Comprehensive Review of the Northwest Energy System ? Final Report:
Toward a Competitive Electric Power Industry for the 21st Century
December 12, 1996 | document CR96-26
PREAMBLE
The 20 members of the Steering Committee of the Comprehensive Review of
the Northwest Energy System have worked for 11 months to develop the
recommendations contained in this final report. These recommendations
represent a consensus of 13 of the 14 voting members of the Steering
Committee, a consensus that has been achieved only by compromise and
sacrifice on the part of each of the members on the Committee. The 14th
voting member acknowledges the significant progress made in many areas but
does not believe that sufficient progress was made on issues related to
fish and wildlife to constitute a real consensus. His views are presented
in Appendix A.
We, the members who voted with the majority, support the report and
will work to educate and persuade others, but our support here does not
commit all of the groups we represent. These compromises, as difficult as
some may find them, are worth making for a simple reason: we have more to
lose as a region than we have to gain as disparate interests.
There is still much work to be done. This final report is specific in
some areas and general in others. More detail and further refinement will
be required to convert these recommendations into the contracts,
legislative bills, rules and policies that will implement them.
As regional interests work further on these restructuring initiatives,
there are bound to be disagreements and new issues to be resolved within
the outlines of these recommendations. However, we believe that the
principles outlined here must remain if any regional consensus is to be
hoped for. With a consensus position, the Pacific Northwest has the best
hope of retaining the benefits of the federal hydropower system and
transitioning to a competitive electricity system that will maximize
benefits for all consumers in the region. The work embodied in this report
will not easily be replicated if the regional consensus is destroyed by
unilateral actions of any party.
Finally, the Committee recognizes that electric utility restructuring
is evolving rapidly and that efforts in Congress and the states almost
certainly will change some of the assumptions underlying this report.
Although our recommendations may not reflect the ultimate end-state of
this restructuring, we nevertheless believe that it does reflect a
workable outcome in itself and a very positive step in this process.
Why Are We Doing This?
The electricity industry in the United States is in the midst of
significant restructuring. This restructuring is the product of many
factors, including national policy to promote a competitive electricity
generation market and state initiatives in California, New York, New
England, Wisconsin and elsewhere to open retail electricity markets to
competition. This transformation is moving the industry away from the
regulated monopoly structure of the past 75 years. Today we are served by
individual utilities, many of which control everything from the power
plant to the delivery of power to our homes or businesses. In the future,
we may have a choice among power suppliers that deliver their product over
transmission and distribution systems that are operated independently as
common carriers.
There is much to be gained in this transition. Electricity consumers
are already benefiting from competition in a number of significant ways.
Competition in the natural gas industry has helped lower the cost of
electricity produced by gas-fired generating plants. Competition among
manufacturers and developers of combustion turbines has contributed to the
availability of less expensive, more efficient power plants that can be
built relatively quickly. Surplus generating capacity on the West Coast
combined with increasing competition among wholesale suppliers has reduced
the price utilities must pay for power on the open market. Broad
competition in the electricity industry that extends to all consumers
could result in lower prices and more choices about the sources, variety
and quality of their electrical service.
But, there are risks inherent in the transition to more competitive
electricity services. Merely declaring that a market should become
competitive will not necessarily achieve the full benefits of competition
or ensure that they will be broadly shared. It is entirely possible to
have deregulation without true competition. Similarly, the reliability of
our power supply could be compromised if care is not taken to ensure that
competitive pressures do not override the incentives for reliable
operation. How competition is structured is important.
It is also important to recognize the limitations of competition.
Competitive markets respond to consumer demands, but they do not
necessarily accomplish other important public policy objectives. The
Northwest has a long tradition of energy policies that support
environmental protection, energy-efficiency, renewable resources,
affordable services to rural and low-income consumers, and fish and
wildlife restoration. These public policy objectives remain important and
relevant. Given the enormous economic and environmental implications of
energy, these public policy objectives need to be incorporated in the
rules and structures of a competitive energy market.
In some respects, the transition to a competitive electricity industry
is more complicated in the Northwest because of the presence of the
federal Bonneville Power Administration. Bonneville is a major factor in
the region's power industry, supplying, on average, 40 percent of the
power sold in the region and controlling more than half the region's
high-voltage transmission. Bonneville benefits from the fact that it
markets most of the region's low-cost hydroelectric power. It is hampered
by the fact that it has high fixed costs, including the cost of past
investments in nuclear power and the majority of the costs for salmon
recovery. As a wholesale power supplier, Bonneville is already fully
exposed to competition and is struggling to reduce its costs so that it
can compete in the market. The transition to a competitive electricity
industry raises many issues for the Bonneville Power Administration and
the region. In the near term, how can Bonneville continue to meet its
financial and environmental obligations in the face of intense competitive
pressure? In the longer-term, when market prices rise and some of
Bonneville's debt obligations have been retired, how can the Northwest
retain the economic benefits of its low-cost hydroelectric power when the
rest of the country is paying market prices? And finally, what is the
appropriate role of a federal agency in a competitive market? The question
is not only whether Bonneville can compete in the near term, but also,
should it be a competitor?
Without Regional Consensus...?
While participants on the Comprehensive Review Steering Committee
represented, by design, many divergent interests, they were fundamentally
interconnected through one unifying value. Collectively, they share an
abiding interest in the stewardship of a great regional resource ? the
Columbia River and its tributaries. The river is the link that brought all
the parties together and unites them in a single, overriding goal. That
goal is to protect and enhance the assets of this great natural resource
for the people of the Pacific Northwest.
The federal power system in the Pacific Northwest has conferred
significant benefits on the region for more than 50 years. The
availability of inexpensive electricity at cost has supported strong
economic growth and helped provide for other uses of the Columbia River,
such as irrigation, flood control and navigation. The renewable and
non-polluting hydropower system has helped maintain a high quality
environment in the region.
But while the power system has produced significant benefits, these
benefits came at a substantial cost to the fish and wildlife resources of
the Columbia River basin. Salmon and steelhead populations have been
reduced to historic lows, and many runs are or are about to be listed
under the federal Endangered Species Act. Resident fish and wildlife
populations have also been affected. Native Americans and
fishery-dependent communities, businesses and recreationists have suffered
substantial losses due in significant part to construction and operation
of the power system. The region's ability to sustain its core industries,
support conservation and renewable resources, and restore salmon runs is
clearly threatened if we cannot reach a consensus regional position to
bring to the national electricity restructuring debate. Without a
sustainable and financially healthy power system, funding for fish and
wildlife restoration could be jeopardized.
The governors of Idaho, Montana, Oregon and Washington, in their charge
to the Comprehensive Review, and the Steering Committee in their
deliberations, recognized that the electricity industry is changing,
whether we like it or not. The Comprehensive Review is not an initiation
of change, but a response to change. It is an effort to shape that change,
to the extent shaping is possible, to ensure that the potential benefits
of competition are achieved and equitably shared, environmental goals are
met, and the benefits of the hydroelectric system are preserved for the
Northwest. The region's ability to shape the change in the Northwest
electricity industry depends on its ability to develop a regional
consensus. If the Comprehensive Review fails to result in a consensus for
regional action, the electricity industry will still be restructured. A
return to the historical industry structure is not an option. Many of the
comments received during the public hearing process on the Steering
Committee's draft recommendations made it clear that this is not a widely
appreciated fact.
What is the likely evolution of the regional electricity market in the
absence of effective regional consensus.
For wholesale power markets, federal policy advancing
competition is already in place. The Energy Policy Act of 1992 and Federal
Energy Regulatory Commission (FERC) Order 888 express a strong commitment
to opening access to the transmission system to make possible a
competitive wholesale power market. Transmission will remain a FERC-regulated
activity and will be strictly separated from generation to ensure that
transmission owners cannot interfere in the efficient operation of the
wholesale power market. Northwest utilities are already in the process of
forming an independent transmission grid operator, called IndeGO. The
purposes of the independent transmission grid operator are to ensure
adequate separation of generation and transmission and to align incentives
to ensure efficient and reliable operation of transmission. Bonneville is
participating in the IndeGO discussions and has already administratively
separated its transmission activities from its energy marketing. Further
development of IndeGO will continue regardless of the Comprehensive
Review.
Given the strong federal policy commitment to a competitive wholesale
power market and an intensifying need for federal revenues, it is likely
that without strong regional support for a different outcome, Bonneville's
electricity eventually would be sold at market prices. Further, the
incongruity of a federal agency as a full participant in a competitive
market could result in limitations on Bonneville's market presence. This
could be accomplished in many different ways, including auctioning the
power, requiring Bonneville to market its power at prices that are tied to
a market index, or limiting Bonneville's marketing of products and
services. However it is done, any cost-based regional benefits that are
derived from public or regional preference are likely to be reduced.
Current electricity policy at the federal level reserves retail
market competition decisions to the states. However, recent congressional
initiatives leave the degree of future state control in question. In any
case, the pressure for retail access and its momentum are not in question.
In the absence of either fairly strong federal legislation or coordinated
regional policy, individual states are likely to move at different rates
toward various forms of retail access policy with large power consumers
tending to get first access. Unless adequate safeguards are in place to
ensure that the owners of monopoly distribution systems cannot unfairly
influence consumers' retail energy service choices, the development of
competitive retail energy service markets for all consumers will be
inhibited. Inconsistent policies among states within an integrated
electricity market will lead to market advantages for some areas, a less
efficient market, and arbitrage opportunities for electricity traders and
marketers.
Utilities under competitive pressure to retain their customers will
find it difficult to support the various social and environmental goals
they have supported in the past. Competitive markets will support some
social and environmental activity, and recent legislative proposals in
Congress suggest that some programs could be mandated at the national
level. However, absent action to place the funding of such activities with
the separate and regulated elements of the market (transmission or
distribution), emphasis on conservation, renewable energy sources and
low-income support will decline. The greater the differences among states
and utilities in the funding of these activities, the more distorted and
less efficient will be the electricity markets.
The "base case" just described has some undesirable features.
However, the region has the ability to manage the transition to
competition to avoid or mitigate the undesirable features if it can
reach consensus on the key features of the energy system.
The Comprehensive Review
The governors of Idaho, Montana, Oregon and Washington convened the
Comprehensive Review of the Northwest Energy System to seize opportunities
and moderate risks presented by the transition of the region's power
system to a more competitive electricity market. The governors appointed a
20-member Steering Committee that is broadly representative of the various
stakeholders in the power system to study that system and make
recommendations about its transformation. The members of the Steering
Committee are listed in Appendix B. Each governor has a representative on
the Steering Committee to make certain the public is educated about and
involved in the Comprehensive Review. In establishing the review, the
governors stated:
"The goal of this review is to develop, through a public
process, recommendations for changes in the institutional structure of the
region's electric utility industry. These changes should be designed to
protect the region's natural resources and distribute equitably the costs
and benefits of a more competitive marketplace, while at the same time
assuring the region of an adequate, efficient, economical and reliable
power system."
Since January 1996, the Steering Committee has held 30 day-long
meetings. In addition, almost 400 people have been involved in more than
100 meetings of various work groups reporting to the Steering Committee.
Hundreds of citizens attended the 10 public hearings that were held
throughout the region on the Committee's draft report. More than 700
written comments were received. This report is the product of that work.
It is a recommendation for restructuring the Northwest electricity
industry to meet the challenges and seize the opportunities inherent in
the competitive transition.
SUMMARY OF RECOMMENDATIONS
The main features of the recommendations of the Steering Committee of
the Comprehensive Review of the Northwest Energy System are summarized in
the following sections. More detailed discussion of the recommendations is
presented in the following chapters. For purposes of organization, this
report is presented in six main topic areas: federal power marketing;
governance of the Columbia River system (a related topic to federal power
marketing); conservation, renewable resources and low-income energy
services; consumer access to the competitive market; transmission; and
future power system roles for a four-state regional body. Issues related
to federal power marketing; conservation, renewable resources and
low-income services; consumer access to the competitive market; and
transmission were analyzed and discussed in work groups during the review
process. Although described as distinct parts, this is an integrated set
of recommendations, the parts of which are interdependent.
Federal Power Marketing ? the Bonneville Power Administration
The Steering Committee's goals for federal power marketing are to: 1)
align the benefits and risks of access to existing federal power; 2)
ensure repayment of the debt to the U.S. Treasury with a greater
probability than currently exists while not compromising the security or
tax-exempt status of Bonneville's third-party debt; and 3) retain the
long-term benefits of the system for the region. The recommendation is
also intended to be consistent with emerging competitive markets and
regional transmission solutions. The mechanism proposed to accomplish
these goals is a subscription system for purchasing specified amounts of
power at cost with incentives for customers to take longer-term (15 to 20
year) subscriptions. Public utility customers with small loads would be
able to subscribe under contracts that would accommodate minor load
growth. Subscriptions would be available first to regional customers in a
specified multipart priority order, starting with preference customers,
then the direct service industrial customers of Bonneville and the
residential and small farm customers of those investor-owned utilities
currently participating in Bonneville's residential exchange, followed by
other regional customers. Non-regional customers could subscribe after
in-region customers. Within each phase of the subscription process,
longer-term contracts would have priority over shorter-term contracts if
the system is oversubscribed.
Longer-term subscribers would have the right to purchase power at cost
for the term of the contract. While the cost of the power from the federal
system is currently somewhat above market prices, the costs are generally
expected to be below market prices in the future. Short-term subscribers
also get the right to purchase power at cost. If they wish to be assured
the ability to renew their contracts at cost, they must pay an option fee
for the term of their contracts to compensate the U.S. Treasury for the
risk of shorter-term contracts. A sliding-scale option fee, ranging
between 2 mills per kilowatt-hour for a five-year contract to 0 mills for
a 15-20 year contract has been proposed.
