|
|
(1997 $) |
||
Bonneville Competitiveness Analysis -- July 1998 |
||
Residential Space Heating - New | ||
Residential Space Heating - Retrofit | ||
Residential Central Air Conditioning | ||
Residential Clothes Dryers | ||
Residential Domestic Water Heating | ||
Residential Refrigerators | ||
Commercial ? New | ||
Commercial ? Retrofit | ||
Irrigated Agriculture | ||
Pulp & Paper (SIC 26) | ||
Flat Load Profile | ||
Regional System Load Profile |
These higher "cost-effectiveness limits" increase the amount of conservation that is cost-effective to acquire. The Council's 1998 Plan contained conservation resource supply estimates in 10 mills/kWh increments for avoided costs up to 60 mills/kWh (1995 dollars.) In developing the 1998 Plan, the Council analyzed the benefits of acquiring conservation at each of these alternative avoided costs in order to determine which level of acquisition produced the lowest present value system cost. Therefore, it is possible to use this prior analysis to estimate the amount of conservation that would be cost-effective to acquire using the Bonneville competitiveness study's forecast of avoided cost. Figure 3 shows the amount of conservation that is cost-effective to acquire by year at up to 30 mills/kWh (1997 dollars) and the additional amount that would be cost effective to acquire at up to 40 mills/kWh using 1998 plan's expected value or average load growth forecast.[7]
[Footnote 7] A levelized cost of 30 mills/kWh in 1995 dollars converts to just over 31 mills in 1997 dollars. Adjusting this value upward by 20 percent to account for higher estimates of avoided costs results in a cost-effectiveness limit of slightly more than 37 mills/kWh, which was rounded to 40 mill/kWh for use in developing the approximate impact of higher avoided cost on conservation availability.
Figure 3. Annual Regional Conservation Acquisitions from 2000 to
2015 for Measures Below 30 Mills/kWh and Below 40 Mills/kWh (1997 dollars)
Corresponding to Market Prices from the July 1998 Bonneville
Competitiveness Analysis
Figure 3 shows that beginning in 2006, the use of the more recent forecast of market prices typically adds about 15 aMW to the annual amount of conservation that the region should target for development.
Figure 4 shows the annual total cost of acquiring the conservation resources according to the schedule displayed in Figure 3. The development of these additional 15 aMW of conservation adds about $75 million annually to the regional total resource cost of conservation acquisition. However, it should be noted that the higher-cost conservation resources (30 to 40 mills/kWh) are not scheduled for acquisition until 2006, the end of Bonneville's next subscription period. The amount of cost-effective conservation that should be acquired during the 2002 - 2006 rate period is not appreciably different than indicated in the 1998 plan.
Figure 4. Annual Regional Conservation Acquisition Costs from 2000
to 2015 for Measures Below 30 Mills/kWh and Below 40 Mills/kWh (1997
dollars) Corresponding to Market Prices from the July 1998 Bonneville
Competitiveness Analysis
Under the Northwest Power Act, Bonneville is obligated to meet the net firm power loads of all of the region's public body, cooperative and investor-owned utilities should those utilities request to be served by the agency. However, Bonneville does not currently have sufficient resources to meet all its expected loads without augmenting the federal system. Under Bonneville's Power Subscription Strategy, Bonneville proposed to make available power (and/or money in the case of the investor-owned utilities? residential and small farm loads) to its customers. Table 2 shows the proposed allocation by customer class. Table 2 also shows the proportion of the region's total anticipated electricity sales that are forecast to be met by Bonneville. Under the conditions shown in Table 2, it would appear that Bonneville would be serving approximately one-third of the region's loads during the subscription period (assuming pre-subscription sales are not subject to a conservation requirement). Therefore, Bonneville could be expected to target one-third of the region's conservation potential for acquisition through its proposed resource augmentation processes and other conservation activities. If the pre-subscription sales are included, Bonneville's share goes up to approximately 37 percent.
