Oregon firms adjust to high energy costs
www.oregonlive.com 03/10/03 BRENT HUNSBERGER
Mad Dog Trucking's David Hutchison turned to friends last week to fix his semitrailer's leaky radiator. Try Our Classifieds
Louisiana-Pacific warned investors late last month of lower profits this spring.
Blue Heron Paper shut down two of three paper machines and sent a third of its workers home in late February.
All three Oregon companies made these moves to cope with the same demon: spiking energy prices.
In the past two weeks, West Coast diesel prices have neared an all-time high, spot electricity prices have more than doubled what they were a month ago, and natural gas prices have soared to three times above normal.
The trend has meant trouble for Oregon truckers, timber producers, food processors and other power-intensive industries that buy power on short-term markets. Such unexpected essential costs are hard enough for commodity manufacturers to manage in normal times. They become even more dangerous as the state's industries struggle to pull out of a long recession.
And if prices stay high into summer, as some predict, they could mean higher energy bills for everyone -- businesses, schools, government and homeowners -- and a big drain on Oregon's economic recovery. The state's latest revenue forecast cites rising regional energy prices as a major risk for more layoffs and production slowdowns.
"I don't think the hikes are at the point where it would actually throw us back into a recession," state economist Tom Potiosky said. "But it makes the recovery that much more difficult."
Roy Hemmingway, chairman of the Oregon Public Utility Commission, said he has "absolutely no doubt" that high energy costs have had a significant impact on the state's economy.
Portland General Electric's 2001 increase alone, which raised rates by 30 percent for households and 50 percent for businesses, drained $400 million from the economy, he said.
"That's $400 million that otherwise would have been available for other things," he said.
Utilities said they are trying to hedge against passing on heightened costs to residential and commercial ratepayers. PGE is taking advantage of the high prices by selling excess power on the market, said Jim Lobdell, the utility's vice president of power operations.
Northwest Natural Gas spokesman Steven Sechrist said the Portland-based utility is not paying high spot prices because it bought its current gas supply last year, when prices were lower.
Customers of other utilities aren't as lucky. Last week, Puget Sound Energy, which provides natural gas to more than 600,000 users in Washington, asked state regulators for a rate adjustment to recover soaring gas costs, potentially adding an average of $10 to residential bills. Bonneville Power Administration, which markets power from the region's 31 hydropower dams and nuclear plants, has proposed a 15 percent wholesale rate increase this fall.
The recent dramatic price increases have been fueled by an unusual mix of war fears in the Middle East, labor strife in oil-producing Venezuela, harsh winter weather in the Eastern and Midwestern United States and inadequate levels of natural-gas storage and drilling rigs.
To meet high winter demand, oil refineries switched from making diesel to producing heating oil, crimping diesel supplies and boosting prices at the pump. Crude oil inventories in the United States, meanwhile, have tumbled to 25-year lows, analysts said.
Winter weather also boosted demand for natural gas, depleting the nation's underground reserves to low levels. Higher gas prices, in turn, helped push electricity prices up, since natural gas can be a raw material for electricity production. One quarter of PGE's electricity comes from natural-gas-fired plants.
Looking ahead, another wild card in the Northwest lies buried beneath the light mountain snowpack. Even if usual spring rains arrive, the Columbia River runoff will be 70 percent of normal, federal forecasters said Friday. That means less water will churn dam turbines. With a shortage of cheap hydropower, the region might have to rely more on pricier sources of electricity this summer.
One manufacturer hard hit by the energy-price spikes of the past two weeks was Blue Heron Paper in Oregon City. The mill, partly employee-owned, furloughed 80 workers and idled two small paper machines on Feb. 28, three days after spot energy prices soared to $116 per megawatt hour. That's far above the Jan. 6 price of $35.42. Prices remained above $70 last week, but the company restarted one paper machine and called back 30 workers, President Mike Siebers said.
Across the Willamette River from Blue Heron, West Linn Paper's monthly energy costs have risen $250,000 since October. The mill is in better shape than Blue Heron because it buys natural gas month by month, instead of daily. Still, the company is instituting conservation measures and using more heating oil to fire its pulp boilers, mill manager Brian Konen said.
SP Newsprint shut down half its Newberg mill for a day when electricity surged above $100. But a hedge agreement that fixes most of the mill's energy costs for six months has helped blunt the impact of the price increases, company officials said.
"If we didn't have that, we probably wouldn't be running today," said Scott Conant, the company's regional controller.
Diesel and power prices also have hurt forest-products manufacturers.
Portland-based Louisiana-Pacific warned investors Feb. 28 that first-quarter profits would suffer because the company was paying more than expected for deliveries of wood fiber, energy for its manufacturing mills and petroleum-based raw materials, an official said.
Food processors rely most heavily on natural gas during summer harvests. Still, Norpac Foods recently switched from natural gas to heating oil to run boilers at its Stayton plant. The farmer cooperative expects to pay more than twice as much for natural gas this summer than it did last year, lowering profits for its members, said Mark Steele, Norpac's corporate engineer.
Truckers might be screaming loudest. Early last week, average West Coast diesel prices hit $1.80 a gallon, a 30-cent rise since Christmas week, the U.S. Energy Department reported. In response, trucking companies began passing the higher fuel costs on to customers by raising fuel surcharges.
Last month, fuel surpassed maintenance as Titan Freight Systems' second-highest cost behind labor. The Milwaukie trucking company, which hauls freight for such customers as Intel and Fred Meyer, raised its fuel surcharge from 3 percent to 4 percent. Larger companies are imposing higher surcharge rates.
Even as costs rise, Titan for the first time in five years is seeing no growth in monthly revenues, compared with the previous year, because of slow shipping demand, company vice president Keith Wilson said.
"The depressed business levels are hurting us, compounding this fuel run-up," Wilson said. "It's really a dangerous mix for some trucking companies."
Smaller truckers are most at risk because they have less leverage to impose surcharges, industry experts said. Over the past two years, thousands of trucking companies have gone out of business as shipping demand has slowed and diesel prices have risen.
Hutchison, an independent truck driver from Molalla, sought bankruptcy protection last month after demand sank for his services hauling sawdust and wood chips. Hutchison borrowed from family and retooled his operation. He now hauls Tillamook cheese and butter in a refrigerated trailer.
But the recent spike in diesel prices has prompted the 47-year-old father of two to hold off on a $1,500 repair to his truck's suspension system. He's considering running with a leaky radiator unless he and friends can find a way to fix it for cheap.
"It cuts into your preventative maintenance," Hutchison said of the fuel costs. "When you start doing that, you're going to pay in the long run."
Oil industry experts said diesel prices should fall once temperatures warm.
But natural gas and electricity prices are another story, analysts said. The nation's natural gas storage is headed for a record low, they said, fueling predictions that summertime prices will be twice as high as last summer.
And if natural gas costs stay high, electricity rates could hover above normal as well.
"That's not going to be good news anywhere," said Marshall Adkins, managing director of energy research at the Florida-based investment firm Raymond James & Associates. "Our view is this summer is going to be real interesting."
Gail Kinsey Hill contributed to this report. Brent Hunsberger: 503-221-8359; brenthunsberger@news.oregonian.com