Spokane's Shining Moment

by Ted S. McGregor, Jr.


This summer, when Californians get their weather report, they'll get an added bonus: a rolling blackout forecast. The state's electricity providers will try to give citizens at least four hours' notice before any black- or brownout, so they can be sure not to get stuck on an elevator for a few hours. What California can't plan, however, is how many of its 34 million residents will get fed up with no power (which you can add on to bad traffic and the constant threat of earthquake) and move out of state -- perhaps to Spokane and the Inland Northwest.


Economic development leaders in Spokane have seen this silver lining in the cloud over California for months now -- their pain could be our gain.


"We are hearing stories from companies we are in contact with that they are very concerned about being able to maintain their businesses," says Mark Turner, president of the Spokane Economic Development Council. "It's not just over high energy costs, but also because there doesn't appear to be any light at the end of the tunnel."


Turner says his organization targets 7,000 businesses in California that may be interested in moving some or all of their operation to the Inland Northwest, and they are making sure they know about the disparity in energy prices. He says that while energy is a major factor for those businesses, it is not the only one. But with the recent increases in power prices in the Golden State, Turner calculates that the cost of doing business in San Francisco may be 40 percent higher than it is in Spokane. And after a long, hot summer, those 7,000 businesses may be even more receptive to the EDC's sales pitch.


"This is not a drill," says Randy Barcus, chief economist for Avista, "these blackouts are going to happen." Barcus says California is expecting 34 days of rotating blackouts out of the 92 days of summer. Blackouts could run as short as an hour or as long as 12 hours. For surfers at the beach, that's no big deal, but if you're running a small manufacturing company in Silicon Valley, it could start to get extremely expensive.


Barcus adds that the electricity that costs a nickel here now costs 15 cents in many parts of California -- and could cost 25 cents very soon. And while even rates in Tacoma and Seattle could double, Avista has not imposed a general electricity rate increase in 15 years.


"A lot of other utilities have asked for price increases," says Kelly Norwood, vice president and general manager for energy resources at Avista. "Our plan is to keep them stable. With what we see today, prices will be relatively flat here for the next few years. That's a good story for our customers, as well as for those who want to move into the region."


Clearly, the fact that Avista has some of the lowest (if not the lowest) electricity rates in North America will become one of the Inland Northwest's top selling points as the crisis in California deepens over the next year. It's a situation that also puts Inland Northwest companies at an advantage over their counterparts in other parts of the country that have higher energy costs that they must pass on to consumers. And no blackouts are expected in Avista's service area this summer.


Individuals and companies moving to Spokane from California in the early-1990s accounted for the last noticeable growth spurt in the local economy. Since then, housing prices and growth rates have flattened. In the early '90s, 8,000 to 10,000 people moved into Spokane County each year; in recent years, that number has been more like 5,000.


And it appears that even before an uncertain summer, some Californians are keeping their options open. Ken Heiman, director of communications for the San Jose/Silicon Valley Chamber of Commerce, says people are working to make the best of the situation, looking to add new generation plants and trying to conserve. "If you've lived in California for any length of time, you're used to conservation, whether it's water, energy or gas. It's kind of a pioneering spirit."


Heiman says his organization has polled its members and found most are planning to stick it out: When asked if they would move out of state if the crisis continued, 88 percent said no. "We haven't seen any kind of mass exodus from Silicon Valley," says Heiman. "The people who have been here awhile recognize the cyclical nature of the business."


But those 12 percent who are thinking of moving may be more than enough. "It only takes a small percentage of people to say, 'I've had enough,' to provide fairly healthy growth to our area," says Barcus.


Certainly any individual or company would have many more choices than just Spokane -- some may be fed up with the West Coast in general and move to places like Indianapolis, where the business climate is strong and livability is still high, too.


Turner says the economic development executives of the nation are descending on California. While Spokane has had a presence there for years, he's hearing stories of the "Tennessee Posse," a group of 20 executives from the Volunteer State who have set up shop in California.


"Many of these communities offer tremendous giveaways and incentives," Turner says. "They will literally offer free land and free buildings and job training -- resources we wish we had."


But Spokane has its benefits, as our economic boosters are quick to point out. Good quality of life with lakes and mountains nearby, relatively uncrowded roads, a good workforce and inexpensive electricity. Two of the bigger companies to have located plants here, B.F. Goodrich and Boeing, did so in large part because of the electricity situation. And in both cases, Avista has been involved in extending infrastructure to the new plants.