Table 2. Bonneville's Subscription Power Allocations
2002 | 2003 | 2004 | 2005 | 2006 | |
Public Agencies (not limited to amounts shown) | 4150 | 4261 | 4407 | 4494 | 4702 |
Investor Owned Utilities [Potentially another 900 aMW (cash or kWh)] | 1000 | 1000 | 1000 | 1000 | 1000 |
Direct Service Industries | 1440 | 1440 | 1440 | 1440 | 1440 |
Total BPA Sales | 6590 | 6701 | 6847 | 6934 | 7142 |
Other Supplier Sales | 13781 | 13873 | 13971 | 14159 | 14289 |
Total Regional Sales (Expected Value Case) | 20371 | 20574 | 20818 | 21093 | 21431 |
BPA's Anticipated Share of Regional Sales | 32% | 33% | 33% | 33% | 33% |
Figure 5 shows the annual conservation resource acquisition levels for the region and for Bonneville during the 2002 to 2006 subscription period based how much of the region's load the agency is meeting. Figure 5 shows that Bonneville and its subscribing customers need to acquire roughly 30 aMW of conservation annually between 2002 and 2006, or 150 aMW over the subscription period. If the pre-subscription sales are included, Bonneville and its subscribing customers would need to acquire approximately 32 aMW annually. For purposes of comparison, Bonneville and its utility customers acquired an average of nearly 60 aMW annually between 1993 and 1997.
Figure 5. Regional and Bonneville Conservation Acquisition Levels
for 2002 - 2006
Figure 6 shows the total resource cost that Bonneville, its customers and their consumers would need to share in order to develop these resources. Figure 6 shows that the annual total cost of acquisition of conservation for loads served by Bonneville's subscription power sales averages approximately $64 million (1997 dollars). Again, if pre-subscription sales are included, the total cost would average approximately $72 Million. Note again that this represents conservation's total cost, and these costs have traditionally been shared between utilities and consumers. It seems likely that Bonneville will be able to secure such cost-sharing in the future.
Figure 6. Total Resource Cost of Conservation Acquisitions 2002 -
2006
Given the challenges posed by the changed electricity industry environment, we have postulated three alternative approaches by which Bonneville might acquire the conservation potential identified above. The first is a description of the framework for past conservation efforts. The second is an attempt to describe an approach that mirrors a market purchase as closely as possible. The third is an attempt to find some middle ground.
The goal that has guided the Council's plans and, consequently, Bonneville's conservation programs has been to minimize the cost of electricity services to the region over the long term. An efficiency improvement was judged to be cost-effective if the life-cycle cost of an energy efficiency improvement was equal to or less than 110 percent of the life-cycle cost of supplying an equivalent amount of energy by conventional means. Quantifiable environmental costs and benefits were to be included in the calculation. The 110 percent factor was included by Congress in the Northwest Power Act to give conservation a boost in the competition with conventional resources. The practical effect of this provision has been small since the amount of conservation that has cost less than the competing conventional resources has always been large compared to the amount of new resources required. This is reflected in the fact that the average cost of the conservation acquired has been well under the cost of the avoided resource.
The long-term approach has meant that the Council's plan and Bonneville's conservation programs have included measures, like improvements in the thermal efficiency of the shells of new housing, that might have 70-year lifetimes. However, longer lifetime measures are subject to greater risk that new innovations and changing market conditions may make them less cost-effective over time. Bonneville was not required to pay the full cost of cost-effective conservation measures. Because conservation delivers benefits to the end-use consumer, consumers have usually been willing to share in the cost. Typically, the cost to Bonneville has been significantly less than the full cost of the conservation.
The so-called "rate impact" test has not been an explicit element of Bonneville's historic long-term conservation acquisition approach. The rate impact test reflects the fact that when conservation reduces Bonneville's sales to a customer, Bonneville loses the contribution of those revenues to its fixed costs. Those revenues must be made up by increasing rates. The rate impact test would limit what Bonneville could spend for conservation to an amount that did not require Bonneville to raise rates.[8] The effect of employing a rate-impact test could be to leave a great deal of cost-effective conservation undeveloped.