The longer-term subscribers assume more risk than current Bonneville
customers from the effects of year-to-year variations in weather, future
power system cost increases and changes in market conditions. For example,
if we were to experience lower than expected market prices that are below
Bonneville costs for an extended period of time, the subscribers would
still be obligated to pay Bonneville's costs. At the end of their
subscription period, short-term subscribers would be able to let their
subscriptions lapse and buy at market prices. If they let their
subscriptions lapse, however, they would not be able to buy at cost in the
future, should that become desirable.
The Steering Committee recognizes Bonneville's existing fish and
wildlife obligations and intends that none of its recommendations affect
existing trust obligations or treaty rights. The Steering Committee
further recognizes that the region will need to provide most of the
required fish and wildlife funding, but supports assistance and cost
sharing by the federal government. The Committee recommends detailed
multiyear fish and wildlife budgets be developed in
government-to-government consultations by federal, state and tribal
authorities. These budgets would be incorporated into Bonneville rate
projections, allowing shorter-term customers certainty regarding fish and
wildlife costs. If market prices are above costs, the Treasury would share
in these benefits by getting some percentage of the difference between
market prices and the cost. The Treasury's share would be applied to
accelerate repayment of the federal debt.
Competition raises the possibility of stranded costs ? previously
incurred fixed costs that cannot be recovered at market prices. If
successfully implemented, the subscription system should greatly reduce
the possibility of Bonneville experiencing any stranded cost. However, if
unmitigable stranded costs remain, a mechanism for recovery of those costs
will be required.
Subscribers may resell power in cases of loss of load and/or to the
extent allowed by existing law. Other commercial transactions by the
subscriber would not disqualify the purchase of federal power. The
benefits of purchases for residential and small farm customers of
exchanging investor-owned utilities should be passed on to end users.
The recommendations would have the effect of disposing of much if not
all of the firm power available from Bonneville on a long- or
intermediate-term basis. The fact that most of Bonneville's power would be
subscribed at cost would limit Bonneville's market role. Any remaining
firm power and other power products would be sold at Federal Energy
Regulatory Commission (FERC)-regulated prices or at competitive prices,
where FERC determines that competitive markets exist. To the extent
consistent with its obligation to repay Treasury, Bonneville should return
to its historic role of marketing power generated by the Federal Columbia
River Power System, rather than becoming an aggressive marketer of
products and services in the emerging competitive power market. Bonneville
should develop a quantitative marketing plan. The plan should be presented
to a transition board reporting to the Governors.
In addition, it is recommended that Bonneville would not acquire
resources to serve its customers' load growth except on a direct bilateral
basis where the customer takes on all the risk of the acquisition.
Similarly, it is proposed that Bonneville would not sell directly to new
retail loads, beyond the existing direct service industry loads, although
it may sell through intermediaries whose transactions would be subject to
state or local jurisdiction.
The Committee recommends that the governors of Idaho, Montana, Oregon
and Washington appoint a transition board to oversee implementation of
these and other recommendations. In particular, the board should
periodically determine whether the subscription process is making adequate
progress or whether another approach is necessary.
Columbia River System Governance
The Steering Committee concluded that we cannot expect to achieve both
the degree of cost stability the electricity industry requires to maintain
the benefits of the Columbia River power system for the region and achieve
sustainable fish restoration unless we ensure predictability,
accountability and effective governance for the fish and wildlife
interests of the river. In short, an effective conclusion of our effort is
not possible without an improved system of river governance that pursues
fish restoration as a high priority.
The Steering Committee was asked by the Northwest governors to focus on
the restructuring of the electricity system and to address the financial
stability of the federal power system. The Committee has done our best to
recommend changes to the federal system that accomplish that goal. It
fully recognizes that there are other important, related issues and
decisions, including those affecting fish and wildlife, that must be
resolved before a truly comprehensive package can be achieved.
The Steering Committee considered a number of matters related to the
governance of the river and the power system. The role of the Northwest
Power Planning Council in river governance was not addressed, but needs to
be. The Governors should hold the Council or its successor accountable for
ensuring that the region is making the most cost-effective use of fish and
wildlife funding. River governance is a fundamental part of any effective
response to changes in the electric utility industry. Until governance
deliberations move forward through a government-to-government consultation
among federal, state and tribal authorities, the prospects for a consensus
on the regional response to utility restructuring are diminished and
controversial. The Steering Committee requests the governors to initiate a
broadly based discussion of improvements in river system governance that
would provide more effective decision-making for this complex ecosystem
and all of its competing uses.
Conservation, Renewable Resources and Low-Income Energy Services
The Northwest electric utility industry has a long and successful
history of developing cost-effective conservation and supporting the
development of renewable electricity sources, such as wind, geothermal and
biomass energy. In addition, the utilities have played a major role in
delivering weatherization to low-income households and helping low-income
households with their energy bills. Competitive pressures, however, are
expected to make significant changes in the ways utilities carry out these
activities in the future. The goal of the Steering Committee's
recommendations is to provide for maximum local control in the
implementation of conservation, renewables and low-income energy services,
while establishing an effective minimum standard that ensures stable
funding for these purposes.
To ensure that cost-effective conservation, renewable resource
development and low-income weatherization are sustained during the
transition to competition and beyond, the Steering Committee recommends
that by July 1, 1997, and annually thereafter for a period of 10 years, 3
percent of the revenues from the sale of electricity services in the
region ($210 million in 1995) be dedicated to those purposes. After 10
years, this commitment should be re-evaluated. Three percent of revenues
is roughly 65 percent of what was spent for these purposes by the region's
utilities and Bonneville in 1995.
The Steering Committee recommends that by July 1, 1999, each of the
Northwest states enact legislation that ensures that all electric
utilities operating within its borders are meeting the minimum standard
for investment in the development of conservation and renewable resources
and provision of weatherization and energy-efficiency services to
low-income consumers. Utilities should demonstrate compliance with the
minimum standard by July 1, 1999. Public utilities may satisfy the
standard in aggregate. If this minimum standard is not being met, the
legislation should provide for the assessment of a uniform system benefits
charge that ensures the collection and investment of funds for these
purposes. Due to the rapid emergence of competitive pressures, the
Committee strongly recommends prompt legislative action. Legislation
implementing these requirements should be implemented simultaneously with
open retail access.
The Steering Committee proposes that between two-thirds and five-sixths
of the funds be retained by local distribution utilities to carry out
locally initiated cost-effective conservation, low-income weatherization
and energy-efficiency services and renewable energy projects. Conservation
projects implemented and funded by large consumers should be credited
against the local conservation target, not including low-income
energy-efficiency services. Local utilities would also offer, or allow
other electricity service providers to offer, "green" power to
their consumers ? power from renewable assistance energy sources. The
Steering Committee recommends that utilities maintain their current level
of low-income energy assistance until states adopt alternative mechanisms
for providing these services. The report recognizes and affirms the energy
system's historic role in providing energy assistance and proposes that
states now provide this assistance by establishing a "Universal
Electrical Service Fund" to provide energy bill assistance. This fund
could be supported by federal Low-Income Home Energy Assistance Program (LIHEAP)
funds, state or local government funds, other funds and/or by a retail
distribution system access fee or meters charge.
Some conservation and renewable resource activities benefit from
regional planning and coordination. Consequently, it is proposed that
between one sixth and one third of the funds be used by a regional
non-profit entity with utility, government, consumer and public interest
membership. Its functions would be to bring about changes in the markets
for targeted energy-efficiency products and services that will improve
their market share; to plan and contract for research and limited
demonstration of renewable energy technologies, and to support the
development of several megawatts annually of renewable generating
capacity. A regional technical forum would be established to track
regional progress toward the achievement of regional goals and provide
feedback and suggestions for improving the effectiveness of conservation
and renewable resource development programs. Funding for these activities
should be collected in part through Bonneville wholesale rates to the
extent regional firm loads are served by power from Bonneville.
How the funds are collected is a matter for state or local decision, as
appropriate. The Steering Committee expects that methods of collection
that are competitively neutral and affect all participants in the market
equally will be found to be preferable.
Consumer Access to the Competitive Market
The goals of the recommendations on retail markets and customer choice
are to encourage a more efficient power system, lower electricity costs,
increased product choice and greater product innovation for all consumers.
These goals were adopted subject to a commitment to maintain the
reliability and safety of the electrical power system. The Steering
Committee concluded that this goal could best be accomplished by putting
in place a competitive electricity market that is driven by consumer
choice. However, there is concern that the benefits of a competitive
market may flow unevenly to different classes of consumers and that some
small consumers may even suffer harm. The report recommends safeguards
intended to help mitigate these concerns.
The Steering Committee recommends that regulators and local utility
boards and commissions offer open access for all customers that desire it
no later than July 1, 1999. The Committee recognizes that some of these
regulatory bodies may choose to phase in full retail access. In these
cases, a similar phase-in of the recommendations on conservation,
renewable resources and low-income energy services may be effected.
Direct access may occur prior to July 1, 1999, however, for direct
retail access to be implemented promptly, several activities must be
accomplished. These include the identification of any stranded costs and,
if any stranded costs are determined to exist, the creation of a stranded
cost collection mechanism; unbundling and cost-based pricing of delivery
services; pilot programs to explore aggregation for small commercial and
residential customers; the exploration of market index pricing options for
residential and small commercial customers; and implementation of public
purposes funding, energy assistance funding and consumer protection
mechanisms consistent with this report's recommendations.
To achieve a competitive retail electricity market requires separation
of the distribution and electricity marketing functions of current retail
utilities. This is necessary to ensure that consumers will have unimpeded
access to alternative electricity suppliers, and vice versa, over the
wires of the distribution utility. The distribution utility would continue
to be a regulated monopoly responsible for the reliable and safe delivery
of electricity from electric service companies to consumers over local
distribution wires. Electricity service companies will offer a variety of
electricity products and services (e.g., firm or interruptible power,
power from renewable resources, peak or off-peak power, fixed or
spot-market prices) to consumers on a competitive basis and may, in fact,
offer other products unrelated to electricity markets. The electricity
services portion of current integrated retail utilities could compete in
this market if the distribution utility function is sufficiently separated
from the electricity services business to ensure that control of
distribution is not used to advantage the electricity services business.
Putting such a competitive market in place will require a significant
transition and ongoing market maintenance procedures. There is a danger
that, until competitive markets have fully developed for all consumers,
some of the benefits of increased competition may be realized primarily by
large consumers at the expense of small consumers. Therefore, the Steering
Committee calls for active government oversight of the transition and
active ongoing programs to facilitate and encourage the development of
meaningful market access for all consumer classes and to prevent
unwarranted cost shifts among consumer classes. Specifically, the policy
calls for licensing of new electricity service providers, applicability of
consumer protection laws, formal complaint processes, consumer information
programs, and a "provider of last resort" to ensure continued
affordable service to all consumers. To further minimize cost shifts to
small consumers, policies should be adopted to provide utilities a fair
opportunity to recover costs of previous investments that may be stranded
by the opening of the market. This is viewed as a transitional problem
only, and incentives must be included for utilities to mitigate any
stranded costs they potentially face.
Transmission
Transmission is the "highway system" over which the products
of electrical generation flow. If there is to be effective competition
among generators, transmission facilities should be operated independently
of generation ownership. An independent grid operator (IGO) regulated by
the Federal Energy Regulatory Commission with broad membership, including
Bonneville and the region's other major transmission owners, is proposed
as a means of ensuring independence of transmission operation and
improving the efficiency of transmission operation. An independent grid
operator should also have clear incentives to maintain reliability and
encourage efficient use of the transmission system.
The independent operation of Bonneville's transmission facilities is
particularly important to effective competition among generators in this
region because Bonneville's facilities make up a large part of the
regional transmission system. To ensure this independence, it is
recommended that Bonneville be legally separated into two organizations
? a power marketing organization to market the power from the federal
power system and a transmission organization to carry out the transmission
functions. The separation of these functions should be structured so that
it does not jeopardize or diminish the legal obligation and ability of
Bonneville to meet fish and wildlife and other obligations. A separated
federal transmission owner (e.g., the Bonneville Transmission Corporation)
could lease its assets to an independent grid operator, or could be an
independent grid operator and operate other participants' assets if FERC
and the other participants agree.
Legislation will be required to accomplish these goals. While
legislation is under consideration, Bonneville should move quickly to
achieve as much administrative separation as possible, and to participate
in efforts to form an independent grid operator that could operate both
federal and non-federal transmission assets.
Future Power System Role for a Four-State Regional Body
When the Northwest Power Act was passed in 1980, the authors
contemplated an extended time of electricity shortage and the need for
increasingly costly large-scale power plants. The Northwest Power Planning
Council was established with two representatives from each of the
Northwest states (Idaho, Montana, Oregon and Washington) to provide the
states and the public a role in determining the region's future need for
electricity and how that need could best be met. The Council was also
charged with furthering the goals of: encouraging conservation and
renewable resources; helping assure an adequate, efficient, economical and
reliable power system; providing environmental quality; and protecting,
mitigating, and enhancing the fish and wildlife of the Columbia Basin.
The Power Planning Council has been credited with many improvements in
electricity planning. However, in an era in which market forces will play
the primary role in determining what plants are built and what can be
charged for their output, the Council's resource acquisition planning role
is no longer relevant. The Steering Committee believes, however. that the
remaining goals are still important to the citizens of the region. The
issue is how they are to be achieved in the context of a competitive
market.
There is much that is unknown about the competitive future we are about
to embrace. As the Northwest transitions toward a competitive electricity
industry, there are roles that the region would want carried out by a
regional body. These roles do not involve resource acquisition planning,
regulation or implementation. They do involve monitoring and analyzing the
transition to a competitive electricity market and informing policy-makers
and the public. This will help ensure that the transition to a competitive
market is accomplished efficiently and fairly throughout the region and
that the public values the Northwest has sought from its power system are
preserved and enhanced.
