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Newco Plus: Thinking About
A Northwest Electricity Cooperative

Mike Kreidler, Member of the Steering Committee

[ Regional Review | Steering Committee Papers | NW EnerNet ]

INTRODUCTION

The white paper entitled "Thoughts on Restructuring the Northwest Electric Power Industry," presented at the February 29 meeting of the Steering Committee by Brett Wilcox offers a thoughtful and attractive approach to fostering the development of a strong, fair, and competitive Northwest electric industry. It has stimulated a great deal of thought and sharpened thinking throughout the region.

The purpose of this short response is to provoke some additional thinking and help bring some of the important points into clearer focus. This paper describes some possible modifications to the Wilcox model in light of the "givens, goals, and structural changes" agreed to by many Steering Committee members in their separate caucuses. These modifications also attempt to stay true to the charge given by the governors in forming the Steering Committee. Their intent is also meant to reflect positions of Washington's governor and views of members of the public, expressed at recent outreach meetings.

Reports from the three subgroups suggest that there is a significant amount of consensus on many given, goals, structural changes, and industry structure alternatives. Among these are the following, paraphrased from discussions among subgroup 2 members:

Givens:

Markets are a good way to achieve greater efficiency in the system
The market is not adequate to support all cost-effective demand side management and renewable resources
Small and large end-use customers will demand a share of the benefits of competition
Regional concern for environmental consequences will remain high

Structural changes needed:

Assurance of market access
New structures to deal with market failures and to ensure reasonable achievement of equity goals and environmental protection
New structures to equitably allocate uneconomic fixed costs of the federal system

SUGGESTED MODIFICATIONS TO WILCOX MODEL

With these features in mind, let us assess the extent to which the so-called Wilcox model satisfies these features. We find that the model does meet most of the desirable features. These include: market access, separate transmission and generation, local autonomy, and greater retail choice. The model also has the attractive features of simplicity and elimination of cumbersome cost allocation formulas that have balkanized the Northwest in recent years.

The three greatest weaknesses of the model are: 1) lack of assurance that debt obligations heretofore assumed by Bonneville will be allocated equitably within the region; 2) lack of assurance that cost-effective capital investments will be made; and 3) abandonment of important goals such as environmental protection, rural assistance, and access to universal service.

We therefore suggest the following modifications to the Wilcox model, designed to address these shortcomings and accommodate additional desirable features of a Northwest electric system. Like the Wilcox model, this modified proposal has four components:

the establishment of a cooperatively-owned power marketing entity (Newco);
a separate transmission entity to operate Bonneville and other regional transmission assets;
a mechanism to collect and repay debt obligations for WPPSS 1, 2, and 3 (which we, with tongue in cheek, term Debtco); and
a separate mechanism to collect and perhaps administer a separate charge for regionally at-risk assets and to promote social goals

NEWCO FEATURES

The Wilcox paper did an excellent job describing in broad outline some possible features of the proposed Newco. We agree with most of them. In order to achieve some of the additional givens and structural changes suggested in subgroup and public outreach meetings, we would offer for consideration the following concepts:

The co-op would exist initially to market federal power. However, once in operation, other power producers or marketers could market their load to coop members as well.
The co-op would be open to anyone with a load greater than a given threshold. This would include traditional utilities, retail customers, and aggregators. We suggest, however, that initially a two-phase membership solicitation would take place. Federal power would be offered first to all existing Bonneville customers by subscription; if a firm surplus remains, the co-op would be open to any new customers and prorated by some equitable formula.
There would be some conditions for membership, including a relatively small membership fee to cover administrative expenses; and, more importantly, commitment to a certain period of membership (e.g., five years)
Many "subsidies" created under the Northwest Power Act would cease to exist as we know them. These include special terms for DSIs, public preference, Northwest preference, the Exchange, irrigation discounts, and the obligation of the federal agency to meet load. These would all be replaced by the right of members of the co-op to receive preferential treatment over non-members, by virtue of their participation. Preferential treatment would include, but not necessarily be limited to, the right to call on the federal system to meet subscribed load; the rights to market surplus power and receive "dividends" if revenues exceed cost; and self governance.
The co-op would set rates and rate principles, with approval by FERC. Alternative rate principles might include cost of service pricing, market-based pricing, or a combination.
Governance of the co-op would be by co-op members.
Most likely, the co-op would not purchase federally owned generation outright, but would lease them from the federal government under long-term leases. The price for such leases would be equitable.
Members would have the ability to resell power to which they have subscribed.
Newco would sell surplus power beyond the firm needs of members at market prices; and would credit surplus revenues back to members as a dividend, or use them for agreed-upon purposes.

