Letter to Customers from Superintendent Gary Zarker

Sunday, March 10, 2002

To our customers:

I would like you to know a few things about the 2000-2001 energy crisis and Seattle City Light's performance in it. We are still dealing with the effects of an unprecedented series of events that drove up wholesale electrical prices to unheard of levels. All of this coincided with just about the worst one year drought on record.

We all know the results. We at City Light had to borrow money to buy power to keep the lights on. To pay back the debt, we had to increase rates to our customers and those rates will be with us for some time. We've posted several pieces of information on our web site including a history we wrote to inform our internal "lessons learned" discussion at http://cityofseattle.net/light/news/features/memo1.asp and a list of pertinent questions and answers at http://cityofseattle.net/light/news/features/memo2.asp.

In my view, these are the key questions that want answers:

• What happened?
• Were we prepared?
• Who was responsible?
• Did we learn anything?
• Where are we headed?

What happened? California's deregulation went out of control and sent shock waves throughout the western electrical marketplace. Prices were allowed to soar ten to twenty times higher than historic prices or those we see today. The federal government, required by law to assure that wholesale prices are just and reasonable, did not follow the law. At the same time, the drought reduced our system capacity by more than half. We had to pay millions more for electricity to keep our lights on and we borrowed money to cover those costs.

Were we prepared? We were not prepared for the prices we saw. Nor was anyone else. If wholesale had remained just and reasonable the price tag for the drought alone would have been less than $100 Million dollars - a big number, but not unprecedented. With those higher prices, the cost of the crisis was nearly $600 Million. That bizarre market bankrupted the largest utility in the west, Pacific Gas and Electric, and forced the state of California to commit $43 billion dollars to purchase energy on behalf of most of its citizens. We have techniques to manipulate our hydro system to absorb the shocks of drought and we used them with some success. Our risk management techniques for dealing with this market and the associated drought worked well in most cases though not in all. In the end, however, we kept our lights on in the most extreme conditions imaginable.

Who was responsible? In my mind, it is very clear that the largest responsibility by far rests with the Federal Energy Regulatory Commission. That agency had the responsibility to regulate the market as it spun out of control, but it did not act, even with clear information from its own staff that the market was out of control. The politics of deregulation proved more powerful than the economic conditions of people in the western United States. It is also becoming clearer by the day that many companies took advantage of the market and manipulated supply in order to increase prices. The next stop for the Enron scandal is the western electricity marketplace.

This utility bears some responsibility as well. We made thousands of decisions during the crisis and, in hindsight, some of them were better than others. I want to assure you that at every step we had our customers' best interests at heart.

Did we learn anything? We will not be caught short in future energy markets. We have acquired enough new energy so that we are surplus even in the driest years. Our financial policies are more conservative today. Together, these strategies will lead to more stable rates than you have seen in the past. We fought deregulation in Washington state five years ago and, given the experience of this crisis, will continue to resist it in the future. We have learned that deregulation of this industry will continue to be a disaster for the ratepayers of City Light and we will continue our opposition with a firmer resolve.

Where are we heading? We are recovering from the blows of the energy crisis. At the end of 2002 we will have $90 Million in excess revenues. We will use that money from other utilities to pay off the loans we took to keep the lights on. We will continue reducing our costs with more cuts this year to assure that earnings in 2003 and 2004 will also be strong. We will continue to seek justice from the marketplace that rendered so unjust a result in 2000-2001 by seeking refunds and rollbacks.

Thank you for all the help you provided by reducing energy use at the height of this crisis. It saved you and the utility you own a tremendous amount of money.

Sincerely,

Gary Zarker
City Light Superintendent