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Scope of work
APRIL 12, 1996
Federal Power Marketing Work Group
Discussion
In preliminary discussion with Steering Committee members, there was near unanimity that Bonneville should neither acquire new resources nor be responsible for net requirements of its customers in the future. A few members of the Steering Committee would modify that limitation by allowing acquisition by specific contract at the request of a specific customer or to make strategic acquisitions to enhance marketing ability and Treasury repayment.
Beyond that there was little consensus other than that the work group should take a broad look at alternative models for marketing federal power and at the implications of those models for a number of factors. One list of models was originally discussed by the Steering Committee and has been rearranged slightly for the work group's specific tasks.
Market power is both a general market structure question and a specific issue for Bonneville, related to the coordinated hydro system. There was uncertainty about the potential magnitude of the problem. Information from the work group may help to inform the overall choices the Steering Committee.
The following issues were taken from the list put together by the Steering Committee. The specific tasks are derived from them, within an overall framework emphasizing the issue of alignment of risk and benefits associated with marketing federal power.
Issues
- Should BPA (or any large Federal entity) be allowed to compete in the wholesale or retail markets?
- How can costs and risk-bearing of the FBS best be aligned with potential benefits and losses? (A criterion for evaluating alternative models)
- Does BPA have the flexibility to compete if it is allowed to? If not, what changes are necessary?
- Should output of the Federal Base System (FBS) be sold at market or cost-based rates?
- What are the alternative models for marketing or allocating (FBS) power and their advantages or disadvantages?
- Competitive
- Asset sale
- Allocation of marketing rights
- Minimize risk by stranded cost charge
- Muddle through
- What organizational/structural changes may be required to initiate the alternative marketing models?
- What are the risks associated with FBS power (e.g., nuclear, fish, treaty obligations, market risk)?
- What are the ownership rights of existing BPA customers in the FBS?
- What are the tradeoffs between minimizing or eliminating market power and maintaining the benefits of coordinated operation of the hydroelectric system?
Tasks
- Define a set of models for marketing federal power to cover the range of alternatives.
Each of the models that the Steering Committee has selected should be further specified by the work group, with the intent of maintaining the essential features selected by the Steering Committee for examination, while providing a fully fleshed-out model that allows all the implications of the model to be seen. The models are intended to cover the range of issues with a small list of alternatives. Alignment of costs and risk bearing with potential benefits is the framework for the alternatives.
A. Muddle through (take no further actions)
This is the base case and assumes no additional institutional modifications from the current situation other than an administrative split of generation and transmission.
B. Competitive
This model is distinguished by focusing changes only on Bonneville's power marketing rights and obligations and not any of its current costs. Changes could include expanding its rights and reducing its obligations, with the goal of making Bonneville competitive at current cost levels.
C. Minimize risk by stranded cost charge
This model is distinguished by focusing on restructuring Bonneville's costs and/or revenues so that costs to be recovered by power sales are at or below market levels, while keeping power marketing rights and obligations relatively the same as are now in place.
D. Allocation of marketing rights
This model focuses on transferring the marketing rights to some other entity while maintaining some level of below-market prices for some or all customers in the region. This would likely be accomplished by the Treasury absorbing risk or potential loss.
E. Sale or lease of marketing rights
This model focuses on transferring the marketing rights and creating a market-priced and market-pricing entity.
F. Other
The above list is not intended to be exclusive or limiting and the committee will encourage other proposals.
- 2. Describe the implications for or treatment of the following issues in each of the models.
A. Treasury repayment
- How would the treasury be repaid for the federal investment?
- Would the repayment be full or partial, and if partial, what would be the level and how would it be determined?
- Would the repayment be immediate or (as now) over time?
- If over time, who bears the risk of repayment? (See also the risk questions.)
- Does the treasury retain an on-going financial liability or is the liability extinguished?
- Does the treasury retain an on-going financial right/asset or is the right extinguished?
B. Risks and benefits
- The risks associated with the federal power marketing rights have been generally categorized as hydro/streamflow risk, fish risk, nuclear risk, and market risk (competitors and new technologies). Are there other major categories that need to be considered?
- Who bears these risks?
