'The options are not great': Cost of electricity to triple for city of Great Falls

Great Falls city commissioners were confronted with an uncomfortable reality during Tuesday's regular commission meeting. The rate the city pays for its electric supply is about to triple, adding approximately $2.1 million a year to the cost of city operations.

“This is not going to be an easy discussion,” City Manager Greg Doyon told the commissioners at the outset of his presentation. “The options are not great.”

Doyon explained that the sudden, startling jump in what the city pays for its electricity is due to two coinciding factors: the looming expiration of the favorable electric supply contract the city currently enjoys, and extreme volatility in American energy markets which have seen prices for electricity rise at more than twice the rate of inflation over the past two years.

Since November 2018 the City of Great Falls has paid a negotiated price for its electricity of $29.25 per megawatt hour (MWh). In the coming days that rate is expected to skyrocket to around $90/MWh.

“When I was thinking about how to articulate this the words ‘jaw dropping’ and ‘gasping’ kind of came to mind,” Doyon told city commissioners. “It’s so different from what it was.”

To be clear, Great Falls residents will not experience a tripling of what they pay to power their homes and businesses. The cost increase is specific to the City of Great Falls.

“What we are talking about is what the City of Great Falls as an organization pays for electricity,” Doyon explained, “when we’re treating water, when we’re processing wastewater — all the pumps, streetlights, those types of things that require an electric supply to operate those services. We’re not negotiating on behalf of residents or anything like that.”

However, the jarring leap in what the city will have to pay for its electricity will eventually trickle down to taxpayers and city utility customers in the months ahead.

“The fiscal impact of this change will be very significant,” said City Finance Department Director Melissa Kinzler. “The largest impact will be in the water fund $900,000 a year, in the sewer fund is estimated to be $540,000 a year, and the street lighting fund $230,000 a year.”

“It’s very likely there will be an impact to city utility rates because of the energy supply contract,” Doyon stated plainly. “There’s just no avoiding that. That is an area that it will be felt in for sure.”

The roots of this sudden price spike can be traced back to 2013 when the city was able to extract itself from its disastrous involvement with the Southern Montana Electric Power & Transmission Co-op. The Billings-based wholesale power seller filed for bankruptcy in October 2012, saddling its members including the City of Great Falls with $21.4 million in debt.

“If there was a silver lining in our separation from Southern Montana Electric, it was that we were then able to go out on the open market and negotiate our electric supply for city functions,” Doyon explained.

Under Southern Montana Electric the city was paying $72.96/MWh for the electricity it used. In Nov. 2013 the city was able to negotiate a five-year fixed rate contract with Talon Electric (formerly Pacific Power & Light) at $41.20/MWh – a substantial savings.

Five years later the contract with Talon Electric was set to expire. The city was then able to negotiate an even more advantageous fixed-rate contract for its electric supply from Energy Keepers, Inc. (EKI), a federally licensed hydropower project at Kerr Dam within the boundaries of the Flathead Indian Reservation. That contract, which came into effect in Nov. 2018, supplied the City of Great Falls with electricity at $29.25/MWh, less than half the default supply rate NorthWestern Energy was offering at the time.

“I just want to emphasize that over the term of that supply contract we’ve probably saved about $1.5 million a year in energy costs,” Doyon said of the city’s association with Energy Keepers. “It was phenomenal.”

But it couldn’t last forever, and Great Falls has had the misfortune of re-entering the energy market at a time of unprecedented rate increases.

“There are a multitude of factors that impact energy pricing including transmission availability … (coupled) with multi-year regional drought conditions impacting the generating capacity of regional dams, retirement of coal generating assets, and natural gas pipeline constraints at key gas fired electric generating plant delivery points in the Pacific Northwest,” information supplied by the City of Great Falls states. “Over the last five years, energy consultants have witnessed indicative term pricing climbing above $100/Megawatt hour.”

Consultants with the energy advisory firm PowerGas Corporation forecast that by the end of this year, the price of electricity on the open market will likely hover between $125.00/MWh and $128.00/MWh.

The city of Great Falls found itself in a difficult situation. Knowing that their contract with Energy Keepers would soon expire, the city retained the services of PowerGas Corporation to help steer them toward the most palatable solution. They were left with three alternatives.

“Essentially our options are to wait until our contract expires and go out onto the open market in November of this year and see what we get for bids,” Doyon told city commissioners. “The other option is to default back to NorthWestern Energy. There’s kind of a captive market here with NorthWestern Energy and if we were to go back and take full energy consumption from them, we would never be able to go back out on the open market. We would default and stay with NorthWestern Energy indefinitely.”

The third option was for the city to execute what’s referred to as a “Blend and Extend” contract. In simplistic terms, a Blend and Extend contract would take the low electricity rate the city now enjoys and ‘blend’ it with the anticipated cost of electricity next November. The contract with Energy Keepers would then be ‘extended’ for an additional year, allowing the city to stabilize the rate it pays for electricity until November 2024. The hope is that by that time the price of electricity will have gone down, and the city will be able to negotiate a new, longer term electric supply contract at a more advantageous rate.

This was the preferred option of city officials, and the one Doyon recommended to Great Falls city commissioners.

“The benefit to the city is that we will have a predictable rate for this term," Doyon said. "Long-term, we’ll have to determine where the market is going to be after this contract extension, versus waiting until November and going out on the open market when our consultant is advising us that the rates at that time are looking be in the range of $125 to $128 per megawatt hour.”

Doyon encouraged the commissioners to “take a deep breath, basically hold your nose and say we’re going to stabilize our rates for the next two years.”

“I wish I had better news and a better way to get there,” he added. “There will definitely be an impact on the city budget, but there’s really not any great way to deal with this other than moving forward and trying to stabilize the rate for that period.”

After some discussion, the city commissioners voted unanimously to authorize Doyon to enter into contract negotiations with Energy Keepers Incorporated (EKI) to blend and extend the city’s current energy supply contract for a period of 20.5 months at a rate of about $90/MWh.

The new electric supply contract will likely be implemented and executed next week; however, Great Falls’ utility customers won’t feel the impact to their own wallets until later this fall. That’s when the city will approve its budget for the coming year.

“It’s unfortunate for everybody that’s just trying to make a living and pay for the normal things whether its gas or groceries,” Doyon said of the current inflationary climate, “but we don’t have control over what happens in the market for these supplies and we’re affected by them as well. We have to make adjustments when appropriate to make sure we’re able to pay for all the supplies and maintenance that are required in each of those utilities. That’s unfortunate, but that’s just kind of the nature of the current environment that we’re in.”

This article originally appeared on Great Falls Tribune: Electricity costs for City of Great Falls to triple