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DRAFT

Public Policies and Their Benefits and Costs
in the Pacific Northwest Electric Power Industry

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This discussion paper has been prepared at the request of the Comprehensive Energy Review Steering Committee (Review) to aid the Review as it explores restructuring of the Pacific Northwest electric power industry. The information presented is not intended to advocate or judge the merits of the policies described, but to list the full range of public policies that affect the regional power market.

The Pacific Northwest electric power industry is influenced by a complex set of public policies which in various ways support or burden the utilities of the region. These public policies are implemented through legislation or regulations which result in various forms of intervention in the electric power market. In most cases, the rationale for the government intervention is to redistribute benefits to achieve public purposes or to promote fairness among different constituencies (see the discussion of government intervention in Appendix A).

Some of these policies are designed to provide benefits to the public or to consumers, while others are intended to aid utilities in their marketing. In many cases, the way these policies are implemented results in some entities receiving benefits and in others supporting (by directly or indirectly paying for) those benefits (see Appendix A). The purpose of this paper is to demonstrate a method for evaluating public policies which reviews their intended purpose and assesses their effects on the electric power industry in the Pacific Northwest (some of the underlying purposes of these policies are described in Appendix B). These policies are listed in four broad categories:

Policies affecting BPA's power marketing
Policies affecting utility structure and regulation
Policies reflecting broader societal values
Policies concerning the development and operation of hydro resources

This list of public policies is not intended to be exhaustive, nor is there any intent to suggest that any policy should be changed or rescinded. This paper is intended only as a starting point for discussion of these policies. The members of the Review are encouraged to use the information included here and to move the discussion forward by asking the following questions:

What was the original purpose of the public policy? Is that purpose still valid today? Are there new public purposes emerging from changes in society or in the structure of the electric utility industry that warrant the adoption of new policies?
Is the mechanism for achieving this purpose still the appropriate means to accomplish it, taking into account changes in the industry, the economy, and other government actions? Is there a better mechanism for achieving the purpose?
What are the impacts of the policy? Are they still acceptable under the current industry environment? To determine the impacts, a base case should be defined (generally, conditions as if the policy were not in place). The next step should be to estimate the monetary value of any transfers and quantify any price distortions that may result from the policy.
Who are the beneficiaries and supporters of the policy in today's environment? Are these the same parties who were intended to benefit from and support the policy when it was first defined?

The following section lists public policies that influence the electric power market in the Pacific Northwest.

Public Policies Affecting the Pacific Northwest
Electric Power Market

For each public policy listed below, there is a brief description of the policy; an explanation of its original purpose; and notations tentatively identifying the source of the policy (e.g., federal or state legislation, rate processes, etc.), who supports (pays the cost of) the policy, who benefits from it, and how those benefits and costs might be calculated.

This format suggests, but does not dictate, how policies might be analyzed. Some reviewers may have different perspectives as to the characteristics of the policies addressed in this format. The information provided is intended only as a starting point for discussion and not as a definitive conclusion about the characteristics of the policies.

A. POLICIES AFFECTING BPA POWER MARKETING

Public Preference
Public preference allows publicly owned utilities priority access to Federal System power at BPA's cost, which until recently has been below the price in a competitive market.

Purpose: To provide a cost-based "yardstick" to compare to prices for power from investor-owned utilities. It was established in response to abuses of market power by IOUs in the early years of electric power marketing.
Source: Bonneville Project Act (and other federal power legislation)
Supported by: Other purchasers of BPA power
Beneficiary: Public utilities
Impact evaluation: The difference in price between federal power and power from other suppliers.

Federal System Generation and Transmission Reliability
The Federal Columbia River Power System (FCRPS) maintains reliable power service through efficient use of interconnected facilities and the flexibility of its large base of hydroelectric generation.

Purpose: To ensure reliable electric power service to utilities and consumers.
Source: BPA's panoply of authorizing legislation including the Bonneville Project Act, the Transmission System Act, and the Northwest Power Act
Supported by: BPA sales to customers
Beneficiary: BPA's customers and consumers who take advantage of the convenience of dependable electric service. Some utilities benefit to the extent they use the capability of the Federal System without full payment to BPA. BPA is unbundling its products to assure that, in the future, those who benefit from the Federal System pay their share of the costs.
Impact evaluation: The difference between the avoided cost of interruptions in wholesale electric service and the avoided cost of a less than optimal power system.

Residential Exchange
The residential exchange results in a direct payment from BPA to exchanging utilities (generally IOUs) to be passed to their residential and small farm customers. The provisions of the Northwest Power Act that created the exchange include requirements that preference customers should be no worse off than they would have been without the exchange.