These roles include:
Conservation and Renewables ? working with regional interests
to devise ways of overcoming market barriers, participating in market
transformation activities, providing guidance in meeting the region's
conservation and renewable goals and working with the regional technical
forum to track regional progress;
The Competitive Marketplace ? providing information,
evaluation and analysis of the evolving marketplace to ensure full, fair
and effective competition throughout the region; and
Public Participation and Involvement? informing and involving
interested members of the public on matters that affect them, their
environment and their economy.
The funding of the Northwest Power Planning Council has been through a
charge on Bonneville Power Administration rates. If federal legislation
affecting the role of the Northwest Power Planning Council or a similar
regional body is pursued, the question of the level and sources of the
funding should be addressed.
FEDERAL POWER MARKETING: THE
BONNEVILLE POWER ADMINISTRATION ? ADAPTING TO A COMPETITIVE ENVIRONMENT,
PRESERVING THE BENEFITS OF LOW-COST HYDROPOWER FOR THE NORTHWEST
Goals
The Steering Committee's goals for federal power marketing are to: 1)
align the benefits and risks of access to existing federal power; 2)
ensure repayment of the debt to the U.S. Treasury with a greater
probability than currently exists while not compromising the security or
tax-exempt status of the Bonneville Power Administration's (Bonneville's)
third-party debt; and 3) retain the long-term benefits of the system for
the region. This recommendation is also intended to be consistent with
emerging competitive markets and regional transmission solutions.
Background
Bonneville is a federal power marketing agency charged with marketing
the power output of the federal dams on the Columbia and its tributaries.
It is a wholesale supplier, marketing power to utilities that, in turn,
sell power to retail consumers. The only exceptions are the direct service
industries, which historically have been served directly by Bonneville. On
average, Bonneville markets about 40 percent of the firm power in the
Northwest and substantial, but varying, amounts of nonfirm power.
Bonneville is required to sell its firm power (the power that can be
counted upon even under poor water conditions) at cost under contracts to
public agency customers (e.g., municipal utilities, public utility
districts, cooperatives), residential and small farm customers of
utilities that are not public agencies, and direct service industries.
Only when it cannot sell all its power within the region is it allowed to
market outside the region. As a result of the Northwest Power Act of 1980,
Bonneville also has the responsibility of acquiring new resources to meet
the loads of those customers that choose to place their growing load
requirements on Bonneville.
Historically, Bonneville has been a low-cost supplier of electricity.
In recent years, however, Bonneville's power has lost its price advantage.
This has been the result of a combination of factors, including low
natural gas prices, surplus generating capacity on the West Coast, the
opening of the competitive wholesale electricity market and the resulting
decline in electricity prices. Bonneville has also experienced increased
costs resulting from requirements for salmon recovery, resource
acquisition costs and other factors. Bonneville's ability to reduce costs
is hampered by the fact that a large part of its costs are fixed. These
fixed costs include repayment of debt to the U.S. Treasury for the
construction of the hydroelectric and transmission systems and repayment
of the debt for three Washington Public Power Supply System nuclear power
plants.
The opening of wholesale electric competition has put great stress on
Bonneville. Bonneville's utility and direct service industry customers now
have a greater degree of choice under amended or new power sales
contracts, and current power sales contracts will expire in 2001.
Bonneville has been struggling to determine its future competitive role
and to secure sufficient sales to cover its costs and make its payments to
the Treasury and the Supply System. The ultimate risk, should Bonneville
be unable to cover its costs, lies with the Treasury. While this is
occurring, many of Bonneville's traditional customers, particularly those
without generating resources, continue to look to the agency as their
primary or exclusive power supplier.
In the future, however, conditions are likely to change. Many industry
observers expect that gas prices and the market price of electricity will
eventually rise. In addition, Bonneville's fixed costs can be expected to
fall as debt is paid off. When this happens, the price of Bonneville's
power would be very attractive. Whether the Northwest will be able to
retain these future benefits has been brought into question, in part due
to legislation that would sell federal power marketing agencies. Even if
Bonneville is not privatized, the revenues that a low-cost power producer
could generate could be very attractive to future Congresses, particularly
if the Treasury has been called upon to bear the risks of that power
producer when conditions were not so favorable. In this context, a
long-term solution that retains the benefits of the system in the
Northwest would be highly desirable.
Finally, there is the question of the appropriate role of a federal
agency in a competitive market. Right now, Bonneville is struggling to
compete. In the longer-term, as restructuring proceeds and the electricity
industry becomes more and more competitive, the question may no longer be
"can Bonneville compete?" but "should Bonneville
compete?"
Recommendations
Summary
The Steering Committee recommends the institution of a
subscription-based system for marketing the electricity produced by the
federal system. The subscription process would maintain the principles of
public and regional preference to the output of the Bonneville system at
cost. The recommendation is designed to facilitate a fully competitive
bulk power market and freedom of action by customers. Simultaneously, it
is intended to better balance risk and rewards among customers, Bonneville
and the U.S. Treasury. The subscription system is central to aligning the
risks and benefits of the federal power system, and to reducing the risk
faced by the Treasury. Treasury currently faces the risk of market prices
below cost, but does not receive the benefit when market prices are above
costs.
Subscribers would contract to purchase power from the system at cost,
take or pay, for the period of their subscriptions, including periods
similar to what the region is now experiencing when costs are above market
prices. Subscribers would also be able to purchase at cost when costs are
below market levels. The power product contracted for could vary depending
on the requirements of the customer.
Bonneville would not acquire additional resources to serve load growth
except on a bilateral contract basis, where the customer absorbs the risk.
However Bonneville could offer short-term products and services that are
responsive to variations in loads from planning estimates to those
customers willing to pay for such services. Bonneville would not sell
directly to new retail loads, beyond the existing direct service industry
loads. Moreover, if the system is fully subscribed, there would be no need
for Bonneville to market to retail loads.
No remedy is possible unless Bonneville can effectively manage and
control its costs. In this recommendation, subscribers would gain advisory
influence over power-related costs and would have the ability to call for
binding arbitration on certain cost issues under their contracts.
Several provisions of the subscription process are specifically
intended to provide benefits to the Treasury and preclude the need for
stranded cost mechanisms. However, to the extent that unmitigable stranded
costs remain, then a mechanism to recover these costs will be required.
The Committee recommended a transition board appointed by the
governors, to oversee the subscription process and report to the governors
on its prospects for success, among other potential tasks.
Disposition of Federal Power
Long-term subscriptions provide stability to Bonneville, the Treasury
and customers. However, a number of customers, particularly those without
generating resources, may want to contract for much of their load in
shorter-term intervals as they make the adjustment to new competitive
markets.
The core or basic product of federal power marketing is energy from the
federal system. Depending upon limitations of availability, contracts for
this product should be available to regional customers at cost. Customers
may then purchase other services that are individually priced by
Bonneville to change this energy into a product that meets their needs, or
alternatively they may provide it themselves. In addition, customers may
be willing to purchase the energy for differing periods of time or with
different obligations placed on Bonneville. This affects the degree of
risk the Treasury is absorbing, and in turn should be reflected in the
price the customer is required to pay.
One product could be provided for customers with predictable loads, or
ones that acquire load shaping services from another entity.
Alternatively, Bonneville would offer a take-and-pay arrangement for
customers that want to rely upon Bonneville to serve their actual monthly
loads. The latter service would cost more in order to cover the revenue
uncertainty that Bonneville would face as a consequence.
Long-term subscribers get the right to purchase power at cost for the
term of the contract, up to 20 years. While the cost of the power from the
federal system is currently somewhat above market prices, the cost is
generally expected to be below market prices in the future. For potential
subscribers to make a long-term commitment to Bonneville, particularly at
a time when the agency's rates are above market, Bonneville needs to take
actions that push the envelope of cost reductions. In addition to the
agency's own initiatives in reducing costs, long-term contracts need to be
structured in a manner that is very explicit regarding the limitations on
the customer's obligation to pay.
Short-term subscribers also get the right to purchase power at cost,
paying the same general costs as the long-term customers. For at least the
short-term following 2001, renewable contracts of shorter duration place
an element of potential risk on the Treasury, associated with customers
leaving if Bonneville costs became significantly higher than market.
Because of this, the short-term subscribers are required to pay an option
or subscription fee if they want to reserve the right to re-subscribe at
cost after the contract expires. The option fee would enable the customer
to either extend the cost-based contract, or to reduce or terminate loads
on Bonneville at the end of the existing contract commitment. The option
fee is a premium payment reflecting the risk to the system and to the
Treasury of shorter-term contracts. A customer also has the choice of
purchasing cost-based power without paying an additional option fee under
the initial offering. However, at the end of that customer's purchase
term, that customer will be able to purchase power from Bonneville only at
market-based rates. This further purchase ability does not imply
preferential access at market prices.
The option fee should be priced to reflect its value, while at the same
time not making it economically and competitively prohibitive. Using a
range of market conditions and assumptions regarding Bonneville costs,
Bonneville and the Northwest Power Planning Council have identified a
sliding scale option fee ranging from 0 mills/kilowatt-hour for long-term
(i.e., 15- to 20-year) contracts to 2 mills/kilowatt-hour for five-year
contracts. Bonneville should prospectively develop competitively priced
tools that balance risks and rewards between shorter-term and longer-term
load commitments and that reflect the overriding purpose of compensating
the Treasury for the risk associated with shorter-term contracts.
Short-term subscribers could continue to purchase short-term in the future
by purchasing subsequent option fees, or they could convert to long-term
contracts without subsequent option fees.
The subscribers assume a greater level of risk than in the current
system. For example, if the region were to experience lower than expected
market prices that are below Bonneville costs for an extended period of
time, the long-term subscribers would still be obligated to pay
Bonneville's costs. Short-term subscribers would be able, at the end of
their subscription period, to let their subscriptions lapse, but may elect
to stay, hoping to realize the longer-term savings associated with the
system. There would be a higher level of annual probability of Treasury
payments, placing more risk on the subscribers from the effects of
year-to-year variations in weather, future power system cost increases
(e.g., the cost of generator rewinds and other necessary maintenance and
upgrades) and changes in market conditions.
The process for the disposition of federal power should be completed by
2001, so that the results can be in place when Bonneville's existing
contracts expire. The term of the contracts would be determined by the
individual subscribers, during their initial subscriptions for firm power.
Although 20 years would provide maximum contract certainty for Bonneville
under current law, it is in the agency's best interest not to have all
contracts expire at the same time, as is the case in 2001. Firm power
would be subscribed for by month with appropriate ancillary delivery
services. Any remaining firm power and other products should be sold at
prices regulated by the Federal Energy Regulatory Commission (FERC) or at
competitive prices, where FERC determines that competitive markets exist,
and revenues should be used to reduce costs to the subscribers.
At the end of a contract, whether long or short-term, the purchaser has
a right of first refusal to renew the contract for subsequent periods so
long as the appropriate option fee has been paid. The initial
subscription, and any subsequent ones, would follow a specific priority
order. Any power that is freed up as a result of non-renewal of contracts
would be offered to others at cost through the same priority structure
described below.
Priority for Subscriptions
The priority order for subscriptions would be implemented in a
sequential multiphase process. Customers could elect to split their
subscriptions between long- and short-term contracts. The phases are
structured so that publicly owned utilities get first priority; direct
service industries and representatives of residential and small farm
customers of investor-owned utilities get second priority; other regional
customers, such as representatives of investor-owned utility commercial
and industrial customers, get next priority; and non-regional customers
get last priority. Within this overall framework, there is an emphasis on
long-term subscriptions, so that, to the extent there is a conflict due to
over-subscription within a phase, subscription term would be the
tie-breaker, with the longer-term having priority. Customers having
long-term contracts or those that paid an option fee should have broad
rights to extend, renew or convert their contracts to longer-terms, up to
20 years, at any time during the contract life, independent of the length
of the existing contract, provided at the time of renewal they have a
qualified load.
Phase 1
In the first phase, loads of regional public utilities and cooperatives
would subscribe with no limitations on the term, within the current
20-year maximum. The first phase would be reserved for publicly owned
utilities to subscribe up to the average of the contractual entitlements
of the highest two consecutive years of the 1997-2001 contract period,
plus some provision for minor load growth of small full-requirements
utilities representing in the aggregate no more than 1,000 average
megawatts of Bonneville load. Additional load growth of these small
utilities and the load growth of other public utilities may be met through
bilateral contracts or tiered rates.
Phase 2
During the second phase, the direct service industries and the
residential and small farm customers of the investor-owned utilities
(through their representatives, described below) would be allowed to
subscribe with no limitations on term, within the current 20-year maximum.
The direct service industries' subscriptions would be limited by the
average of the contractual entitlements of the highest two consecutive
years of the 1997-2001 contract period. Each investor-owned utility
customer subscription would be limited by the average total actual
regional exchange load of its residential and small farm customers, again,
in the two highest consecutive years between 1997 and 2001. If there is
over-subscription, subscription term will serve as the tie breaker, with
the longer-term having priority.
For the purposes of the subscriptions, investor-owned utility
residential and small farm customers could be represented by
investor-owned utilities or other entities that serve Northwest
residential or small farm loads, as certified by state regulators. The
benefits of purchases for these customers should be passed through to the
end users.
Phase 3
The third phase would be for other regional wholesale and direct
service industry loads. Each subscription is limited by the subscriber's
total regional load. To the extent there is over-subscription in this
phase, longer-term subscriptions will have priority.
Phase 4
In the fourth phase, Bonneville could sell to regional wholesale and
direct service industry loads at market prices for those who wish to buy
only at market prices in the future. In addition, Bonneville could sell
"excess" federal power for periods up to seven years to
out-of-region customers. "Excess" is a defined term in recent
legislation. Power sold in this phase would be sold subject to current
law. As a principle, the Steering Committee believes that in-region
customers of Bonneville should have the ability to secure non-recallable
Bonneville contracts of a time period at least equal to out-of-region
customers of Bonneville.
