Saturday, January 19, 2008

Soaring electricity prices leave Massachusetts manufacturers struggling

Higher power bills contribute to plant closings
State lawmakers will soon finalize energy legislation that aims to promote efficiency and alternatives to fossil fuels. But as legislators iron out differences between recently passed House and Senate bills, businesses say they need to pay closer attention to what many firms consider the real crisis: spiraling electricity costs.

Massachusetts manufacturers pay the highest electricity prices in the continental United States, and the gap between their costs and those of competitors in other states is widening, according to the Energy Department. In 2006, the most recent annual data available, industrial users in Massachusetts paid more than double the average US rate, compared to 60 percent more in 2005. Only Hawaii has higher industrial rates.

As a result, Massachusetts manufacturers are struggling to stay in business. Electricity costs have contributed to the shutdown of several plants with the loss of an estimated 2,000 jobs, according to Associated Industries of Massachusetts, the state's largest employer group.

Among them: a 200-year-old paper mill in Lee. The mill's owner, Schweitzer-Mauduit International Inc. of Alpharetta, Ga., said electricity played a role in the decision to shutter the plant later this year and lay off about 160 workers. Power costs at the Lee mill jumped nearly 30 percent, or $2.8 million, over the past two years, with electricity accounting for 17 percent of manufacturing costs, said Bill Foust, vice president of administration.

That compares to 5 to 7 percent at Schweitzer-Mauduit's other mills.

"Electricity isn't the only reason we plan to cease operations," said Foust, citing other factors such as falling demand for the cigarette papers produced at the mill, "but rising energy costs have been significant there."

Massachusetts has long had high electricity prices, but several factors contributed to the recent run-up, specialists said. First, the state depends on expensive fuels to make electricity. About 60 percent of New England power plants run on natural gas or oil, and sharp increases in the costs of these fuels passed through to electricity prices, according to ISO-New England, the organization that runs the region's power grid.

Nationally, these fuels account for a combined 21 percent of power generation. Cheaper coal-fired and nuclear plants generate nearly 70 percent of the nation's power.

Other factors driving costs here are growing demand, lagging supply, and inadequate transmission, which creates bottlenecks that further constrain supply. Difficulties at power plants and other facilities, such as liquid natural gas depots, also push prices higher.

"These are constraints that are self-imposed in New England," said Gordon van Welie, chief executive for ISO-New England. "Yet we keep consuming more."

Western Massachusetts has been hardest hit by rising electricity costs, recently pummeled by sharp increases in delivery charges from Western Massachusetts Electric Co., a unit of Northeast Utilities of Berlin, Conn. Those increases, approved in a 2006 settlement with former Attorney General Thomas F. Reilly, helped raise power costs for large commercial and industrial users more than 20 percent last year.

Total power costs for large users are projected to rise 11 percent this year, according to the utility.

Under Massachusetts' deregulated market, utilities just deliver electricity, charging delivery rates regulated by the state. Independent generators that make electricity sell it at market prices determined by supply and demand. Utilities pass those prices on to consumers.

Economic development officials in Western Massachusetts say soaring electricity costs are not only pushing plants like Schweitzer-Mauduit's over the edge, but also are hurting efforts to recruit companies. About a year ago, Ice River Springs Water Co. Inc. of Feversham, Ontario, planned to open a bottling plant in Pittsfield. But when corporate officials saw electric rates, they put the building they purchased up for sale and opened the plant in New Hampshire
Sandy Gott, executive vice president, said her company is working with economic development officials to revive the Pittsfield project. The Berkshire Chamber of Commerce recently formed a cooperative of smaller companies to buy power in larger volumes at lower rates. Gott said Ice River Springs is examining whether those savings will be enough.

"We're kind of in limbo and trying to make a final decision," said Gott. "The electricity prices were quite a shock."

At the Friendly Ice Cream Corp. plant in Wilbraham, soaring prices boosted power costs by nearly $1 million over the past 2 years, gobbling savings from investments in energy-efficient lighting and refrigeration and other projects, said Mike St. Marie, vice president of production and distribution. Friendly pays 14 cents a kilowatt hour for electricity, up from about 8 cents three years ago.

"Rates have really spiraled out of control," St. Marie said, "and it makes us a little uncompetitive."

Ian Bowles, the state's secretary of energy and environment, said the Patrick administration recognizes that high electricity prices hurt competitiveness and is pushing initiatives to lower them. They include investing heavily in energy efficiency; revamping utility rate structures to promote conservation; and developing renewable sources, such as wind, solar, and biofuels, to reduce reliance on natural gas and oil. Significantly increasing efficiency could slice electricity expenses 3 to 5 percent a year, Bowles said.

Robert Rio, senior vice president at AIM, agreed energy efficiency could cut prices. But, he said, policy makers should move carefully in subsidizing alternative energy and other programs.

"We need a policy that puts electricity prices first," Rio said. "All these programs are nice, but we need to constantly ask, 'How is it going to reduce prices?' "

Many of these programs are funded with surcharges on utility bills, typically fractions of a cent per kilowatt hour. Many homeowners barely notice these charges, Rio said. But for industrial users, consuming millions of kilowatt hours a year, they boost costs by thousands of dollars.

M. Brian O'Shaughnessy, chief executive of Revere Copper Products Inc. of Rome, N.Y., said surcharges for energy efficiency, renewables, and other programs contributed to the shutdown this fall of Revere's plant in New Bedford. About 90 workers lost jobs.

New York development programs exempt manufacturers from such surcharges, O'Shaughnessy said, and rates at Revere's Rome facility are half those at New Bedford. "Massachusetts has to recognize that industrial companies have to be competitive with industrial plants around the world," O'Shaughnessy said. "You can't burden manufacturers with higher costs in a region where high costs already make it harder to compete."

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