[Footnote 8] Under the ?no losers? or ?rate impact? test Bonneville's conservation acquisition costs would be limited to the difference between its rates and the cost of power purchases, rather than 110% of power purchase costsIn the long-term approach, Bonneville's conservation investments could either be expensed, i.e., the total cost paid up front, or capitalized, i.e., the capital would be borrowed for some period, say up to 15 years or the life of the measure. Expensing has a lower total cost but much bigger impact on near-term cash flow. Capitalizing better matches when Bonneville incurs the costs when the benefits are received and matches more closely the expenditure pattern for power purchases on the market. However, capitalizing results in a somewhat higher total cost to Bonneville. In addition, capitalization of several years of new investment builds up an accumulation of debt payment obligations. This raises Bonneville's fixed revenue requirements (and power rates) in the future, when market prices (and Bonneville's competitiveness) are less certain. The decision about which way to pay for conservation depends on factors like concerns about near-term versus long-term expenses, borrowing capability and so on. Although historically most of Bonneville's conservation acquisitions were capitalized, that need not be the case.
The intent here is to define a conservation acquisition strategy that, in terms of the effects on Bonneville, mirrors as closely as possible purchasing power on the market.
There are two principal components to such a strategy. They are:
The principle of paying only for conservation delivered during the contract period is probably the more significant in terms of its effect on the ability to capture the cost-effective conservation identified in the Council's plan. Figure 7 shows the regional conservation potential in the Council's current plan that has simple payback of less than five years at an electricity price of 2.6 cents per kilowatt-hour. Assuming five years is typical of the average contract length, at a payback period of five years or less, only 250 aMW of conservation of the 1535 aMW of the regionally cost-effective conservation in the Council's Plan are available. Moreover, not all of this is available between 2002 and 2006. Of the 250 aMW of total potential, only 100 to 130 aMW is available during the subscription period. The remaining potential is in new commercial buildings not be yet built and/or in major renovations/remodels of existing commercial buildings that will not occur during this time period. Since Bonneville anticipates that it will only be serving approximately one third of the region's loads, roughly one-third (33 ? 40 aMW) of these limited conservation opportunities are available in its customers? service territories. Conservation that came on line later in the contract period would have even less time in which to pay for itself. While updated market price estimates will raise the level of this curve somewhat, the basic message is the same, i.e. there are very limited conservation opportunities available that can pay for themselves in a relatively short contract period.
Moreover, much of this very low cost conservation (three-year payback and less) is conservation consumers are more likely to do on their own. Targeting programs at this conservation is unlikely to yield significant incremental savings. The majority of the conservation that is cost-effective on a longer-term basis would go largely undeveloped.
Figure 7. Regional Conservation Potential from the 1998 Plan by
Simple Payback Period 1996-2015
The traditional long-term acquisition approach would most likely result in the largest amount of conservation developed and the lowest total long-term electricity service costs for the region. Emissions and other environmental effects would probably be lower as well. Long-term benefits would, of course, be subject to uncertainty regarding future power technologies and their costs. Depending on what Bonneville has to pay for the conservation and whether or not they would choose to capitalize those costs, this approach might or might not result in Bonneville raising near-term rates above what they would be with the alternative of purchasing power on the market. There is, however, the risk that Bonneville might not receive the full benefits of the investment in conservation if some customers leave Bonneville at the end of their contracts.
On the other hand, the market purchase look-alike is intended to protect Bonneville from the risk of having made unnecessary and unproductive investments should it lose loads after the upcoming contract period. This approach would pay only for benefits Bonneville receives during the contract period. It would also limit what Bonneville pays for conservation so as to have no impact on rates. As noted in the previous section, of these two conditions, the former seems likely to have the greatest impact on achieving conservation targets.
If all the utilities in whose service territories Bonneville's funds were invested in longer-lived conservation were to take their loads off Bonneville at the end of their contracts, those investments would yield no further benefit to Bonneville. If Bonneville expenses its investments, it will not have the risk of a stranded investment.
