Aftermath of crisis: How the Truckee Donner PUD rebounded after the California energy debacle | SierraSun.com

Aftermath of crisis: How the Truckee Donner PUD rebounded after the California energy debacle

Matthew Renda
Special to the Sun

TDPUD is a transmission-dependent electricity utility, meaning it doesn’t produce its own electricity at a power plant, but instead buys it wholesale from companies that produce power.

TRUCKEE, Calif. — The Truckee Donner Public Utility District is better positioned than it has been in years as it continues to keep residential and commercial electricity rates stable and below inflation, while building reserves necessary to make capital outlays designed to rejuvenate its infrastructure.

But the relatively rosy financial picture comes in the wake of one of the most tumultuous periods of the utility's 85-year existence, as California's decision to deregulate the electricity market in the late 1990s created unprecedented chaos.

"The energy crisis was big," said Steven Poncelet, spokesman for the Truckee Donner Public Utility District. "Our district was just a minnow swimming in this giant sea, and then all of a sudden they let in the sharks."

In 1996, under the administration of Gov. Pete Wilson, the state of California passed and signed Assembly Bill 1890, which led to the partial deregulation of the electricity market sector.

At the time, TDPUD was operating as a publicly owned electric utility district, also known as a municipal district, or a "muni."

There are about 55 such districts in California, governed by a locally elected board of directors and regulated by the California Energy Commission.

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'MANIPULATING THE MARKET'

TDPUD is a transmission-dependent electricity utility, meaning it doesn't produce its own electricity at a power plant, but instead buys it wholesale from companies that produce power.

A publicly owned electricity district is contrasted with the investor-owned, for-profit model such as Pacific Gas & Electric or Liberty Utilities, the latter of which serves the majority of the Lake Tahoe Basin.

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READ MORE: Rolling blackouts, exorbitant prices and market manipulation prompted the California electricity crisis that began in 2000 and lasted two years, driving some of the largest utility companies in America into bankruptcy and contributing to the downfall of prominent politicians, including California Gov. Gray Davis.

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The California Public Utility Commission regulates this form of electricity purveyor, although the Federal Energy Regulatory Commission also regulates specific elements of the industry.

After the newly deregulated market began to operate in 1998, TDPUD saw wholesale rates for electricity jump from a range of about $28 to $36 per megawatt hour to a range of about $100 to $140.

"Enron and others started manipulating the market," Poncelet said during a recent interview at the PUD's offices in Truckee. "There were some playing by the rules, while others were just messing the whole thing up badly, transferring huge amounts of money out of California. California consumers just got crushed."

The period of time when Enron, PG&E Enterprises, IdaCorp Energy and others were using deregulation to enrich themselves wildly at the expense of ordinary consumers was between 2000 and 2003, until FERC stepped in and put a price cap on electricity prices.

'WILD FLUCTUATIONS'

Prior to the federal agency's intercession, things came to a head for TDPUD, which had its previous contract signed in April of 2000 for power at a price of $35 per megawatt hour, set to expire in March 2001.

Desperate for some stability and a degree of certainty in exceptionally volatile market conditions, the board agreed to a 7-year contract with IdaCorp Energy with a locked-in price point of $72 per megawatt hour.

"We couldn't stand the wild fluctuations, but to get certainty, we had to pay a little," Poncelet said.

Within months of signing, a confluence of events conspired to turn what appeared to be a favorable contract into something approaching a worst-case scenario.

PG&E was on the precipice of bankruptcy (they would eventually declare), causing FERC to step in, and the state of California to reintroduce regulations into the electricity market, leaving a lot of utility outlets that played by the rules holding the bag.

In addition, 2001 was a large precipitation year for the American West, so the abundance of hydroelectric power exerted considerable downward pressure on the price of electricity.

All told, soon after signing a contract that bound TDPUD to pay the $72 per megawatt hour rate, prices collapsed to around $35.

"We were committed to the medium-term fix, stuck at twice the market rate," Poncelet said. "It cost us about $25 million in the first year, and had we been forced to continue, our rates would've gone up hundreds of percent. The contract was for seven years, and there would've been a massive rate increase."

THE LAWYERS STEP IN

Instead, TDPUD lawyered up and filed suit, alleging IdaCorp had not exactly acted above board throughout the crisis — all the while negotiating a settlement, arguing that if the district had to honor the contract, it would likely end up in bankruptcy and IdaCorp wouldn't see the full dollar amount anyway.

In January 2003, the two companies reached a settlement, with TDPUD agreeing to pay $26 million to be released from the contract, with IdaCorp agreeing to provide the district with energy at a $42 per megawatt hour for a period of three months to give the district time to establish a more sustainable solution.