Purpose: To provide access to low-cost federal power for residential and small farm consumers served by investor-owned utilities, extending benefits of low-cost federal power beyond customers of publicly owned utilities, who had access to it under public preference.
Source: Northwest Power Act
Supported by: BPA sales to other BPA customers; chiefly publicly owned utilities and DSIs.
Beneficiary: Residential and small farm consumers served by exchanging utilities
Impact evaluation: One part of the impact would be the difference between the retail price charged by exchanging utilities and what that retail price would be without the exchange. Another part would be the differences in retail rates of other BPA customers with and without the exchange.

Irrigation Discount
BPA initially offered the irrigation discount as a discount from the PF rate for utilities with high concentrations of irrigation loads. BPA's 1996 rate proposal discontinues the irrigation discount.

Purpose: To help irrigated agriculture during a period of depressed economic conditions in the agricultural sector of the Pacific Northwest.
Source: BPA rate process seasonally in 1942 and 1954 rates, year-round starting in 1965 (phased out from 1974-79)
Supported by: BPA sales to non-irrigation customers
Beneficiary: Irrigation utilities and the irrigators they serve
Impact evaluation: The difference in the rate charged to irrigation utilities and non-irrigation utilities with and without the discount policy.

Low-Density Discount
The low-density discount is a discount from BPA's PF rate for rural utilities with large service territories and small customer bases.

Purpose: To offset higher distribution costs to low-density customers.
Source: Northwest Power Act
Supported by: BPA high-density customers
Beneficiary: Low-density utilities, typically publicly-owned electric cooperatives
Impact evaluation: The difference in the rate charged to low-density utilities and to the other utilities with and without the discount policy.

Reserved Power for Irrigation and Payment of Project Costs Under Irrigation Project Authorizing Legislation.
Under the provisions of the laws that authorized construction of dams, power for irrigation and other Reclamation project purposes is reserved from the power generated by the projects. Rates for this power are below BPA's usual firm power rates. In addition, power users (BPA customers) pay project costs allocated to irrigation that are deemed "beyond the irrigators' ability to pay."

Purpose: To promote irrigated agriculture and the economic benefits of increased farming in the region and to support irrigation purposes of multi-purpose projects
Source: Project authorizing legislation
Supported by: BPA customers
Beneficiary: Irrigators (directly); regional economic development (indirectly)
Impact evaluation: Part of the impact is the difference between the revenues BPA could receive for the reserved power at standard rates and the revenues BPA receives at the statutory price. The remainder is the rate impact on the other classes of customers to make up for costs not recovered from irrigators.

BPA's Credit as Backed by the Federal Government
BPA's credit, as an agency of the federal government, improves the marketability of bonds issued by a variety of regional public entities including WPPSS, CARES (the Conservation and Renewable Energy System), EWEB, Tacoma City Light, and others.

Purpose: To support the region's goals in maintaining an adequate power supply to meet the region's needs.
Source: Bonneville Project Act
Supported by: Federal taxpayers
Beneficiary: Entities sponsoring and participating in developments backed by BPA, and consumers who benefit from those developments.
Impact evaluation: The increase in financing costs if the same projects were not backed by BPA, or the costs of replacing developments that would not go forward without BPA backing, and their resulting rate impacts.

Regional Preference
BPA sales of surplus power outside of the Pacific Northwest are subject to limitations. These include a requirement that surplus power BPA offers for sale outside the region must first be offered to buyers within the region, restrictions on resale of BPA power, and call-back provisions under which BPA can recall power from extraregional sales if it is needed within the region. Some of these provisions were modified under the Water and Power Appropriations Act in late 1995 to relax the call-back and resale constraints of the Regional Preference Act. These changes are expected to enhance BPA's ability to market power outside the PNW.

Purpose: To reserve the low-cost power benefits of the Federal Columbia River Power System first for the use of the citizens of the region.
Source: The "Regional Preference Act" Public Law 88-552, and the Northwest Power Act.
Supported by: BPA, through foregone revenue that would come from unrestricted export sales
Beneficiary: BPA's Pacific Northwest power customers
Impact evaluation: The difference in revenues BPA would receive from sales not subject to regional preference restrictions, or the difference in price PNW utilities would pay if they could not exercise regional preference rights for BPA power, and the effect of those revenue changes on rates to BPA's customers

Nonfirm Power Rates
Historically, BPA has sold large amounts nonfirm power to utilities in the PNW and in the Pacific Southwest at relatively low rates based on its unpredictable availability and market prices during the times it is available. More recently, with changes in hydro operations to aid salmon migration, large amounts of power in excess of the region's firm power needs have become available on a more predictable basis during spring and summer fish flow periods. Although BPA markets significant amounts of this power as firm, much of it is sold as nonfirm power at spot market prices. Nonfirm energy rate schedules allow BPA to offer power at "market expansion" rates that stimulate additional sales.

