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Seattle City Light Annual Report, 2001

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Gary Zarker, Seattle City Light Superintendent, 2000-2001

 

NOTE Seattle City Light, City of Seattle -- City Light Department, and the Department are used interchangeably in this report.

MISSION Seattle City Light is in business to sustain and enhance the community's quality of life by providing excellent energy services to our customers and to be the most customer-focused, competitive, efficient, innovative, environmentally responsible utility in the United States.

Superintendent Zarker's Letter

On March 4, 1902, Seattle voters took a bold step by approving bonds to build a hydroelectric power plant on the city's newly established Cedar River watershed to supply electricity for street lights. At the time, the Seattle Electric Company, then a tentacle of the national Stone & Webster cartel and a distant ancestor of today’s Puget Sound Energy, was the dominant private electrical utility and owned or controlled most of the city’s streetcar and interurban lines.

Guided by a young but indomitable engineer named James D. Ross, the new utility powered its first street lights on January 10, 1905, and began serving private customers by the following September. Such competition precipitated an unavoidable clash with private interests, which pursued an aggressive media and political campaign against public power for decades to come.

City Light became an independent municipal department in April 1910 and went on to establish a record of innovation and efficiency envied around the world. It developed an extraordinary hydroelectric resource on the Upper Skagit River beginning in 1919 and, in 1967, on Northeastern Washington’s Pend Orielle River. City Light acquired the last private electrical assets and customers within the Seattle city limits in 1950 and became a partner with utilities, public and private, throughout the region to develop a model system for generating, distributing, and managing electricity for the greater public good.

The utility survived two world wars, fierce competition, and innumerable swings in the local, state, and federal political climate. Mistakes were made, and a few disasters were narrowly avoided – such as a substantial investment in nuclear power – but City Light emerged from every challenge smarter and stronger.

Nothing, however, prepared us for 2001, truly a year in which all of the rules changed. We thought we had weathered the "perfect storm" of 2000, when California’s disastrous experiment in deregulation and the cynical manipulations of Western energy markets by Enron and other profiteers combined with a record Pacific Northwest drought to send energy prices soaring. But 2001 proved far worse.

We were not alone in our travails, of course. The largest utility in the West was driven into bankruptcy. Whole industries were shut down. Some utilities watched as their major industrial customers closed up shop, other utilities stranded salmon, others took on high cost, long-term contracts that would burden them and their customers for many years.

None of those things happened at City Light. Our lights stayed on, we had a strong salmon year on the Skagit, and our major customers continued to operate. But at a cost.

Among all the frustrations of this remarkable year, two stand out. The year 2001 was to be the year we implemented a plan approved by the Seattle City Council in 2000 that would reduce the impact of weather on our power supply and put in place more conservative financial planning parameters. By October of 2001, the plan was in place, allowing us to meet our customers’ needs with our own resources even in the worst water conditions. But the storm hit before our preparations were complete. The other frustration was with the stewards of the marketplace, the Federal Energy Regulatory Commission (FERC). In the face of the obvious, in the face of the recommendations of their own staff, the FERC failed to provide the regulatory oversight that would have saved customers billions of dollars and many thousands of jobs throughout the West.

City Light survived this crisis thanks to steadfast support from its elected supervisors, the Mayor and City Council of Seattle, thanks to the skill and resilience of its workers, and thanks to an unparalleled commitment to extraordinary conservation measures by customer-owners.

This annual report offers what we believe is a candid and accurate chronicle of the year’s unprecedented events and City Light’s responses. While we are still assimilating the experiences described here and making necessary adjustments in utility policies and practices, there is no question of City Light’s fundamental soundness and reliability as we move into our second century.

Gary Zarker
Superintendent
Seattle City Light

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2001 Highlights

    January 2001
    Successful "Save 10% at home and at work" conservation program
    is launched to reduce wholesale energy purchases.

    February 28, 2001
    Nisqually earthquake shakes Puget Sound but barely affects
    City Light facilities and services.

    April 2001
    Consolidated Customer Service System goes "live."

    June 2001
    FERC caps wholesale energy prices too late to blunt cost impacts.

    July 2001
    Klamath Falls gas-fired plant begins generating 100 MW for Seattle.

    September 11, 2001
    Terrorist attacks on the United States intensify utility security efforts.

    October 2001
    BPA begins delivery of power under Seattle’s new 10-year contract.

    November 2001
    Rainfall and snow pack exceed normal levels while national economy
    slips into a recession.

    December 2001
    Seattle enters contracts to become the largest municipal utility
    purchaser of wind power in the United States.

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Introduction

Two thousand one will be remembered as the year all the rules changed. The tragedy of September 11 showed the world that unimagined events could indeed occur, and on a vast and horrific scale. For City Light, 2001 was the year when decades of conventional utility practice and assumptions collapsed amid the chaos of the western energy crisis, the costliest electrical energy event in the nation’s history.