Subsequent Subscriptions
To the extent firm power becomes available as a result of non-renewal
of contracts, the remaining power will be offered through the same
multiphase process described above. Customers that elect not to subscribe
to Bonneville, or that subsequently allow short-term subscriptions to
lapse would be served at market prices in the future. Contracts subject to
recall for public preference under current law would be subject to recall
only for loads of new public utilities and after a waiting period of up to
five years from formation of the utility, depending on the availability of
power.
Resale of Power
Subscribers may resell the power for which they have subscribed for the
remaining term of the contract in cases of loss of load and/or to the
extent allowed by existing law. Power will be considered to be delivered
to regional loads if, at the time of delivery, the subscriber serves
qualifying loads equal to or greater than the amount delivered. Other
commercial transactions by the subscriber should not disqualify the
purchase of federal power.
The Exchange
As a result of the Northwest Power Act of 1980, Northwest utilities
have the right to sell to Bonneville an amount of power equal to that
required to serve their residential and small farm customers at the
utilities' average system costs and receive an equal amount of power at
Bonneville's average system cost. In reality, this is an accounting
transaction. No power is actually delivered. This was intended to be a
mechanism to share the benefits of the low-cost federal hydropower system
with the residential and small farm customers of the region's
investor-owned utilities. As a result of decisions made by Bonneville in
its most recent rate case, those benefits have been reduced. The Steering
Committee acknowledges that the residential and small farm consumers of
exchanging investor-owned utilities will be adversely affected by the
reduction of exchange benefits. Congress intervened for one year to
stabilize the exchange benefits. However, on October 1, 1997, there will
be rate increases to the residential and small farm customers of the
exchanging utilities. The Steering Committee encourages the parties to
continue settlement discussions and to explore other paths to ensure that
residential and small farm loads receive an equitable share of the
benefits of the federal base system.
Fish and Wildlife
The Steering Committee recognizes that fish and wildlife restoration
and mitigation obligations exist and expressly intends that none of its
recommendations should be implemented in a way that alters, amends,
diminishes or repeals the trust obligations of the federal government, or
the treaty and other rights of the tribes, including those rights
associated with tribal hunting and fishing, water and other natural
resources.
The Committee recognizes that the cost of additional fish and wildlife
restoration investments beyond those currently contemplated in the fish
and wildlife Memorandum of Agreement is unknown. Additional costs could be
incurred, particularly if measures are undertaken to restore historic
river conditions in some segments of the Columbia River Basin. The
Committee believes that the region will need to provide the bulk of those
fish and wildlife restoration funds. At the same time, the Committee
emphasizes the importance of an energy industry restructuring package that
shares the future benefits of the power system among the parties in the
region. The Committee believes that the federal government should provide
additional assistance and share the costs in the restoration effort,
particularly given the provisions of the U.S./Canada Pacific Salmon
Treaty, the Endangered Species Act and the fact that federal land and
water management practices have had an adverse effect on fish and wildlife
populations that are being protected and restored with regional ratepayer
funds.
The Committee further recommends that flexible, but detailed, multiyear
fish and wildlife budgets are essential to the accountability and fiscal
management of the restoration effort and should be developed in
government-to-government consultations by the federal, state and tribal
sovereign governments on a rolling five-year basis. Budgets of this kind
will help discipline the restoration efforts and will help provide
relative certainty for the power system and fish and wildlife managers.
This recommendation assumes that sufficient information will be
available before 2001 to prepare a five-year fish recovery budget, and
that the input from this process could be incorporated into Bonneville
rate projections. This process should provide shorter-term customer
certainty regarding fish costs, and the opportunity for fixed five-year
rates, as Bonneville is currently offering through 2001.
Ownership Benefits for the U.S. Treasury
Currently, the overall "risk taker" regarding Bonneville's
responsibility to meet financial targets is the U.S. Treasury, as the
recipient of annual debt payments from Bonneville. To the extent that
Bonneville secures revenues to cover all costs including Treasury
payments, there is no incremental risk to the Treasury. However, in the
event that Bonneville's revenues are not sufficient to cover its costs,
including Treasury obligations, the shortfall would be handled as a
deferral of any difference between the Treasury obligation and the actual
payment.
It is financially unstable and politically undesirable to anticipate a
federal power marketing agency operating in an environment in which the
Treasury faces excessive financial risk and/or a probability that there
will be a deferral of obligations on a recurring basis.
During the last 13 years, Bonneville has not deferred a Treasury
payment. Also, with newly adopted rates, Bonneville is not projecting a
deferral for the five-year period through 2001. However, the amount of
money involved is significant, which in turn makes the risk to the federal
government significant. Between 2002 and 2006 Bonneville is scheduled to
pay a total of $2.063 billion to the Treasury, with a net present value of
$1.661 billion. Over a 25-year period, these amounts are $11.848 billion,
with a net present value of $5.029 billion.
Bonneville faces in 2001 an environment in which customer contracts
expire, markets may be lower than agency costs and there is uncertainty
regarding fish mitigation costs. In the longer-term, market conditions
should change to Bonneville's favor, but not necessarily by 2001. A
solution needs to be found that both improves Treasury's position from the
status quo, and over time offers an incentive to the federal government to
continue operating Bonneville. Four actions are recommended to address
this situation.
- As referred to in other sections, Bonneville needs to pursue all
actions possible in the short-term to cut costs, thereby giving the
agency the best opportunity to either meet or come close to
competitive market prices with cost-based products, thereby retaining
a strong customer base.
- To the extent that there is a deferral of any portion of the
Treasury payment in any year, this should become an immediate
repayment obligation when Bonneville's costs fall below market. When
Bonneville has an opportunity to adjust rates and there is a projected
positive difference in Bonneville's favor between market and cost, the
next set of rates would remain at market for a sufficient period to
fully recover any obligations that had been deferred from the previous
period.
- As described in the section on "Disposition of Federal
Power," shorter-term subscriptions will pay an option fee or
other higher price that would prospectively reimburse the Treasury for
losses or deferrals due to the short term of the subscriptions. This
revenue should be used by Treasury to accelerate repayment of
Bonneville's debt.
- When Bonneville's cost-based rates are below market, customers would
agree that subsequent rates would contain an additional share of the
difference between an indexed market rate and cost-based rates. This
share would be paid to Treasury as a "repayment acceleration
payment" as a supplement to each annual obligation. The customers
still benefit to the extent that these funds are being applied against
Bonneville Treasury payments, which will reduce their future costs
over time. The U.S. Treasury benefits in that it is receiving cash
that is otherwise not due until a future date. This provision would
apply to the extent that market prices exceed cost-based rates where
the costs include any repayment of past deferrals due to the previous
provisions.
Stranded Cost
The Committee believes that the recommendations in this report,
prudently implemented, should dramatically reduce any risk that Bonneville
would need to seek stranded cost recovery. Nevertheless, Bonneville, like
other Northwest utilities, faces the prospect of load loss due to
increased competition associated with greater customer choice at the
wholesale and retail levels. It is this Committee's expectation that
Bonneville will do all that it can to manage its costs and take other
appropriate actions to avoid a stranded cost charge. However, to the
extent unmitigable stranded costs remain, then a mechanism to recover
these costs will be required.
Customer Advisory Committee
Customers, particularly those signing up for long-term commitments,
need to have an effective mechanism to assure them that Bonneville's
revenues and costs over time reflect the intent of their power sales
contracts. Existing federal legislation allows for appointments of
advisory committees to assist agencies such as Bonneville, without
exercising formal governance responsibilities. The Bonneville
administrator would continue to report to the Department of Energy, but
would receive strong customer input through an advisory committee. The
committee would consist mainly of subscribers, but also would include
representatives of other interests. The committee would review
Bonneville's budget requests, overall capital budgeting levels and
operating cost levels, rate setting, key marketing issues, and provide
input into the power-related capital and operating cost decisions of the
Corps of Engineers and the Bureau of Reclamation. The committee would
provide input to decision-making authorities on fish-related matters.
However, final decisions regarding fish measures should remain squarely
within the purview of the existing or future mechanisms for river
governance.
Although the advisory committee should be helpful in establishing
policy direction for the power operations of Bonneville, it is not the
primary or exclusive mechanism for subscribers to determine their business
relationship with Bonneville. New power sales contracts will define the
nature of the business relationship between Bonneville and individual
customers. These contracts will have common features and unique
characteristics depending upon the types of services the customer is
buying from Bonneville. It is proposed that the contracts contain an
ability for subscribers to call for binding arbitration on specific power
cost-related items that do not affect implementation of fish recovery
measures.
Bonneville in the Competitive Market
Bonneville should plan to achieve sufficient net revenues from
unsubscribed products to meet Treasury payments and maintain cost-based
rates to subscribers. Speculative risk to Treasury and subscribers should
be minimized. To the extent consistent with its obligation to repay
Treasury, Bonneville should return to its historic role of marketing power
generated by the Federal Columbia River Power System, rather than becoming
an aggressive marketer of products and services in the emerging
competitive power market. A quantitative plan for marketing should be
presented to the transition board described below reporting to the four
Northwest governors.
This recommendation would have the effect of disposing of much if not
all of the firm power available from Bonneville on a long- or
intermediate-term basis. The fact that most of Bonneville's power would be
subscribed at cost would limit Bonneville's market role. Any remaining
firm power and other unbundled power products would be sold at prices
regulated by FERC or at competitive prices, where FERC determines that
competitive markets exist. This approach is intended to provide means for
Bonneville to meet its financial obligations, but Bonneville's role in
competitive markets must be further defined to respond to concerns about a
governmental entity as a participant in these markets.
In addition, Bonneville would not acquire resources to serve its
customers' load growth except on a direct bilateral basis, where the
customer takes on all the risk of the acquisition. However, Bonneville
would be making spot-market power purchases sufficient to: 1) supplement
monthly firm hydro energy in meeting current firm loads, and 2) store
water for flow augmentation to help rebuild fish populations. This
recommendation distinguishes these spot-market purchases, which are not
necessarily required to be on a bilateral contract basis, from purchases
to meet load growth, which are required to be on a bilateral contract
basis.
Finally, Bonneville would not sell directly to new retail loads, beyond
the existing direct service industry loads, though it may sell through
intermediaries whose transactions would be subject to state or local
jurisdiction.
Governors' Transition Board
To ensure public accountability, regional acceptance and prompt
implementation of the Committee's recommendations, the governors should
appoint a high-level board. This board shall be known as the Northwest
Energy Review Transition Board. The Board should remain in place until
the recommendations of the Review are implemented or 2001, whichever is
sooner.
The Board will work with regional interests and Bonneville in a public
process to oversee the subscription process and provide liaison with the
Northwest congressional delegation and affected constituencies. The Board
periodically should determine whether Bonneville and its customers are
making adequate progress on the subscription process or, if they are not
likely to succeed on a timely basis, whether another approach is
necessary. The Board should periodically report its findings to the
governors.
The Transition Board would review Bonneville's progress on the
development of procedures for offering and pricing products and services,
and Bonneville's role in the competitive market. The Board also would
assist the region in responding to federal legislation.
In addition, the Board should be responsible for making recommendations
to assist in implementation of the Review's recommendations.
COLUMBIA
RIVER SYSTEM GOVERNANCE
Perhaps the central challenge the governors of our four states have
given the Comprehensive Review is to advise them as to how the many
benefits of the Columbia River system can best be preserved. The Steering
Committee has struggled with this challenge and has made considerable
progress. At a time when the electricity industry is already engaged in
monumental regulatory and related changes, the challenges the river system
faces bring an additional dimension of instability that is particularly
unsettling. The region cannot expect to achieve both the degree of cost
stability the electricity industry requires to maintain the benefits of
the Columbia River power system for the region and achieve sustainable
fish restoration unless it ensures predictability, accountability and
effective governance for the fish and wildlife interests of the river. In
short, an effective conclusion of the Committee's effort is not possible
without an improved system of river governance that pursues fish
restoration as a high priority
The Steering Committee was asked by the Northwest governors to focus on
the restructuring of the electricity system and to address the financial
stability of the federal power system. The Committee has done its best to
recommend changes to the federal system that accomplish that goal. The
Committee fully recognizes that there are other important, related issues
and decisions, including those affecting fish and wildlife, that must be
resolved before a truly comprehensive package can be achieved. As the
governors consider the Steering Committee's recommendations, they should
use the opportunity to consult with the appropriate federal, state and
tribal authorities and urge that the fishery issues are moved forward with
the same level of zeal and dispatch in a parallel process on the same
schedule as implementation of these recommendations. Addressing both power
and fish concerns will help achieve a consensus in the region that will
benefit our efforts as federal restructuring legislation advances.
The Steering Committee considered a number of matters related to the
governance of the river and the power system. The role of the Northwest
Power Planning Council in river governance was not addressed, but needs to
be. River governance is a fundamental part of any effective response to
changes in the electric utility industry. Until governance deliberations
move forward in government-to-government consultation among federal, state
and tribal authorities, the prospects for a consensus on the regional
response to utility restructuring are diminished and controversial.
To ensure accountability, the governors should insist that the Council
or its successor agency include in its Columbia River Basin Fish and
Wildlife Program a prioritized budget for investments in fish and wildlife
measures, including the relative priority of operational changes to the
hydropower system. The governors should hold the Council or its successor
accountable for ensuring that the region is making the most effective use
of available fish and wildlife funding.
For some, the issue of river governance appears as intractable as any
the region has ever faced. However, there is reason for hope. Many of the
stakeholders have been working together in various forums. The Committee
believes consensus is possible and believes it is important to pursue it
on a schedule that ensures that the issue can be addressed expeditiously.
The Steering Committee requests the governors to initiate a broadly
based discussion of improvements in the river system's governance
mechanisms that would provide for more effective decision-making for this
complex ecosystem and all of its competing uses.
CONSERVATION, RENEWABLE RESOURCES
AND LOW-INCOME ENERGY SERVICES ? REFLECTING THE VALUES AND MEETING THE
NEEDS OF NORTHWEST CITIZENS
Goals
Three clear goals are proposed for conservation, renewable resources
and low-income energy services:
- Conservation ? to ensure that all cost-effective electric
efficiency opportunities are captured in a manner consistent with
increasingly competitive electricity markets.
