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Mitigating the Risks of
Fish Cost
Increases
in New Federal Power Contracts
Roy Hemmingway
May 31, 1996
Many participants in the Comprehensive Review have expressed the opinion that long-term commitments to purchase federal power will not be forthcoming without some limitations on the price the federal government can charge. It is unlikely that the federal government would agree to a fixed price contract for a long term (20 years) since it places too many cost risks, particularly inflation risk, on the federal government. Since most of the costs of the hydro system are known, many purchasers may be willing to sign up for long-term contracts "at cost" if other cost risks are reduced.
Principal among these cost risks is the risk of increases in the fish mitigation responsibilities that the hydro system might have to bear in the future. The federal government may need to offer purchasers some limitation on fish cost escalations if it expects to persuade purchasers to commit to long-term purchases "at cost."
It should be noted that limiting fish cost increases is not the only way to make federal hydro power more attractive. For example, if the WPPSS costs were not collected as part of the price of power, the cost of federal power might drop so much that purchasers might be willing to assume the risk of fish cost escalation.
This paper discusses how the risk of fish cost increases could be limited so that purchasers would be more willing to buy federal power. This paper does not discuss how the extent of the power system's obligation for fish recovery would be determined, that is how the functions now played by the Power Planning Council and NMFS would be undertaken in the future.
I. Bookends
The two alternatives presented below show the pure extremes of fully internalizing and fully externalizing future fish cost increases.
- All Fish Costs Collected From Power Purchasers
This alternative would put all fish cost risk on hydro system power purchasers. Whatever fish measures would be determined to be needed would be paid for by the federal power system and passed on to its customers. Like buying an "As is, no warranty"' used car, purchasers would not know whether they were buying an economical resource or one where the economics went negative the day after the purchase commitment.
While this alternative would most purely satisfy the principle that environmental costs should be internalized to the extent possible, it may impose so much cost risk onto the hydro system that purchasers would not be willing to commit to the long-term "at cost" purchase that is intended.
- Fish Costs Collected Off-system
On the other extreme, fish cost increases could be removed from direct power charges, just as it is now contemplated that conservation and renewables may be funded separately by consumers through a systems benefit charge. Fish costs could be treated as a "Public benefit" that is paid by all power consumers, either through a consumer charge, a surcharge on transmission transactions, or some other means.
This mechanism, however, violates the principle of internalizing environmental costs within the resource that causes the environmental damage. It makes persons who purchase no hydropower at least partially responsible for the fish damage costs of the hydrosystem.
II. Reducing Fish Cost Risk to Purchasers
- Opting Out When Fish Costs Go Higher
One way that fish cost risk could be reduced for purchasers would be to allow purchasers to opt out of their purchase obligations if fish costs got too high. Since one objective of the power contracts is to have purchasers, and not the federal government, assume the market risks of power costs, one challenge of this scheme would be to find ways to ensure that purchasers can abandon contracts only when fish costs have risen faster than expected.
Opt out could be allowed 1) when increases in fish costs exceeded an absolute number set in the contract like $0 or $500 million or $1 billion annually; 2) when increases in fish costs exceeded a cumulative average annual percentage, or 3) when power costs, regardless of from what cause, exceeded a fixed number or a cumulative annual percentage increase.
- Shortening the Term of Purchase Commitment
This alternative needs to be mentioned, if only because it is probably the means being employed today to allow purchasers to mitigate their fish cost risk. Instead of 20 year contracts, purchasers could be offered contracts with shorter terms. That way, the purchasers could decide at the end of the contract term whether fish costs have gone so high that further purchases can not be justified.
This alternative, however, works against the principle of moving power cost risk away from the federal government and on to purchasers. Purchasers would be able to stop purchasing federal power under this alternative for any reason, even if fish costs had not increased.
- Cap on Fish Costs
One way to deal with fish costs risks would be simply not to allow fish costs to go above a certain number. This number could be anything from the current fish "budget," to an absolute higher number (e.g., $750 million), to a number that could increase by allowable amounts. Allowable increases could be tied to 1) an arbitrary pre-set annual percentage, 2) the CPI or CPI plus or minus, or 3) a number tied to the market price of power.
The problem with this alternative is that without a commitment from somewhere else to make up the difference the allowable fish costs under whatever cap is established may not be enough to meet statutory standards for restoring fish in either the Northwest Power Act (or its successor) or the Endangered Species Act. Without limitation on the operation of those standards, the power system then would continue to be liable for additional fish costs.
- Sharing the Risk with U.S. Treasury
One way that fish costs risks could be mitigated for purchasers but yet continue to allow the standards in the Northwest Power Act and the Endangered Species Act to operate would be for the risks of cost increases to be shared with the U.S. Treasury.
As an example, at present Treasury has provided a "bank account" of Section 4(h)(10)(C) credits against which BPA can charge when fish costs exceed amounts set in the negotiated fish budget. These credits are against Treasury payment obligations that Bonneville otherwise would have in a given year.
The mechanism for cost sharing could be: 1) Treasury pays everything over a fixed annual budget; or 2) Treasury pays everything above a budget that could escalate according to a schedule set in the statute or an index that escalates according to CPI or market prices.
Why would Treasury be interested in doing this? Because without limitation on fish cost increases, the federal government may be unable to get a price for its power that will allow repayment of hydro-system debt on schedule. Because the federal government should have no expectation of getting above market price for its power. Because fish mitigation requirements were imposed on the hydro system from the federal government after the hydro system was fully built.
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Last modified: June 22, 1996
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