Keeping the Lights on.

Author:Jamison, Michael
Position:Montana utilities

Montanans Struggle with Electricity Costs

Steve Knight used to go to work and sell aluminum. Now, he stays home and sells electricity.

Sitting in a conference room at Columbia Falls Aluminum Co. (CFAC), Knight looks tired, the dim circles under his eyes nearly as dark as the hallways of the industrial plant where he is general manager. He leans forward, elbows on knees, and absently shuffles through a stack of papers detailing the upward spiral of electricity costs and the corresponding downward spiral of his plant's future.

"There are no good options," he says. "The power is just so much more valuable than the metal, and you have to do what you can to stay afloat."

These days, staying afloat means selling electricity, not aluminum. It also means, oddly enough, paying employees not to come to work.

CFAC, nestled at the foot of a blunt, treeless mountain just east of Glacier National Park, used to make a million pounds of aluminum every day. Every 24 hours, the nearly 600 workers churned out enough metal for 29 million beer cans, earning a combined $31 million payroll for the effort.

But all that metal took a lot of electricity to produce. When running full tilt, the plant consumed 345 megawatts, enough to power Billings, Butte, and Great Falls combined. CFAC ate almost one-eighth of all the electricity consumed in the entire state of Montana, and used the energy to turn alumina powder into aluminum.

And that is why it was the first to fall when the cost of electricity doubled, then doubled again, then doubled again, and again, and again, and then finally, once again -- short-circuiting the state's industrial base and the broader economy of the West.

So far, most of the Montana economy has been relatively immune to spikes in power prices, with only the largest industrial electricity users affected. And while no one is certain how the overall economy will fare once predicted high prices hit Main Street, most believe at least a slight economic downturn can be expected.

That anticipated downturn is, in fact, one of the few relative certainties in a power crisis wrought with uncertainty. The future will be more expensive. That is a given. The question is, how much more expensive will it be? There remains no ready answer in a market that shifts faster than Montana weather.

One minute, CFAC was buying $22-per-megawatt power; the next minute, what power could be had was running upward of $1,500 on the spot market, Knight said. It happened that fast.

And at that price, making aluminum made about as much sense as dumping buckets of money into the nearby Flathead River. The best solution, Knight decided, was to take what cheap power he already had secured under contract and sell it back into the grid, cashing in on the very spot prices that were putting him out of business.

"We're going to need a whole new way of thinking about business," he said, "because this is a whole new world we're living in."

A Brave, Ruthless New World

How that new world came to be remains something of a mystery, but most agree it emerged out of a "Perfect storm" of sorts, a confluence of events that were as unpredictable as they were devastating. Any one of those events could have caused higher prices, but when combined they worked together to send energy costs to unimaginable heights.

As early as 1996, energy analysts were warning that electrical deregulation -- giving customers a choice of power providers much the same way they had been given a choice of long-distance telephone carriers -- was a bad idea for Montana.

But large industrial users -- including CFAC -- insisted they could get a better deal on the open market. They got what they asked for, but not what they wanted.

Under Pressure, Congress passed legislation that allowed deregulation of wholesale power. The free market, not government regulators, would determine price. Federal lawmakers followed up by erasing state lines with regard to transmitting power, thus opening the grid to regional competition at the wholesale level.

But, even as the 1997 Montana Legislature was signing retail electricity deregulation into law, power plants in other deregulated states were struggling. California, one of the first to deregulate, found itself in an energy shortfall, even though the state was using slightly less power than it had in the past.

One big power plant after another went off-line for emergency repairs, and the lights began to dim.

At the same time, demand for energy was growing, fueled by a booming national economy, and few new power plants were coming on-line. Demand clearly was outstripping dependable supply. (Except in Montana, a state that produces 5,200 megawatts but uses just 2,800.)

And...

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