TRANSCO FEATURES

At a minimum, Transco would become a separate company from Newco. Ultimately it would either be operated by an independent grid operator for the entire Northwest transmission system, or it would become the independent grid operator itself. Prices would be regulated by FERC under pricing principles consistent with those applied currently to any transmission-owning entities in the region. However, the Transco would be structured to accommodate throughput-based surcharges needed to collect Debtco and regional benefit obligations, if necessary (see below).

DEBTCO FEATURES

The single largest disagreement we have with the Wilcox paper is the characterization of WPPSS debt as power-related, and, hence, a proper responsibility of Newco. For at least WNP 1 and 3, this debt obligation bears no relation to any generating asset. For WNP 2, the arrangements made for repayment of this debt have long been divorced from the assuming cost of running WNP 2. Further WPPSS debt is unique in that it was not originally developed by the federal government but was assumed by the region. For all these reasons, we do not believe it equitable to include WPPSS debt in the same category with all other federal power responsibilities and assets.

There is an additional reason for separating WPPSS debt from Newco. As the Wilcox paper shows in the graph on page 5, in the short run at least, federal power with WPPSS debt included is not competitive with the market. Even if fish and wildlife costs are operated by a different entity, uncertainty over fish and wildlife costs would not be completely removed. Including WPPSS debt as a Newco responsibility would operate as a disincentive to join Newco and would place Treasury repayment at an unacceptably high risk. Removal of WPPSS debt places Newco in a highly competitive situation. In view of the fact that the California PUC proposal also separates nuclear debt from exposure to competition, there is additional competitive pressure to create a similar mechanism in the Northwest.

For these reasons, we propose a separate collection mechanism for WPPSS debt that would be based on a fair allocation of responsibility for that debt. The "right" formula would, we hope, be developed on a consensus basis. It would probably be based partly on percentage of total energy consumption (i.e., throughput); and partly on federal power consumption. We will provide examples of various allocation mechanisms in a later Appendix. (As a fallback, if the region cannot reach consensus on any other allocation approach, the "Bonneville Transmission Agency" could collect this surcharge on a uniform per kWh basis to all taking wheeling services. This is not likely to be the most equitable approach, but it has the benefit of not needing separate legislation or political consensus to achieve.)

Although Newco could be designated the entity responsible for forwarding these payments to the Treasury, a separate agreement, legislation, or other mechanism would have to be put into place to assign responsibility for and collect these payments. This is because not all those responsible to make these payments may choose to be members of Newco. Of course, Newco members could opt to use their dividends to pay their proportionate share of the debt.

REGIONAL BENEFITS

The Wilcox paper argues that certain so-called "social programs" should be dropped, assigned to the market, or dealt with separately from the power system. We agree with the Wilcox paper that, if Bonneville Power Administration (or its successor Newco) no longer bears the responsibility to meet all new regional load or acquire new resources, it should not be expected to acquire demand side resources on behalf of the region. We disagree with many of the paper's other conclusions regarding these important goals.

Acquisition of cost-effective, environmentally beneficial resources continues to be a high priority of our citizens. Furthermore, we disagree with the wholly unsupported claim of the Wilcox paper that the market is now capable and willing to acquire all cost effective demand side resources.

There are additional social goals that the region has historically supported through electric rates. Public testimony at outreach meetings strongly suggests that these goals remain important. They include support for low density rural populations, environmental protection, low income assistance, and research and development. Some of these goals are more at risk under the competitive environment that is already developing and that will be promoted even further under the Newco-Transco model. For example, greater retail customer choice has the potential to leave low income customers particularly at risk, since these customers have the least market power. In addition, it is possible that a Newco-Transco model might not easily accommodate support for low density, rural customers that Bonneville has historically supported through postage stamp rates and low density discounts. Finally, concern has been expressed that a competitive model puts capital formation at risk; or, alternatively, capital becomes much more expensive. Capital-intensive resources, such as demand side management and cost effective renewables, may be at greater risk under the Newco-Transco model.

We therefore propose to establish a separate surcharge to be collected uniformly throughout the region to support these goals. We do not as yet offer any opinions on the administration of the funds collected -- for example, whether there should be central administration or local administration. Nor do we offer an opinion on whether the charge should be collected on the basis of energy consumption, on a per-customer basis, or other allocation. Finally, we offer no suggestion on how large the surcharge would be, or, indeed, how to determine its size. All of these questions would be appropriate topics for a working group to explore.

NEXT STEPS

This paper is intended to provoke additional thinking about how to incorporate the advances expressed by Brett Wilcox with what we have heard from interests in the Northwest in the public involvement program and with the progress we have made as Steering Committee members learning about how competition will affect the electricity industry. We hope you find the coming weeks stimulating.

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Last modified: March 26, 1996
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Newco Plus: Thinking About A Northwest Electricity Cooperative