Back on solid financial ground, Flathead Electric looks forward to future rate decrease

There was a time there, not too long ago, when employees thought twice before wearing the shirts in public.

The Flathead Electric Cooperative name and logo were just so visible. People would see it and start to glare.

It was a stressful time at the valley's sole retail power supplier. In 1999 and 2000, the company posted two straight years of negative earnings - the only such shortfalls in its 68-year history.

There was a 6.9 percent residential rate increase in 2000, followed by increases of 31 percent and 17 percent in 2001.

As deregulated power prices exploded to unprecedented levels throughout the region, businesses and homeowners throughout Northwest Montana worried about even more drastic rate increases. There were even fears that the co-op would go bankrupt, burdened by more than $130 million in debt related primarily to the 1998 purchase of PacifiCorp's Montana distribution system.

Today, after four years of strong margins, Flathead Electric is back on solid ground. A $5 decrease in the monthly basic charge took effect last year, and a modest rate decrease was announced in December, worth about 4 percent or $3 per month for an average residential customer.

The best news is that, rather than staring at bankruptcy, the co-op board is looking forward to the possibility of another, much larger rate decrease in 2006.

Ken Sugden, who joined Flathead Electric as general manager a year ago, said the key to any future reduction will be getting the bulk of the co-op's power supply back with the Bonneville Power Administration.

Currently, he explained, Flathead Electric purchases 70 megawatts from PacifiCorp under a fixed-price contract. That's about half its total power supply - and the cost is "substantially higher" than what Bonneville charges for the remainder.

The PacifiCorp deal expires on Oct. 1, 2006, Sugden said. After that, most of the load - about 54 megawatts - could be switched to Bonneville or some other supplier.

There's still a slight chance that Bonneville won't allow the switch, he cautioned. A final decision is expected any day.

If the switch is approved, PacifiCorp would have the right to match the new terms. However, the spot market price of power right now is about $50 per megawatt hour - or 50 mills, in industry jargon - whereas Bonneville anticipates charging $28 to $30.

"So the question is, in a 50-mill market, will PacifiCorp match 30 mills?" Sugden said. It might, because of a transmission bottleneck in Montana - "but one way or another, we anticipate getting the Bonneville rate."

Mark Johnson, Flathead Electric's finance and accounting manager, said the co-op currently spends about $53 million per year on power. He estimated that switching the 54 megawatts to Bonneville would generate annual savings of around $12 million.

If that all went towards rate reduction, it would support a cut about six times the size of the 4 percent reduction that took effect on Jan. 1.

However, it's too early to tell exactly how much money will be saved, or what portion would go toward rate reduction. Although the co-op is in better financial shape, it's still feeling some aftereffects from several years of turmoil.

Sugden noted that, when the PacifiCorp deal was renegotiated from a variable-price to fixed-price contract in 2001, the situation was so dire that Bonneville had to get involved to provide financial assurances.

"PacifiCorp sold the power to Bonneville and Bonneville sold it to us," he said. "Our credit was so bad, they wouldn't sell it directly to us."

Flathead Electric now has an agreement with its bankers to rebuild its equity to 20 percent by 2009, Sugden said. That will certainly influence any decision about what to do with the 2006 power cost savings.

Jay Downen, president of the Flathead Electric board of directors, said the board is constantly trying to balance the needs of the business with the desire to cut costs for members.

"We hope to hammer down the basic charge even further. We know it's unpalatable to our members," he said. "But we have to be cautious. If you look across the country, you see that co-ops generally have 40, 50, 60 percent equity levels. Ours was near zero. We need to rebuild it. We're also putting money into contingency funds, in case we have a system collapse [due to a major storm]. It's all about providing dependability and stability for our members."

Reporter Jim Mann may be reached at 758-4407 or by e-mail at jmann@dailyinterlake.com