It is important to note that in the event Bonneville does lose load, the benefits of Bonneville's conservation investment would not be lost to the region and, more specifically, to those who participated in the conservation programs funded by Bonneville. The region as a whole will be spending less for electricity services.
How likely is it that Bonneville will lose contract load at the end of the rate period? This is impossible to know with any certainty. The Council's analysis of Bonneville's potential future costs and revenues, completed in 1998, found that for the "medium" market price forecast, Bonneville continued to be a value relative to market prices through the 2007 ? 2011 period for all but the most aggressive dam removal scenarios.[9] Since the time of that analysis, most expectations regarding market prices have increased. To be sure, there could be combinations of low market prices and increased costs that could make Bonneville rates unattractive. However, there appears to be a very good chance that Bonneville will continue to be attractive relative to the market after the 2002 ? 2006 rate period. Bonneville's fixed costs begin to drop significantly in 2012 as the Energy Northwest (formerly Washington Public Power Supply System) debt begins to be retired. Absent a revolutionary new energy technology or political intervention, Bonneville seems likely to be extremely attractive relative to the market in 2012 and beyond.
[Footnote 9] Analysis of the Bonneville Power Administration's Potential Future Costs and Revenues, Northwest Power Planning Council Paper 98-11, July 1998. Pp. 6-8.The likelihood of Bonneville losing significant load as a result of retail access also seems increasingly remote, at least over the next several years. While Montana and Oregon have moved toward opening retail markets to competition, publicly owned utilities that form the largest part of Bonneville's customer base have been allowed to opt out. There seems to be little inclination on the part of the public utility commissions or legislatures in Washington and Idaho to move to open access.
Given these considerations, Bonneville could commit to paying for savings achieved beyond the initial contract period to the extent the customer kept load on Bonneville. If the customer keeps the same proportion of its load on Bonneville, Bonneville could pay the full amount to which it had committed. If the customer were to take some load off Bonneville, Bonneville's payment would be reduced proportionately.
As far as the amount of the payment is concerned, it seems unwise to commit Bonneville to a particular payment level. It should attempt to get the conservation for as low a cost to Bonneville as possible to minimize any adverse effect on its net revenues. However, it should be open to paying more for some conservation and less for other, depending on the value of the savings.
In the event a customer might like to remove load from Bonneville after the initial contract period, the customer would no longer receive payment from Bonneville for savings produced after the initial contract period. If the customer had received a lump sum payment for conservation and removed load after the initial contract period, it could pay an "exit fee" that compensated Bonneville for unrealized benefits of the conservation investment. That seems entirely appropriate.
An important question is whether this risk would prove to be a significant disincentive to customers participating in Bonneville's conservation programs or cause them "cream skim,", i.e. go after only the cheapest opportunities available. The negative effect of cream skimming is that many opportunities in new construction would become lost opportunities. If the assessment is that Bonneville is likely to be very attractive relative to the market for many years to come, the risk might be judged to be quite low and not a deterrent to participation. However, a different assessment of Bonneville's future attractiveness in the market could lead to a different conclusion.
The alternative approaches described above were analyzed to provide estimates of their possible effects on two metrics ? the total cost of electricity services and Bonneville's rates. The former reflects the perspective of the Northwest Power Act, the latter reflects legitimate concerns about Bonneville's position in a competitive wholesale electricity market. The following analysis considers only conservation undertaken as part of Bonneville's augmentation effort. It does not reflect the conservation that will be implemented as a result of Bonneville's contribution to market transformation efforts through the Northwest Energy Efficiency Alliance, the C&R Discount or low-income weatherization activities.
Long-term Acquisition
Historically the Council's plan has attempted to identify the power supply resource mix and development schedule that minimizes the total regional cost of providing electricity services over the long term. From this perspective, all of the benefits and costs associated with providing electricity services are measured at the regional level. The allocation of these benefits and costs across individuals, utilities or Bonneville, while of interest, is not the primary decision criteria. Therefore, the value of Bonneville's development of conservation through its augmentation process from this perspective is not different from conservation's value to the region.
