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"NEWCO PLUS": A BRIEF REPLY

Brett Wilcox, Member of the Steering Committee

APRIL 5, 1996

A. INTRODUCTION

On March 20, Mike Kreidler presented a thoughtful white paper entitled "Newco Plus: Thinking About A Northwest Electricity Cooperative." Mike's paper responded to, and took as its point of departure, a paper I presented on February 29. My paper was called "Thoughts On Restructuring The Northwest Electric Power Industry." In our papers, both Mike and I use "NEWCO" to mean a new non-governmental bulk power sales entity (probably a nonprofit electric cooperative owned by its member-customers) that might assume BPA's bulk power marketing functions if those functions are privatized.

I'm gratified by the constructive approach of Mike's paper, and by our apparent agreement on so many points. In particular, the two papers appear to agree on the basic economics and desirability of a competitive bulk power market and open access transmission system. Much of Mike's paper is devoted to fleshing out NEWCO's features in greater detail, for example. I disagree with little in this portion of Mike's paper.

I also agree that "TRANSCO" should be a transmission company separate from NEWCO. TRANSCO would operate the Northwest high voltage transmission system, and would provide open access transmission services to participants in the competitive bulk power market as an independent grid operator ("IGO") at FERC-regulated transmission rates. I would refer to this entity simply as the "IGO," because "TRANSCO" has come to connote a particular form of IGO that also owns the transmission system -- a complex added feature that is not, strictly speaking, necessary for the IGO to perform its particular role in the competitive market model.

My only significant disagreements with Mike are few in number and easily summarized. I respectfully submit, and will try to demonstrate briefly here, that:

Mike's proposed "DEBTCO" (a separate entity to collect BPA's WPPSS debt) is not needed, would not work, and could well interfere with the very cost savings a competitive power market can provide the region.
Mike's suggested "separate surcharge to be collected uniformly throughout the region" is not a necessary or helpful supplement to the model I proposed.
As my February 29 paper tried to show, and as I will attempt to show again here, there are other and better means available to (a) collect the WPPSS debt, and (b) deal appropriately with such important regional goals and values as conservation, environmental protection, renewable resources, and assisting low-density rural utility systems and their customers.

B. THE THREE BASIC PROBLEMS WITH DEBTCO

Mike proposes DEBTCO as a "new structure to equitably allocate uneconomic fixed costs" (namely the WPPSS debt) of the BPA system. I believe there are three basic problems with DEBTCO:

DEBTCO is not needed.

Contrary to what one might suppose, there really are no "uneconomic" fixed costs of the BPA system that are reasonably foreseeable at this time. As my February 29 paper argued (and as BPA's outside consultants Putnam Hayes & Bartlett have recently concluded), BPA's base hydro costs are so low that BPA could charge competitive market rates and still collect enough revenue to cover all its fixed costs (including the WPPSS debt, conservation debt, etc.), plus BPA's other costs -- if BPA controls those other costs.

NEWCO would be in an even better position than BPA to do so, for reasons my paper tries to explain. NEWCO's fixed costs, even including the WPPSS debt, might well be less than BPA's; its other costs would almost certainly be lower; and NEWCO might be able to compete more effectively than BPA, therefore gaining additional revenue.

The bottom line: If BPA or its successor can raise enough money to pay the WPPSS costs by selling power at market rates (i.e., by selling power to willing, non-captive buyers), then doing so is economic and equitable -- and enough. Footnote1

DEBTCO would not work.

The security of the WPPSS bondholders cannot legally be impaired. As my paper noted, that security includes being "first in line" for payment from the entire BPA-revenue generating system, ahead of BPA's obligations to the Treasury. This provides an enormous "cushion" protecting the WPPSS bondholders from any BPA revenue shortfall (or increased BPA costs).

It might be possible -- I believe it is possible -- to keep this structure intact while privatizing BPA's power marketing functions, although doing so would require great creativity and sympathetic judicial rulings. But trying to go further and separate the WPPSS debt from its foundation of hydro system revenues would, I am confident, so affect the security of the WPPSS bondholders that the chances of favorable judicial rulings would be nil.

DEBTCO might defeat the purpose of a competitive market.

The primary purpose of a competitive market is to bring consumers the benefits of more abundant and diverse goods and services at lower total costs. DEBTCO seems bound to prevent this, whether or not it is intended to. The reason: payments to DEBTCO would presumably be payments made by power customers in addition to payments the same customers make in order to buy power at competitive market rates.

If this is not the case -- if paying DEBTCO does not mean paying total effective power costs in excess of competitive market rates -- then DEBTCO serves no purpose: the WPPSS costs could simply be paid, as they could be today, from revenues collected from power sold at competitive market rates. If, on the other hand, payments to DEBTCO are on top of competitive market rates, then DEBTCO defeats the purpose of a competitive market. Consumers expect and deserve competitive market rates as a ceiling on what they pay, not a floor.

