Seattle Electric Utility Increases Rates 58 Percent

The Seattle Times - Knight Ridder/Tribune Business News -  March 13, 2002

The Seattle Public School District is spending the equivalent of 17 elementary-school teachers' salaries on its higher electricity bill this year.

Cynthia and Andy Tanis got walloped with a $211 bill for their two-bedroom, electricity-heated apartment in Greenwood. Because of it, they've put off paying the bill for the birth of their son.

Scott Galvanizing in Ballard cut its work crew from 12 to six employees as the cost of electricity to keep its molten zinc hot jumped to $7,000 a month from $4,000 over the past year. The recession was already hurting business. "With power costs and with the loss of revenue, I can honestly tell you our company's been running in the red the last six months," said Jeanne Bertsch, the office manager.

Seattle City Light's 58 percent rate increase is reverberating through the city's economy. While many utilities struggled through the West Coast energy crisis of 2000-01, Seattle's punishment was especially severe. To pay for $737 million in power purchases, the utility ran its debt to $1.7 billion and suffered two downgrades of its credit rating. The debt is costing a fortune to pay off -- the equivalent of half a City Light ratepayer's monthly bill -- and will keep rates from falling until early 2005. It could get worse: Mayor Greg Nickels is due to consider yet another increase request for this year. A Seattle Times examination showed City Light was poorly positioned for an energy shortage, relied on an ineffective trading strategy and lacked informed oversight by the City Council.

City Light has taken several steps to guard against a repeat. But other changes are just getting under way. -- City Light won't be caught short again. While it entered the crisis planning to buy large blocks of power on the wholesale market, today it has more power than it needs in all but the most severe drought. It also has broadened its suppliers to include windmills and a natural gas-fired turbine. While the cost is higher than market rates, those sources help fill power gaps when water behind hydropower dams is low. "We've now decided we can never leave ourselves vulnerable to the market ever again," said City Council member Heidi Wills, who heads the Energy and Environmental Policy Committee that oversees City Light. -- The utility has published a new risk manual for its energy traders and installed safeguards against rogue traders. But it is sticking with the trading strategy that failed to protect it during the crisis. While other utilities used more versatile strategies to stock up on power months or years ahead of the crisis, City Light essentially bought its power at the last minute, within two months of when it was used. That left it wide open to price swings on about 20 percent of its power needs. And as the 2001 drought worsened, the amount it had to buy soared along with power prices. Today, Tony Kilduff, the utility's risk manager, says he believes it's acceptable to buy power two months ahead. While his risk-management committee is considering changes such as setting risk limits, he says there is no proposal to change the trading strategy. "Is there a better strategy?" asks Kilduff. "We're not convinced that there is." -- The utility has decided to carry less debt -- once current high debt levels are paid down. It's a departure from the past, when it borrowed to pay for a relatively large share of facility improvements.

The high-debt policy kept cash in ratepayers' pockets, allowing the utility to pay for equipment and repairs on the installment plan over many years. But it left insufficient reserves when the energy crisis hit. City Light's debt rating has been downgraded twice, and the utility is on watch for another cut.

"We've now changed our financial policies to strengthen the financial health of our utility so we'll be much less reliant on debt," Wills said. Trouble is, it's going to take at least a decade before debt falls to the level it was before the crisis.

And in the meantime, City Light's budget woes could get worse. The utility now has surplus power to sell, but electricity prices have fallen. Last August, the utility predicted it could sell surplus electricity this year at market prices averaging $50 a megawatt-hour. Now it expects to get just $22 a megawatt-hour for power that cost between $30 and $50. Unless the market suddenly reverses itself, City Light will be left without enough money coming in to pay its expenses, including a $182 million loan that comes due next March.

To fill the gap, leaders are considering another rate increase and taking on more debt. City Light expects to borrow more from the city's cash pool, a kind of overdraft protection. Forecasts presented to the City Council last week show such debt rising to $161 million next year from $100 million. That would be the highest level ever, and above City Light's limit of $110 million.

"We've never before relied on the cash pool to the extent we're relying on it now," Wills told Superintendent Gary Zarker at last week's briefing. "Ten to 20 million is common; 100 to 150 million is not." The new financial policies also require City Light to start saving $30 million in reserve funds, beginning in 2005. Tacoma and other utilities had that kind of cushion before the crisis.

In short, "lower power prices mean higher rates when we go to the new financial policies" in 2005, said Carol Everson, City Light's finance director.

City Light also is seeking a $282 million refund from power sellers through hearings being conducted by the Federal Energy Regulatory Commission. Hearings were held yesterday, but a decision in the case isn't expected until August.

-- Finally, the City Council has been discussing relinquishing direct oversight of City Light to a utility board. Few utilities City Light's size operate without their own board. City Light officials still report just to the council and mayor, who lack the time and expertise to get involved in the details of complex decisions such as energy deregulation and power planning.

Jerry Garman, a former deputy power superintendent, said it took 45 seconds for the council to approve a $245 million budget the utility submitted in the late 1980s.

"I timed it," Garman said. "And I don't think the council is any more in tune in a business sense with the utility today than it was then." In remarks echoed by other industry veterans, Garman said the council needs a board staffed by people with experience operating in deregulated markets. Informed board members would "not do things just because they have the warm fuzzies about environmentalism or whatever the warm fuzzy of the day is," Garman says.

In the meantime, citizens, businesses and government are paying for City Light's woes. At the Wedgwood Ale House and Cafe, socked with a $948 power bill, owner Robert Paulson posted a message on his sign outside that speaks for many: "Electric Bill Bonfire Rally."