Senator Cantwell Demands Fair Treatment for Northwest Ratepayers
WASHINGTON, DC - U.S. Senator Maria Cantwell (D-WA) today called on the Federal Energy Regulatory Commission (FERC) to ensure fair treatment for Northwest utilities and refunds for those whose customers have been harmed by excessive electricity rates during California's chaotic response to the energy crisis.
Speaking on the floor of the U.S. Senate, and in a separate letter to the administrative law judge overseeing negotiations of potential refunds, Cantwell said the judge's decision paid "nothing but lip service to the plight of the Northwest."
Senator Cantwell's floor statement on Northwest refunds (as prepared):
Mr. President, I rise today to address an issue of extraordinary importance to the State of Washington, the Pacific Northwest and the entire West Coast: the role of the Federal Energy Regulatory Commission in regulating our nation's energy markets and righting the wrongs visited upon ratepayers in California and the Western states by the runaway energy prices over the last year.
We are now 19 days into an expedited review process FERC has ordered to determine the amount of refunds due California consumers as a result of the last year's unjust and unreasonable rates. At the urging of a number of my colleagues from the Northwest, including Senator Murray and myself, FERC finally recognized the realities of energy markets in the West when they allowed Pacific Northwest utilities to participate in these proceedings. But I remain concerned that, in its haste to put the California debacle behind it, FERC will again overlook the consumers of the Northwest.
I'm afraid that my suspicions were borne out last week, when the Administrative Law Judge charged with overseeing this refunds matter issued his recommendations to FERC, again paying nothing but lip service to the plight of the Northwest.
Mr. President, it is now up to FERC to determine what to do with the judge's recommendations, and I believe the Commission should not - cannot - in the interest of fairness, ignore the Northwest in this refund calculation. While many of my colleagues are aware of the toll this crisis has taken on California, we-and the FERC-cannot disregard the impacts it has had on the Northwest and the citizens, businesses and communities of Washington state.
Equitable treatment in this refund proceeding requires that the Commission recognize a certain fundamental truth: that Northwest consumers have been harmed by the unjust and unreasonable prices that have prevailed in all energy markets throughout the West-inside and outside California, and in spot, forward and long-term power markets. And these are the prices and the transactions that have resulted in some Puget Sound communities facing residential and commercial rate increases of up to 50 percent.
The Commission must also recognize that there are differences between how California and Northwest utilities manage their obligations to serve customers. Thus, FERC should not apply a one-size-fits-all test in devising a refunds methodology. The basic litmus should be: did power rates meet the common-sense test of reasonableness? And if the answer is no, the commission must order refunds. This determination should not depend on whether utilities bought energy on the spot market, or made their purchases under longer-term contracts. Western consumers have all been impacted by the havoc unleashed by both California's chaotic energy markets and the apparent gamesmanship of a handful of companies who have taken advantage of this broken power market.
This topic is of particular concern to me because as this crisis has evolved, FERC has been slow to respond to California's situation, and even when it has responded, it has largely ignored the interests of the Northwest. In this refund proceeding, focusing solely on California's spot markets would both significantly harm the utilities of my state, and ignore the residual damage the California crisis has caused in all of the energy markets throughout the West.
The Impacts
Because make no mistake, Mr. President: the pain inflicted by this crisis has been real for the people of Washington. Over the last year, skyrocketing energy prices have caused retail electricity rates to rise in all corners of my state: 20 percent in Clark County, 30 percent in Cowlitz, Skamania and Okanogan counties; 35 percent in Snohomish County and 50 percent in the cities of Tacoma and Seattle. And even as these utilities have passed on these rate increases, some have been forced to issue hundreds of millions of dollars worth of bonds to cover the cost of power.
Seattle, for example, normally spends less than $100 million per year on power purchases. This year, the city spent over $450 million to keep the lights on-in just the first 6 months. And while the utility, in the first 98 years of its history, issued a total of about $1 billion in bonds, it has issued $700 million in debt this year alone to pay its purchased power bills. A number of Northwest utilities have also had their bond ratings downgraded as a result of this crisis.