Conservation's regional value is a function of its cost and availability, the cost and availability of alternative resources, the magnitude and timing of the need for new resources and the risks associated with making the "wrong" decision (e.g., buying too much or too little). The value of conservation resources to the region estimated in the 1998 plan at up to 3.0 cents/kWh was just under $2.4 billion (1997 dollars). Including conservation resources costing up to 4.0 cents/kWh that are cost-effective given more recent estimates of avoided costs would increase this value.
If Bonneville acquires roughly 150 aMW of conservation between 2002 and 2006, the regional present-value cost of providing electric services would be approximately $235 million lower than if this conservation goes undeveloped.[10] Given current views of future market prices, this would be a conservative estimate of the benefits of the reduction in present-value cost of these acquisitions, since it was derived using the 1998 plan's forecast of future market prices. As noted earlier, this does not include the value of environmental benefits or potential location-specific transmission and distribution system benefits that result from conservation investments. The latter are benefits that accrue to the local utility and to Bonneville's Transmission Business Line in the form of avoided costs for distribution or transmission system reinforcement.
[Footnote 10] This was estimated by apportioning the regional benefits according to the share of conservation resources developed on Bonneville's system compared to the amount scheduled for development in the remainder of the region over the period between 2002 and 2006.
As shown in Figure 6, the total resource cost of acquiring the 150 aMW of conservation from the loads expected to be served by Bonneville is roughly $64 million per year for a total of $320 million over five years. Some of the funds for conservation are already in Bonneville's revenue requirement. This includes some part of the $30 million per year for the Conservation and C&R Discount and $12 million per year for Bonneville's contribution to the Northwest Energy Efficiency Alliance (NEEA). However, we do not have estimates of how much conservation these activities are likely to produce in the near term. As conservatism, we assume that all the conservation must be acquired through the dollars allocated for augmentation. We also assume that Bonneville pays for the conservation up front in the year the conservation goes on line as opposed to paying for kWh as they are produced. We also assume that Bonneville will be able to share approximately 50 percent of these costs with its customers and their consumers. Therefore it would require that the agency allocate approximately $32 million per year would spend for augmentation for conservation. The average energy savings produced over the rate period would be 85 aMW (less in the first year, more in the last year). This means that an average of additional $11 million per year would be required for power purchases to meet the 800 aMW augmentation target. This is illustrated in Table 3.
Table 3. Comparative Cost of Market Purchase versus Conservation
Plus Market Purchase
800 aMW @ 28.1 Mills/kWh |
$ 96,924,800 /year
|
Average cost of conservation acquisition |
$ 32,000,000 /year
|
Average conservation savings |
85 aMW/year
|
Average remaining market purchase required |
715 aMW/year
|
Cost of remaining market purchase |
$ 76,001,540 /year
|
Total cost conservation + market purchase |
$ 108,001,540 /year
|
Difference in Bonneville costs |
$ 11,076,740 /year
|
Lost revenue from 85 aMW @ 22 mills/kWh |
$ 16,381,200 /year
|
Net change in BPA's revenue requirement |
$ 27,457,940 /year
|
The other impact on its rates would be the lost revenues associated with the acquisition of 30 aMW of conservation savings annually. As demonstrated in Table 3, if conservation savings average 85 aMW over the rate period, the lost revenue at 22 mills/kWh averages about $16 million per year. Combined with the additional power purchase cost of $11 million per year, the total impact on Bonneville revenue requirement would be approximately $27 million per year.
A rough rule of thumb for estimating the impact of additional costs on Bonneville rates is that a $30 million change in revenue requirements translates into a 0.5 mills/kWh change in rates. Therefore, a net change in its revenue requirements of about $27 million each year would mean it would have to increase its rates by approximately 0.46 mills/kWh. This result would be reduced to the extent that the conservation were achieved through other funding already in Bonneville's budget for conservation, (the C&R Discount, low-income weatherization and NEEA) or the conservation was paid for as the savings were produced rather that in one payment up front. The investment in conservation is also quantitatively different in that much of it will continue to produce benefits beyond the five-year rate period whereas the market purchases will not.
