Western power: an electrifying story: adapting to the new realities of the power market.

Rolling electrical blackouts experienced in California have meant rolling shut downs for some pulp and paper mills up and down the U.S. Pacific Coast. Mills dependent on market power have experienced high-voltage jolts to their operating costs. The supply of electricity in the Western states has not kept pace with demand and energy prices have gone through the roof.

And that's not all. Pacific Coast mills use natural gas to meet their heat and steam demands and to fire their cogeneration plants. Natural gas prices, which were averaging US$2.75/1000 [ft.sup.3]. before August 2000, went to US$60 by mid-December, putting a double whammy on mills. But for a few mills with adequate cogenerating capacity and favorable utility contracts, the energy crisis has been something of a bonanza.

MILLS SHUT DOWN

Electricity gets most of the headlines, but natural gas prices also have skyrocketed and have caused as many problems for mills as electricity. Most of the generating capacity on the West Coast is fueled by natural gas and its producers and pipeliners have not missed out on the opportunity to make megabucks from a megaproblem.

In December, the energy crisis took down several mills, at least temporarily. For a few examples, Shasta Paper in Northern California, and Fox River Paper Co. and Newark Sierra Paperboard Corp. in the Central Valley all took downtime. Natural gas prices were reported as the principal reason for the shutdowns. Also in December, Inland Paperboard & Packaging Inc. took its Ontario, California, recycled linerboard mill down because of high energy costs. Restart dates depended on moderating energy prices. But at least one mill won't be restarted at all.

Georgia-Pacific closed its Bellingham, Washington, market pulp and tissue mill, in December, blaming energy costs that had risen to nearly US$6 million per month, which it said was nearly 50% of the mill's operating costs. The closure was considered temporary at first, but on March 30, G-P announced that the pulp mill and related chemical plant closures would be permanent. The company said it would operate the tissue mill and converting facilities with temporary electric generators while searching for affordable electric power alternatives.

Chuck Forman, account executive for power sales at Bonneville Power Administration (BPA), wholesaler of about 40% of the electricity in the Pacific Northwest, says that pulp and paper mills with market-based contracts were hit immediately and hard by the power crisis. Those with long-term contracts, with prices less subject to fluctuations or runups in the market, were much better off.

Mills that are able to generate enough electricity to meet their own needs have been in a little less trouble than those who must buy power at market prices, especially those without the protection of long-term contracts. Generators, thus far, have had to worry only about the cost of fueling their turbines. But even that has been quite enough of a problem for some mills. Plainwell Inc.'s Shasta Paper mill at Anderson, California, was restarted only after a crash-emergency, 14-day program to institute energy-saving measures throughout every nook and cranny of the mill.

A CONGENERATION BONANZA

Those mills able to generate more electricity than they need have found something of a windfall in being able to sell surplus power into the grid. And in at least a couple of cases, favorable local utility contracts have enabled mills to sell their generated power into the grid at high prices while buying back the power they need at much lower contract prices.

Weyerhaeuser Co., for example, was buying power from the Eugene (Oregon) Water and Electric Board (EWEB) at a very favorable contract rate and selling much of its own generation at much higher market rates. An EWEB contract with Weyerhaeuser makes the scenario possible.

An EWEB spokesman said that Weyerhaeuser was doing "exactly what the contract allows them." EWEB paid to build one of the two turbine generators at the Weyerhaeuser mill 30 years ago and in exchange, gets 50% of the generated power. The contract allows the mill to sell its 50% share to BPA, through EWEB.

In the December 2000 market, the mill was selling power to BPA for US$570 per megawatt, 21 times the rate Weyerhaeuser was paying EWEB. "In effect," according to an article by Alan Pittman in the Eugene Weekly, "BPA is buying power from Weyerhaeuser on the market for US$570 a megawatt and selling it back to them through EWEB for US$27 a megawatt."

Weyerhaeuser and EWEB were reportedly talking about bringing another cogeneration turbine on line this year in order to boost power production even more. If this should ever happen, it may be surmised that it would be done under greatly different contract details.

Longview Fibre also was selling power on the retail market during the same period. The company reported that in its first fiscal quarter ended January 31, 2001, it had power sales of {]S$2G million, which favorably affected operating results by US$7.7 million. In its second fiscal quarter, ended April 30, power sales were US$26.5 million, resulting in a favorable effect on operating results of US$$7.0 million.

In a report by Seattle's KING-5 television earlier this year, BPA said Longview Fibre was selling electricity to other users in the region for as much as US$$200 per megawatt, but buying it under its contract with BPA for only US$$22 per megawatt.

