Understanding electricity in Montana : a guide to electricity, natural gas and coal produced and consumed in Montana (Volume 2002) online

natural gas liquids.



XI



XII



SUMMARY POINTS:

Understanding Electricity in i^lontana

A Guide to Electricity,

Natural Gas and Coal

Produced and Consumed in Montana

These lists of points summarize the guide prepared for the Environmental Quality Council. They
cover the status of electricity, natural gas and coal supply and demand in Montana and the
Montana electric transmission grid. The reader is advised to consult the guide itself for detailed
explanations of technical points and to see the data tables that underpin these summaries.



Summary - 1



Summary - 2



SUMMARY



Electricity Supply and Demand in Montana

â–  Montana generates more electricity than it consumes. Montana generating plants have the
capacity to produce 5,200 MW of electricity. An annual average of 3,200 aMW (1
aMW=8,760 MWh) was produced in the period 1995-1999. During that time, Montana
consumption accounted for slightly more than half of production, with Montana sales and
transmission losses equaling about 1,800 aMW in 2000. (p. I-l)

â–  Montana straddles the two major electric interconnections in the country. Most of Montana
is in the western interconnection, which covers all or most of 11 states, two Canadian
provinces and a bit of northern Mexico. Only about 5 percent of Montana's load is in the
eastern interconnection, along with less than 1 percent of the electricity generated in-state,
(p. 1-2)

â–  Montana is a small player in the western electricity market. The 1999 Montana load (sales
plus transmission losses) was equivalent to about 2 percent of 86,122 aMW load in the
entire western interconnection. Montana generation accounted for less than 4 percent of
total west generation that year. (p. 1-2)

â–  There are 45 electric generating facilities in Montana. The largest are the four privately
owned coal-fired plants at Colstrip, which have a combined capability of 2,094 MW. The
largest hydroelectric plant is U.S. Corps of Engineers' Libby Dam with a capability of 600
MW. (p. 1-2)

â–  The only electric generation plants of any size coming on line in the 1990's were two non-
utility qualifying facilities (QFs): Montana One waste coal plant (41.5 MW) and BGI
petroleum coke-fired plant (65 MW). These two combined now account for about 92
percent of the electricity output of QFs in Montana, (p. 1-2)

â–  PPL Montana's facilities, previously owned by Montana Power Company, produced the
largest amount of electricity on average in 1995-1999, with about 30 percent of the total
generated in Montana. Puget Power was the second largest producer with 16 percent.
Federal agencies— Bonneville Power Administration and Western Area Power
Administration— collectively produced 22 percent of the electricity generated in Montana, (p.
1-3)

â–  Montana generation is powered almost entirely by coal (54 percent) and hydro (44 percent)
(1995-1999 average). Until 1985, hydro was the dominant source of net electric generation
in Montana. Over the last 15 years, about 25 percent of Montana coal production has gone
to generate electricity in Montana, (p. 1-3)

Summary - 3



Montanans are served by 38 distribution utilities: 4 investor-owned, 30 rural electric
cooperatives, 3 federal agencies and 1 municipal. (Four of the co-ops serve only a handful
of Montanans.) (p. 1-4)

In 2000, investor-owned utilities made up 45 percent of the electricity sales in Montana, co-
ops 25 percent, federal agencies 16 percent and power marketers 14 percent, (p. 1-4)

Montana sales in 2000 were 14.5 billion kWh. Sales have tripled since 1960. Growth was
faster in the first half of that period than in the latter. Since 1990, sales to the commercial
sector have grown the most, followed by the residential sector. During the 1990-2000
decade, residential consumption rose at an average annual rate of 1.5 percent, commercial
at 3.4 percent and the overall growth rate was 1.0 percent statewide. Industrial sales have
bounced around, but on the whole haven't increased much. The impact of the 2000-2001
price spike doesn't appear in these data, but the spike did significantly and permanently
reduce industrial consumption, (p. 1-5)

The consumer cost of electricity didn't change much during the 1990's. Throughout that
decade, as in previous decades, electricity in Montana cost less than the national average.
In 2000, Montana averaged 4.74 cents/kWh vs. 6.78 cents/kWh for the U.S. as a whole. On
average, the rates of cooperatives and private utilities were about the same in 2000;
however, that average masks considerable variation, (p. 1-5)