- Renewable resources ? to continue to develop renewable
resources in the region.
- For residents of the Northwest who must live on limited incomes
? to ensure low-income consumers are adequately, affordably and
fairly served in a competitive electricity market.
The Steering Committee believes that the goals for conservation and
renewable resources should be achieved by relying, wherever possible, on
market forces to accomplish cost-effective conservation and renewable
resources. However, the Steering Committee recognizes that the market for
energy-efficiency services may not capture all cost-effective
conservation. Similarly, potentially valuable renewable resource
technologies, which are not currently economically competitive, may
benefit from regional investments that reduce their future costs. The
Steering Committee also recognized that competitive markets are unlikely
to provide households with limited incomes with means to meet their basic
electricity services needs at the same level and quality they currently
enjoy.
The Steering Committee is recommending that during the transition to a
competitive electricity market, the region's retail electricity suppliers
should commit 3 percent of their retail energy service revenues (estimated
to be approximately $210 million in 1995) to facilitating the development
of cost-effective conservation and appropriate renewable resource options,
and sustaining appropriate low-income energy services. The Steering
Committee recommends that tariffs, rates or other fees imposed to collect
these funds be implemented simultaneously with implementation of open
retail access.
The Steering Committee acknowledges the resolutions and letters of
support for public purposes that were submitted by the region's public
utilities commenting on the draft proposal. Committee members urge these
publicly-owned power systems to honor their commitments. The Steering
Committee believes that its recommendations provide for maximum local
control while establishing an effective minimum standard that ensures
stable funding for the public purpose recommendations.
Background
Conservation
For nearly two decades, electric utilities in the Northwest have been
the dominant force behind the development of conservation. The rationale
for utilities' active pursuit of conservation stemmed from the fact that,
until quite recently, the cost of new power generation exceeded the price
charged consumers for electricity. Individual consumers were not paying
the full cost of new generation, so acquiring new generating resources to
serve new loads raised everyone's rates. When utilities acquired
conservation at a lower cost than new generation, the total cost of
electricity for all consumers was less.
Conservation faces a different environment today than it did just a few
years ago:
- The costs of new resources avoided by conservation are lower,
leaving fewer conservation measures cost-effective.
- Retail electricity prices for many consumers are currently above the
marginal cost of new generation. This means that these consumers have
greater economic incentive to invest in conservation than do
utilities.
- Competitive pressures, particularly retail access, make it more
difficult for utilities to include the cost of conservation programs
in their rates. If a utility adds the cost of conservation invested in
one customer's home or business to the rates charged to all its
customers, some customers may seek an alternative supplier whose costs
do not include conservation.
Despite these changes, conservation that costs less than alternative
sources of power remains available for development in the region. For
example, in its 1996 draft power plan, the Northwest Power Planning
Council estimated that approximately 1,500 average megawatts of
conservation would be cost-effective to develop in the region over the
next 20 years. This is roughly equivalent to the electricity demand of a
city half again as large as Seattle. There is some controversy about these
estimates. The Steering Committee has not independently verified the
Council's draft estimates, nor does it endorse them. However, even if
these estimates are significantly reduced, the amount of cost-effective
conservation remaining to be developed appears large enough to warrant
efforts to ensure that it is developed.
There is currently some momentum behind conservation in the region.
This momentum is created by existing utility activities, and the funding
already committed to those activities, as well as market forces. This
momentum could prompt the development of approximately one-third of the
region's cost-effective conservation potential over the next few years. By
the year 2000, however, competitive pressures on utilities and persistent
market barriers could cause the rate of conservation development to
decline below the rate necessary to capture all of the region's
cost-effective conservation potential. On the other hand, utility customer
service efforts and the actions of the market could result in an adequate
pace of conservation development. Today, we do not know how much
conservation will be developed by the market or by utility efforts, nor do
we know what the true nature of the utility business will be in the
future.
The Steering Committee is concerned about what happens during the
transition and about what conditions will prevail after the turn of the
century. Many of the market barriers to development of conservation
resources still exist: lack of reliable information; different economic
incentives for owners and renters, and manufacturers and consumers; and
energy prices that do not fully reflect the environmental costs of that
energy. The Committee expects the competitive market for efficiency
products and services to be stimulated by the opening of competition.
However, the market for efficiency services is still immature. The
development of this market should be closely monitored, particularly in
the industrial and large commercial sectors where most of the conservation
potential is thought to exist. The experience thus far from countries that
have already opened up their electricity markets to competition seems to
indicate that the market for efficiency products and services will not
develop quickly without special attention.
Renewable Resources
Renewable resources can offer unique social and energy system benefits.
These benefits include environmental value, such as the avoidance of
carbon dioxide emissions that may be contributing to global climate
change; resource diversity; and local economic benefits. Some applications
of renewable resources, for example, the use of solar photovoltaics in
remote locations, are cost-effective today. However, utility-scale solar,
wind and geothermal technologies still are more expensive than gas-fired
combustion turbines and current market prices. For example, several
renewable resource projects designed to confirm various technologies under
Northwest conditions are being developed by Northwest utilities and
Bonneville. As a result of recent declines in the price of new power
generation, these projects are anticipated to produce electricity that is
from one and one-half to four times more costly than gas-fired combustion
turbines. In an increasingly competitive electricity market, additional
renewable resources may not be developed unless their economics improve or
consumers demonstrate a willingness to purchase their power at somewhat
higher prices because of their environmental benefits.
Though few renewable resources are cost-effective in the near-term,
ensuring that renewables are available for future development may have
appreciable economic value. An unexpectedly rapid rise in natural gas
prices and/or the adoption of carbon dioxide control measures could
favorably alter the economics of renewables. For instance, although such
estimates are inherently uncertain, it has been estimated that the
imposition of a carbon tax of $40 per ton in the year 2005 could increase
the lifetime benefits of developing renewables in the Northwest to just
under $1 billion compared to $28 million in the no-carbon-tax case.
Low-Income Energy Services
Programs to ensure that low-income consumers are adequately and fairly
served include: 1) energy- efficiency services, 2) energy assistance, and
3) customer service practices. Energy-efficiency services include
traditional weatherization, creative efficiency programs and consumer
education. Energy bill assistance includes emergency assistance, rate
discounts, percentage-of-income payment plans, fuel funds, traditional
payment assistance programs, such as the federal Low-income Heating Energy
Assistance Program and integration of services with other social service
agencies.
Approximately 14 percent of the households in the Northwest are
estimated to have incomes below 125 percent of federal poverty guidelines.
This amounts to 540,000 households. About 55 to 65 percent of the
dwellings occupied by low-income households that are heated with
electricity have yet to be fully weatherized. This translates into between
165,000 and 235,000 electrically heated homes, apartments and mobile homes
that are not as energy efficient as they should be given current and
expected future electricity costs. This means higher electricity bills for
those who can least afford them.
Historically, low-income energy service programs have been funded by a
combination of federal, state and utility sources. In 1995, roughly $19
million per year was provided for low-income weatherization assistance in
the Northwest. The region's utilities and Bonneville provided about 40
percent ($7 million) of these funds. Also in 1995, approximately $39
million was provided for bill payment assistance of some type. The
region's utilities provided about 40 percent ($16 million) of this
assistance, with all of the remaining funds coming from federal sources.
In recent years, there has been a substantial reduction in the level of
federal contribution to these programs. For example, federal funding of
Low-income Heating Energy Assistance Program in Washington State was
reduced by 42 percent between 1994 and 1995. State and utility
contributions have not been increased to offset the reduction in federal
funding.
Recommendations
To ensure that cost-effective conservation, renewable resource
development and low-income weatherization are sustained during the
transition to competition and beyond, the Steering Committee recommends
that, by July 1, 1997, 3 percent of the revenues from the sale of
electricity services in the region be dedicated in aggregate over the
region to those purposes for a period of 10 years. The Committee believes
that it is appropriate to re-evaluate this commitment at the end of the
ten year period. Based on 1995 revenues, this amounts to approximately
$210 million per year. This $210 million is 65 percent of what was spent
for these purposes in 1995 by the region's utilities and Bonneville.
The Steering Committee recommends that by July 1, 1999, each Northwest
state adopt legislation that ensures that all electric utilities operating
within its borders are contributing to the development of conservation and
renewable resources and providing weatherization and energy-efficiency
services to low-income consumers. The legislation should set forth a
minimum standard for retail distribution utility investments in
conservation and renewable resources and the provision of weatherization
and energy-efficiency services to low-income consumers. If by July 1,
1999, this minimum standard is not otherwise being met, the states should
provide for the assessment of a uniform system benefits charge that
ensures the collection and investment of funds for these purposes. Due to
the rapid emergence of competitive pressures, the Steering Committee
strongly recommends prompt legislative action.
The Steering Committee believes that the majority of these funds are
most appropriately used at the local level. Consequently, as much as
five-sixths of the funds could be retained by local distribution utilities
to carry out locally initiated programs to develop cost-effective
conservation, increase the use of renewable resources and provide
low-income weatherization and energy-efficiency services. The Steering
Committee also believes that retail distribution utilities should have the
option of supporting the use of renewable resources through local
initiatives. Local distribution utilities, to the extent they chose to
exercise the option to develop renewable resources or provide incentives
for renewable resource marketing, will be able to retain the greatest
proportion of these funds.
Some conservation and renewable resource activities may, however,
benefit from regional planning and coordination. The Steering Committee
recommends that between one-sixth nor and one-third of the funds be used
by a regional non-profit agency with consumer, utility, government and
public interest membership. Its functions would be to bring about changes
in the markets for targeted energy-efficiency and renewable resource
products and services that will improve their market share; to plan and
contract for research and limited demonstration of renewable energy
technologies; and to support the development of renewable generating
capacity. The approximate allocation of funds to different purposes is
shown in Table 1.
A Regional Technical Forum would be established to develop standardized
protocols for verification and evaluation of energy savings, to track
regional progress toward the achievement of the region's conservation and
renewable resource goals and to provide feedback and suggestions for
improving the effectiveness of conservation and renewable resource
development programs in the region. The Steering Committee's specific
recommendations are described in detail in the following sections.
Conservation
Conservation was divided into two areas for action: local and regional
conservation. Local conservation covers those actions designed to
influence on-site consumer efficiency choices. Local conservation also
includes low-income weatherization activities. Regional actions include
the establishment of a regional technical forum and a non-profit entity to
carry out conservation market transformation.
Local Conservation, Including Low-Income Weatherization
The Steering Committee recommends that the region's retail distribution
utilities allocate at least 2 percent of the revenues from sales of
electricity and distribution services toward the development of
cost-effective conservation and low-income weatherization and
energy-efficiency services for the next 10 years. This investment would be
approximately $140 million per year based on 1995 revenues. The Steering
Committee also recommends that approximately 52 percent (roughly $110
million per year) be allocated to local conservation investments and that
14 percent (about $30 million per year) be allocated for local investments
in low-income weatherization in the region. Customers that use large
amounts of electricity should be credited for documented cost-effective
conservation investments made in their facilities. Such credits should not
include their contribution to regional market transformation and renewable
resource research and demonstration efforts and low-income weatherization
and energy-efficiency service costs. The Steering Committee recommends
that local conservation efforts and low-income weatherization funding be
provided through direct contributions from the region's retail
distribution utilities. Similar to the new Bonneville/State agreement,
utilities are encourage to use the existing state/local agency low-income
weatherization system as a means of accomplishing this work to avoid
duplication.
Table 1. Annual Allocation of Funds to Conservation,
Renewable Resources and Low-Income Energy Services
Purpose |
Percent of electricity
revenues |
Percent of public
purpose funding |
$ Millions based on
1995 revenues |
Local Conservation |
1.6% |
52% |
$110 |
Low-Income Weatherization |
0.4% |
14% |
$30 |
New Renewable Resources |
0.0% - 0.49% |
0.0% - 16% |
$0 - $34 |
Total ? Local Administration and
Implementation |
2.0% - 2.49% |
67% - 83% |
$140 - $174 |
Conservation Market Transformation |
0.43% |
14% |
$30 |
Renewable Resource Market Transformation
New Renewable Resources
[Retail distribution utilities may dedicate their share of these
funds to acquiring renewable resources through locally initiated
programs.]
|
0% - 0.49% |
0% - 16% |
$0 - $34 |
Renewable Resource Research |
0.01% |
>1% |
$1 |
Renewables Development and Demonstration |
0.07% |
2% |
$5 |
Total ? Regional Administration and
Implementation |
0.52 % - 1.0% |
17% - 33% |
$36 - $70 |
Total |
3.0% |
100% |
$210 |
For purposes of tracking regional progress on conservation and
low-income weatherization, the Steering Committee recommends that all
retail distribution utilities and state and local low-income
weatherization service providers adopt and publish an annual report of
their conservation and low-income weatherization achievements. This report
should identify at least the amount of conservation achieved by economic
sector, the number of dwellings occupied by low-income households that
were weatherized and level of utility investment in these areas. The
Committee also recommends that utilities make this report available to the
non-profit entity established to carry out regional market transformation
for conservation and renewable resources so that regional efforts can be
effectively and efficiently coordinated with local efforts.
Regional Technical Forum
The Steering Committee recommends the formation of a Regional Technical
Forum. The Congress directed Bonneville and the Northwest Power Planning
Council to establish a forum to develop standardized protocols for
verifying and evaluating conservation savings. The Steering Committee
recommends that in addition to the charge given it by Congress the
Regional Technical Forum should also track progress toward achievement of
the region's goals for conservation and renewable resource development and
provide feedback and suggestions for improving the effectiveness of
conservation and renewable resource development programs. The Regional
Technical Forum should conduct periodic reviews of the region's progress
toward meeting its conservation and renewable resource goals at least
every five years. These periodic reviews should acknowledge changes in the
market. Any recommended changes for improving the effectiveness of
conservation and renewable resource programs should be communicated to the
appropriate decision-makers. The Regional Technical Forum should be
composed of representatives of utilities, other electricity service
providers, government and public interest groups.
