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Cautious New Cowlitz PUD Leader Faces Myriad of Challenges by Marissa Luck The Daily News, January 23, 2016

On the same day Steve Kern started at Cowlitz PUD last week, crude oil prices slid under $28 a barrel -- less than the cost of two large pizzas. That's bad news for utilities, such as the PUD, that depend on high energy prices to churn a profit on sales of surplus electricity.

As Cowlitz PUD's new general manager, Kern is faced with guiding the utility at a time when its profits are pinched and its costs are rising. It's losing $1 million a month on its Central Washington wind farms. It's saddled with $214 million worth of debt and the unpopularity of rising residential rates, which have crept up 50 percent during the last decade. And the utility is still rebuilding its image after the controversies of the 2013 ouster of former General Manager Brian Skeahan and the failed campaign to recall Commissioner Ned Piper.

This is the world Steve Kern entered as he took the helm from Don McMaster. Kern, 59, grew up on a Central Washington cattle ranch, yet it's his big-city experience at PNGC Power in Portland, Seattle City Light, Duke Energy and Avista Energy in Spokane that he says will prepare him for the role. Cowlitz PUD commissioners say his 35 years of experience in the power industry are needed to face the utility's challenges.

"I knew he had a good reputation and was very knowledgeable about power," said PUD Commissioner Ned Piper. "He's been in all phases of the power industry -- investor utilities, municipalities, public power."

With clear blue eyes and white mustache, Kern has been described as a creative and analytical person who likes to talk out loud when solving problems or planning. He comes across as cautious leader ready to make incremental changes rather than someone who likes sudden, bold changes.

"I view myself somewhat as a pretty conservative leader. I won't be taking a large risk on behalf of our customers," he said, laughing.

Kern's background

Kern studied geological sciences and hydrology at the University of Washington, and said he's worked "in all four corners" of the state for a range of private and public utilities, ending up most recently as a private consultant in Ridgefield.

Although he had worked for Seattle City Light as a consultant with Land Energy, it wasn't until 2007 that he was hired as a full-time employee managing power supply and environmental affairs. There, Kern said he oversaw a staff and budget that were three times the size of Cowlitz PUD's 164 employees. In 2011, Kern made $214,175 at City Light, the third highest paid employee in the city that year, according to The Seattle Times. That compares to his base salary at Cowlitz PUD of $200,000 annually, not including benefits.

Kern worked at City Light during the controversial tenure of superintendent Jorge Carrasco, who pushed for debt reduction and cost controls. Some employees said Carrasco hammered morale when he "fired most of the utility's upper-level management and encouraged the retirements of dozens more employees," later replacing them with outside talent and consultants, reported The Seattle Weekly.

So not everyone was happy with upper management. One now retired Seattle City Light employee, Karen Lebens, said that Kern "was spectacular in his ignorance of technical matters and his total lack of managerial skills." Lebens said that Kern oversaw a reorganization of the Skagit River hydroelectric dam complex that resulted in City Light losing "millions of taxpayer money." Lebens also accused Kern of failing to listen to senior employees' warning about safety problems.

Piper said he contacted Kern after hearing those complaints to hear his side of the story, and was satisfied with his explanation of challenges with that particular employee.

Dena Diamond-Ott, Cowlitz PUD commission president, added that "based on what I've heard from Mr. Kern, Slavin Management (a head hunting agency) and his references during the hiring process and to date, I am very confident that Mr. Kern has the ability and experience to lead our district into the future efficiently and effectively."

Kern defended his five-year tenure at City Light, saying he takes safety seriously and worked to improve efficiencies there. "I think most people in Seattle would say there was a need in the utility to reduce costs, and that doesn't always make everyone happy," he said. "I understand there was a lot of strife … but I think the utility is in a better place than it was 10 years ago."

Throughout his three decades working in the utility industry in the Northwest, he's had various roles with the Pacific Northwest Utilities Conference Committee, a 70-year-old group of public and private utilities that advocates for the industry and assists in planning and analysis of the region's energy needs.

"He thoroughly understands the river operations of the (Pacific Northwest hydroelectic system) and knowing how that all that works is going to bode very well for Cowlitz PUD," said Shauna McReynolds, executive director of PNUCC.

McReynolds and others emphasized Kern's understanding of regional challenges facing Northwest utilities.

"We don't operate on an island as a utility," said Bob Geddes, general manager at Lewis County PUD, where Kern worked for five to six months filling an interim role. "Steve (Kern) has an ability to work well with the other utilities and communicate the needs of the utility he's working for."

Elliot Mainzer, administrator of Bonneville Power Administration, described Kern as "a very creative and very direct" person. Several years ago, when more Northwest utilities started moving into wind energy, Mainzer said Kern was influential in raising awareness of the need to plan around the unpredictability of wind energy.

Diamond-Ott said she specifically appreciated Kern's experience managing hydroelectric operations, wind farms and working with the Bonneville Power Administration, the federal agency that markets power from dams in the Columbia River basin.

Future challenges

Cowlitz PUD buys 90 percent of its power from Bonneville, so when Bonneville raises its rates that means the PUD has to pay more for power. That was one major reason behind the 7.5 rate hike for residential customers last fall.

The escalating cost of power will be the number one challenge for Northwest utilities, Kern said.

"It's in the forefront. It is a question, ‘What are the long-term power supply sources for this utility?' and ‘How do we structure that in a way to protect our customers, meaning from a cost a standpoint?'" Kern asked.

Yet any changes to the PUD's power source likely won't change anytime soon, because its contract with Bonneville doesn't expire until 2028.

"We were going to be looking at longer-term supply portfolio strategy here in the next several months," he added. "(But) our ability to manage and do something … is really beyond 2028."

Bonneville's costs are rising as it is faced with the need to pay for upgrading antiquated power grids and taking steps to protect fish and wildlife, among other factors. At the same time, it's making less money from the sales of its surplus power, forcing it to recoup the losses by raising rates for its wholesale customers, such as Cowlitz PUD.

Kern expects to be involved in BPA's evaluation of its costs and rates and, in the long run, he expects Bonneville's electric rates to remain competitive compared to other sources.

Cowlitz PUD will have a challenge controlling costs, he said, especially as federal regulations for increased cybersecurity kick in. Kern said the utility must make 30 to 50 "significant" changes, some of which have cost other utilities millions.

Another challenge is meeting terms of the voter-approved Initiative 937, which mandates public utilities to obtain at least 15 percent of their power from renewable sources by 2020 (hydropower from dams doesn't count). The utility shelled out $130 million building wind farms, which will put it in compliance with the law until at least 2027. But the once lucrative wind market (the PUD has little or no need for the power itself) has shriveled up. The utility says it's losing $1 million a month on the wind farms.

"I hate to say, ‘It is what it is,' but today we (are in that) position. So how do we make the most out of it? How do we get the most value out of it? How do we reduce our costs?" Kern asked. The utility will have to answer those questions, and figure out how to minimize losses or else reduce costs, he said.

A potential state carbon tax to combat climate change also has commissioners on edge. None or little of the energy the PUD uses releases carbon emissions, but that does not necessarily mean the PUD won't be affected somehow.

Kern is stepping into the top administrative post of an organization slammed by personnel controversies over the past three years. He said employees have told him they are happy to see a fresh face.

"I really work well with people. I get the job done. I think people will see that, and hopefully we can keep moving on," he said, adding that his entire job is focused on one core question: "How do we bring the best value to our customers, whether it's managing risk or keeping our costs down? I'm committed to that."