As electricity prices go up, growth in consumption should slow. Only about one-quarter of
the Montana load had seen significantly higher prices by the start of 2002. The entire
impact on consumption of changes in the regional electricity market has yet to hit. (p. 1-6)

There are no statewide forecasts for future electricity consumption. For a number of
reasons, slower growth than in the past decade seems likely. Scenarios of future growth
suggest that a statewide increase of 260 aMW would be an optimistic estimate. A lesser
amount of net growth would be more likely and a loss of statewide load at least a
possibility, (p. 1-8)

While these are only scenarios, and not predictions, the range does suggest minimal need
for net additions of generation resources to serve increases in Montana loads, (p. 1-8)

Cost-effective energy efficiency improvements plausibly could meet much or all of the net
increase in statewide load over the next decade, (p. 1-9)

There are no comprehensive estimates of the potential for efficiency improvements.
However, it is reasonable to assume potential reductions are in a range around 10 percent,
(p. 1-9)



Summary - 4



During the electricity crisis of 2000-2001, the Pacific Northwest ultimately reduced its
demand by around 20 percent. Most of that came from business suspensions, primarily in
response to payments from their electricity providers. This reduction would not be advisable
or cost-effective under normal conditions, but does indicate the ability of consumers to
change their usage in the face of higher prices, either in terms of what they pay or what
they're offered to forego using electricity, (p. MO)



Summary - 5



SUMMARY

The Montana Electric Transmission Grid:
Operation, Congestion and Issues

â–  Montana's strongest electrical interconnections with other regions are: the Colstrip 500 kV
line which connects as far as Spokane and then into the BPA northwest grid; the BPA 230
kV lines heading west from Hot Springs; PacifiCorp's interconnection from Yellowtail south
to Wyoming; WAPA's DC tie to the east at Miles City; and the AMPS line running south from
Anaconda parallel to the Grace line to Idaho, (p. II-l)

â–  The western United States is a single, interconnected and synchronous electric system. It is
not closely connected with the eastern part of the country. Because there would be massive
instantaneous flows across any direct connection, the interconnections are only weakly tied
to each other with AC/DC/AC converter stations. One such station connecting the eastern
and western grids is located at Miles City. It is capable of transferring up to 200 MW in
either direction. Depending on transmission constraints, a limited amount of additional
power can be moved from one grid to the other by shifting units at Fort Peck Dam. (p. II-2)

â–  The transmission system is managed differently than the way it operates physically, (p. II-
3)

â–  The physical reality of electricity (electrons) is that power sent from one point to another
flows over all transmission lines in the interconnected system. Actual flows at any time are
the net result of all transactions, and are the same for any given pattern of generation and
load, regardless of transactions, (p. II-3)

â–  Management of the grid is different from where the electricity actually flows. Grid
management requires a single "contract path" for each scheduled transaction. A "contract
path" is permission to use a route across separately owned transmission systems from a
point to origin to a point of delivery. It does not have to be the major route taken by the
actual power flows that occur (which could happen over multiple routes), (p. II-4)

â–  Power flows are managed on a limited number of "rated paths." Each path consists of a
number of more-or-less parallel transmission lines that together can be constrained under
some patterns of generation and loads, (p. II-6)

â–  Path ratings are set to provide reliability by ensuring sufficient redundant capacity to allow
for outages of some of the facilities comprising the path. Path ratings may be reduced if
reliability standards are tightened. The West of Hatwai path currently has a rating of 2800



Summary - 6



MW east to west and 600 MW west to east. The Montana-Northwest path has a rating of
2200 MW east to west and 600 MW west to east. (p. II-6)

Schedules are only accepted up to the limit of rated capacity. Netting of schedules is
allowed only for a single scheduler. Netting against other's schedules is not allowed, (p. II-
4)

Scheduling rights across rated paths are generally owned by the transmission owners and
holders of long term contracts for power delivery, (p. II-7)

In 1996, FERC ordered transmission owners to separate marketing and transmission
operations, to maintain web sites on which "available capacity" is posted and offered for use
by others. "Available capacity" is total transfer capacity less committed uses and existing
contracts. Almost no available capacity ever is listed on paths from Montana to the West
Coast, (p. II-7)

Non-firm access is available on uncongested paths but only at the last minute, (p. II-7)