Purpose: To generate revenue by selling power that the Federal System can produce at little cost, rather than spill water.
Source: Regional Preference Act, Northwest Power Act
Supported by: Existing Federal System investments in dams, hydro generating plants, and interregional transmission facilities.
Beneficiary: Utilities using high-cost power that can be displaced with nonfirm power during high-flow periods or good water years; BPA ratepayers via Federal System costs paid with nonfirm power sales revenues.
Impact evaluation: Cost savings depend on the costs of resources that are displaced by nonfirm energy. Revenues are limited by the demand for power during times when nonfirm energy is available and by market prices from alternative suppliers.

Flexibility in Repayment of Federal System Debt
Appropriated debt and Treasury debt used to finance the federal power system must be repaid to the U.S. Treasury within the facilities' average service life or 50 years, whichever is less. BPA uses repayment studies to plan payments so that its obligations are paid in full by the time they are due, including "discretionary" payments on principal that are above required minimum amounts. These discretionary payments level out BPA's payments and direct payment first toward the highest interest debt. Also, while BPA must maintain its total annual payments to principal as established in rate cases, BPA has flexibility to adjust amounts paid among its obligations. Generally, BPA repays its highest interest obligations first. Like other commercial enterprises which seek to minimize costs, BPA uses this flexibility to reduce its total interest expense, and to manage debt within statutory borrowing limits.

Purpose: To help stabilize BPA's year-to-year costs and rates
Source: Bonneville Project Act, Transmission System Act, the Northwest Power Act, and project authorizing legislation
Supported by: BPA ratepayers (through revenues that fund payments)
Beneficiary: Lenders (U.S. Treasury and bond investors) and ratepayers (from rate stability)
Impact evaluation: The effect of directing more of its annual payments toward higher-interest debt is to reduce interest expenses, but the savings are small in the context of BPA's total annual budget. If BPA were required to repay according to a fixed schedule, rates would increase due to increased interest costs from later payments on higher-interest debt.

Additional Policies

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B. PUBLIC POLICIES AFFECTING UTILITY STRUCTURE AND REGULATION

Average Cost Pricing
The regulatory structure of the utility industry provides that utilities price electricity based on their embedded costs.

Purpose: To assure that utilities receive no more or less than an adequate rate of return on investments they made and costs they incurred to serve their customers.
Source: Utility regulation
If market value is greater than historical cost:
Supported by: Utilities
Beneficiary: Utility ratepayers
Impact evaluation: Market value, minus average cost, multiplied by the amount of power sold
If market value is less than historical cost:
Supported by: Utility ratepayers
Beneficiary: Utilities
Impact evaluation: Average cost, minus market value, multiplied by the amount of power sold.

Utility Franchise Service Territories
Utilities with franchise service territories have an obligation to serve consumers within their designated territory, and do not allow their retail customers to purchase power from other providers, thus potentially allowing those utilities to charge above-market rates to these "captive" customers.

Purpose: To avoid duplication of service, which could be more expensive than one utility serving the customer.
Source: State laws
Supported by: Retail ratepayers in franchised service territories
Beneficiary: Franchised utilities and customers purchasing from them who are not required by franchise to do so, whose rates are maintained at competitive prices by revenues from sales to captive customers.
Impact evaluation: The difference between the market price (including distribution charges) and the rate charged to customers served within franchised service territories.

Interclass Rates, Including BPA's Rates to Direct Service Industries (DSIs)
Some utilities charge more than the cost of the services to one class of customer and charge less to another class of customer. Some consumers and utilities view BPA's rates to DSIs as a benefit to the DSIs which is paid from sales to other classes of customers. DSIs take the opposite view, that low costs-of-service to DSIs provide revenues to BPA which help to reduce rates to other customer classes.

Purpose: To allow utilities to offer competitive prices to customers who might otherwise switch fuels or suppliers, and to enable utilities to provide "universal" service to all consumers within their service territories
Source: Public utility regulators
Supported by: Lower-cost type consumers (relative to their rates)
Beneficiary: Higher-cost type consumers (relative to their rates)
Impact evaluation: The value of this price structure depends on the circumstances of the individual utility, including the composition of its retail customers, and the extent to which any of those classes of customers may receive offers to switch fuels or suppliers.

Postage Stamp Rates
Postage stamp rates are uniform rates per unit of power delivered for transmission and distribution of power. Under such rates, distance of the customer from the source of power, and the resulting difference in cost-of-service to various customers, is not a factor in setting rates for each customer.