"Not only has Avista done a great job, but so have some of our smaller, regional utilities, like Inland Power," says Turner. "We are positioned to be very competitive."


So the focus could be on electricity-intensive plants that offer high-paying jobs. And Silicon Valley's other problem may help, too. With many high-tech companies struggling since the collapse of the NASDAQ, a move to another city plays as a way to cut costs and shed some payroll, since all employees won't likely move with the company. Wall Street loves that kind of thing, and it can wind up being the kind of move that can turn a company around.


But big companies could try to take advantage of the low electric rates, too. Server farms, or Internet hotels, are huge collections of computers that power Web sites like Amazon or Yahoo. Each server farm requires an electric load equivalent to a small city, but from an economic development standpoint, they aren't that desirable, since few if any jobs come with them.


And the vision of swarms of Californians moving north is not without controversy, as many locals were angry over the last influx, which some believe led to higher housing prices. In Seattle, bumper stickers in the late-1980s advocated building a wall at the Oregon border. And growth puts pressure on municipalities, so planning, like that done for the Growth Management Act, becomes even more important to maintaining the livability that brings people here in the first place -- livability they may have had back home before it grew too big too fast.


Mayor John Powers is one who thinks Spokane can strike the right balance, and he thinks Avista is the key to making it all happen. "If they do not have to raise rates, and if they can start producing more energy than they need," he says, "that will be a huge home run for Spokane."


Powers says that energy and water will be the key resources in the West in the coming decades, and if Spokane, which is blessed in both departments, becomes very thrifty in its use, "we will become known as a community committed to long-term conservation, and we will attract businesses and new citizens."


Next week: The Inlander takes a look


at ways that individuals and businesses can


conserve energy in the Inland Northwest.





Big Bonuses

A line near the end of a May 1 New York Times story about the West's electricity crisis raised some eyebrows for seemingly singling out Avista as a winner in the power crisis that has plagued California. Without naming names, Blaine Harden wrote: "With their record profits, some public utilities are wiring the emptiness of Eastern Washington with fiber optics, buying diesel generators to make still more power and paying Wall Street-style wages to electricity traders -- while making sure that their electricity rates remain among the cheapest in North America."


The reference fits Avista perfectly -- it has been wiring Spokane (maybe empty to an everyday New York Times reporter, but Harden, a Moses Lake native, should know better) with fiber optic cable for years now. The company has bought a diesel generator to put to use in Othello. And its rates remain among the cheapest on the continent. But Wall Street-style wages? Well, it turns out that describes Avista, too.


Although the company doesn't advertise the fact, its subsidiary, Avista Energy, has been paying out some hefty bonuses in recent years. Although an Avista spokesperson would only confirm that bonuses have been paid, adding that the finances of its unregulated affiliates are private, other sources put the figure well into the Wall Street range.


Two separate individuals familiar with Avista Energy told The Inlander that for performance in the year 2000, between $15 million and $20 million was paid out to Avista Energy's 50 employees. The number seems to be partially confirmed in Avista Corporation's public financial statements, which showed an unexplained $12 million jump from 1999 to 2000 under the "administrative and general" line item.


In light of the fact that the Western United States is supposedly in an energy crisis, some are calling the big money being made a case of profiteering. The situation has created some big winners and even bigger losers. Pacific Gas and Electric filed for bankruptcy protection in April after losing $6.6 billion. But the story behind that headline is that for PG & amp;E to lose that much means somebody else made it. Because PG & amp;E's production capacity couldn't keep pace with demand, the company was forced to buy power at $300 to $450 per megawatt hour and then, by law, was required to sell it for $65 per megawatt hour to its customers. The companies selling into that situation made a bundle -- it's like running a water stand in the desert. Enron, for example, made $1 billion in profits in 2000, much of it on energy trading.


Avista Energy, which buys power and tries to sell it at a profit, has been one of those winners. In 2000, it made about $200 million in profits, which eventually roll back up to Avista Corp. Since that money comes from its unregulated side, however, those profits can't go to keep customers' natural gas prices down -- it all goes to the shareholders and helps make Avista a stronger company.