- Are all of these risks borne by the same entity or are they separated?
- Who enjoys the benefit associated with the federal power marketing rights?
- Is the benefit anything other than power at below-market rates? If so, what is it?
- Is the benefit bearing aligned with the risk bearing?
C. Transfer of marketing rights (if applicable)
- To whom would the marketing rights be transferred?
- What would be the mechanism and criteria for choosing the new owners?
- What are the implications for regional preference and for other regional utilities/customers?
D. WPPSS
- Describe the provisions of the WPPSS project agreements, net-billing agreements and bond resolutions that affect and are affected by Bonneville's power marketing rights and obligations.
- Describe how these would be dealt with, including any limitations on legislative action, if the rights were transferred.
E. Columbia River Treaty
- Describe the current role of Bonneville under the Columbia River Treaty.
- Is that role separable from the federal power marketing rights?
- Can that role be played by another organization?
- How easy is it to change the occupant of the role?
- If the owner of the marketing rights were not part of the U.S. Entity under the treaty, what difference would it make (valuation of the rights, operation of the system, etc.)?
F. Fish and wildlife responsibilities
- Describe the legal responsibilities of Bonneville for fish and wildlife issues.
- Does the presence of these legal responsibilities present any impediment to the transfer of the power marketing rights, or do they simply need to be reassigned to the appropriate entity (part of the determination of the appropriate entity may be an outcome of the 180 Day Review).
G. Other contracts
- Describe the other contractual rights and obligations that would have to be addressed in any transfer of the power marketing rights.
- Do any of them present major obstacles to a transfer?
H. Compatibility with a competitive market
- If there were a widely competitive electricity market five years from now (going beyond wholesale competition to some unspecified degree), would the marketing of federal power be consistent with the structure under which non-federal power, in the Northwest and the West, would be marketed? (The Competition and Customer Choice Work Group should provide the framework for comparison.)
- If the model for federal power marketing were not consistent, would it make a difference? How much difference?
I. Public preference
J. Achievement of regional policy goals
K. Transition
L. Other issues?
3. Define the magnitude of the market power problem for federal power marketing rights
- How is FERC currently addressing market power questions in its decisions?
- How is the Department of Justice currently addressing market power issues, especially in the electric or gas sectors?
- Will single ownership/operation of the federal power marketing assets likely constitute a market power problem in an increasingly competitive market?
- Does it make a difference who the single owner/operator of the generation assets is?
- If there is, or is potentially, a problem, what are the best solutions?
Implications for, and links to, other work groups
- Market power is both a general market structure issue and a particular issue for the federal hydro system, given the benefits of coordinated hydro operation and the federal system's large share of regional hydro.
- This analysis should assume some level of separation of transmission and generation assets that goes beyond FERC's functional unbundling/administrative separation. To the extent this assumption makes a difference in the analysis (e.g., in addressing potential generation market power) the issue should be noted.
- The Competition and Customer Choice Work Group should provide the framework for comparison when evaluating consistency of the federal power marketing structure and a competitive market in the future (e.g., five years from now).
Schedule
The work groups are scheduled to complete their work by July 11, a period of about 100 days from April 1. By the May 9 meeting of the steering committee, the workgroup should be prepared to give a progress report. The report should include the group's strategy for addressing the issues assigned to it, tasks that have been assigned to subgroups, research and data requests issued by the group and staff or contractors responsible, and a detailed listing of the issues and alternatives that are being studied along with some preliminary findings.
At the June 6 steering committee meeting, the group should be prepared to present its preliminary findings regarding alternatives it has evaluated including the pros and cons relative to the important objectives of the regional review.