Purpose: To encourage the "widest possible use" of electricity and support economic development in rural areas of the region.
Source: Bonneville Project Act, state regulations, public agency rate decisions
Supported by: BPA customers with low costs-of-service, largely urban public utilities
Beneficiary: Utilities with high costs-of-service, typically rural electric cooperatives
Impact evaluation: To evaluate the impact of postage stamp rates, the costs of facilities serving specific utilities must be defined and distinguished from the costs of facilities serving larger areas or serving the system as a whole. For each utility, the value is the difference between the current rate under postage stamp rates and the rate under a strict cost-of-service rate.

Public Agency Interest Rates
In general, bonds issued by publicly-owned utilities are exempt from federal (and in some cases, state) income tax and therefore can be marketed at lower interest rates than bonds issued by IOUs. Investor-owned utilities (and their customers) cannot issue tax-free bonds and therefore have to offer a higher rate of return, which results in additional cost.

Purpose: To prevent the federal government from taxing a state entity and to encourage investments in developments for the public good.
Source: State and federal tax laws
Supported by: Federal taxpayers
Beneficiary: Public utilities
Impact evaluation: Tax-exempt bonds typically are issued at interest rates below the rates for comparable taxable bonds. The differential reduces the cost of borrowing, which in turn tends to lower the retail rates of public utilities relative to the private utilities. The value of the benefit can be calculated from the savings in interest payments based on the amount borrowed.

Public Agency Property Tax Exemption
Public utility property is exempt from local property taxes, while IOU property is not. However, many public utilities make payments to local governments in lieu of taxes.

Purpose: To prevent one governmental unit from taxing another
Source: State tax laws
Supported by: State taxpayers
Beneficiary: Public utilities and BPA
Impact evaluation: Property tax rates and procedures for assessing property value vary from one locality to another, so it would be difficult to precisely determine the value of this exemption. If the tax rates and property values were known in detail, it would be possible to calculate the rate increase that would be needed if these utilities paid the full amount of property tax.

Public Agency Income Tax Exemption
Publicly-owned utilities are exempt from federal or state income taxes.

Purpose: Public entities are non-profit, thus do not have income to tax. If revenues were considered as potentially taxable income, this immunity would be based on the principle that one government entity should not tax another.
Source: Federal and state tax laws
Supported by: Taxpayers
Beneficiary: Publicly-owned utilities
Impact evaluation: To calculate the difference in costs to private and public utilities, taxes would be figured by multiplying the amount of utility revenue determined to be taxable by the applicable tax rates. Tax payments could then be used to compute the rate increases that would result if public utilities had to pay income taxes.

Federal Investment Tax Credit and Accelerated Depreciation for IOUs
The U.S. tax structure allows IOUs to take investment tax credits and to take early tax write-offs using accelerated depreciation.

Purpose: To provide incentives for investments to stimulate economic growth.
Source: Federal tax laws
Supported by: Federal taxpayers
Beneficiary: IOUs
Impact evaluation: The value of this policy to IOUs depends on utility investment decisions. Amounts of deductions and credits could be used to compute the rate increases that would result if the IOUs did not receive these income tax credits.

Additional Policies

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C. PUBLIC POLICIES REFLECTING SOCIETAL VALUES

Public Processes
BPA, the Northwest Power Planning Council, the Corps of Engineers, the Bureau of Reclamation, state agencies, and utilities conduct public processes to provide information and to obtain input from the public.

Purpose: To promote better decisions and avoid misunderstandings between different interests
Source: Northwest Power Act, the National Environmental Policy Act, and other laws and policies
Supported by: Agencies conducting public processes
Beneficiary: The public and parties affected by decisions, by creating the opportunity for improved information and analysis, and by lessening the likelihood of disputes. Agencies conducting public processes benefit from better information, which may lead to decisions better reflecting the values of the participating public. These processes also enhance agency credibility, reducing resistance to implementing decisions that are supported by public processes.
Impact evaluation: Generally, public processes add costs. If the amounts of these costs can be determined, they could be used to compute the rate reductions that would result if public processes did not occur. Enhanced decisions and easier implementation of decisions supported by public processes would result in cost savings.

Energy Conservation

Purpose: To assure that conservation is encouraged as an alternative to traditional generating resources for meeting the region's energy needs.
Source: Northwest Power Act and state regulations
Supported by: BPA and other electric utilities
Beneficiary: Participants, and others, who benefit from enhanced environmental quality and lower energy costs resulting from energy conservation.
Impact evaluation: Program participants benefit from lower energy bills due to the adoption of energy efficiency measures. Program costs could be used to compute the rates with conservation programs relative to rates without the programs. Users of environmental resources that are affected by power generation experience lesser impacts to the extent conservation lessens the use of those generators.