Market Transformation
The Steering Committee calls for the region's retail distribution
utilities to mount a coordinated effort to transform markets for efficient
technologies and practices. The intent of market transformation is to
undertake activities that will increase the market share of targeted
efficiency products and services that will be sustained after incentives
or other support are withdrawn. A successful example is the effort to
improve the efficiency of manufactured housing in the Northwest. Utilities
initially paid significant incentives for the construction of very
efficient manufactured homes. As a consequence, the demand for such homes
was so great that it was possible to remove the incentives while still
capturing a high percentage of the market.
Because markets invariably cut across utility and jurisdictional
boundaries, it makes most sense to pursue these efforts regionally. This
effort should establish a non-profit organization to manage conservation
market transformation ventures for the region. This organization's
governing body should consist of consumer, utility, government and public
interest representatives. This organization should have a planned life of
at least 10 years in recognition of the time required to permanently
transform markets and the range of markets or end-uses to be targeted. The
recent formation of the Northwest Energy Efficiency Alliance, whose
initial funding is coming from approximately equal contributions by
Bonneville customers through Bonneville's rates and the region's
investor-owned utilities, appears to be consistent with the Steering
Committee's recommendations. The Steering Committee believes that
approximately 0.43 percent of retail distribution utility revenues
(approximately $30 million per year in 1995) should be allocated for
conservation market transformation. [ Bonneville currently funds
publicly-owned utilities' shares of the regional conservation market
transformation effort. After 2001, funding for conservation market
transformation, renewable research and development, and direct application
renewables should be collected through Bonneville rates in proportion to
the share of regional firm loads that are served by federal resources.
Investor-owned utilities, publicly owned utilities and direct service
industrial customers whose regional firm loads are served in whole or in
part from resources other than direct or indirect federal purchases would
fund the remainder independently.]
Renewable Resources
The Steering Committee considered a range of options for meeting its
goal for developing renewable resources in the region. The Committee's
recommendations for renewable resources are described below.
Existing Renewable Resource Projects
The Steering Committee calls for the sponsors to complete the current
wind and geothermal demonstration and pilot projects. Funding these
projects is the responsibility of the respective project sponsors and is not
included as part of the revenues to be committed to the development of new
renewable resources.
New Renewable Resource Projects
The Steering Committee also recommends that renewable resource market
transformation activities be planned and carried out by the newly
established non-profit entity charged with conservation market
transformation. Alternatively, retail distribution utilities may dedicate
the equivalent of their share of the regional renewable resource market
transformation funds to locally initiated programs. Such funds should be
earmarked toward defraying the above-market costs of renewable resources.
Among many options, the utility could use its share of the funds to
provide incentives for "green marketing" programs (i.e., the
sale of power from qualifying renewable resources), acquire renewable
resources or have marketers bid to leverage the utility's share to yield
the greatest value for its customers. Whether regionally sponsored or
locally initiated, renewable resource market transformation activities
should focus initially on the development of new renewable resource
technologies, including solar, wind, geothermal, hydroelectric (outside of
protected areas as defined by the Council, and other federal or state
agencies and statutes) and low-emission organic, non-toxic biomass.
Depending on the success of green marketing to consumers in the region,
additional renewable resource development may occur. The Steering
Committee recommends that approximately 0.49 percent (approximately $34
million per year based on 1995 revenues) of the region's retail revenues
be invested annually to facilitate renewable resource market
transformation. The Steering Committee believes that utilities should be
permitted to invest renewable resource funds with Bonneville in order for
the agency to make new renewable resource purchases on their behalf.
Renewable Resource Research, Development and Demonstration
The Steering Committee recommends that the region's retail distribution
utilities to allocate approximately $1 million per year for research, and
$5 million per year for development and demonstration of distributed
renewable resources. These funds would be used by the non-profit entity
established to carry out market transformation for conservation and
research, development and demonstration of renewable resources.
"Green Marketing"
The Steering Committee recommends that retail distribution utilities
should provide for so-called green marketing to individual consumers in
advance of full retail open access. Retail distribution utilities may
accomplish this by offering their retail consumers renewable resources or
by permitting other energy service providers to sell renewable resources
to their retail consumers.
Low-Income Energy Assistance
The Steering Committee recognizes and affirms the energy system's
historic role in providing energy assistance to low-income consumers. The
Steering Committee calls for utilities to maintain their current level of
low-income energy assistance until such time as states adopt alternate
mechanisms for providing these services. These alternatives should ensure
that electricity prices are as low as possible and that energy-efficiency
and consumer services, such as level payment mechanisms, remain in place
until they are supplanted by other approaches. The Committee further
recommends that states now ensure this assistance by establishing a
Universal Electrical Service Fund. This fund could be supported by
federal Low-Income Heating Energy Assistance Program funds, state or local
government funds, other funds and/or by a retail distribution system
access fee or meters charge, Qualified low-income (i.e., incomes 125
percent or less of the federal poverty level) customers would be entitled
to receive from all electricity suppliers the bill assistance or rate
discount needed to ensure that they do not pay more than a fixed
proportion (e.g., 5 percent) of their income for electric energy services.
All electricity suppliers could draw from the Universal Electrical Service
Fund to provide the bill assistance needed to serve each qualified
low-income customer, plus a standard administrative cost. Existing retail
distribution utility low-income energy assistance program expenditures
should be credited toward any required contributions to the Universal
Electrical Service Fund.
Collecting and Allocating the Funds
The Steering Committee believes that a new mechanism is needed to
ensure adequate and stable funding for conservation, renewable resources
and low-income energy-efficiency services. This mechanism must be
compatible and consistent with a competitive market. The committee
recommends that before July 1, 1999, each Northwest state enact
legislation that: [ Only a portion of the State of Montana falls within
the region. This presents a unique situation that may require that state
legislation enacted to implement the Steering Committee recommendations in
Montana be structured differently.]
- Establishes a minimum standard for electric distribution utility
investments in conservation, renewable resources and the provision of
weatherization and energy-efficiency services for low-income
consumers. This standard should apply equally to publicly owned and
investor-owned utilities.
- Determines the minimum annual investment per state based on a total
regional investment target of 3 percent of regional electrical service
revenues (estimated to be $210 million in 1995). The Steering
Committee acknowledges that a revenue-based approach to allocating
collection of these funds will be inequitable in some instances, for
example, in high distribution cost/low density systems. In such
instances, alternative approaches may be employed provided that the
overall minimum investment target is met. Investor-owned utilities,
direct service industrial customers and public utilities as groups
should allocate their investments according to Table 1, above.
- Permits each distribution utility to determine how it collects
revenues sufficient to meet this minimum standard in accordance with
its existing regulatory structure, while recommending that allocations
be based on cost of service standards.
- Requires that utilities demonstrate compliance with the minimum
investment standard on or before July 1, 1999, and annually
thereafter. Individual publicly owned utilities should be provided the
option of demonstrating compliance with the minimum investment
standard "in the aggregate" by participating in
collaborative/consortia efforts with other utilities. States should
establish mechanisms to determine utility compliance with the minimum
investment standard.
- Authorizes the imposition of a non-bypassable, local distribution
system access charge (meter fee) on customers served by any
distribution utility that fails to demonstrate compliance with the
minimum investment standard. This fee should collect revenue
equivalent to that distribution utility's minimum standard for annual
investment in conservation, renewable resources and the provision of
weatherization and energy-efficiency services for low-income
consumers.
The Steering committee recommends that legislation establishing the
minimum requirements set forth above should be implemented simultaneously
with legislation implementing open retail access. The timing and details
of the implementation of these recommendations should be directly linked
to the timing and details of implementing the open retail access
recommendations in the following section.
The Steering Committee is concerned that, due to competitive pressures,
utility investments in conservation, renewable resources and low-income
weatherization and energy-efficiency services are being reduced. To ensure
a smooth transition and provide an early indication of potential problems,
the Committee recommends that by July 1, 1997, each utility provide
evidence that it will thereafter meet the minimum standard described
above. Evidence could take the form of state statutes; tariff, rate or
other filings; adoption of rate ordinances; budget resolutions by the
utility's governing board; or other affidavits that specify the funding
level to be dedicated to these purposes. If utilities representing at
least 90 percent of the regional end-use loads do not provide such
evidence by July 1, 1997, then the Steering Committee recommends that the
region seek federal backup to take effect July 1, 1999.
The Steering Committee makes no recommendations as to how individual
utilities should collect the funds ? whether through a charge based on
volume of kilowatt-hours sold, through a distribution access charge that
is independent of or less directly related to kilowatt-hour sales, or some
other method. The Steering Committee believes that the region should rely
on the appropriate regulatory bodies to establish methods of collection.
However, the Steering Committee is mindful of the fact that how the charge
is collected can have effects on both equity among customers and the
competitive balance among different suppliers or fuels. The Committee is
also aware that significant differences in how the charge is collected can
alter the competitive balance among retail distribution systems. The
Steering Committee believes that regulatory bodies will find it preferable
to collect these charges in ways that do not distort competitive balance.
The Bonneville Power Administration's Energy-efficiency Services
Due to controversy regarding the proposed scope of Bonneville's Energy
Services Business (ESB), Congress has asked the Comprehensive Review
Steering Committee to address the competitive implications of ESB
activities; the appropriate level of capitalization for these activities;
and provisions to minimize cross-subsidies from power marketing and
transmission revenues.
By way of background, Bonneville has proposed that its future
energy-efficiency efforts be comprised of three elements:
- Declining support for its historical ("legacy") programs.
- upport for regional market transformation efforts.
- Market development" activities designed to augment the market
for energy-efficiency services, particularly in federal facilities and
through bilateral contracts with its wholesale power customers.
Currently, these activities are grouped together as energy services.
The first two activities are not at issue. The market development
activities have raised two primary concerns:
- The original proposal for an Energy Services Business included a
variety of activities that were perceived to put Bonneville in
competition with private sector energy-efficiency business in a finite
market.
- Various parties were skeptical that the market development
activities could be self-supporting, particularly to the extent that
safeguards were put in place to prevent Bonneville from competing with
private energy-efficiency providers.
To resolve the first of these concerns, Bonneville worked extensively
with the Northwest Energy Efficiency Council (a trade organization
representing energy-efficiency businesses) and other regional parties to
develop principles that would focus Bonneville's market development
activities on increasing the market for privately-delivered energy
services, rather than competing in that market. In the following
recommendations the Steering Committee expands upon those principles.
To respond to the second concern, the Committee proposes to limit
Bonneville's net spending and capital borrowing during Fiscal Years 1997 -
2001 to levels substantially below Bonneville's October 31, 1996 proposal.
The Committee has concerns about Bonneville's ability to control costs in
the long run. However, the Steering Committee has neither the time nor the
inclination to micro-manage Bonneville's staffing and accounting
methodologies. Rather, the Committee proposes to resolve these concerns by
putting tight limits on Bonneville's net expenditures on this activity.
Recommendations
- Bonneville's energy-efficiency activities are not a
"business." The purpose of these activities is to serve
Bonneville's statutory directive to promote cost-effective
energy-efficiency investments. The Committees consider it unlikely
that these activities will completely recover their costs without
unduly competing with private enterprises. To address concerns about
the net cost of these activities, the Committee proposes borrowing and
spending caps in items 11 and 12 below.
- Bonneville's role in market development should be structured and
managed to enlarge energy-efficiency markets beyond that which is
being profitably captured by private business.
- Bonneville's market development activities should be limited to
markets or individual situations that are not currently accessible,
viable, or profitable for the private sector energy-efficiency
industry.
- Bonneville's market development activities should be designed and
implemented to take full advantage of private sector energy goods and
services. These activities should not favor one competitor over
another.
- Bonneville will act primarily as a facilitator/aggregator of
transactions for services provided by its partners.
- Specific Bonneville market development activities will be
discontinued when they become viable and profitable for the private
sector energy-efficiency business.
- An advisory board should be established immediately to monitor
Bonneville's compliance with these restrictions. The advisory board
should consist, among others, of private businesses that could be
adversely affected by Bonneville's failure to comply with these
restrictions, as well as power and transmission customers. Bonneville
should consult with and report to this board at regular intervals, and
the board should report concerns to the Northwest Power Planning
Council.
- Bonneville's market development activities should be limited to its
regional power sales contact customers and federal agencies.
Bonneville should provide energy-efficiency services for federal
agencies in cooperation with the serving utility or when the serving
utility cannot or elects not to provide those services itself.
- Agencies and customers contracting for market development services
should repay the full cost of those services, including repayment of
loans at the appropriate U.S. Treasury rate.
- Any Bonneville organizational unit or activity currently named
"Energy Services" should be renamed "Energy
Efficiency." This is intended to clarify that previous proposals
to undertake a broad spectrum of other retail services have been
dropped, and to preclude Bonneville support for load-building
activities that are inconsistent with Bonneville's conservation
directives.
- Bonneville's use of U.S. Treasury capital should be limited to $5
million per year and restricted to federal projects. This represents a
reduction of roughly 50 percent relative to Bonneville's October 31,
1996 proposal, and a reduction of $71 million relative to the final
rate case figure. Capital borrowed from the U.S. Treasury should be
repaid in full by the participating federal entity. All third party
borrowing shall be non-recourse to Bonneville.
- Bonneville's net costs for market development activities should not
exceed $8 million for the Fiscal Years 1997-2001. Bonneville's
energy-efficiency activities should be self-supporting by September
30, 1999 or these activities should be terminated.
