Energy
Comprehensive review archive Council Home Energy
Comprehensive review archive
Comprehensive Review of the Northwest Energy System
Final Report
Toward a Competitive Electric Power Industry for the 21st Century
December 12, 1996
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.
Table of Contents
COLUMBIA RIVER SYSTEM GOVERNANCE
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.
CONSUMER ACCESS TO THE COMPETITIVE MARKET - ENSURING THE BENEFITS OF COMPETITION FOR ALL
TRANSMISSION - OPEN-ACCESS HIGHWAY FOR COMPETITION IN GENERATION
FUTURE POWER SYSTEM ROLE FOR A FOUR-STATE REGIONAL BODY
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 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.
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 o Governors should hold the Council or its successorf the Northwest Power Planning Council in river governance was not addressed, but needs to be. The 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 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
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.
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?"
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.
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.
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.
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.
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.
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.
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.
1. 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.
2. 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.
3. 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.
4. 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.
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.
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.
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.
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
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.
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 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.
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.
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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
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.
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.
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.
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:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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