It's kind of ironic that Avista Energy has become a success, since as recently as 1999 it was viewed as a ball and chain. Avista even tried to sell Avista Energy, but after the subsidiary lost $100 million that year, buyers were nowhere to be found. But even in 1999, sources say $7 million in bonuses were paid out to employees.


Whether these bonuses will be viewed with outrage by the ratepayers -- or by jealous colleagues employed in the rest of the Avista family -- remains to be seen, but in the world of energy trading, high bonuses are seen as a necessary cost of doing business. A journalist covering the energy markets for a national publication says Avista Energy's bonuses don't sound out of whack at all. After all, the company has been making all the right moves with its trades.


"These may seem like big numbers in Spokane," says a former Avista employee, "but in Houston, if you have a trader that makes you $20 or $30 million, you've got to pay them, or they'll go to work for Enron or somebody else."


But another former Avista employee believes the bonuses are too high, adding that traders who made $100 million for Enron may only get $200,000 year-end bonuses. That former employee adds that Avista Energy isn't even earning the money, since the new profits are the result of positions that were set up years ago by former top traders Mike Griswold and Tom Johns.


"They can't help but make money because they got set up long," the individual says. "Those two were the best traders in the business, and they set them up long back when nobody was going long."


Being long means that you have a long-term contract, and when those contracts were signed by Avista Energy, the price of electricity was a fraction of what it is today. It's just like the stock market, and locking in a steady supply of electricity at $30-$40 a megawatt hour is akin to getting in on the Microsoft IPO. Griswold left Avista Energy over a dispute about his bonus and now runs his own energy trading company in Seattle, and Johns left to become CFO of World Wide Packets.


While it is believed that that lion's share of the bonuses for 2000 went to the top traders, even the lowest person on the Avista Energy totem pole is believed to have pocketed $25,000.


And Avista Energy is showing no signs of slowing down. The first quarter of 2001 has been strong, and the second half of the year may beat all expectations. Avista Energy owns a brand new natural gas-fired turbine now under construction in Rathdrum. None of the energy generated there will go to serve Avista Utilities customers -- all of it will be sold on the open market and will most likely end up powering air conditioners in California. While the decision to build a new plant seemed kind of crazy back in 1998 -- after all, you could buy power cheaper than it could be generated at a new plant -- it now looks like a stroke of genius. And the plant has been rushed along so quickly that its original opening date of November, 2001, has been moved up to July, when prices -- and demand in California -- are expected to still be high. The addition of the Rathdrum plant could add another $200 million to Avista Energy's bottom line for 2001.





Avista's wild ride

Like everybody else involved in energy over the past couple years, Avista has been tossed on the uncertain seas of the worst energy crisis in decades. But unlike some, Avista seems to be coming through the rough patch stronger than ever. That's good news for Spokane and the Inland Northwest, since a strong Avista can be a more active and effective player in local economic development.


"You can be good, or you can be lucky, and I'll take luck anytime," says Randy Barcus, Avista's chief economist. "But I think we're pretty good, too."


In 1999, things didn't look so good, however. Although Avista was riding a wave of excitement over its new name (replacing Washington Water Power) and new CEO, Tom Matthews, the year would not be a good one. Matthews, the first CEO in decades to come from outside the company, applied his free-wheeling style to the stodgy old institution. He diversified, pushing subsidiaries to new levels of prominence, but he also stumbled. He advocated the purchase of Vitol, a Boston-based energy trading firm. Although the company had no assets other than its employees and some software it developed, Avista paid $40 million for the firm. The purchase was a disaster, as the top traders left, winning sizable buyouts from their new parent company, and their contracts didn't pan out to be worth anything. It wound up being in the neighborhood of a $100 million mistake.


Another problem arose when an Avista Corporation trader (not an Avista Energy trader) sold the company short by 700 megawatts. Sadly, the man took his own life shortly thereafter, but Avista compounded the mistake by failing to cover the trades, meaning they didn't buy back the amount they were short. So what could have been a $20 million mistake became another $100 million mistake.


Meanwhile, the company was making another decision that would turn out badly. Avista owned a large stake in a coal-fired turbine in Centralia, Wash., which it used to serve its own customers. They sold that stake to another company, but did not replace it, thinking they could buy power off the open market, which at the time was very affordable (in 1999, the Columbia River had a record-setting runoff). That wound up being another expensive mistake, as the company was forced to buy off the inflated open market in May and June of 2000 just to serve its own customers.