At the July 11 steering committee meeting, the group's work should be done. A detailed written report should be available for the steering committee to use in its deliberations. In addition to the facts gathered and the pros and cons and feasibility of the alternatives examined, it should address the necessary steps to be taken to implement each alternative with a discussion of feasible strategies for phasing in the alternative.
| Task 1 | April | May | June | July |
|---|---|---|---|---|
| Report to Steering Committee | 9 | 6 | 11 | |
| Define the specific models for marketing federal power | ------------- | |||
| Interim review by Steering Committee of specific models | ----- 18 | |||
| Final approval by Steering Committee of specific models | -X |
| Task 2 | April | May | June | July |
|---|---|---|---|---|
| Report to Steering Committee | |
9 | 6 | 11 |
| Evaluate each of the models with regard to each issue | -------- | ------------ | ---------- | |
| Prepare final report | ----- | - X |
| Task 3 | April | May | June | July |
|---|---|---|---|---|
| Report to Steering Committee | |
9 | 6 | 11 |
| Council staff prepares background report for Steering Committee and work group | ------------- | --X | ||
| Evaluate substantive issue | ------------ | --------- | |
|
| Prepare final report | ----- | --X |
Transmission Work Group
Discussion
The Steering Committee expects that its transmission workgroup will build on work already underway in the PNUCC transmission workgroup, and expects that the group will consist of the membership of the PNUCC group, expanded to include other interested parties. The Steering Committee identified a number of topics to be addressed by the workgroup. These topics include:
- A definition of the transmission system, appropriate for evaluating alternative organizations of the system.
- Potential roles of an independent grid operator.
- Effects of our region's choice of transmission organization on other regions.
- Effects of alternative pricing regimes.
- Effects of separation of generation from transmission on the ability of the power system, and in particular Bonneville, to meet financial obligations.
The steering committee did not specify the components of an appropriate definition of the transmission system, but subgroup discussions identified voltage as one means of categorizing lines as part of the transmission system or utilities' local distribution system. The sense of the steering committee appeared to be that line voltage might not capture all the important considerations, and the transmission workgroup should develop a clear definition to guide its work and to help the steering committee consider transmission questions.
There was agreement among the steering committee that while the transmission system will need to be at least administratively separated from generation, a greater degree of separation was likely to be necessary. The steering committee identified an independent grid operator as a way of accomplishing this greater degree of separation. The degree of control given to a grid operator is an area of interest to the steering committee. Some on the committee rejected dispatch of generation by a grid operator. In its discussion, however, the steering committee decided that while there was skepticism regarding mandatory pools and central dispatch, the committee needed more information before it could rule such options out. This should be an area of interaction between the transmission working group and the competition and customer choice working group.
The steering committee expressed interest in the effects of alternative methods of pricing transmission services. This interest included both the equity effects (shifting of transmission costs among all parties) and the efficiency effects (increased total value of services provided by the power system). The alternatives discussed included "postage stamp" and "zonal" pricing of transmission.
The steering committee heard that the separation of BPA's generation from its transmission could effect its ability to meet its financial obligations. It also heard that our region's choice of transmission system operation could affect neighboring power systems.
Primary Tasks
1. Define the transmission system.
- What criteria should be used to define the transmission system?
- What line configurations are exceptions to a voltage categorization?
- What facilities are necessary for control of the transmission system?
- How will market access be affected by the definition of transmission?
2. Define the alternatives for organization and management of the transmission system -- evaluate the advantages and disadvantages of each alternative. The alternatives should include:
- Administrative separation of generation and transmission
- Transmission coordination agreement
- Independent grid operator, without ownership of transmission assets
- Independent grid operator, with the ability to own transmission assets
- Separate transmission company
3. For these alternatives, evaluate the efficiency of operation and incentives for expansion and reliability of the transmission system.
4. For those alternatives that involve transfer of control or ownership of assets, examine possible methods of transfer and compensation for the current owners.
5. Evaluate the potential effect of wholesale market structure on efficiency of operation and incentives for expansion and reliability of the transmission system. This work should be coordinated with the competition and customer choice workgroup. Include the cases of:
- A wholesale market based on bilateral contracts, with grid operator control of sufficient generation to provide system stability
- A mandatory pool, with grid operator control of dispatch of all generation
6. Identify and evaluate alternative methods of transmission pricing (for example, postage stamp, zonal, hub and spoke, on/off charges, congestion pricing and secondary markets for unused transmission capacity).
- What incentive effects does pricing have on efficiency of system operation and expansion?
- What effects do pricing alternatives have on transmission costs for representative utility types?
- What are the administrative implications of the alternatives for transmission pricing?
