Yellowstone Valley Electric Cooperative's general manager is livid over the latest rate increase approved last month by its power supplier.

Terry Holzer called Southern Montana Electric Transmission and Generation Cooperative's 4.5 percent wholesale rate increase to its members "unconscionable."

The increase — the latest in a series of 15 since 2004, after Southern formed to provide power to its five member co-ops and to Great Falls — seem to be "unending and out of control," Holzer said.

But Tim Gregori, Southern's general manager, said the Huntley-based co-op is "Monday-morning quarterbacking," and that the rate increase should not have come as a surprise because he briefs the board monthly of market conditions, wholesale reports, expenses and revenues.

"Do I enjoy rate increases? Absolutely not," Gregori said. But, he said, he has a duty to make sure Southern is solvent, and that includes recommending rate increases.

Holzer said YVEC's wholesale power costs have more than doubled, from $6.9 million in 2004 to $18 million this year, with the latest increase adding $1.5 million in costs. 

YVEC suspected there might be a rate increase in 2011, but was surprised when it occurred at Southern's April board meeting, Holzer said.

The increase means YVEC customers will see a 6 percent rate boost in their bills starting this month. YVEC's average monthly residential bill will increase $7.50 a month, from $123.81 to $131.30 for 1,000 kilowatt hours, Holzer said.

To cope with the series of increases, YVEC has cut overtime, capital expenses, travel and staff.

"This is affecting the operations of the cooperative," Holzer said. "We know we have high rates. We put a lot of effort and take pride in making the system as reliable as possible."

Wholesale power costs are the co-op's biggest expense and typically represent about half of total expenses, said Brandon Wittman, YVEC assistant manager. But other expenses are being dwarfed by Southern's wholesale rates, he said. "We're at 62 percent and going," he said.

The wholesale rate is what Southern's members pay for electricity for their customers.

It's no secret YVEC wants out of Southern. In December 2008, YVEC, in a dispute over expenses and how Southern conducts business, sued seeking to end its power contract and membership with the power supplier. A November trial is set in Yellowstone County District Court.

Southern is composed of YVEC, Beartooth, Fergus, Mid-Yellowstone and Tongue River electric cooperatives, and the City of Great Falls. The Billings-based group supplies members with electricity through contracts and is building a 46-megawatt natural gas-fired power plant near Great Falls.

The $85 million Highwood Generating Station is the first phase of a 120-megawatt plant. Southern switched gears after plans for a coal-fired power plant hit environmental and financing problems.

YVEC wrote off $2.4 million when Southern switched to a gas plant. YVEC has some remaining financial interest in Phase I of the Highwood station, but is not participating in the second phase.

The relationship between YVEC and Southern soured over escalating costs of the Highwood plant and what YVEC says is a lack of information.

Southern's April wholesale rate hike comes after a similar, 4.5 percent increase in December. Southern's members decide how to address the increases with their customers.

YVEC and Great Falls trustees were the only board members to oppose the rate hike. The board approved the increase after a closed meeting and brief discussion in regular session.

YVEC's last customer rate hike was in late 2009. The co-op absorbed 2010 wholesale rate increases but can't "absorb a 9 percent hit" from the last two, Wittman said.

From January 2009 to April 2011, there have been eight wholesale rate increases totaling 42 percent, Holzer said. From 2008 to 2010, YVEC's growth was less than 1 percent and was mostly weather related, he said.

Southern's problem, Holzer said, is that Gregori miscalculated current and future energy needs when Southern contracted for power in 2009.

"They've got power coming out of their ears," and are still building a power plant, Wittman said.

"We are taking a bath on excess power," said David Kelsey, YVEC's trustee on the Southern board. "I'm very cautious that there could be some additional rate increase."

Greg Doyon, Great Falls' city manager, said the latest rate hike will significantly affect the city, but he didn't have exact figures.

Electric City Power, which is the city's utility arm, has contracts with some residential and commercial customers and is not able to adjust its rates, Doyon said.

ECP appealed to customers for a voluntary rate increase to meet Southern's December rate increase, Doyon said. Now ECP has to discuss the latest increase with its customers.

Doyon said he opposed the increase because he had too little information on why it was needed. Great Falls, which opposes Southern's closed sessions and does not participate in them, also is suing to determine whether its contracts can be voided.

YVEC and Great Falls represent about half of Southern's power users.

John Prinkki, a Southern trustee and president of the Red Lodge-based Beartooth co-op, voted for the rate hike, saying it was necessary.

Beartooth already had imposed a 4 percent retail rate hike, effective this month, to adjust for Southern's December increase, Prinkki said.

"We're just going to try and to our best to absorb" the April wholesale hike, he said. Beartooth tries to manage its reserves so "we can absorb these bumps," he said.

The 4 percent retail rate hike means a Beartooth residential customer using 1,000 kilowatt-hours a month will pay $150.18, a $4.50 increase.

In a February newsletter, Beartooth's general manager, Ronald Roodell, explained the retail rate hike and told customers that Southern did not anticipate additional increases in 2011.

Beartooth board member Arleen Boyd, who attends Southern's meetings, said she expects the board will have to cut expenses, impose another retail rate hike or both to meet the latest wholesale price increase.

Gregori said Southern needed a wholesale rate increase to balance revenue and expenses. Revenue it expected from power sales into the market during off-peak times — like nighttime, when demand is low — is falling short because the market is depressed, he said.

The market is depressed, he said, because there is excess hydropower in the Columbia Basin, wind power was entering the market and the demand for electricity is flat in a slow economy.

Southern supplies its members with electricity it buys through contracts with PPL, the Western Area Power Administration and the Bonneville Power Administration.

BPA will no longer supply power east of the Continental Divide, and its contract with Southern ends this summer. "The brief period we enjoyed of low-cost power is gone," Gregori said. 

To replace Bonneville power, Southern contracted in 2009 with PPL for electricity through 2019. The contract was based on forecast demand from Southern's members and looked attractive, he said. YVEC voiced no objections, he said.

Then the economy fell into a recession.

"Nobody saw it coming," Gregori said. "Now we've got to live it," he said, referring to the PPL contract. Attempts to re-open the contract have failed, he said.

"I have no crystal ball," Gregori  said. "This is a case of Monday-morning quarterbacking and a very selective memory" by YVEC, he said. "If we could foresee the future, the situation would have been different."

YVEC's wholesale power costs of 62 percent of its expenses would be "highly unusual and would seem to indicate the inclusion of costs not typically associated with power costs," Gregori said.

Southern's latest rate hike should cost members' customers about about half of the 4.5 percent because retail rate increases typically reflect half of wholesale hikes, he said.

Gregori disputed YVEC's no-growth position, saying its power usage for January and February this year is up significantly from the same period last year.

YVEC officials maintained its wholesale costs are 62 percent of its expenses and said a cold winter increased its power purchases this year.

Kelsey said he abstained from voting on the PPL contract because he thought the deal was rushed and lacked information. "That's the problem," he said. "Million-dollar decisions being made in a hurry."

Contact Clair Johnson at cjohnson@billingsgazette.com or 657-1282.

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Federal Court, Yellowtone County Reporter

Federal court and county reporter for The Billings Gazette.