What Can Be Done About Northwestern?

How bad is NorthWestern’s situation?

Are customers being hurt by it now, or will they be hurt in the future?

What is the PSC doing about it?

What should we do about it?

Can we do anything to avoid this in the future?

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By Bob Rowe
Chairman, Montana Public Service Commission

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There is both a little good news and the potential for bad news for NorthWestern gas and electric customers worried about the effects of NorthWestern’s continued financial deterioration, and debating what should be done.

Good news and bad news

First the good news: To-date, customers have not received worse service, or paid more for service because of NorthWestern’s situation. Gas and electric supply for “default customers” (the small and medium sized customers who don’t have another source of energy) are being firmed up going into the winter heating season.

Natural gas prices have climbed to levels not seen by NorthWestern customers since the early 1980s. NorthWestern’s high gas charges are not the result of its poor financial health. This year’s gas crisis hit virtually all gas companies and customers in the country. MDU and Energy West customers faced a price spike three years ago, and are also struggling with high prices this year. The PSC and the Wheeler Center are co-sponsoring an important Natural Gas Summit on September 17 (Go to http://www.psc.state.mt.us for details.)

Electric prices started moving up last Summer, when the price cap under Senate Bill 390 (the 1997 electric restructuring law) expired. Again, electric prices are a long-term serious concern, but so far have not been made worse by NorthWestern’s financial situation.

Rates paid by customers for distribution services, including the electric wires and substations, the gas pipes and pumps, owned by Northwestern and on which it earns its profit, have not increased since 2001 (based on a complete year of 1999 information).

Now the bad news: As NorthWestern’s situation gets worse, and as it is resolved, it will become more difficult to keep customers entirely out of harm’s way. Most utility bankruptcies around the country have resulted in higher rates to utility customers, even though long-term service and prices may be more stable.

What should our goal be?

Here’s my goal: “A strong, utility-focused enterprise, capable of providing reliable distribution service and default energy service to Montanans.” It would be Montana-focused. It would be run by grown ups. It would deal with Montana regulators and civic leaders based on mutual respect and full disclosure of facts. In sum, it would be focused on its Montana utility customers, and would recognize that its success depends on their satisfaction.

What steps should we take to get there?

I divide the Public Service Commission’s tasks into three time periods: The run-up to bankruptcy, a possible bankruptcy proceeding itself, and the aftermath.

Whether or not NorthWestern goes into bankruptcy (it’s looking more probable), its financial condition is a great concern. Much of the PSC’s current work is grounded in a tough order the Commission issued last January, concerning a NorthWestern request for the PSC to approve certain financing. The PSC told the company to get its house in order: Sell the money-losing non-utility affiliates, revise its executive compensation plan; look at its stock dividends, keep up with system maintenance.

Current NorthWestern management’s response to the PSC’s direction has in many respects been positive. They appeared to take many of the right steps. But they may be trying to climb out of a hole that is now too deep.

The PSC has required detailed reports in several areas, including ongoing reports on maintenance, and reports on injections of natural gas into storage to be available this winter.

The Commission has also been busy implementing its electric default supply guidelines. These are now a nationwide model for supplying electricity to small customers after a state has “restructured” to a competitive supply model. I am concerned that NorthWestern is able, in its current condition, to implement these policies. A PSC-created advisory committee is working with NorthWestern to ensure that these policies are effectively implemented.

Based on a detailed petition by the Montana Consumer Counsel, the PSC has opened a comprehensive investigation into NorthWestern’s finances and structure. It’s a big case, on a breakneck schedule. We have just received the first set of information from NorthWestern. One outcome proposed by the Consumer Counsel could be an order to break out the utility into a separate utility operation. (Such an order might possibly be challenged by NorthWestern on state and federal law grounds).

During a bankruptcy

Driven by the obligations of its non-utility affiliates, NorthWestern has about $2 billion in obligations, when it can probably support only about $1 billion. It also faces severe, current liquidity problems, in part associated with the need to provide energy suppliers security for delivery of gas and electricity. For these and other reasons, it is increasingly likely that NorthWestern could file for bankruptcy before the Commission’s financial inquiry gets very far along, no matter how fast the Commission acts. If so, the information the PSC is developing in the inquiry will provide the basis for the Commission’s position in bankruptcy court. Under the bankruptcy court’s authority, energy purchases would likely be very low risk.

The federal bankruptcy court, most probably in Delaware, will have enormous control over how the company is reorganized under Chapter 11 of the federal bankruptcy code (or, in a Chapter 7 bankruptcy, how its assets are liquidated). A bankruptcy court is a business court. It does not necessarily see its job as protecting customers. How much weight the bankruptcy court gives to the PSC’s positions will depend in part on how much authority the PSC has under state law. Comparing Montana law to law in other states that have faced utility bankruptcy, Montana’s PSC has relatively weaker authority in some important areas.

Montana’s goal in bankruptcy should continue to be establishing a utility-focused, Montana-focused operation, and to avoid shifting costs and risks onto utility customers. The PSC will be a “party in interest” in any bankruptcy, working especially closely with the Montana Consumer Counsel and its experts, and coordinating with the Attorney General and Executive agencies. A bankruptcy case is expensive. The California Public Utilities Commission is spending $15 million a year on the bigger and more complex PG&E bankruptcy. There, it was especially valuable for the California PUC to present its own reorganization plan as an alternative to the company’s and creditors’. In a smaller bankruptcy case, with fewer resources, we will want to be equally effective. We are laying the groundwork for that right now.

After the bankruptcy

A bankruptcy court will create a new cost structure for a reorganized company, and will decide who pays the costs of the bankruptcy itself. Presumably, the company will then file a case at the PSC, asking to have the new court-created cost structure reflected in the rates it is allowed to charge its Montana customers. If so, the PSC will need to examine the proposed “rate base” of capital assets, the structure of debt and equity, the rate of return on capital (profit), and recovery of expenses. This is an area where state utility law and policy and federal bankruptcy law could be at odds. The Consumer Counsel will represent customers in such a case.

It is also possible that, as part of a bankruptcy or afterwards, NorthWestern’s utility operation could be acquired by someone else, possibly another utility or perhaps the Rural Electric Cooperatives or another public or non-profit entity.
If there is a sale, the PSC needs – finally, after years of debate – clear statutory authority to review all aspects of the sale.

The PSC also needs clear authority to order appropriate reporting and other controls concerning transactions between the electric and gas utility operation and any non-utility affiliates. Reasonable affiliate interest rules would require reporting, documentation, and that the transactions will not harm utility customers.

As we have learned, Bozos were driving the bus in the MPC executive suites, and apparently also at NorthWestern’s corporate headquarters at the time it set up the various non-utility affiliates. Reporting rules, which were heatedly opposed by MPC execs over the years, would have put some speed bumps and guardrails in place, helping keep the bus on the road, and providing the utility’s customers and employees at least some protection from the actions of the people at the top. Paraphrasing President Reagan, it’s fine to trust, but it’s essential to verify.