 

Beginning in the mid-nineties, the pace of electric deregulation accelerated, especially in California. City Light and other utilities then took precautions against stranded investment – contracts and financial commitments that could not be recovered at anticipated future rates. Among those strategies was a 65 average megawatt reduction of its purchases from the Bonneville Power Administration, a quarter of its contract entitlement. This meant more reliance on the market, which was less expensive at the time. With normal precipitation in the Pacific Northwest, City Light planners reasonably anticipated that the utility could generate most of the power its customers would need and sell seasonal surplus energy to other utilities. City Light also maintained its long-term commitment to environmental stewardship by keeping its robust conservation program and through promotion of renewable energy sources.


By mid-2000, however, City Light found itself at ground zero in the collision of three unique factors…
 

By mid-2000, however, City Light found itself at the center of a collision of three unique factors: a contrived shortage of electricity in California that forced spot market prices to astronomical levels, a low-water year that robbed Seattle of both the power it needed for the winter and the surplus it sold in the summer, and the persistent refusal of the Federal Energy Regulatory Commission (FERC) to police the western energy market. All these events combined to leave the utility with a record net loss of $52 million. We called it a "perfect storm" at the time, but worse turbulence lay ahead in 2001.

In November 2000, the FERC staff told its commissioners that the markets were dysfunctional and prices were neither just nor reasonable, the standard the agency is required to enforce. Unfortunately, the FERC refused to do its regulatory job. By the end of 2000, City Light’s net expense for needed extra power soared to $104 million. In California, the situation was even worse. State government stepped in to buy power with taxpayer money as its major utilities ran out of cash. Seattle struggled, but kept its lights on.

The cost of keeping the lights on was heavy. The Seattle City Council took the courageous, but unpopular step of raising rates in January, March, and July, as well as passing through an additional increase by the Bonneville Power Administration in October of 2001.

To reduce purchases from the market, City Light’s residential and commercial customers rallied to the utility’s call to conserve an additional 10 percent "At Home and At Work." This reduced consumption saved as much as $80 million for energy purchased in 2001.

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The Manufactured Energy Crisis

Seattle City Light’s experiences cannot be separated from others in the West. Over the years, the Golden and Evergreen states developed a symbiotic relationship in which seasonal surpluses were exchanged - City Light bought California power in the winter and sold excess power in the summer. It was an efficient and effective arrangement.

Even as the economic recovery of the roaring nineties was increasing demand in the West, reserves in the marketplace were still as strong as they had been at any time in the decade. But the market acted as if there was little energy available.

As independent analysts Ann Stewart and Robert McCullough noted in a recent essay in The Seattle Times, "Every utility on the West Coast, from California to British Columbia, was blindsided by the crisis in California. While every utility had carefully studied the fundamentals of the market, they could not have predicted that California’s complex intervention in competitive markets had created incentives that rewarded major market players for withdrawing their electricity generation from the market."

In May 2000, wholesale energy prices doubled. In June they doubled again. After a two month respite, when each megawatt hour still cost three times or four times what it had in prior years, the price shot up to 10 times historic levels. The volatility of the market was dramatized in December when cable television’s Weather Channel broadcast an erroneous daily forecast for subzero temperatures in the Pacific Northwest. Energy prices suddenly spiked from an already high $200 per megawatt hour to an astronomical $2,000/MWh by day’s end. The cold snap did not materialize – but the bills did.

Power managers at City Light used the flexibility of the hydro system to reduce purchases during the day and buy power at night when it is cheaper. In some months, however, the difference between light-load hour and heavy-load hour disappeared. The utility’s risk management committee met frequently during the crisis, evaluating strategies in a superheated setting.

Throughout the crisis, the FERC and other federal leaders refused to intervene, fearing intervention would be taken as an admission that the deregulation experiment had failed and failed badly. At the end of May, the new President capped a series of free market statements by saying "the only thing I won’t do is have price caps." Three weeks later, his new FERC Chairman, Pat Woods, announced price caps throughout the West.

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Nature Takes a Hand

At 82 percent of its generation, City Light has the highest percentage of hydropower in the region. City Light planners use October as the beginning of the water year. The water year that began in October 2000 started badly and soon got worse. Despite predictions for normal precipitation, it was clear by mid-December that the region was in a drought. City Light’s wholly-owned hydro production would be cut in half.

If the shocks from the energy market and from world events were not enough to rock Seattle, the Nisqually Earthquake of February 28, 2001, certainly did.

In keeping with City Light’s policy of "Fish First," power managers maintained minimum stream flows to protect salmon habitats along the Skagit. During the crisis, City Light managers released enough water to insure that redds (shallow water nests of salmon eggs) were kept wet. These actions saved one of the strongest runs of endangered King Salmon in many years.