Fish and Wildlife Mitigation
The Northwest Power Act requires that BPA mitigate for the harm to fish and wildlife caused by the construction and operation of the federal dams on the Columbia River. Other utilities that own power generating facilities are subject to similar mitigation requirements.

Purpose: To assure that those who benefit from Columbia River dams share in paying for damage to fish and wildlife caused by the dams.
Source: Northwest Power Act
Supported by: BPA and other utilities, to the extent mitigation payments exceed costs attributable to power production, through sales to customers
Beneficiary: Non-power users of hydro projects, to the extent BPA's fish and wildlife mitigation costs exceed costs attributable to power production, because costs attributable to non-power uses are paid from power revenues
Impact evaluation: Benefits are equal to the amount BPA pays for fish and wildlife mitigation in excess of the share attributed to power production. This amount could be used to calculate rate impacts.

Research, Development and Demonstration Programs
BPA and other utilities have supported a wide variety of research, development and demonstration (RD&D) efforts in fields including power generation and transmission technology, fish and wildlife, environmental remediation, energy conservation, and renewable resource development. This support has led to numerous developments which have improved system performance or reduced system costs, or to the commercialization or implementation of new energy resource measures.

Purpose: To facilitate improvements in power system operations, and to promote the commercialization and adoption of energy conservation measures and renewable resources
Source: Bonneville Project Act, Northwest Power Act
Supported by: BPA, through sales to its customers, and other utilities
Beneficiary: Project sponsors, power system users, and those who benefit from environmental values enhanced by use of conservation and renewable resources.
Impact evaluation: Depends on the particular RD&D project and its success, as well as the extent it is applicable in practice. Supporting RD&D involves a risk that money spent will not result in equivalent returns or benefits. A utility may or may not receive benefits equal to its expenditures for RD&D efforts, but the industry or the public typically benefits when RD&D is successful in bringing about innovations. The net present value of the rates could be computed with and without RD&D, to estimate the benefits of the program.

The Exclusion of Some Environmental Externalities from Power Prices
Power prices generally do not include the full value of environmental externalities that are a consequence of power production. Some costs are not yet known, while others are not easily calculated. Some costs (particularly emissions into air or water) are part of a larger impact for which power production is only partly responsible.

Purpose: To limit regulations to those that can be reliably documented and are politically practical.
Source: The limitations of State and Federal environmental regulations and policies
Supported by: Other users of these resources
Beneficiary: Consumers of electricity through lower prices than would occur if power costs included all environmental externalities
Impact evaluation: The rate increase avoided by not incorporating the costs of full environmental mitigation into power costs, and either the value of the degradation in the quality of environmental resources or the costs to other environmental resource users of mitigating environmental damage.

Additional Policies

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D. PUBLIC POLICIES CONCERNING THE DEVELOPMENT AND OPERATION OF HYDRO RESOURCES

Coordinated Power System Operations the Pacific Northwest are owned and operated by a variety of entities, including Federal agencies, IOUs, public utility districts, and municipal utilities. Coordinated operation allows the region's generating resources to be operated like a single system, rather than a group of interconnected but separate systems, and enhances the stability of the interconnected systems. Participants can obtain back-up services through coordination that allow stronger systems to support weaker systems during periods of stress.

Purpose: To facilitate efficient operation, reduce costs, and enhance reliability, and to share the benefits of operation of Columbia River Treaty projects.
Source: Pacific Northwest Coordination Agreement, Mid-Columbia Hourly Coordination Agreement, Northwest Power Pool, and other planning and operating activities among operators.
Supported by: BPA and other operators
Beneficiary: All participants, and consumers who avoid personal or business costs of a less-efficient and reliable system
Impact evaluation: Without coordination, either system reliability would be lessened (with higher costs to consumers; such as the costs of more frequent blackouts or brownouts) or utilities would have to bear additional costs for facilities that they currently enjoy under a coordinated operating system. The costs of reduced reliability or additional facilities could be used to calculate rate increases without coordination.

Canadian Treaty Benefits
Under the Columbia River Treaty, four major dams were constructed to store run-off in the Columbia River drainage. These dams provide storage which increases the ability of the coordinated power system to produce power, enhances flood control, and provides additional flexibility to support all river uses.

