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July 10, 1996
Chuck Collins, Chair
Comprehensive Regional Review
7900 SE 28th Street, Suite 200
Mercer Island, WA 98040
Dear Chuck:
On behalf of the Investor Owned Utilities I have been asked to submit the following comprehensive proposal to the Regional Review Steering Committee. This proposal reflects a consensus recommendation by all of the IOUs and is based on the analysis conducted by the Steering Committee's four Working Groups. The IOU's proposed recommendations have benefited from the analysis and debate that has occurred in the Working Groups. It is obvious that there are important public policy issues raised by the changes that are sweeping the industry and the nation and that the work of the Comprehensive Regional Review is very timely.
This region--like the nation--is in transition from the old pervasively regulated electric power system which created vertically integrated monopolies to a much more competitive energy marketplace. In this letter, and the attached slides, the IOU's describe their vision of where the current changes are leading and propose specific policy recommendations that we believe the Steering Committee should forward to the Governors. Due to time constraints, only a few of the slides will actually be presented at the meeting on Friday, however, if the Steering Committee would like a more complete discussion of our recommendations we would be pleased to do so at a time of your choosing.
Our vision is that by about the year 2000 all consumers should have the opportunity to choose their electric supplier. This fundamental change must be accomplished without shifting large amounts of prudently incurred utility investments to others. Departing customers should pay a fair portion of these costs to the extent utilities cannot mitigate them. In other words, this region should follow the general approach that the FERC has prescribed for stranded costs recovery.
In our vision, transmission and distribution facilities remain regulated natural monopoly facilities. Distribution would remain regulated by state PUC's or by local bodies in the case of preference utilities. All transmission--including BPA's--would be equally regulated by the FERC.
BPA's transmission would be legislatively separated from its power marketing function. All of the region's high voltage, backbone transmission would be operated by an independent grid operator (IGO)--although ownership of those facilities could remain with their present owners. The IGO would be fully regulated by FERC. To hasten formation of an IGO, the region's IOU's are planning to file with FERC a proposal to form a new Independent Grid Operator (IndeGO) for operation of their transmission systems. They plan to file the IndeGO proposal by years-end and have the new IndeGO operational by July 4, 1997.
As we move to the new competitive system, it's essential to retain for all citizens of the region the value of the region's federal hydropower system ... that the region's wild salmon and other environmental values be truly protected ... that existing preference utilities and other regional utilities as well as the DSI's have a full, fair opportunity to retain their public preference and regional preference claims on federal power by having the first rights to sign long-term contracts to buy that power in an amount up to their historical loads at cost. And it is essential that the U.S. Treasury not be asked to incur any additional risks on the region's behalf.
We envision BPA--or a successor federal agency--having a role in coordinating the existing federal hydropower system and selling the existing system's output, principally on long-term contracts.
BPA should no longer have any obligation to serve or to acquire resources for load growth. We envision it being permitted to enter into bi-lateral contracts with utilities wishing to have BPA acquire resources for them provided those contracts leave all the attendant risks with such customers. BPA, the Treasury and other customers must not be exposed to the risks of new resource development.
Consistent with the move to competition, the role of the federal BPA should shrink--not grow. BPA should not make retail sales except to its existing, long-standing DSI customers. Nor should BPA be expanding into new business lines such as energy services and futures markets.
Wild salmon and other fish and wildlife impacted by the federal hydro system must be protected. That requires more attention to effective governance over fisheries management, relying more on science to design and evaluate recovery measures and setting priorities based on the most cost effective solutions. But it also requires that the obligation to restore the fish and wildlife resources impacted by federal hydropower be paid for by those who enjoy the benefits of the federal power system.
Eventually, we think optimal levels of investment in energy efficiency and renewable generating resources can be achieved by operation of a competitive energy market. But during the transition period, targeted financial assistance for energy efficiency and renewables will be needed. Funding for these alternatives to conventional generation must be done in a manner that is market neutral. Otherwise it will be fundamentally at odds with the requirements of a competitive electricity market. Consequently, we envision the need for the NW states to impose across-the-board meter charges on all end users to fund energy efficiency and if necessary renewables during the transition period of perhaps 10 years or so. The IOUs envision that it could take the NW states two years to implement the necessary legislation to implement a meter charge. During this two year period the IOUs propose that the region establish a market transformation fund financed by the region's retail utilities in proportion to their shares of regional load.
Thank-you for the opportunity to present our recommendations to the Steering Committee. We stand ready to continue to support the important work of the Regional Review and will be prepared to assist you as necessary in your efforts to develop Comprehensive Recommendations to the Governors.
Sincerely,
James Litchfield
Consultant to the IOUs &
President
Litchfield Consulting Group, Inc.