- Bonneville should revise its October 1995 record of decision for
firm non-requirements products and services contracts by replacing the
"Energy Services" section with an
"Energy-Efficiency" section that incorporates a final plan
for energy-efficiency activities consistent with the restrictions
herein. The energy-efficiency plan should not include activities
listed in the original Record of Decision "Energy Services"
section except those directly related to energy-efficiency. Other new
activities listed in the original Record of Decision "Energy
Services" section should not be offered by any part of Bonneville
in competition with the private sector.
CONSUMER ACCESS TO THE COMPETITIVE
MARKET ? ENSURING THE BENEFITS OF COMPETITION FOR ALL
Goals
The goals of the Comprehensive Review Steering Committee
recommendations on retail markets and consumer choice are to encourage a
more efficient power system, lower electricity costs, increased product
choice and greater product innovation for all consumers. These goals were
adopted subject to a commitment to maintain the reliability and safety of
the electrical power system. The Steering Committee concluded that these
goals could best be accomplished by putting in place a competitive
electricity market driven by consumer choice. This section describes the
background of facts and trends that led to this decision, then describes
the recommended vision of a competitive retail electricity market driven
by consumer choice, and finally lays out several steps that should be
taken to accomplish a transition to this competitive market by July 1,
1999.
Background
The Steering Committee's decisions about competition and consumer
choice in retail electricity markets were made in the context of the
changes already occurring in regulation, legislation, and electricity
markets themselves. The changes that affect retail markets are more recent
than the changes in wholesale markets, but they are a natural extension of
those changes. The Federal Energy Regulatory Commission's Order 888 will
force open wholesale markets for electric power, but it left decisions
about retail electricity markets to the states.
During the past year, most states have initiated processes to address
the question of retail competition. A variety of conclusions have been
reached. Some states, such as California, have established schedules and
passed legislation for moving to retail competition. Others, such as New
Hampshire and Illinois, have developed pilot programs to test the
feasibility of retail competition in electricity. Others have allowed
retail wheeling rates for large consumers on a case-by-case basis. There
is enough action at the state level on retail competition to establish a
perception of tremendous momentum toward a more competitive retail
electricity market. "It's inevitable," was a phrase heard often
during the Comprehensive Review process.
In spite of the high level of state activity in this area, or perhaps
because of the uneven progress by states, national legislation has been
introduced to require retail competition in electricity markets
nationwide. Colorado Representative Dan Schaefer introduced a bill
entitled "The Electricity Consumers' Power to Choose Act". This
bill would give all consumers the right to choose their electric service
provider by December 2000. A similar bill, the "Electric Power
Competition Act of 1996," has been introduced by Massachusetts
Representative Edward Markey.
The strong momentum toward retail competition reflects the current
feasibility of some large consumers acquiring their own electricity
supplies in the wholesale market. Prices of wholesale power often are
below the price industries are paying their local utility and the
potential savings are an important factor in businesses' bottom lines.
Large users are quick to point out that they buy almost nothing at retail
except for electricity. Similarly, power marketers are anxious to provide
power and services to large consumers. Both energy marketing companies and
large users support more open retail power markets.
Opening up retail markets only to large users, however, is highly
controversial and would, in all likelihood, limit the potential benefits
that could be gained from more active competition. The major concern is
that additional costs would fall on small captive customers as a result of
large consumers acquiring their electricity elsewhere and leaving stranded
costs behind. Without some agreement on how to recover stranded costs,
there is a clear temptation to pass those costs on to captive customers.
The surest way to prevent shifting of costs to small captive customers
is to free them to acquire their power supplies from alternative sources,
just like the large consumers. When consumers have choice among
electricity suppliers it is very difficult to subsidize other consumers at
their expense. However, unlike the wholesale market, there is currently no
well developed competitive retail electricity market. There are many
important issues to be addressed and several technical problems to be
solved before a widely available retail electricity market can be
developed.
One of the major concerns raised is that of continued universal service
at affordable prices. Reliable electricity supplies are a fundamental
component of modern lifestyles and public safety. Some are concerned that
few competitive electricity suppliers will come forth to serve small
consumers, especially low-income consumers, at affordable rates. There may
be increased need for consumer protection standards and information and
education to help consumers make decisions about a product that is
invisible, but essential to modern life. Some form of oversight may be
needed to ensure a truly competitive retail market and to keep separate
the regulated and competitive portions of the electricity system. In
addition, more sophisticated billing and metering systems will be needed
to keep track of the vastly increased number of participants in the
market.
Some of these problems are best solved by allowing the market the
opportunity to develop. Others require government intervention and
oversight. The Steering Committee recommendation attempts to balance these
two categories of need by allowing the market to develop while, at the
same time, specifying solutions to important social concerns that arise
with retail competition and setting an ambitious target to achieving full
retail competition.
Recommendation
The Steering Committee recommends that beginning no later than July 1,
1999, all retail distribution utilities offer open retail market access
for those customers that desire direct market access. The committee
recognizes that states, regulatory agencies, or retail distribution
utility governing bodies may authorize plans that provide a transition or
phase-in to full retail market access. In these specific cases, that may
result in a similar transition or phase-in of the full implementation of
the public purpose recommendations that are linked to the open access
recommendation.
Direct access may occur prior to July 1, 1999. However, it is
recommended that in order to provide for direct retail access on the
schedule in this report, several activities must be accomplished promptly.
These include the identification of any stranded costs and, if any
stranded costs are determined to exist, the creation of a stranded cost
collection mechanism that does not cause cost shifting; resolution of any
outstanding contractual issues; unbundling and cost-based pricing of
electricity delivery services; pilot programs to explore aggregation for
small commercial and residential consumers; the exploration of market
index pricing options for residential and small commercial consumers; and
implementation of public purposes funding, energy assistance funding and
consumer protection mechanisms consistent with this report's
recommendations.
The implications of this statement are far reaching. It will completely
change the structure of the retail electricity market. It implies
significant actions not only by utilities, but by state legislatures,
regulators, and local governing boards of publicly-owned utilities. These
recommendations are offered with the intent of aiding the appropriate
regulatory bodies as they address these issues.
For consumers to have real choices in electricity supply, they must
have unimpeded access to alternative electric service providers.
Similarly, new energy service providers must have access to consumers
through the local distribution system on a non-discriminatory basis with
no advantage to the incumbent utility. The only way to effectively ensure
these conditions are in place is to require division of the incumbent
utility into two separate business lines; one a regulated electricity
distribution utility and the other an electricity service company that
competes on an equal basis with other energy service providers. The
Steering Committee concluded that legal divestiture of the energy services
component is not required, given that adequate regulatory safeguards are
in place to assure independence of the two businesses. Some companies may
find it advantageous to legally separate, but the Steering Committee
recommendation does not require it.
Electricity distribution utilities
The electricity distribution utility formed by separating utility
functions will be a regulated monopoly responsible for the safe and
reliable delivery of electricity over the network of local distribution
wires. This utility will have an obligation to connect any consumer to the
electricity grid, but will not ultimately be responsible for acquiring the
electricity that it delivers. The distribution utility will provide open
and non-discriminatory access to the local distribution grid to any
electricity supplier. The distribution utility may be the point of
collection of funds to support public purposes, such as conservation,
renewable resources, stranded cost recovery, and low-income weatherization
and bill support. Initially, the distribution utility may provide metering
and billing services on an unbundled basis; that is, with the separate
components of the electricity costs itemized. However, metering and
billing may ultimately become a separate competitively provided service.
Electricity service companies
The remainder of the current retail electric utility, after separation
from the distribution business, will compete with other electricity
service providers to serve end-use consumers. This company will offer a
variety of electricity products and services to consumers in an effort to
win as many customers as possible, or as suits its business strategy. It
may rebundle such separate products and services as bulk electricity
supply, transmission, shaping to load patterns, maintenance of reserves,
and distribution. The transmission and distribution would be acquired from
the regulated utilities that provide such services, while the electricity
generation, shaping and reserves may be bought in the competitive power
generation markets or supplied from plants the company owns. The
electricity service company will probably utilize various financial
derivatives to provide risk mitigation services, such as fixed-price
products. It may not have any defined service territory or be limited to
only one line of business. It may offer natural gas, oil,
energy-efficiency services, and even cable television along with its
electricity products. Due to the nature of electricity, the electricity
service company will probably be licensed by state or local authorities
and be subject to consumer protection standards. The Steering Committee
recommended that the Bonneville Power Administration, the region's federal
power marketing agency, not compete in this competitive retail energy
services business.
Policies for structuring competition
The Steering Committee developed a number of guidelines for state and
local policy-makers to implement in order to be ready for retail
competition by July 1, 1999. These were referred to as market maintenance
procedures because they are intended to facilitate the efficient and fair
operation of a competitive retail electricity market. Many of these
guidelines are concerned with putting consistent requirements in place for
all market participants.
Registration and licensing standards
Consistent registration or licensing standards should be established
for all market participants sufficient to protect consumers and the
delivery infrastructure from abuse. Regulators or local agencies should be
equipped with the authority to correct abuses should they occur, by
reviewing and revoking licenses or by assessing financial penalties.
All market participants serving residential and small commercial
consumers should fall fully within the jurisdiction of state consumer
protection laws and regulations. Consumer protection legislation and
regulations should be adopted or applied to address issues including, but
not limited to, credit terms, disconnection of service, standardized
billing information, redlining and discriminatory pricing, unfair trade
practices and fraud, service quality, and consumer privacy.
Electricity bills
Standardized information should be available on monthly bills, or other
appropriate media, which would convey information about the provider's
resource portfolio, environmental characteristics of that portfolio and a
consumer satisfaction index. If itemized costs appear on consumer bills,
disclosure should be complete, not partial. For example, charges for
stranded cost recovery, transmission, distribution, low-income assistance,
generation by type, demand-side management, and renewables should be
included. Energy bills should include a place for the consumer to lodge
complaints concerning service abuse. A neutral resolution mechanism for
disputes between consumers and their energy service providers should be
established within regulatory bodies or local agencies.
Balanced competition
Policies should be established to ensure that competition among
established power providers and new market entrants is based on the value
of services and products provided to the consumers and not on variations
in the regulatory or market requirements faced by these categories of
retail service providers. Consistency should be established among market
participants in access to consumers, responsibilities for protection of
consumers and for maintenance of a competitive market (open access,
service obligation, product labeling, etc.). To the degree possible,
regionally consistent policies concerning meters charges should be
established. Similarly, where the commercial transactions of established
providers are taxed, the transactions of new entrants should be equally
burdened.
Clarify regulatory authority
The restructuring of the retail electricity market will necessitate
some changes to established government responsibilities relating to the
electricity industry. The relationship between state or local utility
regulatory agencies and state consumer protection agencies and laws needs
to be clarified, or, if necessary, new institutions may need to be
established. Responsibility for low-income assistance for electricity
bills and the funding of that assistance needs to be decided. The
relationship between federal regulatory authority and state and local
regulatory authority to accomplish public policies (through the use of
meters charges, local distribution charges, or other means) and to oversee
the competitive market for retail services should be clarified.
Incentives for reliability and efficient use of local distribution
systems
Distribution system charges will remain regulated to ensure
reliability, efficiency and appropriate cost allocation. Local
distribution and delivery services should be priced and regulated in a
manner that fosters reliability and the efficient use and expansion of the
facilities.
Transitional Steps
The Steering Committee identified a number of transitional steps that
should be taken to help complete the development of a competitive retail
market by July 1, 1999. State legislatures, regulators, local governing
boards and utilities should begin to implement these steps as soon as
possible. To the extent possible, decisions and actions by public policy
makers during the transition should not create an advantage or impose a
disadvantage on any group of competitors, nor preclude later actions to
enable the development of efficient markets.
Unbundled billing
Consumers' electricity bills currently show one price for delivered
electricity. The various components of the cost are not identified, that
is, the components are bundled into one charge. These components may
include, among others, bulk electricity supply, shaping services,
reliability reserves, transmission, local distribution, and conservation
program costs. Consumers will be better educated about electricity
services and better prepared to make separate decisions about some of
these products and services in the future if they begin to see the
separate components on their bills now. Therefore, utilities should begin
to unbundle, that is, itemize, the components of consumers bills for
informational purposes in preparation for separate pricing in the future.
Separation of local distribution from electricity services
Utilities should reorganize their companies to functionally separate
local distribution service from retail electricity services. Separate
accounting systems should be developed in preparation for the
side-by-side, but independent, existence of a regulated distribution
utility and a competitive retail electricity service company. Full legal
separation of the two functions is not required as long as regulators and
local governing boards put in place the necessary safeguards to prevent
utilities from using their monopoly positions in distribution to influence
their market positions in the competitive electricity services business.
Provide open transmission system access as soon as possible
Utilities, working with their regulators or local governing boards,
should provide open and non-discriminatory access to the local electricity
distribution system as soon as possible. Utilities should develop open
access tariffs for this purpose. Making such services available will help
the competitive electricity services business develop and will provide
early identification of any problems associated with operating in an open
access retail market environment. The lessons learned will feed into the
more formal restructuring process and help ensure its successful
implementation.
Modify distribution utility service obligations
Most utilities currently have a regulatory obligation to serve,
that is provide retail electricity services to all consumers in their
service territory. In the market envisioned by the Steering Committee,
such an obligation is inconsistent. Instead, the distribution utility
should have an obligation to connect all consumers to the
electricity services market through their distribution system. Neither the
distribution utility, nor its affiliated electricity service company, will
have any special obligation to provide electricity supplies and services
to consumers in the restructured electricity market. Regulators and local
governing boards need to alter the utility service obligation requirements
to be consistent with a competitive electricity services market.
Promote development of retail electricity service providers
To effectively serve all types of consumers, it is important to gain
experience in competitive retail electricity markets and to put in place
conditions that encourage its development. In addition to the unbundling
and open access tariffs described above, state legislatures and regulators
are encouraged to establish an orderly transition to direct access to
competitive retail electric service markets. An orderly transition would
facilitate the market's development while ensuring that all consumer
classes benefit and that unwarranted cost shifting is prevented.