Across the state, at Boundary Dam on the Pend Oreille River, sharply reduced releases from federal dams upstream meant that only one of the dam’s six turbines was in use.

If the shocks from the energy market and from world events were not enough to rock Seattle, the Nisqually Earthquake of February 28, 2001, certainly did. The 6.8 temblor – the strongest in the Puget Sound region since 1949 – damaged many older buildings in Seattle, but had no effect on power houses, generation stations, and dams. The distribution system suffered outages affecting only 19,000 customers, mostly properties built on landfill in Seattle’s south end. Almost all service was restored by midnight. Total damage to City Light facilities was approximately $250,000, compared to more than $1 billion in earthquake damage around Puget Sound.

In November 2001, the rains returned at last. Steady precipitation continued into December and January promising an above-normal water year for 2002. But for City Light, as with the rest of the world, nothing would ever be "normal" again.

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Power Supply

The crisis came as City Light was changing its resource mix in profound ways. It contracted for power from a clean-burning gas generator in Southern Oregon in July of 2001 and a large wind farm near Walla Walla at the end of the year, to go with a new contract with the Bonneville Power Administration. It complemented these resources with new planning concepts to manage the new mix.

Beginning on July 29, 2001, Seattle began receiving the energy output of 100 MW of capacity from the Klamath Falls gas-fired power plant under a five-year contract, renewable for five additional years. This 500-megawatt plant was developed jointly by the City of Klamath Falls and PacifiCorp Power Marketing of Portland. Klamath Falls is in southern Oregon, with good access to natural gas pipelines and the main electrical transmission line between California and the Northwest. The plant also incorporated greenhouse gas mitigation strategies. It replaced the 80 aMW lost when the coal-fired Centralia plant was sold more than a year before.

In October, Seattle began a new contract with the Bonneville Power Administration. City Light and other power generators had long negotiated for a "slice" of the federal hydroelectric system. Seattle’s slice of the system is 4.6676 percent of the power generated by BPA. The actual amount of power will fluctuate, depending on rainfall. City Light will pay the same percentage of BPA’s system costs, including any budget overruns and debt payments to the U.S. Treasury. City Light accepts some risk of reduced power output caused by fish-protection measures on the Columbia River system. This sharing of risk with BPA also entitles City Light to enjoy any system benefits. For example, City Light will be able to market any surplus energy associated with its percentage of the system.

The contract also gives City Light a "block" of BPA power. A block is a firm amount of power shaped (or scheduled) to a monthly net requirement. Under the block and slice contract, City Light will buy 493.8 average megawatts for the first five years of the contract and 608.2 average megawatts for the second five years. The contract runs until 2011. Based on price forecasts, the contract could save City Light millions of dollars compared to purchasing power from the wholesale market.

By the end of 2001, Seattle had completed its contracts for purchase of the State Line Wind Project. The State Line project consists of 399 windmills built by Vesta in Denmark and erected by FPL Energy in Walla Walla County, Washington, and Umatilla County, Oregon. City Light will receive the energy output from 50 MW of wind-generated power during the first six months of 2002, increasing to 100 MW later in the year. Seattle is now the largest municipal utility purchaser of wind power in the nation.

The net effect of these decisions is that City Light can meet its load in almost all months under poor water conditions with resources it controls. Not only does this protect against future drought, but it produces surpluses in good water conditions that can be sold in the marketplace. Combined with more conservative financial policies, the result is that the utility will pay back its energy crisis debt more quickly and move to lower and more stable rates in the future.

In addition, City Light’s efforts to meet the challenge of mitigating all of its CO 2 emissions attributable to generation is leading to growing expertise in the field of greenhouse gas mitigation. A project to identify and pursue mitigation strategies is well underway. The experience gained during this process will become a best practice for utilities around the country.

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Getting More From Less

Since 1976, conservation has been part of Seattle’s energy policy. The conservation accomplishments of many years combined in 2001 to save ratepayers significant amounts of money. All of those measures in place represented expensive power that did not have to be purchased.

Residential and commercial customers responded enthusiastically to achieve the 10 percent conservation goal. These actions averted the necessity to buy upwards of $80 million of electricity in the market.

To further reduce market purchases in the crisis year, City Light asked its customers to provide immediate help by cutting back on energy use. The utility enlisted local television meteorologists in a special media campaign urging citizens to "Save 10% At Home and At Work." Residential and commercial customers responded enthusiastically to achieve the 10 percent conservation goal. These actions saved upwards of $80 million worth of market electricity.

