HELENA - The Montana Supreme Court heard arguments Thursday over how Montana Power Co. should be able to charge customers for some of the utility's electricity costs over the next quarter of a century.

The outcome may affect the electricity bills of Montana Power customers for years, but how much rates rise or fall depends on what happens in the volatile energy market.

The court did not immediately rule, but members quizzed the attorneys at length over the complicated issues involved.

At issue is how Montana Power recovers its cost of buying 100 megawatts of electricity under long-term contracts with independent small generators. Federal law requires utilities to buy power from those parties at rates set by state regulators - in this case, the Public Service Commission.

But those prices historically have been much higher than the market price. That required Montana Power to sell the power at a lower price than it paid, a difference earlier estimated by the company to be $400 million over 25 years.

The question before the high court is how that difference is accounted for in customer bills as a 1997 law relaxing state regulation of the electric industry begin to take effect.

Montana Power wants a system in which electricity rates would be adjusted annually to reflect the changes in market price. That's the best way to ensure rates shadow costs, the company said.

The Public Service Commission argued that "tracking" method is not allowed by state law. Rather, the utility is required to estimate its cost upfront and apply a set transition charge to customers' bills, the PSC said.

The company said nothing in the law prevents use of its tracking process; the commission said nothing in the law permits its use.

The high court appeal came in a lawsuit filed by Montana Power in November 1999, challenging PSC's position on cost recovery. District Judge John Whelan of Butte ruled in favor of the Butte-based utility, and the PSC appealed.

Some Supreme Court justices said they could not understand why Montana Power, largely responsible for writing the 4-year-old deregulation law, did not make sure it specifically allowed the kind of cost recovery the utility wants to use.

Mike Manion, attorney for the company, said Montana Power felt other wording in the law ensured the company would not have to rely on just an estimate of its costs.

In a volatile electricity market, allowing yearly adjustments in rates to track the difference between costs and the market rates is the only fair way to make sure consumers are not gouged and the utility's financial health is secure, he said.

Attorneys for the PSC and large industrial users of power said the court cannot rewrite the law to accommodate Montana Power. "It's not for the judiciary to fix this statute," said Kyla Gray of Billings, lawyer for the industries.

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