The power behind the power: Time for a change?

E-mail this article Print this article Related stories Part 1: Dark days at City Light: Seattle utility was ill-prepared for a chaotic market A Power Primer

In the summer of 2000, the political leaders who oversee Seattle City Light were concerned about looming energy blackouts in California, but they failed to foresee the calamity that would hit Seattle a few months later.

On Aug. 3, City Councilman Jim Compton, vice chairman of the committee that oversees the utility, waved a newspaper article about California's energy crisis at a committee hearing and wondered aloud whether City Light was lining up power supplies fast enough.

Power was already selling for 20 times its normal prices.

"I think somebody's going to sound the alarm that we may be fiddling while California burns," Compton warned.

There was still time to act. But Compton didn't press his point, and the meeting moved on to other topics. Though City Light was entering the winter short of electricity, its strategy was to leave many power purchases for the last minute. In the end, it was forced to pay exorbitant prices on the overheated market.

The result is rate increases of nearly 60 percent and a total debt of $1.7 billion, which will keep rates high for years.

A Seattle Times examination found City Light was poorly positioned when deregulation in California sent power prices soaring. City Light managers missed clues to the developing crisis, relied on ineffective trading strategies, and reacted slowly compared with some other utilities.

As the energy crisis hit, elected officials didn't challenge the utility's assumptions. And the council's earlier decisions — such as selling a coal-power plant and shedding cheap electricity from the Bonneville Power Administration — left ratepayers more vulnerable to the power market.

Some politicians and utility observers now suggest an independent utility board would be better-equipped than the City Council and mayor to oversee City Light. Even City Light Superintendent Gary Zarker said that during the worst of the energy crisis of 2000-01, he could have used advice from people more familiar with the utility business.

Who's in charge?

City Light is unusual. Of the nation's 10 largest citizen-owned electric utilities, it is the only one without its own utility board — an appointed or elected panel devoted solely to utility matters.

In Seattle, oversight is left to the mayor and City Council. The mayor hires and fires City Light's superintendent; the council sets rates and policy.

Zarker operates in a political arena in which politicians — not energy experts — call many of the shots. In fact, the circumstances of his own hiring in 1994 reflect that political world.

Mayor Norm Rice hired Zarker, who had no utility background, when political savvy may have seemed more important than a working knowledge of dams or power markets. The previous superintendent, Roberta Palm Bradley, was pushed out after clashes with union leaders and her staff.

Zarker had won plaudits as city budget director and head of the engineering department before taking over City Light. He is a longtime friend of Mayor Greg Nickels, with whom he splits Mariners season tickets.

In mid-2000, as the West Coast energy crisis began in earnest, Zarker's utility had a new overseer in council rookie Heidi Wills, who was made energy-committee chairwoman.

Wills had run for office in 1999 on environmentalist credentials. As an aide to King County Executive Ron Sims and as former student-body president at the University of Washington, she championed buses, salmon and recycling.

While the energy crisis surged onward, Wills focused on conservation, clean power and help for low-income ratepayers. She did not challenge strategies that left City Light vulnerable to ruinous power markets.

"I think she really focused on the demand side of the utility's power needs rather than the supply side," said City Councilwoman Margaret Pageler, who ran the energy committee from 1995 to 1999.

An opportunity missed

A review of Wills' committee meetings — which received biweekly briefings from City Light — suggests she and her colleagues didn't fully grasp the dangers ahead.

On Aug. 17, 2000, two weeks after Compton waved the news article, City Light was burning through cash so fast to buy electricity that it expected a $30 million deficit by the end of the year. Council members were asked to raise rates.

Some wondered: Could it get worse?

Compton seemed to come closest to understanding City Light's vulnerability if market prices continued up. He hit on a key point: Perhaps Seattle should buy some power in advance — at higher-than-usual prices — to lessen the risk of paying even more later.

"If we do see a worsening or catastrophically worsening situation in the wholesale market, maybe we should have a conversation about accepting substantially higher prices to get some certainty or to get some stability into our contract situation," Compton said.

Zarker replied that he would lock in such power contracts if he thought the utility would run short.

Compton pressed the point: "But what if the price was going to get so high that it got to some fantastic level, which it's doing, I guess, in the instantaneous market in California?"

"We've confronted that several times," Zarker answered. "We are doing it again now. How much of our future need should we be buying from future markets?" The risk, he said, was getting stuck with high-priced power the utility might not need.

"This is one of the hardest decisions I've ever made in my career — of when you pull the trigger on a high-cost product like that," Zarker said.

Councilman Richard Conlin noted that prices could drop. "The implication to me is we have to be really careful," he said. The consensus was to wait and see — not buy power in advance.

Wills ended the conversation by pointing out the upside of high power prices. "What the high prices allow us to do is capture this sense of urgency and hopefully channel it into more conservation," Wills said. If that happens, she said, "hopefully we won't need to buy as much in the market."

Mayor Paul Schell also went along with City Light's plan.

But the strategy they thought was cautious was actually very risky. It amounted to hoping for rain and stable market prices.