City Light Helped Its Customers Save Power and Reduce Their Light Bills in Other Ways By:

  • Distributing compact fluorescent light bulbs (CFLs) to thousands of its customers. A special mailing to customers included coupons to order more efficient bulbs that consumed a third of the electricity of regular incandescent bulbs. A remarkable 57 percent of City Light’s customers responded, ordering 360,000 bulbs. Another 30,000 bulbs were distributed directly to the Seattle Housing Authority. City Light also partnered with the Seattle Police Department’s Block Watch program, "Night Out," to distribute 20,000 bulbs in a single summer evening.

  • Partnering with Pepsi and local vending machine companies to install 5,000 VendingMisers. These devices "power down" refrigerated vending machines when they are not needed while still preserving food safety and quality. CocaCola has joined the program and savings will increase in 2002.

  • Promoting the 10+10 Program. This program created an additional percent incentive for City Light’s commercial and industrial customers whose projects could come on line during the energy crisis.

  • Continuing to develop the Seattle Energy Code with the Department of Design, Construction and Land Use to increase energy efficiency in new construction. The City Council adopted the energy code in September 2001.

  • Becoming a role model for energy-efficient construction. The City Council adopted the Sustainable Building Policy in 2000 and pledged to meet the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) standard. City-built construction and remodeling projects of more than 5,000 square feet will use "green" materials and techniques that meet the LEED "silver" rating. The City of Seattle wants to provide incentives to private developers to use more sustainable materials and techniques and City Light is developing programs to offer to the private sector.

  • Reducing carbon dioxide emissions equivalent to removing 7,800 vehicles from the road.

  • Helping its larger commercial and industrial customers maximize energy efficiency by launching Seattle MeterWatch in July. MeterWatch is a Web-based program that allows building managers to monitor their electricity use every 15 minutes by computer. Large commercial and industrial customers use office computers to dial in to City Light and monitor their energy consumption. The managers tailor the reports to their own needs. Two-thirds of downtown’s largest buildings and more than a third of the largest users outside of downtown can access real-time data on their electricity usage and adjust consumption as they choose.

  • Continuing its many other programs that assist customers in trimming their power bills. Large and small commercial customers received rebates for purchase of energy-efficient equipment such as coin-operated laundries in apartment buildings, lighting upgrades and even manufacturing equipment in larger facilities.

  • Reaching an agreement in 2001 with the Bonneville Power Administration to receive approximately $27 million for conservation projects over the next two years.

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Dedication and Innovation

The economic downturn nationwide, particularly in the high tech industry, meant that the expected demands of new large customers did not materialize. Plans for electricity-intensive installations such as data centers – called server farms and telco hotels – were canceled, delayed, or reduced. These decreases in expanding services helped reduce expenditures for new service at a critical time.

Since 1905, when City Light first turned on the lights in Seattle, the utility has assembled cohesive and skilled groups of trades workers who have kept those lights on. In the early days, line workers took every opportunity to recruit new customers to the fledgling system. A century later, City Light crews still respond when a customer needs assistance. Whether working in underground vaults or high over head, City Light’s diverse workforce achieved the goals for system reliability. Despite the earthquake and several storms late in November, the average customer was without power less than one hour over the entire year.

In 2001, the City of Seattle became a role model for energy-efficient construction. The City Council adopted the Sustainable Building Policy in 2000 and pledged to meet the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) standard.

In the face of numerous challenges, natural and financial, City Light crews kept the turbines and generators turning. At Boundary, the rehabilitation of Unit 52 was completed, the fifth of six huge generators to be reworked. This 12-year, $131 million project is being accomplished largely in-house by City Light staff.

When City Light first started building its hydro facilities in 1902, construction workers and City Light employees were housed in self-contained towns built just for that purpose. Cedar Falls, Newhalem, and Diablo later evolved into distinct communities. When construction began for Boundary Dam in the 1960s, City Light changed this approach and relied upon the nearby town of Metaline Falls to house its people. The utility wanted to be a good neighbor and City Light contributed to new and improved roads, a high school, a medical facility, and other municipal services. This tradition continued in 2001 when City Light completed a fiber optic link between the dam and the Power Control Center in Seattle. The line was expanded to schools and libraries in Metaline Falls to tap directly into the Internet. Students and library patrons can now use the Information Superhighway as conveniently as in any "wired" metropolitan area.


After the terrorist attacks on September 11, security assumed a new importance. City Light had to reexamine its approach to public access.

In December, crews at the Tolt Powerhouse replaced a broken waterwheel that had kept the plant running at half its capacity. All of the construction was handled in-house, and it demonstrated City Light’s tradition of dedication and teamwork between the staffs in power generation and engineering. By the end of the year, the Tolt was producing electricity at its designed capacity of 16 MW.

In December, crews at the Tolt Powerhouse replaced a broken waterwheel that had kept the plant running at half its capacity. All of the construction was handled in-house, and it demonstrated City Light’s tradition of dedication and teamwork between the staffs in power generation and engineering. By the end of the year, the Tolt was producing electricity at its designed capacity of 16 MW.