Purpose: To increase storage and control of Columbia River flows
Source: The Columbia River Treaty between the United States and Canada; Non-Treaty Storage Agreement
Supported by: BPA and the Corps of Engineers (as the United States Entity under the treaty), British Columbia Hydro (as the Canadian Entity), and purchasers of Canadian Entitlement power through the Columbia Storage Power Exchange
Beneficiary: Power purchasers, users of the projects in the United States and Canada, and downstream activities that are protected by flood control operations
Impact evaluation: The market value of power generation both at the projects and downstream, and the value of flood control and other benefits from multi-purpose use of the projects.

Flood Control Operations at Hydro Projects
One of the primary purposes for many Pacific Northwest dams is to provide flood control benefits. The cost of flood control is not collected from the beneficiaries because flood control is considered a public good (see Appendix A for a discussion of public goods).

Purpose: To reduce flood control damage caused by rivers.
Source: Project authorizing legislation
Supported by: Federal taxpayers and dam owners whose power production rights are occasionally curtailed for flood control operations
Beneficiary: Occupants of areas protected from flooding
Impact evaluation: The impact of flood control operations is the difference between the costs of federal dams attributed to flood control and the value of the damage avoided downstream if the dams were not built or operated for flood control. It may be difficult to identify the beneficiaries and to provide a mechanism to collect the benefits.

Dam Sites and Accompanying Water Rights
For many of the dams constructed in the U.S. by federal, private, and public utilities, the utilities have exclusive rights to the sites and use of the water. Utilities often continue their exclusive rights as dams come up for relicensing, because utilities generally receive new licenses; although new environmental or operational conditions may be imposed (see next entry).

Purpose: To promote economic development.
Source: Federal power laws
Supported by: Federal taxpayers
Beneficiary: Project owners
Impact evaluation: The value would be the economic value of the dam sites and the water used by these projects.

Environmental Mitigation Requirements in FERC Licenses for Non-Federal Facilities
Federal licensing of dams provides a mechanism for placing conditions on the use of public resources that are designed to prevent or mitigate environmental damage caused by construction or operation of those projects.

Purpose: To assure that the developers benefiting from federally-licensed hydro projects pay the costs to mitigate the environmental impacts of those developments
Source: Federal power laws
Supported by: Non-federal owners of federally licensed facilities
Beneficiary: Other users of the rivers affected by non-federal hydro projects
Impact evaluation: Costs of required mitigation increase the costs of power to consumers using power from non-federal hydro projects. The rate impact depends on the mitigation costs. Mitigation efforts reduce costs to other resource users who would otherwise pay for mitigation or experience the effects of environmental damage.

Navigation at Federal Hydro Projects
Some federal dams were authorized, among other purposes, to improve navigation. When these dams were built, a portion of the cost was allocated to navigation.

Purpose: To promote navigation on the rivers and the resulting economic benefits of low-cost shipping.
Source: Project authorizing legislation
Supported by: Federal taxpayers
Beneficiary: Waterway users and businesses that benefit from river shipping
Impact evaluation: The value is the portion of the costs of federal dams attributed to navigation, compared to the economic value of the navigation made available by these projects.

Consumptive Rights to Water
Water to irrigators and other holders of water rights is generally free (via appropriated water rights granted under state law).

Purpose: To allocate water among users and provide an economic incentive to develop the Western frontier
Source: State and federal water laws
Supported by: Other water users (including in-stream uses, such as fish and wildlife, recreation and power production) who have lower priority for use of flows.
Beneficiary: Water users
Impact evaluation: The economic value of the water for agricultural, domestic, commercial, or industrial use provided by the issuance of water rights, and the costs of a lack of water to uses which are not supported by water rights.

Interest Rates on Federal Hydro Projects
Appropriations that financed several federal hydro projects in the Columbia basin applied assigned interest rates that were below the market interest rates at the time the projects were actually built, although the rates may have been at market levels at the time the projects were authorized. Pending debt buyout legislation reflects a compromise among the President and both Houses of Congress to resolve issues surrounding debt repayment, including the appropriate interest rate for outstanding federal debt on the Federal Columbia River Power System.

Purpose: To achieve social or political goals that legislators supported at the time the projects were built (e.g., economic development).
Source: Project authorizing legislation
Supported by: Federal taxpayers
Beneficiary: BPA power customers and non-power beneficiaries of the projects
Impact evaluation: The impact would be the difference in costs between the actual borrowing rate and the market rate at the time of financing.

Recreation at Federal Hydro Projects
Recreation is one of the multi-purpose uses of federal hydro projects.