Instead, the Northwest got hit by the second-worst drought on record, which severely limited the utility's hydropower supply. And by early 2001, the price of electricity purchased from the wholesale energy market soared to $300 a megawatt-hour — higher than it had ever been. At times early last year, City Light spent $2 million a day to keep the lights on.

Not a 'complete deck'

In retrospect, everyone involved admits it would have been prudent to buy power in advance for the first several months of 2001. That would have insulated City Light.

But Compton said elected officials were never made fully aware of the risks ahead.

"I don't feel that we ever played with a complete deck in this game," he said. He has called for a city audit of the utility's decisions.

Wills said the utility should have bought more electricity after it sold its share of a power plant in Centralia that had provided about 8 percent of City Light's electricity.

"That's certainly an area where a mistake was made, selling Centralia and not shoring up with another long-term power contract," Wills said in a recent interview.

But then she changed her mind. "I'm even going to retract the word 'mistake,' " she said. "Here's why: Because of volatile weather conditions, you never know what your generation output is going to be."

Instead of blaming City Light, she said, ratepayers should blame their high power bills on greedy energy companies and federal regulators who refused to cap electricity prices.

"Without a crystal ball, how close can you get to making the perfect decision?" Wills said.

Too much to ask?

Some people who have watched City Light closely wonder whether council members — often distracted by other issues — should relinquish part or all of their oversight to an independent utility board.

"I don't want to bang on the City Council. They are trying to do what they think is a good job. But I don't want a garbageman doing brain surgery on me," said Jerry Garman, a former deputy superintendent for power at City Light who retired in 1992 and is now a power consultant.

Most large public electrical utilities have dedicated boards. Washington's 28 public-utility districts are run by elected commissioners. Tacoma Power has a utility board appointed by the City Council.

Those setups don't guarantee success. Snohomish PUD, for example, got socked by the energy crisis and has the highest rates in the state, although those rates are scheduled to drop by April 1.

But Randy Hardy, City Light superintendent from 1984 to 1991, said a properly educated utility board could stay more focused than the City Council.

"My frustration in seven years as superintendent of City Light is there were always sexier issues, whether it was new dog-leash policies or what have you," Hardy said.

Even Zarker, while praising the council for raising rates when needed — which was vital to preserving the utility's credit rating — indicates he would be open to the idea.

"Nobody runs a business of this magnitude without a board of directors, without an informed board of directors," he said. "That (absence) made managing (the crisis) particularly hard."

Zarker said the City Council is good at telling the utility what citizens want it to do — keep rates low, spend money on wind power and make sure its dams don't kill salmon, for example.

But: "That's not to say they have a good grasp of the business environment in which this utility operates — or that they should have."

Some elected leaders are ready to look at the idea.

"I think it's time. I think the nature of the business has changed dramatically enough to consider an independent board," Pageler said.

Politics and power

Some citizen watchdogs argue that the City Council and mayor have a conflict of interest when it comes to City Light.

They point to a 1999 decision to charge City Light ratepayers a new tax for streetlights — a service that had always been paid for out of the city's general tax dollars.

An independent utility board would never have agreed to that new fee, about $1 a month, because City Light customers didn't get new services in return, critics argue. A judge ruled the fee illegal last year, a decision the city has appealed. Meanwhile, city lobbyists are trying to change the law.

"I think there's been poor governance from the mayor and City Council," said Rud Okeson, a retired City Light engineer and member of the utility's citizen rate-advisory committee. He has sued the city demanding a refund of the streetlight tax.

Political directives coming from the City Council can affect the financial health and management of the utility. For decades, successive City Councils and mayors prodded the utility to keep rates low — even though that meant racking up higher debt.

In 1996, while Pageler was head of the energy committee, the City Council agreed to reduce the amount of cheap hydroelectric power it got from the BPA. Also on Pageler's watch, the utility hatched the plan to sell its share of the coal plant in Centralia. Both actions increased City Light's reliance on the energy markets at a time when prices were low.

Nickels backs Zarker

While he has yet to say much about utility issues, Mayor Nickels has already made one important decision about the utility since taking office: reappointing Zarker.

Nickels came into office promising to shake up city government. He ousted four city-department heads and before reappointing him, publicly humbled Police Chief Gil Kerlikowske over his handling of last year's Mardi Gras riots.

But Nickels quickly reappointed Zarker, calling him a "universally praised public-utility leader."

In an interview last week, Nickels said he's known Zarker for years. The two live near one another in West Seattle. Zarker has also contributed to Nickels' political campaigns.

But Nickels said he put the utility chief through the same scrutiny as other Cabinet officials. "City Light had a bad year," Nickels said. But Zarker is "a first-rate manager."

Wills also defended Zarker and said she's not convinced an independent utility board is necessary. Still, she is seeking advice on whether utility management has been adequate and is asking for $25,000 to $50,000 to hire a consultant to study the issue.

"I think that will be money very well spent," she said.

Jim Brunner can be reached at 206-515-5628 or jbrunner@seattletimes.com

Alwyn Scott can be reached at 206-464-3329 or ascott@seattletimes.com

Lynda V. Mapes can be reached at 206-464-2736 or lmapes@seattletimes.com