7. Evaluate the effects the alternatives, for organization and management of the transmission system and for transmission pricing, might have on the power system's ability to accomplish its public purposes and meet its legal obligations. This work should be coordinated with the federal power marketing work group and the public purposes work group.
8. Identify the most important issues to be addressed in the transition from the present transmission system to the future system.
Schedule
The work groups are scheduled to complete their work by July 11, a period of about 100 days from April 1. By the May 9 meeting of the steering committee, the workgroup should be prepared to give a progress report. The report should include the group's strategy for addressing the issues assigned to it, tasks that have been assigned to subgroups, research and data requests issued by the group and staff or contractors responsible, and a detailed listing of the issues and alternatives that are being studied along with some preliminary findings.
At the June 6 steering committee meeting, the group should be prepared to present its preliminary findings regarding alternatives it has evaluated including the pros and cons relative to the important objectives of the regional review.
At the July 11 steering committee meeting, the group's work should be done. A detailed written report should be available for the steering committee to use in its deliberations. In addition to the facts gathered and the pros and cons and feasibility of the alternatives examined, it should address the necessary steps to be taken to implement each alternative with a discussion of feasible strategies for phasing in the alternative.
| Tasks | April | May | June | July |
|---|---|---|---|---|
| Report to Steering Committee | |
9 | 6 | 11 |
| 1. Define transmission system | --------- | -X | ||
| 2. Identify alternatives for organization and management of transmission system | --------- | -X | ||
| 3a. Evaluate these alternatives for their effect on efficiency of operation and incentives for expansion of transmission | ----------- | -------- | ||
| 3b. Prepare report to steering committee on pros and cons on alternatives | ----------- | ----------- | --X | |
| 4. Examine methods of transfer and compensation for assets | ----------- | --------- | ||
| 5a. Evaluate the potential effect of wholesale market structure on efficiency of operation and incentives for expansion of transmission | ----------- | --------- | ||
| 5b. Prepare report to steering committee on effects of wholesale market structure | ----------- | ----------- | --X | |
| 6a. Identify alternative methods of transmission pricing | --------- | -X | ||
| 6b. Evaluate alternative methods of transmission pricing | ------------- | --------- |
| Tasks | April | May | June | July |
|---|---|---|---|---|
| 6c. Prepare report to steering committee on pros and cons of pricing alternatives | ----------- | ----------- | --X | |
| 7. Evaluate effects of organization, management and pricing of transmission on system's ability to accomplish public purposes and meet legal obligations | ----------- | ----------- | ||
| 8. Identify transition issues | --------- | ----------- | ----------- |
Competition and Customer Choice Work Group
Statement of Work Group Task: Evaluate the issues raised by the development of a competitive electricity generation market and utility and utility customers' access to that market.- Describe current status of the regional
power system.
- What are the rules governing wholesale power
markets and competition currently? What are the rules
governing access by retail customers to the wholesale power
markets?
- How do they vary by State?
- How do they vary for publicly-owned utilities (POU) and investor-owned utilities (IOU) and direct service industries (DSI)?
- What are the forces driving change, current stresses on
the system?
- What activities are occurring right now to
increase customer access to markets?
- Industry
- Utility
- Core customers
- What initiatives are being proposed at the national level to increase retail access?
- What approaches to increased retail access have been proposed in other states?
- What activities are occurring right now to
increase customer access to markets?
- What are the rules governing wholesale power
markets and competition currently? What are the rules
governing access by retail customers to the wholesale power
markets?
- Competitive electricity markets. Describe the issues
surrounding market access for (1) POUs, (2) IOUs, (3) large
industrial customers, (4) large commercial customers and (5)
small utility customers.
- What is likely desire and purpose for access for some or all retail customer groups?
- Define barriers to access as they currently exist.
- Regulatory, technological, market, others?
- What issues are raised by access in each of the
categories?
- Bonneville limitations on public utility access?
- Need for retail wheeling?
- Separation of distribution from generation function?
- Ability to fund and carry out public purposes?
- Funding above-market-cost utility resources?
- System Reliability?
- Local choice?
- What are the key transitional issues that would need to be addressed for each category?