Purpose: To increase the public's opportunities for recreation in and near federal hydro projects
Source: Project authorizing legislation
Supported by: Federal taxpayers
Beneficiary: Recreational users of federal hydro projects and businesses supported by such recreational use
Impact evaluation: The value is the portion of the costs of federal projects attributed to recreation, compared to the economic value of the recreational opportunities made available at these projects.
Additional Policies

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APPENDIX A

RATIONALE FOR GOVERNMENT INTERVENTION IN MARKETING

The purpose of this appendix is to provide some background on the reasons governments adopt policies that affect commercial markets. Governments intervene in marketplaces primarily to overcome four types of market imperfections .Footnote1

Natural monopoly
Obstacles to marketing public goods
Societal externalities
Environmental externalities

Natural monopolies generally arise where there are economies of scale. That is, when a larger company has significantly lower costs than an equivalent group of smaller companies, it may be more efficient for society to have one large company. The objective of government intervention is to increase social welfare from such companies and to ensure their efficient operation without excessive profits. An example of a natural monopoly is the electric distribution ("wire") business, where generally a consumer deals with only one provider. A single distribution company can avoid duplicate distribution systems which would have higher costs, not be economically efficient and increase land use. The mechanisms for dealing with natural monopolies in the electric power industry have been to regulate the large companies, and to encourage the formation of consumer-owned utilities where the absence of sufficient economies of scale failed to attract private companies.

Public goods are goods and services which the public generally believes should be enjoyed by all, that the people are "entitled" to, and therefore cannot or should not be withheld from the public. Some examples of pure public goods are public parks, national defense, and flood control. Public goods are generally goods which are so abundant that if one person consumes (or enjoys) them, it does not affect others' opportunities to enjoy the same good or service. On the other hand, private goods are generally those that need to be rationed because of their scarcity. Most goods in our society are private goods, and our society has used price as a rationing tool for these goods. Typically, it is difficult for society to collect payment for the benefits of public goods. Attempts to charge some users are complicated by the potential that "free riders" will obtain similar benefits at little or no charge. Because of the difficulties in collecting the costs of providing public goods, they are generally under-provided in the marketplace.

Societal externalities generally result from benefits (or costs) that some people receive (or have to pay for) because of others' consumption of that good or service. They result generally from the difficulty in collecting (or paying for) the societal benefits (or costs) that people experience because of the actions of those using the good or service. An example is where one family's improvements to their home increase the value of their neighbors' homes. Research, development and demonstration (RD&D) activities are sometimes subsidized because they can generate societal benefits that cannot be provided by the marketplace.

Environmental externalities also result from benefits (or costs) that people receive (or have to pay for) through others' consumption of goods or services. As with societal externalities, it is sometimes difficult to collect (or pay for) the value of environmental damages caused by such consumption. Some examples of environmental costs that are difficult to recover are global warming, air pollution, and water pollution. Where the cost of the environmental damage is not captured in the market price, society has used various means to compensate for the costs; such as taxes on commodities creating the environmental damage, and government regulations to set standards of consumption for what the marketplace treats as free goods (air, land, and water).

Implementation Effects of Public Policies

In implementing public policies, governments have put into place a variety of mechanisms to shift costs or value among elements of the economy to meet social objectives or purposes. Some argue that such public policy actions are needed to correct the market imperfections discussed above. Others argue that, although these policy actions may have been put into place with the best of intentions, they affect the relationships among entities in the competitive marketplace, and because such actions deviate from the purely competitive model, they misallocate societal resources. In some instances, market forces have resulted in a different effect than was intended when the policy was first implemented. The mechanisms that governments have chosen to implement public purposes are a sensitive issue to those who may either benefit from or feel handicapped by their effects.

When Congress, state legislatures, or regulatory bodies act to protect the health, safety, and welfare of the citizenry, they seek to serve the public interest. Consequently, it is troublesome to describe the results of these actions as subsidies, because the term connotes to many an inappropriate distortion of the marketplace. In the literature, subsidies are defined as "distributional impacts," intended or unintended, of public policies.

Footnote2Public policies can and do result in subsidies; in most cases the distributional impacts that result are those that were intended by the policy. However, due to the negative connotations that many be attached to the term, this paper avoids labeling public policies as "subsidies."

Because public policies may result in increased benefits (less cost, more revenues or a commodity at less than its market value) to one class of society, and decreased benefits to another, it is important to trace the distributional impacts of each public policy to determine if the outcome is consistent with the intent of the policy.

References

Samuelson, Paul A. And Nordhaus, William D.; Economics, McGraw-Hill, Fourteenth Edition, New York, 1992, pages 301-3 and 310-3.
Jaccard, Mark, "The changing rationale for government intervention in the electricity industry", in Energy Policy, 1995, Vol. 23 No. 7, pages 579-592.
Moffart, Donald W., Economic Dictionary, 1976, Elsevier Scientific Publishing Co., New York, 1976, page 262.
Steenblik, Ronald P., "A note on the concept of 'subsidy'", in Energy Policy, 1995, Vol. 23 No. 6, page 483-4.

