rate increase is different from changes in the unregulated energy market getting passed on to consumers. That particular increase is to account for the cost of purchasing the dams, I believe. But the idea is that hydro power would be a less risky source in the long term, compared to buying power on the open market.
Jim Heffernan
Jim Heffernan
Oct 15, 2013 10:46 AM
Regarding tribal ownership of a hydropower facility, see also the ownership interest of the Confederated Tribes of the Warm Springs Reservation of Oregon in the Pelton/Round Butte hydropower system on the Descutes River in Oregon:

http://www.portlandgeneral.com/[…]/round_butte_fact_sheet.aspx

This ownership interest is noteworthy as the warm Springs tribes (as are the Salish Kootenai) are integrating ecosystem functions into facility operations. In the case of the Pelton/Round Butte project, that meant a substantial capital investment in a juvenile fish passage facility as a component of a salmon restoration program. Both the Warm Springs and Salish Kootenai are also members of the coalition of Columbia Basin tribes working to modernize the Columbia River Treaty between the U.S. and Canada. The coalition is comprised of tribes whose management authorities and responsibilities have been affected by the implementation of the water treaty. The coalition is working to see fish passage restored to all historic areas blocked as a result of dam construction through the treaty review process.
Russ Doty
Russ Doty Subscriber
Oct 15, 2013 10:11 PM
Sarah: Rates did not go down as a result of deregulation--they went up and up and up. A close reading of the Dennison article you cited indicates that as do several of his earlier articles. Check out Pat Judge's Master’s thesis from the U of M on deregulation. And anything written by Pat Dawson on rates.
Further, if Montana had not deregulated the dams (which were fully depreciated at the time they were sold) should have come out of the rate base and rates should have gone down. Instead we are now in a game often played by utilities where they sell paid for infrastructure back and forth to inflate its value and depreciate it over and over--something that should not happen under quality regulation. Please read my book "Poles Apart" to see how Montana Power played the multiple sale game in the early part of the 20th Century.
Further, PPL may be trying to spin the sale as that they cannot make money in MT because of some policy, but many coal generators are having that trouble because there is more energy for sale because of renewables and it is keeping the price down and the other two reasons Dennison quotes from Elliot Mainzer. PPL has depreciated much of the value of the dams and now is selling them back so Montanans have to pay for them yet again at an even higher inflated price. Not a good deal even if it is green. NorthWestern's customers would be better off if the utility would promote green customer owned community renewable energy projects rather than killing them at almost every opportunity. Then consumers would not be faced with the musical dams game every 30 to 60 years. We have a solar collector on our house to avoid that. Russ Doty
Sarah Jane Keller
Sarah Jane Keller Subscriber
Oct 29, 2013 09:34 AM
Russ: Thanks for your comment. Yes you are correct, and your statement about rates is consistent with my post. My comment above, however, is incorrect. I should have said that rates shot up after deregulation, but that growth in residential rates has leveled off in recent years (please correct me if I'm wrong). I appreciate you contributing more context to this post with your other points. I'm curious, do you think that Montanans are better off if Northwestern doesn't buy the dams, all other things being equal?