In this case, the district elected to enter into a four-and-a-half-year contract with Constellation Energy Group, a Maryland-based company.

The electricity TDPUD purchased from Constellation was produced primarily by burning coal.

In total, the TDPUD had to eat a little more than $50 million as a result of California's energy crisis. The district took out a loan to ease the immediate burden of the settlement payment, and the debt related to that was finally retired two years ago, in January 2013.

While the financial implications have largely vanished as the district continues to build reserves while keeping rates flat, the hard lessons learned about diversification, length of contract and risk continue to linger as the TDPUD moves forward.

THE TDPUD TODAY

TDPUD General Manager Michael Holley makes one of the largest base salaries in the Tahoe/Truckee region for a public employee at roughly $216,000 per year, not including bonuses, benefits and other compensation.

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RELATED: Tahoe-Truckee's highest-paid public employees, including Michael Holley with the Truckee Donner PUD, made $3.7 million, as base pay, in 2014, as discussed in a special report by the Sierra Sun.

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His base salary is about $12,000 per year more than his nearest contemporary, South Tahoe Public Utility District General Manager Richard Solbrig, and about $54,000 more than salary of former North Tahoe Public Utility District CEO Paul Schultz, who was fired in November (although he has since been rehired as assistant general manager).

Tony Laliotis, current president of the five-member TDPUD board of directors, said Holley is not only worth every penny, but is actually saving the district money because he acts as the general manager of both the district's electricity and water divisions.

"You have to evaluate it by comparing his salary to his peers in the industry," Laliotis said. "In the electricity industry, there are higher salaries, and if you compare his salary to that of other general managers, it's probably a little low.

"If you compare it to other GMs who do water, it might be a little high. But I think the balance is in line with the industry."

Laliotis is quick to point out that TDPUD is performing well, too, and that contributes to the ostensibly high salary.

"Michael is performing at a really high level," he said.

RIGHTING THE SHIP?

Unlike a decade ago, the TDPUD does not garner its electricity via one power purchase agreement, but procures power from several sources.

It owns equity shares in a number of renewable sources, such as a 15 percent stake in Horse Butte wind farm in Idaho; it accesses energy produced at a federal hydroelectric plant at Stampede Reservoir; and it buys power from a Payson — a natural gas-fired plant in Utah.

To control costs, TDPUD sources for power through the Utah Municipal Powers Systems, which is essentially a pool of other municipal utility districts scattered throughout the Intermountain West.

UMPS allows all its members to leverage greater purchasing power while minimizing its exposure to risk by spreading it throughout the conglomerate.

"We are all nonprofit (munis), and buy entering a pool, it helps minimize risk and it gives a small utility such as us the opportunity to swim in the large sea that is the electric resource market," Poncelet said.

The PUD spokesman asserts that the diversified approach throughout its energy portfolio has the district in much better stead then a decade ago.

"When you look at our rates from 2003 against inflation, you can see we have righted the ship," Poncelet said.

A CHANGE IN DIRECTION

Residential rates in 2003 were 10.8 cents per kilowatt hour and have increased 22 percent to 13.2 cents. The increase is 4 percentage points lower than the 26 percent increase in the Consumer Price Index over the same period of time.

The TDPUD's up-to-date energy portfolio shows that renewable energy comprises about 43 percent of production, far above the 33 percent mandated by the state of California for 2020.

Laliotis said the renewable energy portfolio is such because customers demanded it right before he assumed his seat in 2006-07.

Before then, the district signed a medium-term contract with Constellation Energy, which produces the balance of the energy it delivers to California via coal-burning plants.

Many residents in Truckee balked at the heavy reliance on burning coal and demanded the district diversify and invest in more renewable energy sources, such as wind, solar and hydroelectric.

"I wasn't on the board when the whole coal issue went down," he said. "But that was the turning point to really change the direction of the district."

'RATES, RELIABILITY AND RENEWABLES'

Laliotis said the cap and trade program in California, in which other companies can buy carbon emission "credits" from companies that don't use their full allotment due to the use of renewable energy alternatives, has meant TDPUD has made enough money to offset the higher costs often associated with renewable energy.

"We made about $800,000 last year," he said. "That's real money that has allowed us to purchase renewable energy without raising rates."

Poncelet agrees that the model of diversification, flexibility and the utilization of renewables has led the district to put its financial difficulties firmly in the past while building capital to address pressing infrastructural needs.

"The theme I want (rate-payers) to get is that there are three legs of the stool: rates, reliability and renewables," Poncelet said. "The renewables are driven by our customers' demand and by regulation. But while people say they want 100 percent renewables, when they look at how it impacts rates, they think again.