Matthews became the lightning rod for these decisions. Some shareholders were concerned that he was taking the company too far from its humble roots in generating electricity and serving its community. Matthews, whose family never joined him in Spokane, eventually resigned. But his legacy is hardly all bad, as he is more responsible than anyone for setting up the Avista Energy subsidiary to become the powerhouse of the overall company, as it has in the past year, when it erased even the setbacks from 1999.


The internal reaction to the ups and downs of the past few years has been resolute: Avista does not want to make the same mistakes again. It has redoubled its efforts to cover its load so it never has to buy off the open market, and it seems to be less interested in trying to be a wildly diversified company.


Barcus says when he used to work at Southern California Edison in the 1970s, the company was so proud, it would never second-guess itself. He says Avista doesn't share that trait. "[SC Edison] would take the ship down trying to save a decision. But this company says, we're going to make good decisions going forward." Barcus says both Vitol and Centralia are examples of unfortunate decisions that weren't made worse by hand-wringing. Avista cut its losses and moved on.


With a new generating plant in Rathdrum set to come on line in July, Avista Energy should be poised to be successful for some time. And the loss at Centralia will be replaced by a new project in Oregon that Avista Utilities has a 280-megawatt stake in. Coyote Springs II, which comes on line in June of 2002, should guarantee that Avista can cover its load, and by 2002 Avista Utilities expects to have surplus power (unless there is another drought next year) that can either be sold back onto the grid or be allocated for new businesses moving to the Inland Northwest.


Never wanting to be short again, and to make it through the next year, in the fall of 2000 Avista locked in favorable prices for natural gas for its turbines and for any extra electricity it might need.


Avista has gone back to basics in other ways over the past year as well, going over its operation with a fine-tooth comb (as most utilities probably have). Kelly Norwood, vice president and general manager for energy resources at Avista, says the company has found many ways to maximize its assets and bring new generation on line. Avista has bought a new diesel turbine that it will install in a shuttered facility in Othello, and the generation plant on North Market in Spokane will be allowed to run for longer hours starting in August when new emissions controls are installed. And simply upgrading the turbines at existing dams will allow even more power to be coaxed out of the existing grid.


"Some of this technology is from the 1950s," says Norwood. At Noxon on the Clark Fork River, Avista expects to grow its 55-megawatt turbine to perhaps 80 megawatts with new technology. Meanwhile, Avista just relicensed its Clark Fork River dams for 45 years and is just beginning to do the same with its six Spokane River dams.


In some cases, Avista has had to buy equipment, which is in high demand, from Europe, giving their engineers a crash-course in retrofitting. All that equipment costs money, and Avista is able to make those investments on the strength of its trading over the past year -- and on the knowledge that within a year, it should have a long position and be able to sell even more power onto the spot market.


But the other side to Avista's strategy is to promote conservation. If less power is used, it is less likely that Avista will have to buy power on the open market. And the less that has to happen, the stronger a company Avista will be.


But success has its own risks, and some Avista watchers fear that if it continues to thrive, it will become attractive to larger energy companies looking to consolidate. While Avista Energy may be very attractive right now, to get to it you'd have to mount a takeover of the entire company. The fact that Avista serves a region seen as remote to the rest of the country may make it less attractive as a potential purchase, says one person familiar with Avista and national energy markets. Others say Avista can do things to prevent what would be a major blow to the local economy (having Avista run from, say, Houston would certainly make for a different company, likely one less focused on local economic development initiatives).


Like a puffer fish that makes itself look bigger to ward off predators, Avista could protect itself by making its stock more valuable. And that has happened, as in recent months the stock has gone from $16 a share to $22. Or Avista may want to seek a regionally sensible merger, as it did in the mid-1990s with Sierra Pacific of Nevada. That merger never panned out, but a company like Idaho Power, which is in a similar boat as Avista, could make good sense as a potential partner.


Or Avista could spin off Avista Energy as a separate company, with an IPO, and keep a good chunk of it. That way, Avista Corp. could insulate itself from suitors who really just want a little moneymaker to add into their corporate collection.


Although some are predicting a merger mania in energy similar to the one seen in banking in the '90s, the threat to Avista doesn't appear to be that imminent. And even though its recent history seems to indicate the company may shy away from major, course-altering decisions, if the future is anything like the past few years, Avista will have some important decisions to make soon enough.