Coal-plant sale was good idea at the time
Seattle Times staff reporter
Seattle City Light joined seven other utilities last year in selling a jointly owned coal-burning power plant near Centralia for $554 million to TransAlta, Canada's largest investor-owned utility.
By all accounts, the utilities were delighted to be rid of the Centralia plant. The hydra-like ownership structure was awkward, they complained. And for Seattle officials, ownership of a dirty coal plant was a blotch on the city's green image.
Talk about timing. Not too long after the plant and adjacent open-pit mine changed hands in May, the West's energy crisis erupted. Power that once sold for $30 a megawatt hour suddenly cost $300 or more.
In the 10 months since the sale, while City Light and some other former owners have jacked up power rates and gone into debt, TransAlta has raked in big profits.
The Centralia plant, built in the 1970s, generates 1,340 megawatts - more than enough to power the city of Seattle. Until last year, it had been owned by eight utilities, with the largest shares held by two private utilities, Portland's PacifiCorp (47.5 percent) and Spokane's Avista Energy (18 percent). Seattle City Light and Tacoma Power each owned 8 percent.
"We all wish we had it now," said Paula Green, City Light deputy superintendent.
Since losing that power, City Light estimates it has spent $35 million more buying power on the market through January than it would have if it had held onto its share of the Centralia plant.
The coal plant provided City Light, as an owner, with 75 megawatts at a cost of about $27 per megawatt hour. To replace that, the utility has paid an average price of $122 a megawatt hour on the market, Green said.
In January alone, the city-owned public utility spent nearly $80 million buying power off the volatile energy market, at an average price of $232 per megawatt hour, according to utility records. At times, it paid as high as $600 a megawatt hour.
Numbers are still being figured for February, but the utility estimates it spent $84 million buying power on the market - a single-month record. If that number holds up, City Light will have spent $348 million buying power on the market since June.
Utility officials here blame California for the crisis. That state's experiment in deregulation, combined with a lack of new power-plant construction, encouraged price gouging by power distributors, they say. The problem has been made worse by the dry winter, which left dam reservoirs perilously low.
The surge in market power prices has forced City Light to raise rates by 28 percent this year. And more increases are likely this summer or fall as drought conditions cut production at hydroelectric dams.
Meanwhile, TransAlta reported a before-tax profit of $87 million (U.S.) last year on its Centralia operation, said Miranda Keating Erickson, senior analyst for investor relations. "It did exceed our expectations," she said.
While TransAlta must spend an estimated $200 million to comply with a federal order to clean up the plant's sulfur-dioxide emissions, analysts say the company remains well-positioned to take advantage of the West's volatile power markets.
"They saw the potential in the plant, and I think it's turned out to be a very good investment for the company," said Robert Hastings, an analyst with Raymond James, a Vancouver, B.C., securities firm.
Most of TransAlta's Centralia output is locked into relatively cheap long-term contracts, but its most lucrative deals come from selling power at higher rates to customers who need it on a day's or even an hour's notice.
Ironically, some of those customers are utilities who once owned the plant.
For example, City Light paid TransAlta nearly $5 million between May and January, at an average price of $146 per megawatt hour. At times, that spiked to $425. Tacoma Power paid $20.7 million over the same period, according to spokeswoman June Summerville.
No one is saying City Light could have predicted the power crisis, but in hindsight some wish a permanent replacement for the coal plant's power output had been found before it was sold.
"What we wish is that we had locked into other contracts sooner and not assumed we had two years to find another resource," said Seattle City Council President Margaret Pageler, who chaired the council's Energy Committee when it authorized the Centralia sale.
In July, the city's replacement power will come on line in the form of a new natural gas-fired power plant in Klamath Falls, Ore. City Light will buy an average of 100 megawatts from that plant, at about $56 per megawatt hour, Green said.
City Light officials defend the choice to sell the Centralia plant, regarded as one of the dirtiest in the West.
"We sold a 1970s dirty coal facility and replaced it with a state-of-the-art, clean natural-gas facility. That's how I look at it," said Green.
Environmentalists blame the plant for the haze that sometimes obscures Mount Rainier. It is the largest stationary source of sulfur-dioxide emissions in the region - 70,000 tons a year.
In 1995, the federal Environmental Protection Agency ordered the plant to cut those emissions by 90 percent before 2003. Faced with the estimated $200 million cost of installing "scrubbers" capable of cleansing the emissions, the utilities started trying to unload the plant in 1998.
There were other financial considerations. City Light wanted to avoid its share of the estimated $380 million cost of restoring the stripped land to its original form once the mine is exhausted, Green said.
At the time, no one saw a need to hang on to the plant because market power was cheap. Among Seattle officials, discussions about Centralia focused mainly on its environmental impacts.
At a City Council briefing two years ago, City Light Superintendent Gary Zarker said the city had been "embarrassed" by its ownership of the dirty power source.
At the same meeting, Pageler predicted the sale would be a win for Seattle consumers.
"I think we have a terrific dividend, potentially, for our citizen owners here," Pageler said, referring to City Light's $36 million share of the $554 million sale price.
Pageler predicted the proceeds would be "more than enough" to lock in replacement power. But in the current market, it turned out to be small change.
Seattle wasn't alone in failing to predict the energy crunch. Other utilities also suffered setbacks since selling the coal plant.
Tacoma City Councilman Kevin Phelps noted that Tacoma recently bought diesel generators to supply 48 megawatts to the city at $150 per megawatt hour - more than three times what the utility paid for power from Centralia.
Now Phelps says he wonders why Tacoma Power and the other utilities couldn't have kept the Centralia plant's cheap but dirty power.
"I think the region really stumbled," Phelps said. "If they (TransAlta) can do it, what was the big concern? Why didn't we spend the $200 million (in cleanup costs) and have that resource for years to come?"
Tacoma Power started levying a 50 percent surcharge on its power bills in December and expects it to last at least through September.
Avista, a private Spokane-based utility, was caught without enough power to supply its customers after selling its share in the plant. Tom Matthews, the company's chairman and chief executive officer, told Electric Utility Week last June the company's business judgment in selling Centralia without locking in replacement power was "dead wrong."
Meanwhile, TransAlta is moving ahead to clean up and expand the Centralia plant and adjacent mine, which together employ 760 people.
TransAlta is installing scrubbers to clean up the sulfur dioxide from its smokestacks, taking advantage of a $100 million tax break offered by the Legislature.
The company also plans to put in more efficient turbines, which could boost output by 75 megawatts, said Rich Woolley, vice president for TransAlta's Centralia operations. And it recently won approval to build a 248 megawatt, gas-fired power plant at the site.
Woolley, who also managed the plant under its former owners, understood their reasons for selling.
"There were eight different agendas as to what the power needs were," he said. "It made it very difficult for them to focus."
TransAlta, which also owns coal-fired power plants in Alberta, was a perfect fit to manage the Centralia operation, Woolley said. So far, the proof is in the profits.
"Let's just say it was a really, really good idea," he said.
Jim Brunner can be reached at 206-515-5628 or firstname.lastname@example.org.
Seattle Times staff reporter Hal Bernton contributed to this report.
Material from The Associated Press was included in this report.