BY TED SICKINGER and SCOTT LEARN



The proposed 2020 closure of

's coal-fired power plant in

is a potential victory for environmentalists, one that could set a national precedent in the debate over global warming.

It also spotlights an increasingly uncomfortable dilemma facing Oregon's largest electric utility, its 821,000 ratepayers, shareholders and the region at large.

How does PGE afford the massive slate of investments required to continue reliable electric service without driving electric rates into the stratosphere?

The question stands whether PGE shuts Boardman or not, as keeping Oregon's only coal-fired plant open until at least 2040 would require $500 million in pollution controls. The

votes Thursday on a 2020 closure plan that requires far fewer controls.

But the early closure of one of PGE's cheapest power sources -- and Oregon's biggest pollution source -- puts new pressure on to find affordable alternatives.

The answer is complicated by state rules forcing utilities to meet an increasing percentage of customers' demand with renewable resources; by environmentalists desire to see the company replace Boardman with low-carbon power; by the expiration of PGE's long-term contracts for cheap hydropower; and by the stock market's tepid appetite for PGE's shares.

PGE has been in a similar position before. The utility made few power plant additions in the 1990s, and the shutdown of its

in 1993 left the company with a major power generation shortfall -- a gap it filled with short-term power purchases on the open market.

That strategy worked beautifully as long as wholesale prices remained low and stable. But the western energy crisis -- largely directed by PGE's then-parent company,

-- left the utility and its ratepayers unmercifully exposed to the market, with the result that its customers now pay among the highest electricity rates in the Northwest.

A BIG CAPITAL TAB



The Trojan analogy only goes so far. That unplanned shutdown left little opportunity for a considered response. But PGE still relies on market purchases and faces other constraints.

For more

Read The Oregonian's continuing coverage of the

The biggest is the shear size of its capital investment needs -- as much as $2.5 billion for new power plants and other projects during the next four years.

That's excluding Boardman's replacement. PGE declined to estimate what the new costs would mean for rates, but the total capital is almost double its entire rate base today.

PGE executives say plant investments will reduce exposure to the wholesale market, reducing power costs. But as "legacy" power sources fade, they talk of smoothing rate increases, not eliminating them.

"We recognize that there's really no way in the next 5 to 10 to 15 years to get through this action plan without having some increases in costs," said Dave Robertson, PGE's vice president of public policy,

Here's how the $2.5 billion investment shakes out:

To satisfy Oregon's renewable energy requirements, PGE plans to add the equivalent of its $1 billion

by 2015. It will need more renewable power -- likely wind -- to meet escalating standards in 2025.

Meanwhile, PGE's contracts for cheap hydropower from public utilities on the mid-Columbia River -- 15 percent of its supply today -- are expiring. As it looks to replace those contracts, it proposes two new natural gas plants. That's $800 million, plus fuel.

To move the new power, PGE has proposed an

across the Cascades.

Then there's Boardman.

PGE customers consume 65 percent of Boardman's 600 megawatt output. That's 15 percent of PGE's overall supply.

But that number understates Boardman's importance. The coal plant 150 miles east of Portland is PGE's go-to source of cheap power. While PGE cycles other plants up and down to meet peaks and dips in demand, Boardman typically runs full throttle.

If the 2020 plan goes through, PGE needs $90 million in pollution controls by 2018 to keep Boardman chugging until 2020, then find power to replace it. PGE has penciled in another workhorse natural gas plant to replace it along with relatively small amounts of biomass and geothermal power.

PGE is required to put all of its power needs out for competitive bid to assure ratepayers the best deal. But whether its builds the plant or buys power under contract, PGE and its ratepayers will be far more exposed to volatile natural gas prices.

In presentations to investors, PGE promotes its slate of capital projects as a driver of earnings growth. Regulators allow a 10.1 percent return on equity in its rates, attractive for a low-risk investment at a time when 10-year Treasury notes yield 4 percent annually.

But PGE has consistently under-earned what regulators allow. As a result, its stock performs below its utility industry peers.

That's a problem because regulations won't allow PGE to just borrow to cover its investments. It has to issue stock, too, even if the price is depressed.

PGE's critics blame management.

"They have a remarkably poor record of resource management," said Jim Lazar, a utility rate-making consultant in Olympia. "You have to go to Montana to find a company that's made as many mistakes as PGE."

Analysts say management's performance has been about average. They blame regulators, saying existing rules and past rate cases have left the company without the ability to fully recover costs.

Neil Kalton, an analyst with Well Fargo Securities, sees the 2020 closure as a modest positive for shareholders because it reduces the short term need to finance $500 million in pollution controls.

But unless the regulatory environment improves, he said, the market won't have a great deal of enthusiasm for PGE's stock.

GLOBAL WARMING CONCERNS



The Sierra Club and other environmental groups want PGE to close Boardman as early as 2016. Environmental groups and the Citizens' Utility Board also want PGE to replace the coal plant with greener options than natural gas and to bump up energy efficiency investments.

Boardman emits about 4 million tons of greenhouse gases a year -- just over 5 percent of the state's estimated total for 2005. It's also Oregon's largest source of emissions that contribute to acid rain and haze.

But just replacing Boardman with natural gas plants won't do the job long term, said Angus Duncan, chairman of

and president of the

.

Natural gas plants emit roughly 40 percent of the global warming gases that coal plants do. But using PGE's projections, Duncan calculates that PGE's greenhouse gas emissions would bump back to 2010 levels by 2030 if Boardman is replaced with natural gas, thanks to demand growth and loss of carbon-free mid-Columbia hydropower.

The state's goal is to cut greenhouse gas emissions to 75 percent below 1990 levels by 2050.

PGE's current plan assumes energy efficiency will cover half of demand growth and includes increased renewable power. "But it doesn't exhaustively explore them in the way it will have to if we're going to have a chance of being on the C02 (reduction) curve," Duncan said.

PGE has agreed to work with environmentalists and ratepayer advocates to study replacing Boardman with renewables.

Possibilities include better energy storage that would allow PGE to store intermittent wind and solar energy, geothermal, wave and biomass energy.

To satisfy regulators, those options will have to be as cheap as natural gas, said Bob Jenks, executive director of the Citizens' Utility Board, a ratepayer advocacy group. Many of them don't meet that standard now.

"Nobody has 'the plan' today," Jenks said. "That's why we need to test out the least-cost, least-risk options. We're not talking about getting PGE to do renewables at any cost."

--

;