Indeed, the economic impacts on Washington have already begun to take root. Energy-intensive industries such as aluminum smelting and pulp and paper production have been driven to the brink of collapse, and the layoffs already number in the tens of thousands. There are innumerable other businesses that are teetering on the brink that simply cannot absorb any more rate increases:
Georgia-Pacific has shut down its pulp and paper mill in Bellingham, Washington, laying off 420 workers. Another paper company in Stielacoom, has also had to idle its workforce due to escalating power prices. Washington's aluminum industry, which provides my state with about 7,500 family-wage jobs, has curtailed a large part of its production anywhere from six months to two years-and it is unclear if the companies will ever resume production at current levels. These companies, which produce a large proportion of the nation's aluminum, have given up more than 75 percent of their power supply in order to minimize the region's BPA rate increase. Due to drought conditions and the cost of purchasing power for irrigation, many farmers in Washington state have chosen to forgo planting this summer. Because agriculture is already one of the most stressed industries in Washington, the impacts of the current energy situation are particularly devastating. Many of our irrigators are being paid not to farm, based on energy savings compared to their usage the previous year. But when irrigators can't farm, that has ramifications for entire communities and related businesses, such as cold storage, food processing and transportation. The effects on small business have been equally harrowing. At a Small Business Committee field hearing last month, my colleague Chairman Kerry and I heard from the president of a steel foundry based in Tacoma, which has been in operation since 1899 and employs about 350 people. In the face of this crisis, the plant has undertaken an aggressive conservation program, which has helped it reduce its power consumption by 20 percent. At the same time, the foundry has increased its efficiency and will actually produce more steel this year. But despite its extraordinary efforts, the plant's power bill will rise almost 60 percent, virtually eliminating any profits and already forcing a handful of layoffs. In the words of the company's president, any further rate increases will mean the foundry will have to close its doors.
This crisis has a very human face. Our LIHEAP caseload in Washington state is expected to grow 50 percent this year on account of rising energy costs. I have heard from senior citizens who can't afford to light their homes at night, and will be making hard choices this fall and winter between heating their homes and buying food.
I have visited children who are worried that their parents will lose their jobs, and that they will lose their homes, when the companies where their mothers and fathers work close down due to high energy costs.
And our schools are having to cut corners. The Central Valley School District near Spokane, for example, has thus far had to divert $200,000 that would otherwise be used to purchase textbooks to pay its energy bills.
And what's more startling still is that the gravity of the impacts and the number of Washington residents suffering from this crisis will continue to grow, when the Bonneville Power Administration-which provides Washington with 70 percent of its power-is forced to raise its rates another 46 percent this October.
It is clear that FERC has an obligation to help these people - not only by stabilizing the market and ensuring fair rates in the future, but by addressing the past wrongs that have already done serious harm to consumers and businesses in my state and throughout the West.
THE FERC ORDER
Price Mitigation
FERC took its first serious step in this direction on June 19, when it issued an order designed to help mitigate the effects of the nation's energy crisis and reign in skyrocketing energy prices in 11 western states. Given the economic casualties my state has already suffered, I believe FERC's action on this matter was long overdue.
The effectiveness of FERC's price mitigation plan will remain of vital concern to me and to many of my western colleagues, and I encourage the Commission to remain mindful of the effects this California-focused mechanism may have on other states. Specifically, it remains to be seen how FERC's approach-tying the cap to the cost of producing the most expensive megawatt of power needed to meet load in California-will affect the availability of supply in the Northwest this winter, during our peak-heating season.
The Case for Refunds
But of particular concern to me today is the issue of refunds. As part of its June 19 order, FERC established this 15-day settlement conference for participants in California energy markets to reach agreement on potential refunds for overcharges and settlement of California's unpaid accounts. As has been the case throughout this crisis, the order was initially silent on the issue of relief for the Pacific Northwest. It was only after the intervention of a bipartisan group of Northwest Senators that FERC saw fit to issue an amended order, clarifying that Northwest parties could also participate in those discussions.