Comprehensive Proposal
for Restructuring the
NW Electric Power System
by the
Investor Owned Utilities
July 12, 1996
IOU Goals for a Comprehensive Proposal
- Retain the benefits of the Federal hydropower and transmission systems for all NW citizens
- Important social values must be secured
- Rural communities must not incur undue hardships
- Fish & wildlife protection remains an obligation of the hydro system
- Establish equitable and stable mechanisms to foster energy efficiency and renewable generation
- Changes must be in the public interest, must provide customer choices and must be consistent with National Energy Policy
IOU Goals for a Comprehensive System Proposal
- BPA's role is not to become a federal competitor in power or energy services markets
- Separate BPA's transmission and power marketing functions through federal legislation
- BPA transmission must be subject to the same FERC regulation and standards imposed on IOUs
- Changes must not increase US Treasury risk
Public Purposes
- Responsibility for energy efficiency in transition to competitive energy service markets
- Interim market transformation activities
- Renewable resource policies
- Public welfare policies
- Fish & wildlife obligations & governance
Energy Efficiency Goals - Oregon Conservation Restructuring
- Market Neutral - does not distort competitive energy marketplace
- Adaptable to new electric utility & competitive structures
- Eliminate artificial market boundaries
- Encourage efficient markets and competition
- Provide stable source of funding
- Provide equitable access to funds
Energy Efficiency Goals from Oregon
- Remove conservation costs from utility rates
- Provide customer services that are flexible and unbundled
- Provide for a wide base of support and governance
- Limited direct purchase of conservation measures
- focus on market failures & facilitate Escos competing in energy service markets
Energy Efficiency Objectives
- Improve energy efficiency's ability to compete with generation
- Provide stable funding to transform energy efficiency markets and reduce market failures
- Shift the responsibility for the purchase of energy efficiency to the consumer
- Low income consumers remain a social welfare responsibility of government
Energy Efficiency Recommendations
- The state legislatures should implement a universal meter charge for all customers
- The meter charge will provide resources for market transformation to reduce market failures
- The objective of market transformation is to intervene in markets to insure cost-effective energy efficiency measures are purchased by consumers
- In a successfully transformed market, future consumers will choose cost-effective measures without financial assistance.
Energy Efficiency
- Funding efforts should focus on market transformation, but there maybe a limited need to partially fund local conservation efforts with a portion of the meter charge
- Market transformation is a transitional problem to fully competitive energy services markets
- Meter charge legislation should "sunset" in 10 years
Interim Funding for
Market Transformation
- A 2 year interim fund is established as a bridge until legislation for a meters charge is passed
- Fund would be centrally controlled and managed, perhaps through the Council
- The budget for market transformation should be developed through a public process and be consistent with the Council's regional plan
- All retail utilities would contribute in proportion to their regional load
Interim Market Transformation
- BPA would not make contributions to the fund except for their DSI loads
- Contributions to the fund would displace DSM currently budgeted
- Public Utility Commissions would need to support this change in DSM funding
- Evaluations of transformation activity effectiveness would be conducted on a regional basis by the fund manager
Renewable Resource Policies
- Risk management and environmental benefits of renewables are desirable to some customers
- These customers are willing to pay for the benefits of renewables
- IOUs, individually, will explore green marketing with direct access to retail consumers
- The current renewable demonstration projects should be honored.
Renewable Resource Policies
- A market neutral meter charge could be used to collect any funds needed to support renewables
- Transmission should be structured to provide fair, equitable and not unduly discriminatory market access for renewables
- Competitive power markets will provide all needed ancillary and back-up power services.
Low Income & Rural Customers
- Helping low income citizens pay their electric bills remains a government responsibility
- IOUs, their share and bond holders all pay substantial local, state & federal taxes that support such governmental responsibilities
- Universal Service - will continue to supply energy
- If there are large rate impacts, they should be mitigated during a transition period - 10 years.
- Rural customers will have the option to purchase federal low voltage delivery facilities
Customer Choice Principles
- The NW States should provide all retail consumers access to competitive power markets.
- Each State's legislation should be designed around a uniform regional energy policy developed in this Review
- Each State's legislation will be unique to the State's interests, but by the year 2000 all consumers in the region should have access to competitive power markets
Customer Choice Principles
- State legislation will establish stranded investment procedures, guidelines and criteria
- PUCs will resolve stranded investments for IOUs to allow for fair recovery of non-mitigatable prudently incurred stranded costs from departing customers
- Public utilities will follow the stranded investment policies in the retail access legislation
- Consumer protection will need to be included in retail access legislation
Retail Access to BPA's Transmission
- BPA should only provide transmission access for retail loads when:
- the states or federal legislation permits retail access and defines stranded investments and recovery mechanisms
- BPA's transmission system has been legally separated from power marketing & is under full FERC regulation
- FERC's criteria provides for recovery of stranded investments
- Consumers can not escape recovery of stranded investment obligations through federal transmission
Disco Responsibilities to Support Retail Access
- Provide reliable distribution services
- Aggregator of last resort for customers that do not exercise their right to choose an alternate power supplier
- No requirement to reserve existing generation resources for customers wishing to return to the local Disco
- Distribution system charges should be cost based and unbundled
Transmission System Restructuring
- Non-discriminatory, open transmission access is critical to the successful formation of competitive electric power markets
- An independent grid operator (IGO) will facilitate the separation of transmission from power marketing interests
- The IOUs are proposing to form an Independent Grid Operator (IndeGO) in response to FERC and the transmission work of PNUCC
IndeGO Principles
- Meet FERC policies for non-discriminatory, open access for all users of the transmission network
- Facilitate power supply competition by integrating the transmission system operations
- Keep transmission rates as low as possible through increased utilization
- Maintain system security and reliability in accordance with the policies and guidelines of NERC and NWPP.