Bonneville's conservation acquisition is intended to be a less costly alternative to market purchases. Bonneville must be assured of actually (within a reasonable band of uncertainty) getting the kWh savings in the amounts and at the times expected. Otherwise, it will have to incur the costs of purchases (or market revenues forgone) to ensure meeting its obligations. How Bonneville gets this assurance is probably a function of the power product the customer is purchasing and the associated contractual relationship between Bonneville and the customer.
Bonneville is moving toward implementing a C&R Discount for qualifying customer investments in conservation and renewables and low income weatherization. This effort was initiated prior to the realization of the need to acquire resources to meet 2002 ? 2006 loads. The initial rate proposal allocates $30 million per year for the rate discount. That is about half what staff estimates to be the annual cost of Bonneville's share of the total cost of the least-cost conservation implementation schedule in the Council's current plan. The logical question is why cannot the rate discount be the vehicle for meeting the conservation acquisition targets for 2002 ? 2006?
The C&R Discount was not designed nor advertised as an acquisition. The C&R Discount was intended to help utilities remain involved in conservation and renewable resource development and low income weatherization. Within the range of conservation, renewable resources and low income weatherization, what is done and how funds are allocated among these activities is up to the local utilities.[11] Some of the activities that are likely to be eligible for the discount cannot be counted upon to produce actual savings required of an acquisition or satisfy the cost-effectiveness criterion. Moreover, Bonneville's augmentation needs are for specific amounts of energy and/or capacity during specific times of the day and year. It is not clear that the conservation resources pursued by individual utilities will coincide with Bonneville's resource needs. The provisions for verification and evaluation are limited.
[Footnote 11] If the utilities' use of the C&R Discount is disproportionate in one direction or another, Bonneville has committed to providing funding to assure a viable effort in each of the areas.As currently proposed, the discount formula also has limited incentives for local utilities to seek to minimize the cost of conservation borne by the utility system. Utilities have the option of submitting their costs and having them reimbursed through the discount. The lure of just doing what is necessary to recover the investment could be strong. There is little incentive to seek end-use customer contributions to leverage the discount. The C&R Discount will produce some savings, and realistic estimates of those savings should be counted toward meeting the conservation targets. However, without "tightening up" the program, it is likely that an additional acquisition effort will be required to achieve cost-effective target levels.
Because the C&R Discount is part of the current rate case, Bonneville has been reluctant to consider making the kinds of changes to the C&R Discount that would be necessary for it to qualify as an acquisition program. Bonneville places a high priority on completing the rate case on schedule and is concerned that making such changes could delay the rate case. There may, however, be ways in which the acquisition program can "piggy back" on the structure of C&R Discount to minimize confusion and increase efficiency.
The Northwest Energy Efficiency Alliance (NEEA) is an activity co-funded by Bonneville and its customers and the investor-owned utilities of the region to pursue "market transformation." Market transformation is the concept of intervening in the market for targeted energy efficiency technologies (products, services or practices) to effect permanent changes in those markets. Market transformation is generally NOT delivering energy conservation services at the retail level.
Instead, the focus is on developing a thorough understanding of the markets for promising energy efficiency technologies and then undertaking activities that have the potential to shift market preference toward those technologies. On one end of the spectrum, these activities might look a lot like research, development and demonstration. On the other end, there might be consumer incentives designed to boost market share and encourage manufacturers to commit the investment necessary to achieve economies of scale that will bring the cost of the technology down. However, the payoff is generally long term. In most cases, there will be near-term savings produced by NEEA programs, and NEEA is committed to thorough evaluation of its efforts to verify those savings. In those instances, the savings should count toward conservation targets. In general, however, NEEA's focus is on effecting long-term changes in the market, and it should not be diverted from that objective.