But Mr. President, the 15-day settlement window has now closed and no agreement has been reached-for consumers in either Washington state or California. And as I've mentioned, the Administrative Law Judge made his recommendation to the Commission last week on how to proceed. Again, this recommendation was mostly silent on the issue of relief for the Pacific Northwest. It should also be noted that, to the extent it did comment on our concerns, it was factually incorrect. While the recommendation said Pacific Northwest parties "did not have data on what they were owed, nor an amount of refunds due them," it is a matter of public record that a group of Northwest utilities-net purchasers in the West's dysfunctional power markets-submitted a claim for $680 million dollars, as well as documentation and a proposed methodology for calculating the refunds they are due.
These utilities, Snohomish PUD, Seattle City Light, Tacoma Power and others, are the utilities whose customers have already seen rate increases of from 35 to 50 percent.
That notwithstanding, this is a silence the Commission itself cannot, in the interest of fairness, sustain. FERC must seek an equitable solution for the Northwest. And in order to do this, I believe it is crucial that FERC recognize some fundamental differences between the Northwest and California energy markets-and that fundamental fairness requires refunds for both sets of customers.
Market Differences
First, FERC needs to recognize that most Northwest participants in the California markets are load-serving utilities. These load-serving entities are responsible for a miniscule percentage of the power sold into California-certainly no more than 4 percent--and they are clearly not the parties that broke the market. Further, many in the Northwest, especially the Bonneville Power Administration, have been partners in helping California keep the lights on during emergencies, at costs to the Northwest that cannot necessarily be quantified. And Bonneville is still awaiting millions of dollars in repayment from California entities, including now-bankrupt PG&E.
The Obligation to Serve
Unlike power marketers and merchant generators, Northwest utilities operate under a statutory obligation to meet all of their customers' electricity needs. Further, our region's power supply is essentially based on hydroelectricity-a full 78 percent of the total generation in Washington state comes from our dams. As has been made painfully clear by this year's drought-which has amounted to the second-worst water year on record-the uncertainties of hydroelectric production require that our utilities make other wholesale power purchases to meet load. In keeping with responsible planning practices, they buy a portfolio of products, of varying duration, in order to ensure they will be able to keep their customers' lights on.
The Northwest Does Not Take A Spot Market Approach
This points to a second, fundamental difference between the Northwest and California markets: whereas California utilities were forced, under the state's restructuring law, to make all of their purchases in a centralized hour-ahead or day-ahead market, we have no such centralized market in the Northwest. While we do have bilateral short-term markets, our utilities have traditionally only used them to balance the difference between forecasted and actual loads, streamflows, weather and other similar factors. Instead, Northwest utilities rely heavily on "forward" or long-term contracts that last for periods varying from month ahead, to quarterly or longer.
Prices in Forward Markets Are Unjust
But these contracts have been closely affected by the skyrocketing spot market prices in California. It is thus absolutely crucial that for the purposes of its refund proceeding, FERC recognizes that power prices throughout the West-and not just in spot markets, but in these forward contracts as well-are unjust and unreasonable. Washington state's prices have moved in lockstep with spot market prices.
In its June 19 order, the commission itself commented on this, stating that there is a "critical interdependence among prices in the ISO's organized spot markets, the prices in the bilateral spot markets in California and the rest of the West, and the prices in forward markets." Clearly, FERC has recognized the reality of how our Western markets work. So it's now time for the Commission to devise a comprehensive solution, which takes the interlinked nature of these markets into account.
Indeed, when one compares forward contract prices in the Northwest with spot market rates both within the region and in California over the last year, they show a correlation of more than 80 percent on a monthly average basis. That is, forward prices in the Northwest have moved in tandem with California's prices, which the commission has deemed unjust and unreasonable. And it's these forward purchases that have largely driven the rate increases in the Northwest. It is clear, then, that any FERC refund order that seeks to treat all Western participants fairly must include them in the calculation.