After the terrorist attacks on September 11, security assumed a new importance. City Light had to reexamine its approach to public access. The popular tours of the Upper Skagit Hydroelectric Project that began in the 1920s were suspended, the first time since World War Two. Increased security throughout the community has affected the way City Light employees access customer properties for such things as repairs and maintenance and reading meters. Like the rest of the community, City Light changed while still going about its daily business.

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Saving Salmon and More

City Light’s policy of Fish First continued to produce results in 2001. Managers resisted the temptation to use water to turn generators when energy prices were high in order to insure that sufficient water was available to protect salmon egg nests, called redds, in shallow water. The fragile redds must remain just below the surface for eggs to hatch into juvenile salmon, and water that is too deep or runs too quickly can easily wipe out the nests and a generation of fish.

More than two million Pink Salmon returned to the Skagit in 2001, up from 300,000 a decade before. The 2001 adult Chinook return ran almost 15,000, three times the 10-year average. As a demonstration of the complexity of the Skagit ecosystem, the increase in the salmon runs caused an upswing in the population of the endangered American Bald Eagle, which feed on the pawned-out carcasses. At one time this symbol of our nation was near extinction. Today, the Skagit hosts the largest population of Bald Eagles in the continental United States.

City Light’s efforts at restoring salmon runs were years ahead of the federal listing of salmon as a threatened species. Today, more than three quarters of the Skagit’s salmon spawn within the 25 miles of river affected by dam flow. City Light purchased 78 additional acres in four parcels on the Skagit and the Tolt rivers that will be preserved from development and improved to provide safe drainages and clean stream beds where fish can spawn. Illabot Channel, a key Chum Salmon spawning area, was extended 1,400 feet. In the Skagit Basin, City Light now owns more than 8,000 acres of protected habitat. In North King County, the Tolt River is being reconnected to its historic course by moving back flood control levees. The wider flood plain will still provide protection from high water while increasing riparian habitat.

Ross Lake in the Skagit Project contains what is probably the healthiest Bull Trout population in the Northwest. Bull Trout are a resident fish, but much remains unknown about them. City Light researchers have begun a long-term project to learn more about this species and this particular population and hope that the research will help this species in other waters where it is not doing as well.

At Seattle’s first hydro plant near Cedar Falls, work continued on the Cedar River Habitat Conservation Plan. Seattle first tapped the Cedar in 1900 for drinking water and then in 1905 for electricity. City Light and Seattle Public Utilities have been working to restore salmon habitat on the Cedar. Even though fish cannot yet pass the Landsberg Dam to the Cedar Falls hydro plant, City Light is preparing for the day that will happen. The plant is being modified to insure that hydro operations will not adversely affect the fish.

The well-being of the Earth is in our hands
At one time the nation's symbol was near extinction. Today, the Skagit hosts the largest population of Bald Eagles in the continental United States.

Closer to home, City Light day-to-day operations have also gone green. City Light is a large industrial operation that uses fuels, solvents, paints, and other chemicals. Ten years ago, the utility generated more than 100,000 pounds of hazardous wastes that had to be treated, stored, or disposed of. By using less hazardous materials in its operations, reducing waste, and by recycling, this figure has dropped to 16,000 pounds a year, saving customers money and improving the health of the environment.

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Serving Customers

One of the original goals of Seattle’s Municipal Lighting Plant was to bring the benefits of electricity to all. In this year of rate increases, City Light enhanced its traditional rate assistance programs to keep electricity flowing to customers who can least afford it.

Along with expanding eligibility for low income rate assistance, the City Council added money for outreach, helping to increase participation particularly among elderly. More than 60 percent of seniors who qualify actually take advantage of rate assistance. The council also decided to match contributions to Project Share. Started in 1984 during the last major electrical crisis in the Northwest, Project Share accepts donations from customers who add a few dollars to their bills every two months. These donations help defray the bills of less fortunate members of the community. In April, the City Council voted to match the first $400,000 contributed by the community. By the end of 2001, Project Share raised $371,508 in gifts, all of it matched by the council, from customers. Nearly 2,000 customers benefited.

This year City Light replaced its aging customer account and billing system with the Consolidated Customer Service System. CCSS is a joint effort by City Light and Seattle Public Utilities to bring together all of Seattle’s municipally-owned utilities – electricity, water, and solid waste – into a single customer database. This was an immense project which involved dissimilar services in separate departments and approximately 700,000 customers. Planning, development, and testing took four years and $40 million.

On April 2, 2001, the new system went "live." The conversion not only endured the predictable challenges of any computer changeover, but had to accommodate three overlapping customer databases, the disparate pricing structures of three departments, and 10 different rate changes.

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Summary of Financial Results in 2001

City Light’s financial results in 2001 were severely impacted by poor water conditions in the Northwest region and high prices in the wholesale electricity market in the Western United States.