A path may be fully scheduled, and therefore congested, even though the actual flow may
be considerably less than the path capacity. For example the West of Hatwai path was
deemed congested and some schedules had to be rejected 8 percent of the time during a
period in which the path was never actually loaded more than about 90 percent of capacity,
(p. II-8)

Negotiations are underway, and applications have been filed with FERC, to form
independent organizations ("Regional Transmission Organizations" or RTOs) to operate and
manage the transmission grid. Montana would be part of RTO West. (p. II-8)

RTO management would allow for regional management of path congestion and scheduling
for better utilization and availability of the transfer capacity of the grid. (p. II-9)

Issues involved in the amount and availability of capacity include the need of utilities to
withhold capacity because of uncertainty, the way reliability criteria are set, the limited
number of hours that transmission paths are congested, and the challenges and costs of
siting and building new transmission lines, (p. II-9)

The Western Governors' Association recently sponsored two studies on transmission. One
looks at the need for new transmission in the west under two scenarios of resource
development. The second report considers alternate ways to encourage and finance the
construction of needed investments in new transmission capacity, (p. 11-12)



Summary - 7



SUMMARY

Natural Gas in Montana: Current Trends, Forecasts and the
Connection with Electric Generation

â–  Montana obtains the largest portion of its natural gas from Alberta and will continue to do
so in the near future. Montana produces about as much gas as it consumes, but exports
most of this to the Dakotas and the U.S. Midwest, (p. III-l)

â–  The delivered price of natural gas to our homes and businesses includes the wellhead price
of gas (price of the gas itself out of the ground), plus transmission and delivery fees, plus
other miscellaneous charges. Wellhead prices are set in a continent-wide market. The
natural gas transmission and delivery fees are set by utilities and/or pipelines, under
regulation by state and federal agencies, (p. III-7)

â–  Congress started the deregulation of the U.S. market in 1978. (p. III-7)

â–  The wellhead price of natural gas for Montana and the Pacific Northwest is set mainly in
Alberta. Albert prices follow the AECOC Index, which in turn follows the major U.S. gas
indices. Alberta's price tends to run about $.30/Mcf lower than average U.S. prices due to
its geographic location, (p. III-8)

â–  Average wellhead prices nationwide are expected by the U.S. Department of Energy to
increase about 3 percent annually in the next 20 years. They are expected to average
$2.04/Mcf in 2002 and $3.20-$3.70/Mcf in 2020 using current dollars. The actual U.S.
wellhead price in 2002 so far has been in the $2.50-$3.00/Mcf range, although the price
was as high as $3.80/Mcf in early May, 2002. It is important to note that gas prices and
energy prices in general can fluctuate widely at any given time. (p. III-8)

â–  Average delivered natural gas prices for the U.S., which include wellhead price plus
transmission and delivery fees, are forecast to increase slowly over the next 20 years at
about 0.5 percent per year. According to the U.S. Department of Energy, delivered
residential prices in Montana will likely remain below those elsewhere in the U.S. due to
relatively low transmission costs. Montana households can expect to pay around $5.00-
$5. 50/Mcf through 2010 (in current dollars) while the average U.S. residence can expect to
pay $6.00-$7.00/Mcf. (p. III-9)

â–  Northwestern Energy (NWE; previously Montana Power Company) provides natural gas
transmission and distribution services to 151,000 customers in the western two-thirds of the
state. Both its transmission and distribution businesses are regulated by the Montana Public
Sen/ice Commission, (p. III-5)



Summary - 8



NWE currently has access to relatively cheap Alberta gas as a condition of the transition to a
deregulated retail market. As of July 1, 2002, NWE core custonners may have to pay gas
prices closer to national prices, (p. III-9)

Montana-Dakota Utilities (MDU) is Montana's second largest natural gas utility, distributing
natural gas in the eastern third of the state, from Billings to the Dakotas. MDU uses the
Williston Basin Interstate/Warren transmission line, which is regulated by FERC, to move its
purchased gas. Most of MDU's purchased gas is domestic, with about 50 percent coming
from Wyoming; only about 10 percent comes from Canada, (p. III-6)

Energy West (formerly Great Falls Gas Co.) is the third largest gas distributor in Montana,
serving the Great Falls area. Other small companies sen/e a few rural towns, (p. III-7)

Recent Montana natural gas consumption has been around 60 billion cubic feet (bcf) per
year. Average Montana gas consumption is expected to increase slowly at less than 1
percent annually according to utility projections, (p. III-3)