IndeGO Principles
- Improve transmission efficiency through improved management and coordination of:
- transmission planning, maintenance & operations
- economies of scale
- elimination of duplication
- Establish a single transmission tariff
- Reduce transaction costs and simplifying transmission agreements.
- Avoid inappropriate transmission cost shifts
IndeGO Principles
- Maintain existing transmission contracts through a voluntary transition period.
- Be regulated by all of FERC's requirements.
- Follow strict conflict of interest requirements
- Provide efficient and economical transmission through incentive based regulation that balances operational efficiency and reliability.
- IndeGO will provide for possible future divestiture of transmission assets to create Transco
IndeGO Participants
- The transmission systems of Idaho Power, Montana Power, PacifiCorp, Portland General Electric, Puget Power, Sierra Pacific Power and Washington Water Power would be operated by a single IndeGO.
- The IOUs hope to file the IndeGO proposal with FERC by December 31, 1996 and if approved by FERC begin operations by July 4, 1997.
IndeGO & BPA Transmission
- IndeGO participants encourage BPA's legal separation so that it can participate in the IndeGO
- Separation of BPA's transmission business should be structured so that it can join the IndeGO
- BPA's transmission business should be regulated by FERC under the same requirements as FERC regulates IOU transmission
Transmission System Wires Charges
- Transmission system wires charges are difficult to design & could impact market efficiencies
- Wire taxes are difficult to apply to all transmission utilities & bypass could result
- Wire charges will not provide a stable source of funds to support important public purposes
- Fair and equitable wires charges are impossible
- Stranded cost charges for departing customers may be appropriate
Federal Power Marketing
- Legislation would create a new Federal agency with limited authority
- The new Federal Agency's role would be to administer the sale of the output of existing federal generation
- Recognized public and regional preference
- The Federal Agency must balance the risks to the US Treasury with the rewards to NW consumers
Authorities of New Federal Agency
- Coordinate and operate the FBS+ resources.
- Allocate the FBS+ under long-term contracts at cost to existing BPA customers
- Contract pricing includes historical costs plus prudent future costs
- Customer advisory board will be given substantial control over budgets and operating plans
- Disputes will be settled through binding arbitration
- Costs included in pricing shall not include imprudently incurred future utility costs.
Authorities of New Federal Agency
- The Federal agency would not be governed by local and state governing bodies:
- The Federal agency would be permitted to market power only at wholesale
- The Federal agency would not be permitted to enter into other lines of business such as Escos, brokering, futures, derivatives, natural gas or aluminum transactions
- All federal environmental requirements would continue to apply to the new federal agency
Risk/Reward Alignment
- Risks of short-term purchases, to coordinate and operate the system, will be limited through review and approval of the customer advisory board
- No obligation to serve load growth
- "Bilateral" contracts will be available to meet load growth but they must shield all other customers and treasury from resource acquisition risks
- No new business lines, Escos, brokering, futures, derivatives or financial transactions
Long Term Allocation of Power
- Long-term wholesale power sales contracts will be offered at cost under an allocation process
- Power would be allocated to customers in the following priority:
- Public loads in the region currently served by BPA
- DSIs, IOU and Public historic regional loads not served by BPA
Allocation of Power Products
- Customers would purchase a slice of the output of the entire existing federal power system
- Customers will be able to maximize the value of the products received
- The the output of the federal hydro-system would be shaped to the maximum extent possible, subject to non-power constraints, to meet regional loads.
- Power products may be remarketed
Allocation of Power Products
- Some power products may not be allocated
- The Federal agency will market these products and will credit revenues to long-term allocation customers
- Individual customers may request that the Federal agency provide marketing services for products & services excess to the customer's needs
Auction for Excess Power
- Slices not taken through allocation will be offered through an auction and sold at fair market value
- Any funds received in excess of costs shall be first used to repay deferred federal treasury repayments and if funds remain they will be refunded to the states for public purposes.
- The Federal government will retain the ability to secure any stranded investments from wholesale customers that choose not to accept an allocation
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