Due to low rainfall and streamflows in the watersheds supplying the Department’s hydroelectric resources, the Department was required to purchase large amounts of energy in the wholesale

market through September 2001 in order to serve its retail customers. Prices in the wholesale market through May 2001 were at extraordinarily high levels throughout the Western region. The

Department’s need to purchase wholesale energy diminished in the second half of the year, as contracts for the purchase of additional power from the Klamath Falls Cogeneration Project and the Bonneville Power Administration took effect. The Department raised rates four times in 2001 to deal with the financial effects of its high power costs. However, the additional revenue from these rate increases offset only a portion of the increase in power costs. The Department therefore experienced a net loss of $73.3 million for the year after deferral of $300 million in excess power costs from 2001 to future years.

Operating Revenues

Retail Power Revenues. Revenue from sales of energy to retail customers in the Seattle service area totaled $503.4 million in 2001, an increase of 28.6 percent over the $391.6 million in revenue recorded in 2000. This increase occurred in spite of the fact that the quantity of energy delivered to retail customers in the service area actually declined by 5.1 percent from the 2000 level. Consumption of electricity declined in response to rate increases, the Department’s campaign for reduction of energy use, and the regional economic recession. Rates were increased four times in 2001. Average rates increased by 9.8 percent on January 1, 18.0 percent on March 1, 9.3 percent on July 1 and 10.3 percent on October 1. The first three increases were required in order to offset the effect of high purchased power costs. The final increase passed through to customers the financial effects of increases in Bonneville power rates on October 1, 2001, as mandated by the City Council.

Wholesale Power Sales . Wholesale power revenues include revenue from short-term sales to utilities and other wholesale market participants, the valuation of power delivered under seasonal exchanges, and other energy credits. Revenue from sales of energy in the wholesale market fell from $103.1 million in 2000 to $75.3 million in 2001, a decrease of 26.9 percent. The quantity of energy sold was 78.9 percent lower in 2001 than in the preceding year. The decrease in energy sold was offset by an increase in the average sales price, from $46.04 per MWh in 2000 to $161.90 in 2001. The value of energy delivered to other utilities under seasonal exchange contracts and other energy credits totaled $33.2 million in 2001, a substantial increase from the $5.1 million recorded in 2000. This increase was in part due to a change in the method of calculating the value of energy delivered under exchange contracts.

Transmission and Other Revenues . Transmission and other revenues include revenue from basis sales, from the rental of utility properties, from the sale of transmission rights, and from miscellaneous fees and charges. Revenue in this category increased from $5.9 million in 2000 to $15.6 million in 2001. Basis sales involve the simultaneous purchase and sale of power at different geographical points with a result that is equivalent to the transmission of power from the point of purchase to the point of delivery. Valuation of the delivery side of basis transactions in 2001 amounted to $6.9 million, an increase of $6.4 million over the 2000 level. Rental of transmission lines to the Bonneville Power Administration (BPA) generated $1.3 million in 2001, an increase of $0.6 million from 2000. Revenue from the sale of transmission rights provided an additional $1.5 million in 2001, or $0.6 million more than in 2000. Miscellaneous fees and charges brought in $5.9 million in revenue in 2001, compared with $3.8 million in 2000. In summary, total operating revenue increased from $505.6 million in 2000 to $627.6 in 2001. By far the largest part of this increase was a result of rate increases enacted in 2001.

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Operating Expenses

Operating Expenses increased from $543.7 million in 2000 to $654.8 million in 2001, an increase of $111.1 million, or 20.4 percent. Increases in costs related to long-term purchased power contracts account for three-quarters of the increase. Significant increases also occurred in short-term wholesale power purchases, transmission expenses, customer service costs, and taxes. A decline in generation costs partially offset the growth in these categories.

Long-Term Purchased Power . The cost of power purchased under long-term contracts with other utilities increased from $79.3 million in 2000 to $151.2 million in 2001, an increase of $71.9 million, or 90.7 percent. On July 29, 2001 the Department began to receive power from the Klamath Falls Cogeneration Project under the terms of a contract that took effect on July 1, 2001. Power delivered from this project cost $18.4 million in 2001. Purchases of power from BPA under a new contract effective October 1, 2001 increased significantly from 195 average MW under the former contract to 502 average MW in the fourth quarter of 2001. The rates charged by Bonneville for this power under the new contract were also higher because Bonneville had exercised its right to increase rates to cover the increase in its costs resulting from poor water conditions and high wholesale prices. As a result, the cost of power purchased from BPA increased from $34.4 million in 2000 to $66.8 million in 2001. The value of energy delivered to City Light under seasonal exchanges increased from $6.4 million in 2000 to $28.0 million in 2001, largely as a result of a change in the method of valuing the energy received. The cost of power purchased under other long-term contracts fell slightly, from $38.5 million in 2000 to $38.0 million in 2001.