The prediction of slow growth does not include gas consumed by the proposed Silver-Bow
electrical generation plant or the Montana First Megawatts plant in Great Falls, currently
under construction. The Silver Bow plant alone would boost Montana gas consumption by
50 percent. Though these plants would each significantly increase total Montana natural gas
consumption, they would not significantly affect gas prices, (p. III-3 and 4)

Although gas prices are expected to increase slowly, Montana may be subject to increasing
price volatility from extreme events such as the California energy crisis of 2000-2001.
Increased pipeline capacity from Alberta out to the U.S. Midwest and U.S. East Coast means
that the wellhead price paid in Montana today is more closely tied than ever to prices paid
nationwide and to unexpected, nationwide events that can affect prices. Further, there is an
increased use of natural gas nationwide for electricity generation, which has led wholesale
electric and natural gas prices to become intimately tied together. Increasing convergence
of the electricity and natural gas markets means that extreme events like the California
energy crisis are likely to affect both markets simultaneously, (p. III-IO)



Summary - 9



SUMMARY
Coal in Montana

â–  Montana is the sixth largest producer of coal in the United States, with over 38 million tons
mined in 2000. Almost all the mining occurs in the Powder River Basin south and east of
Billings, (p. IV-1)

â–  In 1958, after almost a century of mining, Montana production bottomed at 305,000 tons,
an amount equivalent to less than 1 percent of current output. As Montana mines began
supplying electric generating plants in Montana and the Midwest in the late 1960's, coal
production jumped. Production in 1969 was 1 million tons; ten years later, it was 32.7
million tons. Since the end of the 1970's, production has increased gradually to around 40
million tons. (p. IV-1)

â–  Over the past decade Montana has produced a little less than 4 percent of the coal mined
each year in the U.S., more or less maintaining its share of the national market. In
comparison most eastern states lost market share during this decade, primarily to
Wyoming. Western states other than Wyoming followed a path similar to Montana, more or
less maintaining market share, (p. IV-2)

â–  The price of Montana coal averaged $8.87 per ton at the mine in 2000, including taxes and
royalties. The price of coal has been on a downward trend since the early 1980's, when the
average price of coal peaked at $14.22 per ton ($22.10 in 2000 dollars). By 2000 that price
had fallen 60 percent in real terms. The decline in Montana prices mirrors the decline in
prices nationally, (p. IV-2)

â–  In 2000 about 60 percent of Montana coal came from federal lands and under 20 percent
from resen/ation lands, (p. IV-3)

â–  Montana had seven coal mines in operation in 2001. The largest were Westmoreland's
Rosebud Mine at Colstrip and Kennecott Energy's Spring Creek Mine near Decker, each
producing around 10 million tons per year. No major new mines have opened since 1980,
though the West Decker and Spring Creek mines have expanded significantly, (p. IV-3)

â–  Westmoreland is the largest producer in Montana, accounting for 44 percent of 2001
production. Kennecott is the second largest, accounting for 25 percent of coal production
outright and holding a half-interest in mines producing an additional 24 percent of Montana
coal. (p. IV-3)



Summary - 10



2001 marked the passing of an era in Montana coalfields, as over 40 years of utility
ownership of operating coalfields in Montana came to an end. Utility-owned production had
been substantial in past years, (p. IV-3)

About 95 percent of the coal consumed in Montana is used to generate electricity. Montana
coal consumption has been more or less stable since the late 1980's, after Colstrip 4 came
on line. (p. IV-3)

Almost all of Montana coal production is used to generate electricity. In recent years, about
74 percent has been shipped by rail to out-of-state utilities, about 9 percent has been
burned to produce electricity for in-state customers and about 15 percent had been burned
to produce electricity and shipped by wire to out-of-state utilities, (p. IV-4)

Over the last decade, Michigan, Minnesota and Montana have each taken about a quarter of
all the coal produced in Montana. The rest has gone to numerous other states, (p. IV-4)

The Montana industry, like the coal industry nationwide, has become more productive, with
the number of employees dropping even while the amount of coal mined increased, (p. IV-
4)

Taxes on coal, despite decreases from historical highs, remain a major source of revenue
for Montana, with $32.3 million collected in state fiscal year 2001, about one-third in
nominal terms the amount collected in 1984. Coal severance tax collections dropped due to
changes in the tax laws that began with the 1987 Legislature and due to the declining price
of coal. Production has risen modestly since the cut in taxes, (p. IV-4)