- Given the evaluation above, what are the benefits and
risks in each of the following three approaches to industry
reorganization is preferred?
- Facilitate, encourage and accommodate increased market access for all customers.
- Allow retail competition to evolve naturally through the operation of the market.
- Pursue alternatives approaches to reaching the goals of customer choice, increased efficiency, etc. (i.e. through incentive regulation, product unbundling, or changed definition of wholesale/retail markets, or others.)
- Evaluate alternative wholesale market structures
including various pooling arrangements and bilateral models.
Address each alternative regarding the following:
- Providing clear and accessible price discovery;
- Efficient utilization of electricity generation resources;
- Efficient utilization of transmission resources (Transmission Group has primary responsibility);
- Reliability of supply;
- Identifying needs, and providing investment incentives, for additional capacity;
- Sharing the benefits of a more efficient competitive wholesale market among all customers.
- The ability to address transition costs and various nonmarket goals.
- The ability to identify and control excess market power of either a pool operator, individual generators, or large customers.
Conservation, Renewables, Public Purposes Work Group
Discussion The conservation, renewables, public purposes work group combines several topic areas from the template. They include:- Conservation
- Renewable resources
- Environmental costs
- Low income energy assistance; and
- Public purposes, obligations and cost transfers such as rural development, irrigation, flood control, recreation, navigation, public preference, residential exchange and so on.
There was less agreement about renewables. Some believe that the market will develop cost-effective renewable resources while others believe there are regulatory and market barriers to be overcome. The tasks for the work group include identifying the barriers to preservation of renewable resource options and renewables development; identifying strategies to overcome those barriers including RD&D and commercialization, and identifying the means of financing and administering those strategies.
Environmental costs were discussed. The mitigation of environmental costs that are legitimately attributable to the power system, including fish and wildlife costs, were acknowledged to be the responsibility of the power system. While there may be disagreement with specific mitigation requirements, establishing those requirements was generally believed to be the responsibility of the appropriate environmental regulators. The issue of governance of fish and wildlife mitigation is being addressed by the 180-Day Review. The risk associated with fish recovery requirements will be addressed by the Federal Power Marketing group. There does not appear to be any specific task for the work group on this issue. However, the implications of structural alternatives on the ability to fulfill environmental responsibilities should be a consideration for all work groups.
Opinion regarding treatment of Bonneville's public purposes, obligations and cost transfers such as rural development, irrigation, flood control, recreation, navigation, residential exchange and public preference was mixed. Some are concerned that these issues are so difficult as to prevent progress on other issues.
Others felt that it is necessary to address them. It was agreed that at a minimum, an effort would be made to identify and quantify these purposes, obligations and cost transfers. To the extent that the work group identifies significant issues, it should report these to the steering committee and seek direction as to whether the work group should explore conceptual alternatives. Bonneville has performed an initial assessment that has been delivered to the Steering Committee. The necessity of linkages between these issues and the work of other groups was noted. It is the responsibility of all work groups to consider the effect of alternatives on the ability of the system to fulfill public purposes.
Primary Tasks
1. Identify and evaluate alternative means of securing cost-effective conservation that are consistent with increasingly competitive electricity markets. Explicit evaluative criteria should be developed and utilized. Specific tasks include:
- Identify kinds of conservation market is likely to develop;
- Identify the kinds of cost-effective conservation that the market is unlikely to develop;
- Identify the kinds of market failure that impede development of that conservation;
- Identify alternative strategies for overcoming those market failures, estimate their financial requirements and evaluate the relative effectiveness of those strategies;
- Identify and evaluate alternative mechanisms for financing implementation of those strategies that are broad based and competitively neutral, including consideration of whether such mechanisms should apply to fuels other than electricity;
- Identify and evaluate alternative mechanisms for administration; and
- Identify transition and implementation steps.
2. Identify and evaluate alternative means of preserving renewables as a long-term option and encouraging development of renewable resources.
The alternatives must be consistent with increasingly competitive electricity markets. Explicit evaluative criteria should be developed and utilized. Specific tasks include:
- Identify the barriers to the preservation of renewable resource options and development of renewable resources, considering both RD&D and commercialization;
- Identify alternative mechanisms for overcoming those barriers, estimate their cost and evaluate the relative effectiveness of those strategies.