The restarting of Bonneville conservation acquisition provides an opportunity to try to avoid some of the criticisms of earlier efforts. Much of the criticism stemmed from what was perceived as the rigid, prescriptive, command and control nature of early Bonneville programs. Many, if not all, of those criticisms were addressed as Bonneville's conservation efforts evolved and matured. It should be possible to build on those experiences. Some possibilities are described below.
However, third parties ? state or local governments, energy service companies ? might well be interested in participating in a Bonneville conservation acquisition. If the local utility is not inclined to participate, these entities could be allowed to bid their conservation to Bonneville. However, a working partnership with the serving utility could be necessary to assure Bonneville of receiving the savings. In addition, these entities would have to face the possibility that the utility might choose to take load off Bonneville after the initial contract period, putting the Bonneville payment to the third party at risk. It may be very difficult to find third parties willing to accept that risk. Some means of mitigating that risk would probably have to be devised if third parties are to have a realistic role.
Section 6(c) of the Northwest Power Act requires Bonneville to conduct a public process on any proposal to acquire a major generating resource, to implement an equivalent conservation measure, to pay or reimburse investigation and preconstruction expenses to the sponsor of a major resource, or to grant billing credits or services involving a major resource. One of the findings Bonneville must make is whether the proposed action is consistent with the Council's plan. The Council may choose to make its own determination of consistency. A major resource is one that is greater than 50 aMW and is acquired for more than five years. Staff understands that in its power purchases for augmentation Bonneville does not anticipate individual purchases that will be greater than 50 aMW and that in no case will contracts be for more than five years. Similarly, while Bonneville's conservation acquisitions will extend beyond five years, in is unlikely any individual contract will be for 50 aMW or more. These resources then, do not meet the definition of a major resource, that would trigger Section 6(c). Even if a winning argument were made that somehow these resource acquisitions required review under 6(c) the staff's preliminary view is that Bonneville's proposed acquisitions through market purchases and conservation efforts, would meet the Council's 6(c) criterion. That is, they are "so structured that [they] will achieve substantially the goals and objectives of the plan. ?"
Bonneville has proposed a set of draft principles to guide their conservation acquisition. Those principles are reproduced in Appendix C. In general the staff finds that these principles embody policies that seek to implement the "middle-ground" alternative for conservation acquisition described above. Staff recommends that the Council endorse this approach. Staff believes this approach is capable of meeting cost-effective conservation acquisition targets and is appropriate for the situation in which Bonneville finds itself.
Bonneville states in its principles that it will target for acquisition its share of the cost-effective conservation identified in the Council's current plan. Staff estimates this to be a minimum of 150 aMW of conservation over the subscription period. Staff recommends that the Council endorse this as minimum goal for Bonneville's conservation activities during the 2002 ?2006 period including the C&R Discount, low-income weatherization efforts not included in the C&R Discount, the activities of NEEA and conservation acquisition undertaken as part of the augmentation effort.
In addition to Council endorsement of Bonneville's "augmentation principles," the staff has three additional recommendations.
Staff recommends that Bonneville's Transmission Business Line (TBL) also participate in supporting conservation and demand management efforts in cooperation with the efforts sponsored by Bonneville's Power Business Line (PBL). TBL faces the need to make significant, long-lived investments in transmission infrastructure to be able to serve growing loads. Efforts that reduce those loads may make it possible to avoid part of that investment. While the TBL will be more oriented toward peak shaving and shifting than traditional conservation, many measures provide both kinds of benefits, and therefore benefit both business lines. In addition, there may be synergies between conservation and demand management efforts.
The staff recommends that Bonneville consider modifying the proposed Conservation and Renewable Resource Discount to serve as a platform for acquiring conservation from Bonneville's customers. Staff recognizes Bonneville's concerns that changing the C&R Discount could affect the schedule of the rate case. However, the potential confusion and duplication resulting from two parallel efforts argue for consolidation. As currently proposed, the program does not contain sufficient incentives for utilities to aggressively seek consumer cost-sharing so as to leverage the discount. Since all utilities under the program have the option of just claiming cost reimbursement up to the total discount amount for which they are eligible, it seems unlikely that it will engender acquisitions that are as cost-efficient (from Bonneville's standpoint) as is possible. These shortcomings must be addressed if the Rate C & R Discount is to serve as an acquisition tool.