Other regenerators find the matter much murkier. Dick Johnston, general manager of Smurfit-Stone Container's Santa Clara, California, mill says, "The California and Western states energy market is so messed up it would be easier not to be in it." His mill is more than self-sufficient in electrical production and sells power into the California grid. But Pacific Gas & Electric, former buyer of the mill's excess power, went bankrupt, owing Smurfit-Stone Container a considerable sum for purchased power.

Johnston is cautious about the future of cogeneration selling in the region. He warns that regeneration prices and markets may not hold kip arid, at any rate, are subject to fluctuation according to demand, the price of natural gas and the state of the economy.

Other companies in other industries in the region also have found ways to reap rewards from fine energy crisis. Kaiser Aluminum, for example, shut down its aluminum smelting plant near Spokane earlier this year because it can make more money selling its power than making aluminum. Washington Gov. Gary Locke said Kaiser could make a profit of US$300 million and urged the company to share the wealth with its workers and community.

Forman observes, "When millions of bucks are on the table, all kinds of things happen. Creative thinking Follows the money."

AN UNMET ENERGY CRISIS

An early warning that the Pacific and northwestern states were headed for trouble came on August 10, 1996, according to the Eugene (Oregon.) Register-Guard. On that date, temperatures soared to near 100[degrees]F. in several states and electrical demand zoomed upward. East of Portland, Oregon, a main transmission line failed when it grew so hot that it stretched and sagged into a tree. Systems fell like a row of dominoes in a series of outages that left seven million people in 14 states without power.

Too little was done in the ensuing five years to head of the crisis. Johnston notes that in California, which is in the most trouble of any state in the region, no new power plants were built in 12 years. He thinks that California will not be in supply-demand balance for at least three more years.

Electricity needs in the region have continued to grow, but have not been met or matched by growth in either generating capacity or transmission improvements. To date, energy providers have announced plans for adding more than 25,000 megawatts of new generating capacity over the next five years, which would increase the regional power supply by nearly two-thirds. Forman counts six new power plants, two recently completed and four more slated to come on line by mid-2002, with 16 more scheduled to begin construction in the region.

But many observers point out another looming crisis in a regional transmission capacity that is now pushed to its limit. BPA, which owns about 70% of the high-voltage transmission grid in the Pacific Northwest and Montana, plans to spend more than US$2 billion over the next seven years to improve transmission, but this will permit the moving of only an additional 10,000 megawatts--40% of the planned new generating capacity.

HOW COMPANIES COPE

With some companies paying seven times as much for energy as they paid a year ago, and the Energy Information Administration predicting a 40% increase in natural gas prices over last year, how are pulp and paper companies coping?

Billy Davis and Jim Simpson, senior consulting engineers for power at Washington Group International, Birmingham, see new opportunities for in-plant generation. This will take a while, they say, and intensive planning and rigorous engineering will be required to support cogeneration decisions. They also see a stronger focus on carefully developed energy partnerships for both electricity and natural gas.

And, while it is a more viable option for mills in the east than in the West Coast, they also see a renewed interest in solid fuels. Their firm, they say, has done more research and planning for coal-burning in the past year than in the previous 15 years. In response to air quality concerns, they note that it is technically fEasible to clean the air from coal-burning plants, just very expensive.

THE CERTAINTY OF UNCERTAINTY

California had braced itself for a very rocky 2001. Consumers and industry alike were warned to expect the worst, with brownouts and blackouts sure to come, especially when really hot weather hit the state. There just wasn't going to be enough power to go around. In January, California suffered several power emergencies in which it was forced to pay more than US$1,000 per megawatt at critical times. State officials frantically lined up contracts.

By late July (the time of this writing), there had been no blackouts in California since May 8. The surprising success of conservation efforts and the occurrence of an unusually cool summer brought about a situation no one in the state ever would have predicted: California had surplus electricity on its hands and was selling it in a glutted market.

Obliged to buy power at an average cost of US$133 per megawatt-hour, whether it needs it or not, the state has sold some of that power back into the market for as little as US$15 per megawatt-hour. Critics, of course, said that this development was simply more evidence of a poorly conceived, ineptly administered plan for electricity deregulation that has left the state at the mercy of a merciless market.

Of course, if temperatures should soar in August, California could be in crisis again before you read this. All of which says that energy conservation must become a permanent priority, not only for the pulp and paper industry, but for the nation; that new plants, no matter how fueled, must be built to supply inexorably growing electricity needs; and when those generating plants are built, transmission lines must be in place to distribute the power.

Charles E. Swann is a contributing editor to Solutions! and has written extensively on the pulp and paper industry. He is based in Waleska, Ga. His e-mail address is: [e-mail]