APPENDIX B

PURPOSES OF PUBLIC POLICIES AFFECTING
THE PNW ELECTRIC POWER MARKET

Major Federal Legislation Affecting Utilities

Congress has occasionally passed legislation to regulate or control the electric utility industry. The electric utility industry is also importantly affected by various state laws and regulations governing utilities and their practices. The following are the most significant of those laws:

The Federal Power Act of 1920: This Act established the jurisdiction of the Federal Power Commission (later renamed the Federal Energy Regulatory Commission [FERC] ) to license non-federal dams, and to regulate power transactions and activities of investor-owned utilities. The Electric Consumer Protection Act of 1986 reinforced FERC's obligation to consider fish and wildlife impacts in the licensing process.

The Public Utility Holding Company Act of 1935 (PUHCA): This law was enacted in response to evidence of abuses of market power by investor-owned utilities, including self-dealing between power companies and their suppliers, which were often owned by the same holding company. The Act prohibited utilities from establishing independent power marketing companies.

The Public Utility Regulatory Policies Act of 1978 (PURPA): This law was enacted to effect a number of changes in the electric utility industry; notably, requiring utilities to purchase the output of certain types of generating resources (known as Qualifying Facilities) at the utilities' avoided cost.

The Energy Policy Act of 1992: This law established the right of non-utility generators to obtain access to transmission to market power, and allowed utilities to set up independent power marketing entities.

BPA's Legislative Mandates

BPA's activities in the Pacific Northwest are the result of a number of purposes that are expressed in the various laws that govern BPA's operations (these purposes are described below).

Since the policies governing BPA's activities often have been addressed repeatedly in successive enactments, they are listed by topic rather than separately under each law:

Power Marketing & Transmission: Congress created BPA in 1937 to market and transmit the power produced at Bonneville Dam. Since then, BPA has been authorized and directed to market federal power in excess of project needs and to provide transmission from 29 federal dams and certain non-federal thermal resources. BPA is also responsible for operation, maintenance and expansion of the Federal Columbia River Transmission System. BPA is also directed to provide transmission services for non-federal power and to construct transmission facilities for such service, if necessary. (Bonneville Project Act, Transmission Act, Northwest Power Act, Energy Policy Act)

Allocation of Benefits: Congress directed BPA to market federal power for the benefit of the general public. Several provisions give BPA specific guidance: encourage the widest possible diverse use of electric power, give preference to public bodies and cooperatives, and give Northwest consumers first call on BPA's power. Residential exchange provisions create a mechanism for distributing BPA benefits more broadly throughout the region. Extra-regional sales are limited. (Bonneville Project Act, Regional Preference Act, Northwest Power Act)

Allocation of Costs: In 1974, Congress passed legislation making BPA a self-financing agency. BPA's customers and consumers are to pay all power system costs through power rates. BPA is directed to set rates as low as possible, consistent with sound business principles. Legislation also provides guidance on allocation of costs among power and transmission users of the system. New standards of non-discriminatory service have recently been enacted. (Bonneville Project Act, Transmission Act, Northwest Power Act, Energy Policy Act)

Resource Acquisition & Priority to Conservation: In 1980, Congress expanded BPA's mission to assure its Northwest customers an adequate, efficient and reliable power supply. BPA is now responsible for acquiring resources sufficient to meet contractual obligations to its Northwest utility and industrial customers. As part of its expanded mission, BPA is directed to give highest priority to cost-effective energy conservation and to encourage the development of renewable energy resources. (Northwest Power Act)

Fish and Wildlife Responsibilities: In 1980, Congress also assigned BPA responsibilities for protection and enhancement of fish and wildlife affected by federal power facilities. BPA is directed to treat fish and wildlife interests equitably and to carry out programs for the conservation of endangered and threatened species.

(Northwest Power Act, Endangered Species Act) Planning and Public Participation: In planning strategies to meet its mission, BPA is directed to provide for broad public participation and to consider the environmental impacts of its actions. The Northwest Power Planning Council was established as a regional entity to pan for power, conservation, and fish and wildlife protection. It ensures state input into BPA decision-making. (Northwest Power Act, National Environmental Policy Act, Administrative Procedures Act, Freedom of Information Act)

Footnote1:

For a discussion of the role of government, see Samuelson and Nordhaus (Reference: 1). For a more complete discussion of the rationale for government intervening in the marketplace, see Jaccard (Reference: 2).

Footnote2:

For a good definition of subsidies, see Moffart (Reference: 3) or Steenblik (Reference: 4) .

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