- Identify and evaluate alternative mechanisms for financing implementation of those strategies that are broad based and competitively neutral;
- Identify and evaluate alternative mechanisms for administration; and
- Identify transition and implementation steps.
3. Public purposes, obligations and cost transfers.
Identify and estimate the costs of public purposes, obligations and cost transfers including rural development, low density discount, residential exchange, irrigation, flood control, low-income energy assistance, recreation, navigation, and public preference. Specific tasks include:
- Review Bonneville analysis of public policies and their benefits and costs recently delivered to Steering Committee for completeness and modify the list as appropriate;
- Estimate, to the extent possible, the costs associated with the public purposes, obligations and cost transfers identified.
- Identify alternative means of providing low income energy assistance.
- Report issues of significance to the Steering Committee.
- Explore conceptual alternatives to specific public purposes as directed by the Steering Committee.
Implications for, and links to, other work groups
Maintain liaison with the groups considering federal power marketing, competition, and transmission to ensure that they consider the implications of the alternatives considered for the ability to support public purposes, obligations and cost transfers. Schedule
The work groups are scheduled to complete their work by July 11, a period of about 100 days from April 1. By the May 9 meeting of the steering committee, the work group should be prepared to give a progress report. The report should include the group's strategy for addressing the issues assigned to it, tasks that have been assigned to subgroups, research and data requests issued by the group and staff or contractors responsible as well as a report on the status of the initial work tasks.
At the June 6 steering committee meeting, the group should be prepared to present its preliminary findings regarding alternative strategies it has evaluated with respect to conservation and renewables as well as its assessment of the costs of public purposes, obligations and cost transfers.
At the July 11 steering committee meeting, the group's work should be done. A detailed written report should be available for the steering committee to use in its deliberations. It addition to the facts gathered and the evaluation of the alternatives examined, it should address the necessary steps to be taken to implement each alternative with a discussion of feasible strategies for phasing in the alternative. Proposed timelines for the tasks are shown below.
Conservation
| Task | April | May | June | July |
|---|---|---|---|---|
| Report to Steering Committee | 9 | 6 | 11 | |
| Develop work plan, information needs and assignments | ------X | |||
| Identify conservation market likely will and will not develop and kinds of market failure | ------------- | -X | |
|
| Identify and evaluate strategies for overcoming market failures | ------- | ----------- | X | |
| Identify and evaluate financing mechanisms, including implementation step | |
--------- | ------------ | --X |
| Identify and evaluate administrative mechanisms, including transition and implementation steps | |
----- | ------------ | --X |
| Document | |
|
------------ | --X |
Renewables
| Task | April | May | June | July |
|---|---|---|---|---|
| Report to Steering Committee | |
9 | 6 | 11 |
| Develop work plan, information needs and assignments | ------X | |
|
|
| Identify barriers | ------------- | -X | |
|
| Identify and evaluate strategies for overcoming barriers | ------- | ------------ | X | |
| Identify and evaluate financing mechanisms including implementation steps | --------- | ------------ | --X | |
| Identify and evaluate administrative mechanisms, including transition and implementation steps | ----- | ------------ | --X | |
| Document | |
|
------------ | --X |
Public purposes, obligations and cost transfers
| Task | April | May | June | July |
|---|---|---|---|---|
| Report to Steering Committee | |
9 | 6 | 11 |
| Develop work plan, information needs and assignments | ------X | |||
| Review Bonneville Analysis of public policies benefits and costs and modify list as appropriate. | ------------- | --X | ||
| Estimate cost of Public purposes, obligations and cost transfers and report significant issues to Steering Committee | ------------ | X | ||
| Explore conceptual alternatives for public purposes as directed by Steering Committee | ------------ | --X | ||
| Identify alternative means of supporting low income energy assistance | -------- | ------------ | ----X | |
| Maintain liaison with other work groups regarding implications of structural alternatives for public purposes | ------------- | ------------ | ------------ | -- |
| Document | |
----- | ------------ | --X |
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