PSC staff calls for rejection

The Montana Public Service Commission should turn down, at least for now, most of the
electricity contracts NorthWestern Energy arranged to supply Montanans starting July 1, the PSC
staff recommended Friday.

By CHARLES S. JOHNSON of the Missoulian State Bureau

The PSC staff concluded that most contracts submitted by NorthWestern didn’t meet
industry-accepted procurement practices or lacked sufficient documentation to show why one
supplier was chosen over another. The staff offered detailed criticism of some of the contracts.

It recommended turning down five of the eight contracts over which the PSC has jurisdiction. The staff
said NorthWestern could later add contracts to its portfolio if they were acceptable.

If accepted by the five-member PSC, which begins deliberations Monday, the recommendations
would deal a major blow to NorthWestern, the South Dakota company that bought Montana Power
Co. earlier this year. It likely would force NorthWestern to go to the spot or open market and secure
additional power to supply 295,000 Montana consumers.

If the PSC accepts the recommendations, it would also raise questions about power prices starting
July 1 for residential customers. As proposed by NorthWestern, typical residential customers using
750 kilowatts a month would pay 13 percent more on July 1 and an additional 7 percent July 1, 2003.

In response, NorthWestern spokeswoman Claudia Rapkoch said, "It’s just nothing more than a
working document. It’s not necessarily final. There will be discussions and deliberations that will
continue"

She said NorthWestern officials will be reviewing the document and closely following the
commissioners’ discussions next week.

Among other concerns, the staff questioned NorthWestern’s selection of Montana Wind Harness for
wind-power generation. The contract was not recommended by one of the key utility staffers reviewing
the applications but still was picked by the utility.

Missoula businessman Jim Carkulis was the driving force behind Montana Wind Harness. After being
selected for the contract, questions were raised about Carkulis’ past business failures and his lack of
experience in wind power.

"They selected a company that had at best a sketchy background, no experience, but was ‘very well
connected politically’ … that promised jobs in the form of a wind generation plant," the PSC staff
said. It said NorthWestern "failed to verify the principals of the company and made repeated requests
from Montana Wind Harness that were stonewalled."

At the time of the PSC hearing in April and May, Montana Wind Harness had yet to procure the
financing to develop the project.

Mike Uda, a Helena lawyer representing a wind power company not selected, praised the staff
recommendations.

"I think it’s really a watershed moment in this case because there were a lot of concerns about the
procurement process, almost from its inception, and the commission staff said those concerns were
well taken," said Uda, who represented Northern Alternative Energy.

NorthWestern officials had argued that its proposed energy supply portfolio was prudent and therefore
the company was entitled to the full-cost recovery for the contracts from consumers.

The PSC staff saw it otherwise in a 42-page memo released late Friday afternoon.

The staff recommended including contracts with Duke Energy for 111 megawatts for a year and two
contracts totaling 450 megawatts for five years from PPL Montana. NorthWestern had already signed
contracts with both power providers. Other independent power producers, which the PSC has to
include, would be part of the mix.

In addition, the staff criticized the NorthWestern energy portfolio for failing to include any
conservation, even though that policy has been recognized by both Gov. Judy Martz and the Montana
Legislature.

The staff also pointed out numerous flaws in how NorthWestern documented its selection in the
bidding process.

"It is up to the company as the default supplier to document, support and clearly demonstrate that it
has made its best judgments all the way through the procurement process, and the company has not
done so," the PSC staff said.

In addition, the staff pointed out what it saw as defects in how NorthWestern selected its suppliers
and in many cases failed to follow what is known as "industry accepted procurement practices."

The staff raised a series of concerns about NorthWestern buying power from a sister company’s
gas-fired plant in Great Falls known as Montana First Megawatts. It concluded that Montana First
Megawatts transaction "is not in the public interest and should not be included in the default supply
portfolio."

With the capacity payments they are required to pay, NorthWestern consumers would practically
foot the tab for the Montana First Megawatts’ entire $160 million plant over the 20-year deal, the staff
said. That might be OK if all of the plant’s power was dedicated to NorthWestern customers, but the
company plans to sell 90 megawatts on the open market, the PSC staff said, raising serious
concerns.

The PSC staff also expressed "serious concerns" over NorthWestern’s selection of Rocky Mountain
Power, and the utility’s lack of due diligence.

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