Wholesale Power Purchases: Short-Term . Poor water conditions in 2001 required City Light to purchase large amounts of energy in the wholesale market at elevated prices. City Light incurred costs of $520.4 million in purchasing power in the wholesale market in 2001, an increase of $308.4 over the 2000 level of $212.0 million. The average price paid for the 2,411,210 MWh of power purchased in 2001 was $215.15 per MWh. In 2000 City Light paid an average of $86.47 for 2,451,348 MWh of wholesale power. In addition, the Department paid $4.0 million to large industrial customers for voluntary curtailment of consumption during the period of high market prices in 2001, compared to $0.4 million in 2000.

In May 2001 the City Council authorized the Department to defer a portion of the cost of wholesale power purchases in 2001 and to amortize the deferred costs in future years. Accordingly, excess power costs in the amount of $300 million have been deferred from 2001 to future years. Because of the deferral, only $224.4 million of wholesale power costs are shown as an expense in 2001.

Transmission. Transmission expense grew from $21.7 million in 2000 to $30.3 million in 2001, an increase of $8.5 million, or 39.3 percent. The valuation of the purchase side of basis transactions accounts for $4.4 million of this increase. The cost of transmission services under contracts with BPA increased by $3.1 million from 2000 to 2001. The Department contracted for an additional 650 MW of transmission capacity from BPA, effective October 1, 2001, to accommodate the higher amount of power available under the new power sales contract with BPA. In addition, BPA’s transmission rates increased by 24.3 percent on October 1, 2001.

Customer Service. The cost of customer services rose from $22.2 million in 2000 to $27.5 million in 2001, an increase of $5.3 million. Bad debt expense increased by $1.9 million, reflecting the economic slowdown in the Puget Sound region and the increases in City Light’s rates in 2001.

The implementation of the City’s new Consolidated Customer Service System for City utilities accounted for an additional increase of $1.4 million from the 2000 level. Expense for media advertising, primarily to encourage curtailment of consumption during the period of high

wholesale market prices in 2001, increased by $1.3 million over 2000. Other customer service expenses grew by $0.7 million.

Generation. Operating and maintenance expenses for the Department’s generating resources decreased from $25.7 million in 2000 to $17.0 million in 2001, a decrease of $8.7 million. The sale of the Department’s 8 percent share of the Centralia Steam Plant in May 2000 accounts for $7.1 million of the decrease. Hydroelectric operations and maintenance expenses declined by $1.6 million from 2000 to 2001, due in part to a credit for prior-year administrative charges paid to the Federal Energy Regulatory Commission and to lower operating costs at the South Fork Tolt Project.

Taxes. Tax expense was $52.6 million in 2001, an increase of $9.7 million from the 2000 level. Taxes paid to the City of Seattle and the State of Washington account for most of the growth in this category. State and City taxes are levied as a percentage of gross revenue. The increase in tax payments parallels the increase in revenue.

Other Operating and Maintenance Expenses. Increases in the value of the Department’s plant and equipment, including the new customer billing system, resulted in an increase of $6.0 million in depreciation expense, from $55.5 million in 2000 to $61.5 million in 2001. Distribution expenses increased from $34.5 million in 2000 to $36.5 million in 2001. Administrative and general expenses, net of amounts allocated to capital projects, rose from $37.0 million to $39.1 million. Both of these increases reflect a reduction in the level of activity in the Capital Improvement Program, which resulted in a corresponding shift of costs to operating activities and a lower allocation of administrative and general expenses to capital projects. Conservation costs increased from $7.0 million to $8.5 million, reflecting an increase in the amortization of past conservation investments. Power marketing and system control expenses increased from $5.5 million in 2000 to $6.1 million in 2001.

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Non-operating Revenues (Expenses)

Interest Expense and Amortization of Debt Expense. Debt-related expenses, including interest and the amortization of debt expense, increased from $53.2 million in 2000 to $73.9 million in 2001, reflecting interest expensed on bonds and notes issued in 2000 and 2001. In December 2000, the Department issued $98.8 million in long-term bonds at an effective interest rate of 5.30 percent to finance capital requirements. In March 2001, the Department issued an additional $503.7 million in long-term bonds at an effective interest rate of 5.08 percent to finance capital expenditures and refinance certain outstanding bonds. In the following month, $182.2 million in two-year revenue anticipation notes were issued at an effective interest rate of 3.84 percent to fund the anticipated deficit in the Department’s operating cash flow. Interest costs on these issues were partially offset by the effect of the March 2001 refunding of $125.1 million in outstanding bonds. Also, $9.8 million in interest costs on the March 2001 long-term bond issue was paid from bond proceeds rather than from current revenues.