The staff also recommends that the Council support Bonneville's implementation of a program to acquire conservation through a competitive bidding process. Given the lead time required to develop proposals, Bonneville should initiate efforts to communicate with customers and third parties regarding its needs as soon as possible. Indeed, the staff believes that unless the C & R Discount program design features are altered, Bonneville should place its greatest emphasis on establishing a "bidding" or "competitive procurement" process to acquire conservation. This process should be open to subscribing customers as well as other parties who have arrangements with end-use consumers served by Bonneville's customers. Staff recommends that Bonneville solicit bids for conservation savings (both energy and capacity) that to the extent workable mirror the range of market power products it is also buying. For example, if the agency is soliciting bids for high-load-hour energy or capacity during the winter months delivered to major load centers, it should ask for comparable conservation products. It should base its determination of the cost-effectiveness of these conservation savings against the price of comparable market power purchases.
[The comment period ended January 21, 2000.] The Council is seeking public comment on the following questions:
The Northwest Power Act gave the Bonneville administrator, for the fist time, authority to acquire resources to meet the load requirements of customers it is obligated to serve. To provide the region with some oversight of Bonneville's choices, the Act requires that the administrator's resource acquisitions and related activities shall be consistent with the Council's 20-year power plan, with certain narrowly limited exceptions. Section 4(d)(2).
The Northwest Power Act requires the Council's plan to give priority to resources the Council determines to be cost-effective. First priority goes to conservation, second to renewables, third, to generating resources using waste heat or of high fuel conversion efficiency, and fourth, to all other resources.
A cost-effective resource is one that is forecast to be reliable and available within the time it is needed and that has an incremental system cost no greater than that of the least-cost similarly reliable and available alternative resource. System cost includes all direct costs over the life of the resource, including distribution and transmission costs, waste-disposal costs, end-of-cycle costs, and fuel costs. It also includes quantifiable environmental costs and benefits directly attributable to the resource. Conservation gets a 10 percent credit in the cost-effectiveness calculation.
The Act plainly intends that the Administrator shall acquire conservation and renewables to the maximum extent practicable. Section 6(e)(1). Even though the administrator may have acquired other resources, as authorized by the Act, the administrator still has a responsibility to pursue conservation. "Notwithstanding any acquisition of resources pursuant to this section, the administrator shall not reduce efforts to achieve conservation and to acquire renewable resources. ?" Section 6(b)(5).
In devising mechanisms to deliver conservation that involve direct arrangements with consumers, the Act directs the administrator to "make maximum practicable use" of local utilities and other local entities that can effect such arrangements. Section 6(e)(2). While the Act does not define "local entities," one could imagine an energy services provider or a local governmental unit fitting within that term.
Figures B-1 and B-2 compare the medium forecast contained in the Council's Analysis of the Bonneville Power Administration's Potential Future Costs and Revenues with 1998 plan's forecast of future market prices for on-peak and off-peak spot power purchases by month from January 1999 through December 2016.
A review of Figure B-1 shows that the 1998 plan's forecast of avoided cost for power purchases during peak periods of power-demand are below the July 1998 estimate. Figure B-2 shows that during low power-demand periods, the more recent forecasts of avoided costs are both higher and lower than the 1998 plan's forecast. Overall, however, this more recent market price forecast is generally above that used to establish the conservation potential in the 1998 Plan. Moreover, the newer forecast also exhibits greater variance over the course of the year. Compared to the 1998 plan's market price forecast, the on-peak prices for the summer months, and August in particular, are substantially above those used in the Plan. This is due to the fact that the summer air conditioning demands in California and the desert Southwest are driving the entire West Coast's power market during this period of the year.
Figure B-1. Comparison of Future Monthly On-Peak Wholesale
Power Market Prices January 1999 to December 2016
Figure B-2. Comparison of Future Monthly Off-Peak Wholesale Power
Market Prices January 1999 to December 2016