"Rates are the bricks and mortar for people's budget and it impacts business and economic development. Ultimately, it's about the balance."

The TDPUD expresses confidence that striking that balance has led it past the energy crisis that afflicted all of California at the turn of the century and that nearly led the district to bankruptcy — and into a future that is more stable, predictable and environmentally benevolent.

— Matthew Renda is a former reporter for the Sierra Sun and North Lake Tahoe Bonanza and currently is a Santa Cruz-based writer. He may be reached for comment at matthew.renda@gmail.com.

EDITOR’S NOTE:

In recent months, Matthew Renda has written other in-depth stories covering Tahoe-Truckee impacts pertaining to education and the environment, such as:

• Close observers of conservation land purchases in California are calling for greater transparency and accountability from state agencies that distribute hundreds of millions of dollars in public money on an annual basis; and

• A swirl of controversy and misinformation is growing as Nevada continues implementing the nationwide Common Core education initiative aimed at establishing what students should know after graduating from each grade level.

Have a story idea? Feel free to email Mr. Renda at matthew.renda@gmail.com, or Sun/Bonanza Managing Editor Kevin MacMillan at kmacmillan@sierrasun.com.

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Fast facts about TDPUD

• Established in 1927.

• About 14,000 customers, about 88% residential.

• Locally elected Board of Directors; 5 directors, 4-year terms, staggered.

• Electric and water utility, serves greater Truckee area, including portions of Placer County.

• Learn more at http://www.tdpud.org

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By the numbers: TDPUD rates vs. inflation

Cumulative percentage increases comparing TDPUD rates with inflation, with baseline established as 100:

E: TDPUD electricity rates

C: CPI-U (Consumer price index)

2003: E: 100, C:100

2004: E:105, C:103

2005: E:105, C:107

2006: E:110, C:109

2007: E:110, C:114

2008: E:118, C:114

2009: E:122, C:117

2010: E:122, C:119

2011: E:122, C:122

2012: E:122, C:125

2013: E:122, C:126

2014 (est): E:122, C:130

2015 (est): E:122, C:134

Source: TDPUD

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By the numbers: TDPUD Renewable Portfolio Standard

0.4% in 2007

17% in 2008

28% in 2009

22% in 2010

35% in 2011

42% in 2012

44% in 2013

According to the PUD, the district is fully resourced to meet state regulatory requirement of 33% by 2020 with stable rates, and is well positioned for future regulatory requirements.

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By the numbers: TDPUD operating budgets

>Fiscal year 2015

Electric Revenue: $23,560,000

Electric Expenses: $20,910,000

Electric Income: $2,650,000

>Fiscal year 2014

Electric Revenue: $23,330,000

Electric Expenses: $20,390,000

Electric Income: $2,940,000

>Fiscal year 2013

Electric Revenue: $23,240,000

Electric Expenses: $19,990,000

Electric Income: $3,250,000

>Notes:

• Balanced 2014-15 budget with no rate increases for electric.

• General manager assumed duties of water utility manager in 2010 (about $250,000 annual savings).

• Investing in both capital projects and reserves.

> Electric cash and designated reserves:

December 31, 2003: $3.7 million

December 31, 2013: $11.5 million

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Timeline of events: California Electricity Crisis

1996: California Legislature passes Assembly Bill 1890, which leads to partial deregulation of the electricity market.

1998: Spot market for energy begins.

2000: Prices for energy see significant spike; Enron and other private corporations begin varying degrees of market manipulation while pulling in enormous profits; blackouts affect San Francisco and Bay Area during heat wave.

2001: TDPUD enters full-requirements contract with newly formed private entity IdaCorp for $72 per megawatt hour; California Gov. Gray Davis declares state of emergency; PG&E files for bankruptcy; rolling blackouts affect hundreds of thousands of customers throughout California; Vice President Dick Cheney appointed as head of the National Energy Development Task Force.

2002: TDPUD is locked in at twice the going rate for wholesale electricity; the Federal Regulatory Energy Commission begins investigation into Enron that will eventually end in convictions of company leaders; California reintroduces regulation into the market.

2003: TDPUD sues IdaCorp attempting to get out of 7-year contract; TDPUD pays $26 million settlement to get out of contract, Gray Davis ends state of emergency in California; Davis is recalled and replaced by Republican Gov. Arnold Schwarzenegger.

2006: Kenneth Lay and Jeffrey Skilling, the architects of Enron, are convicted on multiple federal felony charges of committing vast fraud; Lay dies soon after and the conviction is vacated, and Skilling begins to serve time in federal prison.

Click here to read more about the energy crisis and its aftermath.

Source: Various media reports and the National Museum of American History.