Particular concern exists for the small consumer. Pilot programs should be
designed and implemented to encourage the development of aggregators who
can provide competitively priced power for small consumers. States should
recognize that effective competition may not materialize in all market
segments. They should be prepared to consider alternative means to address
this problem when it occurs, including, but not limited to, authorizing
local units of government to aggregate small consumers.
A "green" power marketing program should be developed to
introduce varied products to consumers and to provide an opportunity for
renewable resources to compete in the retail electricity market based on
their environmental characteristics and price.
Finally, a provider-of-last-resort mechanism should be
maintained to accommodate those who cannot choose a supplier or for whom
no suppliers materialize. Such a mechanism could include a last-resort
supplier of energy at affordable rates, or could be a system of random
assignment of electricity service providers to consumers who have not been
able to effectively access the market.
Opportunity to recover stranded costs
Opening up the retail electricity market to competition raises the
possibility that some utility costs become stranded; that is, a utility
may not be able to recover the full costs of some previously rate-based
assets. To the extent that stranded costs are a problem, utilities may
resist competition and may attempt to shift stranded costs onto captive
customers. To facilitate the transition and reduce cost shifting
incentives, utilities should be given a fair opportunity to recover
legitimate, non-mitigable stranded costs. Any policies on stranded cost
recovery should preserve a strong incentive for utilities to mitigate
stranded costs to the greatest extent possible. Recovery of non-mitigable
stranded costs may be accomplished through exit fees or distribution
access fees. However, it should be clear that stranded costs are
transitional in nature and recovery provisions should be limited in
duration and amount recovered.
TRANSMISSION ? OPEN-ACCESS
HIGHWAY FOR COMPETITION IN GENERATION
Goals
The primary goal of the Steering Committee's recommendations for
transmission is a transmission system whose structure and operation help
ensure a fully competitive generation market. The recommendations are also
designed to improve the efficiency of use of the transmission system and
to maintain the system's reliability as the pressures of competition on
utilities increase.
Background
If consumers are to realize the benefits of competition in the
generation of electricity, competitors in that market must have equal
access to the transmission system. The Federal Energy Regulatory
Commission (FERC) has recognized the critical importance of equal access,
as demonstrated in its Orders 888 and 889, and has indicated that its
policy goal for transmission is to facilitate a fully competitive
wholesale market for generated electricity. The Steering Committee expects
FERC to move ahead with the definition of rules to make sure that all
competitors have non-discriminatory access to the transmission system.
If a single party owns both transmission and generation, there is
potential for the owner to increase the profits of its generation by
limiting transmission access to competitors. That owner is also subject to
competitive pressures that may serve as a disincentive to needed
investments in transmission maintenance and expansion. These pressures may
also encourage operating on the edge of reliability limits. To ensure
equal access and reliability requires that decisions affecting
transmission be effectively separated from decisions affecting generation.
The necessary separation can be accomplished by the formation of a FERC-regulated
independent grid operator, or independent grid operator (referred to in
the FERC Order 888 as an independent system operator, or ISO) that is
responsible for the operation of the transmission assets of multiple
owners. Operating and charging for the use of these systems as a single
system would also eliminate "pancaking" of transmission rates
(paying a different rate to each transmission owner over whose system a
power transaction is scheduled) and make possible
more efficient operation.
Recommendations
The Steering Committee recommends the formation of an independent grid
operator, regulated by FERC and including the transmission assets of the
Bonneville Power Administration and other owners of major transmission
assets in the region. Membership should be voluntary, but every effort
should be made to enlist wide participation.
Independent Grid Operator Responsibilities
The Northwest's independent grid operator should have operational
control over the transmission system and enough operational control of
generation to ensure short-term reliability. The independent grid operator
will also have responsibilities in other areas, such as maintenance,
planning and expansion. The independent grid operator should have clear
incentives to maintain reliability and encourage the efficient use of the
system. The independent grid operator will necessarily follow FERC
principles for independent system operators, and may include modifications
agreed to by participants and approved by FERC. Load control centers could
be maintained locally, if participants prefer. The Steering Committee
recommends that intermittent, as-available and distributed generation
should be treated fairly in buying and selling necessary ancillary
services and the provision of transmission services, and that transmission
planning should follow long-term least-cost planning principles.
Bonneville Power Administration
Since Bonneville's transmission facilities make up a large part of the
regional transmission system, these facilities operational independence
from Bonneville power marketing considerations is particularly important.
Therefore, Bonneville's power marketing and transmission functions should
be fully and legally separated (including separated funds). Bonneville's
generation and transmission systems should be separated to promote
competitive practices and to avoid the problem of self-dealing between the
generation apparatus and the transmission system. This approach is
consistent with the direction of federal energy restructuring policy being
implemented around the country.
In addition, the Committee is aware that both generation and
transmission are valuable federal assets and their revenues are currently
collected for deposit in the Bonneville Power Administration Fund.
Further, the Committee understands that the receipts to the Fund are now
legally bound to meet Bonneville's financial obligations, which include
payment of the Washington Public Power Supply System (WPPSS) bonds, other
Bonneville financial obligations, and the agency's fish and wildlife
mitigation and restoration requirements, as necessary. Accordingly, the
Committee recommends that any separation of generation and transmission
? whether by administrative or legislative means ? be achieved in such
a way that it does not jeopardize or diminish the legal obligation and
ability of Bonneville to meet fish and wildlife and other obligations.
The resulting Bonneville Transmission Agency or Corporation should
become a full participant in the independent grid operator. If other
participants agree that the interests of the new Bonneville transmission
entity have been sufficiently separated from the interests of power
marketing, it could be the regional independent grid operator.
Legislation will be necessary to accomplish the separation of
Bonneville's transmission and generation functions. Legislation should
also subject Bonneville's transmission to FERC regulation that is
equivalent to FERC regulation of investor-owned utilities.
Governance
The makeup of the independent grid operator governing board should
follow FERC guidelines, which require that no individual market
participant or class of market participants have the ability to control
the independent grid operator. It could include owners and users, state
and regional regulatory entities on an ex-officio basis (similar to the
Northwest Regional Transmission Association and the Western Regional
Transmission Association) and at least some independent outside
representatives from the broader public, or it could be fully independent
of owners and significant users.
Wheeling for Retail Loads
The independent grid operator, in providing wheeling for retail loads,
would be governed by rules set out in FERC Order 888. These rules would
allow such wheeling if it is authorized by the state or utility in which
the retail load is located. The Steering Committee recommends that
Bonneville honor the same rules until it becomes a participant in an
independent grid operator.
Pricing of Transmission
Transmission pricing becomes increasingly important as the transmission
system is used by more parties and transactions become more market-based.
Some pricing practices used in the past would give users inappropriate
signals for their use of transmission in the expected competitive
environment of the future. Past pricing practices could also give
inaccurate signals regarding the location of power resources and the
expansion of transmission system capacity. These issues are being
addressed by both the Northwest and Western Regional Transmission
Associations. The Steering Committee recommends that pricing of services
provided by the independent grid operator, which will be subject to FERC
regulation, should follow principles being developed through the regional
transmission associations.
Transition Issues
During the period that the legislation is under consideration,
Bonneville should move to accomplish as much separation of generation and
transmission as is possible by administrative measures. In addition,
Bonneville should participate in efforts to form an independent grid
operator that could operate both federal and non-federal assets.
An independent grid operator should assist in facilitating a
competitive power market for customers that take delivery of their power
requirements at sub-transmission voltages over facilities they currently
do not own. In the transition to an independent grid operator, Bonneville
should work with these customers to ensure that fair pricing mechanisms,
reasonable transition periods and opportunities for utilities to gain
control over delivery facilities are available.
FUTURE POWER SYSTEM ROLE FOR A
FOUR-STATE REGIONAL BODY
Background
When the Northwest Power Act was passed in 1980, the authors
contemplated an extended period of electricity shortages. Many believed
that the shortages could only be averted through the construction of
increasingly costly, large-scale power plants. The participation of the
federal Bonneville Power Administration was believed to be essential to
the financing of these plants. As part of the bargain struck in return for
this expansion of Bonneville's authority, the Northwest Power Act
established the Northwest Power Planning Council. The Council, which is
made up of two representatives of each of the governors of the states of
Idaho, Montana, Oregon and Washington, was directed to further the
following goals:
- To encourage conservation and efficiency in the use of electric
power;
- To encourage the development of renewable resources;
- To assure the region of an adequate, efficient, economical and
reliable power supply;
- To provide for the participation and consultation of the states,
local governments, consumers, customers, users of the Columbia River
system and the public at large in:
- the development of regional plans and programs related to energy
conservation, renewable resources and other resources, and
protecting, mitigating and enhancing fish and wildlife resources;
- facilitating the orderly planning of the region's power system;
- providing environmental quality; and
- the protection, mitigation and enhancement of the fish and
wildlife, and their habitat, of the Columbia River Basin.
The Power Planning Council has been credited with many improvements in
electricity planning. However, in a competitive environment, market forces
will play the primary role in determining when and what generating
resources are built and what can be charged for their output. In such an
environment, Bonneville will no longer play a central and key role in
resource development and the Northwest Power Planning Council's regional
planning and oversight of Bonneville's resource acquisitions are no longer
relevant.
Future Roles
While the Council's power acquisition planning role is no longer
relevant, the remaining goals of the Power Act are ones the Steering
Committee believes are still important to the citizens of the region. The
issue is how they are to be achieved in the context of a competitive
market. The Steering Committee believes that moving to a competitive
electricity industry can yield benefits and could, if properly structured,
achieve many of those goals . There is, however, much that is unknown
about the competitive future. How the transition to the competitive future
is accomplished is of critical importance to achieving those goals and,
more broadly, to the region's economic and environmental interests. As the
Northwest moves toward a competitive electricity industry, there are roles
that should be carried out by a regional body. These roles involve
monitoring and analyzing the transition to a competitive market and
informing regional policy-makers and the public. These roles are important
if the transition is to be accomplished efficiently and fairly throughout
the region and if the public values the Northwest has sought from its
power system are to be protected. These roles do not include resource
acquisition planning, regulation or implementation. After some period of
development of the competitive market, certainly less than 10 years, the
need for a continuing regional role should be re-evaluated. The
transitional roles include the following:
Conservation and Renewable Resources
The recommendation for conservation and renewable resources relies
heavily and appropriately on local action to overcome market barriers. In
some instances, such market barriers are uniquely local. In others,
however, barriers cut across local boundaries. Consequently, there remains
a need for an entity like the Council to identify the barriers and work
with regional interests and others to devise mechanisms to overcome them.
The Council or a regional entity like the Council should also be an active
participant in the non-profit entity established to carry out market
transformation for conservation and renewables, both for its expertise and
its unique regional perspective. The recommendation recognizes that there
is value in providing guidance and suggesting standards for meeting the
region's conservation and renewable resource goals. This is consistent
with the Council's historic role and should be carried out by a regional
body like the Council. Finally, the recommendation also recognizes the
need for tracking and reporting progress regionwide. A regional body like
the Council, working with power suppliers, industry, governments and
public interest representatives in the context of the Regional Technical
Forum recommended in an earlier chapter, is an appropriate way to
accomplish these tasks.
The Competitive Marketplace
Competition will create a regional, and probably Westwide, electricity
market. While an individual utility approach will remain important for
regulation of the distribution function, much of the market activity will
occur across utility and across state boundaries. There will be many new
non-utility and non-regulated actors in this market. In addition,
differences in market structure and rules among and within states can
result in market friction and create opportunities for market participants
to arbitrage these differences to the detriment of consumers and overall
market efficiency. The development of the market should be monitored for
potential problems of market power or structural market inefficiencies
until the new structure is mature. Carrying out this monitoring, promoting
information sharing and coordinating resolution of multistate issues is an
appropriate role for a four-state regional body like the Council.
Included in this role is the need for some level of continued regional
review of the Bonneville Power Administration. This recommendation should
result in a less aggressive market role for Bonneville. Bonneville's
administrator will, however, continue to have a great deal of discretion.
While Bonneville is in a position to exercise significant market power,
regional review of Bonneville and its market role is important.
Efficient functioning of the electricity market depends in large part
on access to relevant information by all market participants. The Steering
Committee is confident that as the market matures, mechanisms will develop
to provide that information broadly. During the transition, however,
access to such information is likely to be uneven. It would be desirable
to have a regional body that provides information, evaluation and analysis
relevant to the evolving marketplace to help the development of full, fair
and effective competition throughout the region.
Efficient functioning of the competitive electricity market also
depends on the efficient operation and expansion of the regional
transmission system. As open access is put in place through the work of
the regional transmission associations and during the creation and early
operation of an independent grid operator, the Council's overall regional
perspective will help to keep the transition on track toward its goal of
an efficient market.
Finally, the competitive market has uncertain implications for the
quality of our environment. For example, some are predicting significant
increases in emissions as a result of competition. The effect of the
competitive electricity market on key environmental indicators needs to be
monitored and evaluated and, if necessary, policy-makers assisted in
developing market-oriented corrective mechanisms. Although the Council
should have no regulatory responsibility in this area, monitoring,
analyzing and working with policy-makers are appropriate roles.
Public Participation and Involvement
One of the primary charges given the Northwest Power Planning Council
under the Northwest Power Act was to facilitate public participation and
involvement on issues related to electricity and fish and wildlife in the
region. The Council has attempted to fulfill this charge by maintaining an
extensive public information and public outreach program, both through its
central offices and its offices in each of the Northwest states. In some
respects, the competitive market will give consumers a much greater say in
the electricity industry than they have had before. Nonetheless, a
four-state body with the ability to inform and involve interested members
of the public on matters that affect them, their environment and their
economy across the region will continue to be of value.
Funding
The funding of the Northwest Power Planning Council has been through a
charge on Bonneville Power Administration power rates. If federal
legislation affecting the role of the Northwest Power Planning Council is
pursued, the question of the level and sources of the Council's funding
should be addressed.
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