HELENA - NorthWestern Corp.'s announcement last week that it might sell its interest in the Colstrip 4 power plant looks like just another boring utility/finance story. But it's not, for it will have a huge monetary impact on the company's 300,000-plus ratepayers in Montana.
The question is, what will that impact be? Might it be positive for ratepayers, as suggested by the company, in the form of a long-term source of reasonably priced power?
Maybe. But the Montana Consumer Counsel, which has been watching the issue closely, says this positive outcome may happen only if state regulators crack down on the questionable elements of this deal.
If that doesn't happen, a Consumer Counsel consultant says, NorthWestern's Colstrip 4 gambit is little more than a multimillion-dollar shakedown of its Montana ratepayers - and a huge windfall for company shareholders.
John Wilson, an economist hired by the Consumer Counsel, says NorthWestern could walk away with
$200 million-plus in profits, pay no federal income tax on the gain, deny ratepayers tens of millions of dollars in tax benefits they arguably paid for - and still leave those ratepayers at the mercy of the marketplace for their electricity.
At issue are 222 megawatts of coal-fired power produced by the Colstrip 4 plant east of Billings. That's enough electricity to supply one-fifth of NorthWestern's customer base, and because the plant was built 20 years ago, its power is inexpensive.
Until last year, NorthWestern and its predecessor, Montana Power Co., controlled this power through a lease agreement. Half the power is sold to Puget Sound Energy, a Seattle-area utility; the other half goes to Montana consumers, at a relatively low price.
Last year, NorthWestern bought out the two leases for $187 million, giving it full ownership of the power. Just last week, NorthWestern announced it has arranged to sell ownership of power to an investment group for
If the sale were to go through, the new owner has agreed to sell back the power to NorthWestern Energy and its Montana customers at a discount from market price. That sell-back wouldn't occur until current power-sale contracts expire in 2010, 2014 and 2018, so we don't know what the actual price would be.
But if the discount were to take effect next year, Montana consumers would pay about $80 per megawatt hour (mwh) for this electricity - considerably more than the $35 they're paying for the largest contract that serves them.
Yet NorthWestern is giving state regulators and its Montana customers another option: Leave the power in NorthWestern's hands, but "rate-base" the electricity, meaning the company gets to earn a regulated rate of return on the power far into the future, based on a value tied to the $400 million sale offer.
Company officials say that means locking in a price of about $60 per mwh. It's more than consumers pay now for most of this same power, but the price isn't bad when compared with the current market, and it could look a lot better if wholesale power prices continue to rise.
"We believe this is a very good opportunity for our customers," says NorthWestern spokeswoman Claudia Rapkoch in Butte. "There is no way we could go out and find a similar (power source) today for a similar price."
Members of the Montana Public Service Commission, which will make a decision later this year, say they generally like the idea of rate-basing the power. It's a step toward making NorthWestern more like it was before deregulation, as a utility that owns some of its own power sources, they say.
Customers would have long-term access to this power at a reasonable price, and not be at the mercy of the marketplace.
The Consumer Counsel, the state office that represents utility consumers, likes the idea of rate-basing power, too. But it says the key is how to calculate the rate-basing, and how the benefits of Colstrip 4 power are divided between consumers and the company.
"There are questions about the technical ownership of Colstrip 4 and who has the right to the benefit of that, based on the financing," says Consumer Counsel Robert Nelson.
Nelson's office believes NorthWestern improperly used ratepayer-backed debt to finance its purchase of Colstrip 4 last year. The PSC is investigating this claim.
If the claim is true, ratepayers should get more benefit from the purchase, the Consumer Counsel says. That would probably mean rate-basing the power at a value less than NorthWestern's proposed $400 million sale price, thus lower-priced power for consumers.
Wilson, the economist who testified for the Consumer Counsel, says regulators also need to take a hard look at how the treatment of Colstrip 4 power will affect NorthWestern's prior "net operating losses," or NOLs.
NorthWestern estimates it has nearly $350 million of NOLs stemming from its 2003 bankruptcy, when it sold non-utility companies at a huge loss.
Wilson says ratepayers should share in these tax benefits, because ratepayer revenue sustained the company through bankruptcy reorganization.
If NorthWestern uses the NOLs to reduce federal taxes on any profit from the Colstrip 4 sale or rate-basing, the company not only is cutting its tax bill but also "spending" the NOLs, so ratepayers wouldn't get any benefit, he says.
"It would be clear and undeniable ratepayer abuse to allow NorthWestern to use ratepayer-supported public utility financing to (buy Colstrip) for the sole purpose of realizing a capital gain to, in turn, be used to deny ratepayers the benefit of tax savings that would otherwise hold down their utility rates," Wilson wrote in testimony submitted to the PSC on May 20.
Rapkoch says NorthWestern did not use public-utility debt to buy its share of Colstrip 4 power, and will demonstrate that fact to the PSC as the case unfolds. The company also believes NOLs are the company's to use as it sees fit, because the losses were from non-utility companies.
Nelson, the Consumer Counsel, says sorting out the whole mess could be a contentious, lengthy battle: "I think we're a long way from resolving all of these issues."
Mike Dennison is a reporter for the Missoulian's State Bureau in Helena. He can be reached at (406) 443-4920 or by e-mail at firstname.lastname@example.org.