Montana's output is dwarfed by Wyoming's, which produced 31.6 percent of the country's
output in 2000. This is nine times as much coal as Montana produced. This is due to a
combination of geologic, geographic and economic factors that tend to make Montana coal
less attractive than coal from Wyoming, (p. IV-5)



Summary - 11



Chapter 1: Electricity Supply and Demand in
Montana

Electricity is the new energy crisis. During 2000 and 2001, price spikes and supply disruptions
spread across the country, most notably in the West. Even before that, the electricity industr/
had begun sweeping changes, prompted by the deregulation of the wholesale electricity
markets in 1992 through the federal Energy Policy Act and deregulation of the Montana retail
market in 1997 by SB390. This chapter provides historical supply and demand information
needed to put the current changes in context, along with some estimates of future
consumption. Because of these changes, the historical data, while still useful, are not as reliable
predictors of the future as they once were.

Transmission, which affects access to out-of-state markets by Montana suppliers and
consumers, is covered in a separate chapter. Prospects for future supplies and their effect on
rates, as well as energy efficiency and how it could be encouraged, will be covered in a
supplement in November 2002, after the market digests the recent PSC decision. The
supplement will address both conventional sources (primarily natural gas and coal) and "new"
technologies (primarily wind and distributed generation of various types). Still, growth in the
Montana in-state market will not, by itself, justify much new generation construction over the
coming decade.

1. Necessary Definitions

Certain terms are used throughout this chapter and are explained here. Electricity is measured
in kilowatt-hours (kWh) or megawatt-hours (MWh). A MWh is 1,000 kWh. One MWh is
produced when a 1 MW generator runs for one hour. A 1 MW generator running for all the
8,760 hours in a year produces 1 average Megawatt (aMW). As one illustration of electricity
use, residential customers without electric heat use typically use 10-30 kWh per day. As
another, the Helena and the Helena valley use around 80 aMW (700 million kWh), with a peak
around 140 MW (Data request MCC-8, PSC Docket No. D2001. 10.144).

Montana Power Company (MPC) sold most of its generating units to PPL Montana at the end of
1999. The remainder of the units and the entire distribution utility were sold to Northwestern
Energy (NWE) in February 2002. Some data from the period of MPC ownership are labeled PPL
Montana or NWE where that would be more useful for the reader understanding the current
situation.

2. Montana in Perspective

Montana generates more electricity than it consumes. Even so, it is a small player in the
western electricity market. Montana generating plants have the capacity to produce 5,200 MW
of electricity. Primarily because hydro generators depend on the rise and fall of river flows, but
also because any plant needs downtime for refurbishing and repairs, Montana produced an



I-l



annual average of 3,200 aMW, 1995-1999.
During that time, Montana sales and transmission
losses accounted for slightly more than half of
production, or, in the year 2000, about 1,800
aMW.



Kev Electricity Facts for Montana



Generation capacity
Average generation
Load in 2000



5.200 MW
3.200 aMW
1.800 aMW



Montana straddles the two major electric
interconnections in the country. Most of Montana

is in the Western interconnection, which covers all or most of 11 states, two provinces and a bit
of northern Mexico. Only about 5 percent of Montana's load is in the Eastern interconnection,
along with less than 1 percent of the electricity generated. The 1999 Montana load (sales plus
transmission losses) was equivalent to about 2 percent of 86,122 aMW load in the Western
interconnection. Montana generation accounted for less than 4 percent of total West generation
that year. As another comparison, 1999 sales in Montana were equivalent to about 6 percent of
the 26,807 aMW sold in California.



3. Generation



There are 45 generating facilities in Montana (Table El). The oldest are Milltown Dam, near
Missoula, and Madison Dam, near Ennis; both were built in 1906. The largest are the four
privately owned coal-fired plants at Colstrip, which have a combined capability of 2,094 MW.

(Capability is the maximum



Average (ieneration bv Company. 1995-1999



Company

PPL Montana' -
Puget Sound Power & Light'
Avista (WPP)-

Bonneville Power Administration'
Western Area Power Administration'
Portland General Electric-
North Western Energy -â– *
PacificC^orp"

Yellowstone Energy Partnership
Other
TOTAL



' PPL Montana plant.s were owned by MFC until mid-December. 1999.