Investment Income. Investment income of $13.5 million in 2001 exceeded the 2000 level of $9.8 million by $3.7 million. The increase is attributable to interest earnings on the investment of the unused proceeds of the March 2001 first-lien bond issue, partially offset by interest on borrowing from the City’s cash pool. As of December 31, 2001, $161.7 million of bond proceeds remained in the Construction Account. At various points in 2001, the Department’s operating cash balance in the City’s cash pool was negative. Interest expense related to the Department’s negative balances offset interest earnings on the Construction Fund and the Bond Reserve Account. In December 2001, the City Council authorized a loan of $110.0 million from the cash pool to cover the negative balances. As of December 31, 2001 the outstanding balance on the loan from the cash pool was $100.0 million.

Gain on Sale of Centralia Steam Plant. In 2000 the Department recorded a gain of $29.6 million from the sale of its 8 percent share of the Centralia Steam Plant. There was no comparable transaction in 2001.

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Fees, Grants and Transfers

As required by GASB Statement No. 33, in 2001 the Department began reporting non-exchange transactions as revenues on the operating statement. Fees, grants and transfers in 2001 amounted to $15.3 million. Capital fees, previously reported in equity, as contributions in aid of construction, constitute the main component of this category. In 2001 capital fees, mainly in the form of construction charges, were $12.5 million. Operating grants from the state and federal governments, primarily to support conservation and renewable investments, and a transfer from the City of Seattle to fund conservation programs and support for low-income customers totaled $2.8 million.

Net Income (Loss)

The Department recorded a net loss of $73.3 million in 2001 versus a net loss of $52.0 million in 2000. Equity as of December 31, 2001 was $300.1 million.

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Independent Auditors’ Report

Superintendent, City of Seattle – City Light Department
Seattle, Washington

We have audited the accompanying balance sheets of the City of Seattle – City Light Department (the Department) as of December 31, 2001 and 2000, and the related statements of operations and changes in retained earnings and of cash flows for the years then ended. These financial statements are the responsibility of the Department’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Department as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Department was required to adopt Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133, and Governmental Accounting Standards Board No. 33, Accounting and Financial Reporting for Nonexchange Transactions, effective January 1, 2001.

Deloitte & Touche LLP
Seattle, Washington
March 29, 2002

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Elected Officials

(As of January 2002)

    Mayor
    Greg Nickels

    Seattle City Council
    Peter Steinbrueck
    , Council President
    Chair: Parks, Education and Libraries Committee

    Jim Compton
    Chair: Police, Fire, Courts and Technology Committee

    Richard Conlin
    Chair: Transportation Committee

    Jan Drago
    Chair: Finance, Budget, Business and Labor Committee

    Nick Licata
    Chair: Neighborhoods, Arts and Civil Rights Committee

    Richard McIver
    Chair: Housing, Human Services and Community
    Development Committee

    Judy Nicastro
    Chair: Land Use Committee

    Margaret Pageler
    Chair: Water and Health Committee

    Heidi Wills
    Chair: Energy and Environmental Policy Committee

    City Attorney
    Thomas A. Carr

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Executive Team

    Gary Zarker
    (206) 684-3200
    Superintendent

    Dana Backiel
    (206) 386-4500
    Deputy Superintendent – Generation Branch
    Generation Engineering
    Generation Plant Operations
    Generation Program Management
    Boundary Capital Improvement Project
    Skagit Capital Improvement Project

    Mike Sinowitz
    (206) 386-4530
    Acting Deputy Superintendent – Power Management Branch
    System Control Center
    Power Marketing Monthly
    Power Marketing Real Time
    Resource Administration
    Automated Systems

    Jesse Krail
    (206) 615-1505
    Deputy Superintendent – Distribution Branch
    Systems Engineering
    North Electric Service
    South Electric Service
    Central Electric Service
    Power Stations
    Distribution Program Management
    Apprenticeship Office

    Joan Walters
    (206) 684-3361
    Deputy Superintendent – Customer Services Branch
    Account Executives
    Account Services
    Energy Management Services
    Hearing Officer

    Jim Ritch
    (206) 386-4500
    Deputy Superintendent – Finance and Administration Branch
    Finance
    Facilities Management
    Information Technology

    Nancy Glaser
    (206) 684-3125
    Director of Strategic Planning and Environment and Safety

    Bill Kolden
    (206) 684-3125
    Director of Human Resources

    Bob Royer
    (206) 615-0050
    Director of Communications and Public Affairs


Weathering the Storm, Seattle City Light
Seattle City Light 2001 Annual Report
© Seattle City Light, City of Seattle

With inquiries or concerns about reported financial information or to order the Seattle City Light 2001 Annual Report in print, please email Fernando Estudillo or call Fernando at 206.684.3832. With other questions or comments, please email Larry Vogel or call Larry at 206.684.3884.

 
 
 
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