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Energy Prices Drop Drastically by Ken Dey Idaho Statesman, September 8, 2001

If trend holds, customers may see rates drop

With little fanfare or notice, wholesale electricity prices have dropped dramatically over the summer to near-normal levels.

Despite dire predictions of prices remaining at 30 cents per kilowatt hour throughout the summer, the average price for power now is at about 3 cents per kilowatt hour -- a rate thought impossible just months ago.

Energy experts say it's too early to know if the low rates will continue. If they do, Idaho Power customers could see a rate reduction in the spring.

"We were forecasting early in the spring that there was a chance of a significant problem," said Dick Watson, director of the power division for the Northwest Power Planning Council, a federally funded advisory council that deals with energy issues in Idaho, Montana, Oregon and Washington. "The question now is, why didn't it happen?"

Watson and others who chart wholesale energy prices offered these explanations:

• Conservation programs from customers and buyback programs in which farmers and certain industrial plants were paid to curtail electricity use.

• The addition of new power generating sources, both permanent and temporary.

• A drop in natural gas prices that cut the cost of power from gas-fired generators.

• Emergency measures at hydroelectric dams throughout the Northwest that allowed more water through turbines while increasing the potential risk to migrating salmon.

"Everything worked too well," Watson said. "And when you put it all together, it was a lot of load off the system."

But Watson said those programs aren't long-term fixes, and although there's some significant power projects coming on-line soon, power supplies still are not at the level they need to be, and the market could continue to be volatile. And, he added, weather will always play a part in power needs.

"If we run into a cold snap this winter, we could have problems," he said. "We're not out of the woods yet."

The drop in power rates is a welcome development, but it caught many utility companies off-guard, including Idaho Power Co.

The utility gambled and lost on the savings it expected to realize from its irrigation buyback program, and now rate-payers will likely have to pick up the tab.

The buyback program was supposed to protect Idaho Power and its ratepayers from skyrocketing electricity prices this summer. But instead, wholesale power prices dropped dramatically -- leaving the utility with contracts that pay farmers 15 cents a kilowatt hour not to use electricity that now sells for a quarter of that price.

Idaho Power has agreed to pay more than 400 farmers a total of $75 million for not using nearly 500 million kilowatts (should read kilowatt*hours) of power. The utility is paying farmers 15 cents a kilowatt hour to keep their irrigation pumps off. But it now turns out that it would have been cheaper for the utility if the buyback deals had never been made.

How much Idaho Power's misjudgment on future prices will cost its ratepayers isn't known yet, and Maggie Brilz, Idaho Power's director of pricing, said it's too early to speculate.

But she contends that the buyback program helped lower demand, and that, in turn, brought power prices down. Without the buyback program, she suggested, ratepayers might ultimately have paid more for their electricity.

Idaho Power wasn't alone in failing to predict how far prices would drop.

Avista Utilities, which serves northern Idaho, bought a block of power last spring on the electricity futures market to lock in a price and avoid higher prices later in the summer. When the wholesale price began to fall, Avista was stuck with its contract to buy higher-priced power.

"Nobody was expecting a drop-off like this," said Bill Eastlake, electricity policy adviser for the Idaho Public Utilities Commission.

In March, when Idaho Power's buyback program was approved by the PUC, it seemed like a good idea to pay irrigators 15 cents a kilowatt hour to not irrigate. At that time, the utility and the PUC, which approved the program, had no idea the wholesale market price would drop below 15 cents.

Eastlake said the program made perfect sense at the time. If the 30 cents a kilowatt hour rate had held, the utility could potentially have saved $75 million for ratepayers over the life of the program, which ends in November.

"It was kind of like paying for insurance and not having to use it," he said.

The 30 cent per kilowatt hour price held in April, but in May, average market prices for power based on the Mid-Columbia Price Index fell to 26 cents a kilowatt hour and then took a steep dive in June, to a 7 cents average. The decline continued, with prices hitting the 3-cent range Friday.

Eastlake said today's prices are now near the pre-energy crisis average of 1.8 cents to 5 cents a kilowatt hour.

Because wholesale prices are down, Idaho Power filed an amendment to the irrigation buy-back plan this week with the PUC that would allow irrigators to break their contracts and resume irrigating for the remainder of the season. That would let Idaho Power forgo the 15 cents per kilowatt hour payments and avoid at least some of its losses.

If the amendment is approved by the PUC and enough irrigators start irrigating again, it will help offset at least some of the $75 million Idaho Power is obliged to spend on the program, but utility officials say they have no way of knowing how many will take advantage of it.

Brilz said some irrigators who were using alternative power sources, such as generators, to irrigate their lands may opt to start using Idaho Power's electricity again, but no one is obliged to remove themselves from the program.

Brilz said when the program ends in November, Idaho Power will be able to tally the final costs, and those costs will be included in the company's power cost adjustment for 2002.

Related pages:
Idaho Power Buybacks Impose Hidden Costs, Idaho Statesman, 9/9/1