Simply put, any refund policy must not disadvantage the utilities of the Northwest because of the contractual mechanisms they've used to acquire power to serve their customers. It's a matter of simple fairness--especially since the long-term planning practices of Northwest utilities have actually helped bolster price stability in the West by removing load from volatile spot markets.
The Case of BPA
I believe the case of the Bonneville Power Administration illustrates very well the plight of the Northwest throughout this crisis. BPA has often responded to the California ISO's urgent calls for power supply when the state has teetered on the edge of rolling blackouts. In fact, on three separate occasions, the Department of Energy issued emergency orders directing Bonneville to sell power into the state. It should also be noted, however, that California entities have yet to repay BPA for about $100 million of these transactions. Meanwhile, BPA has at times drawn down its reservoirs-arguably compromising the reliability of the Northwest power system to aid California.
While BPA has sold into the California spot markets, it has actually been a net purchaser of power during this crisis, when one takes into account its forward contracts. And when faced with the volatile energy prices throughout the West, Bonneville earlier this year made the difficult decision to pay customers to curtail their loads rather than venture into the market. After a Herculean load-reduction effort that was largely successful-but has left the future of the Northwest aluminum industry in doubt--BPA will still be forced this fall to raise its rates another 46 percent. Clearly, Bonneville and the Northwest customers it serves have been victims of the power crisis touched off by California's botched experiment in partial restructuring.
A Northwest Framework
So again, I believe it would be blatantly unfair for the Commission to ignore the specific circumstances of the Northwest in its current refund proceeding. My state's utilities should not be unduly penalized for sales into California when they have been forced to purchase this same power at similarly unjust rates-but in different markets, and for longer periods of time. And further, the Northwest entities that have been harmed directly by the California market failure should be eligible for refunds.
FERC must work toward a comprehensive settlement that addresses the claims of not just California consumers, but the Northwest's as well. And in order to reach an equitable solution, it must acknowledge the fundamental differences in the California and Northwest markets. I believe a fair outcome for the Northwest requires the Commission to take a few simple steps.
First, FERC must recognize an inescapable, common sense conclusion - that all western power markets have been dysfunctional for quite some time. This, despite the Commission's duty under the Federal Power Act to ensure just and reasonable rates in all markets and at all times. I urge the Commission to act in accordance with Section 309, which directs FERC to do what is "necessary or appropriate to carry out the provisions" of the Federal Power Act. Again, power prices have been unjust, regardless of the type of market in which Northwest utilities have purchased their power. The fact is, we in the Northwest have a different market than California, and FERC simply cannot apply the same formula in quantifying the damages to our consumers. The Northwest has been swept up in this tidal wave--set in motion by an unstable market. And applying a one-size-fits-all approach to the issue of refunds would amount to FERC throwing only California a life preserver. In short, any refund liability for sales into California should be judged against the unjust and unreasonable prices Northwest utilities have themselves paid under forward and long-term contracts. Those utilities that can, using this methodology, demonstrate a legitimate claim should also be eligible to receive refunds to offset the harm done to their customers. And the Northwest cannot be left behind. Just as the Administrative Law Judge has recommended that all California parties be given an opportunity to make their cases in an evidentiary hearing later this summer, so too must the Northwest be allowed to make its case in the same proceeding. FERC must determine Pacific Northwest utilities' eligibility for refunds simultaneous with its determination for California. And repayment of the amounts due to Northwest utilities from California must also be a crucial part of the refund calculation.
And so, Mr. President, I call on FERC's commissioners to incorporate these principles into any refund policy they approve for the West. It is indisputable that the Northwest has been harmed, and now is the time for FERC to step in and mitigate some of the damage that has been done as a result of the last year's unprecedented run-up in power prices throughout the West. I urge the Commission to craft a solution that guarantees fair treatment for our Northwest load-serving utilities and refunds for those whose customers have been most damaged by the chaos in an unstable market in California.
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