A final, related point: if and to the extent that DEBTCO operates to spread the costs of BPA's WPPSS debt beyond BPA's (or NEWCO's) customers to the region as a whole, the effect would be to reduce rates for BPA's (or NEWCO's) customers at the expense of other power users. I don't believe this is among the steps needed to make BPA's (or NEWCO's) power competitively priced, as my February 29 paper explains. And if BPA's (or NEWCO's) customers are willing to buy that power at market rates that are also sufficient to cover the costs of BPA's WPPSS debt, would it be equitable to burden others with those costs? And why would we want to?: Contrary to what one might suppose, there really are no "uneconomic" fixed costs of the BPA system that are reasonably foreseeable at this time. As my February 29 paper argued (and as BPA's outside consultants Putnam Hayes & Bartlett have recently concluded), BPA's base hydro costs are so low that BPA could charge competitive market rates and still collect enough revenue to cover all its fixed costs (including the WPPSS debt, conservation debt, etc.), plus BPA's other costs -- if BPA controls those other costs.; NEWCO would be in an even better position than BPA to do so, for reasons my paper tries to explain. NEWCO's fixed costs, even including the WPPSS debt, might well be less than BPA's; its other costs would almost certainly be lower; and NEWCO might be able to compete more effectively than BPA, therefore gaining additional revenue.; The bottom line: If BPA or its successor can raise enough money to pay the WPPSS costs by selling power at market rates (i.e., by selling power to willing, non-captive buyers), then doing so is economic and equitable -- and enough. Footnote1
DEBTCO would not work.: The security of the WPPSS bondholders cannot legally be impaired. As my paper noted, that security includes being "first in line" for payment from the entire BPA-revenue generating system, ahead of BPA's obligations to the Treasury. This provides an enormous "cushion" protecting the WPPSS bondholders from any BPA revenue shortfall (or increased BPA costs).; It might be possible -- I believe it is possible -- to keep this structure intact while privatizing BPA's power marketing functions, although doing so would require great creativity and sympathetic judicial rulings. But trying to go further and separate the WPPSS debt from its foundation of hydro system revenues would, I am confident, so affect the security of the WPPSS bondholders that the chances of favorable judicial rulings would be nil.
DEBTCO might defeat the purpose of a competitive market.: The primary purpose of a competitive market is to bring consumers the benefits of more abundant and diverse goods and services at lower total costs. DEBTCO seems bound to prevent this, whether or not it is intended to. The reason: payments to DEBTCO would presumably be payments made by power customers in addition to payments the same customers make in order to buy power at competitive market rates.; If this is not the case -- if paying DEBTCO does not mean paying total effective power costs in excess of competitive market rates -- then DEBTCO serves no purpose: the WPPSS costs could simply be paid, as they could be today, from revenues collected from power sold at competitive market rates. If, on the other hand, payments to DEBTCO are on top of competitive market rates, then DEBTCO defeats the purpose of a competitive market. Consumers expect and deserve competitive market rates as a ceiling on what they pay, not a floor.; A final, related point: if and to the extent that DEBTCO operates to spread the costs of BPA's WPPSS debt beyond BPA's (or NEWCO's) customers to the region as a whole, the effect would be to reduce rates for BPA's (or NEWCO's) customers at the expense of other power users. I don't believe this is among the steps needed to make BPA's (or NEWCO's) power competitively priced, as my February 29 paper explains. And if BPA's (or NEWCO's) customers are willing to buy that power at market rates that are also sufficient to cover the costs of BPA's WPPSS debt, would it be equitable to burden others with those costs? And why would we want to?

C. WHAT'S WRONG WITH A SURCHARGE

The last point about DEBTCO applies equally, I believe, to Mike's proposed "separate surcharge." If the surcharge does not raise rates above competitive market levels, then it is not needed: the revenues collected from competitive market rates will suffice, and a portion of them can be diverted to serve the goals Mike mentions. (This is what my February 29 paper proposed.)

If, on the other hand, the surcharge would raise effective rates above competitive market levels -- which I suspect may be what Mike intends -- then it is simply a tax, and one that burdens consumers, distorts the competitive market (including competition between electricity and other forms of energy), and disadvantages the Northwest economy. As my paper noted, in today's economy other regions and nations can be expected to compete for agriculture and industry by offering whatever economic benefits or incentives they may have available, including the cost benefits of a competitive power market.

More basic, to me, is that we can and should accomplish what Mike wants to accomplish without a surcharge. My paper proposed, for example, creation of a "Regional Governing Body" or RGB to control the operation of the Columbia River system and to make the public policy choices that environmental protection, conservation, renewable resources, and similar goals entail. The RGB would consist of, and be controlled by, representatives of the four Northwest States. (Mike's paper doesn't mention the RGB. I wish it did. I think regional control of the region's river system is one of the most exciting possibilities de-federalization offers.)

I also proposed that the RGB receive funding -- which the RGB could decide to commit to these goals -- from the power system in at least two ways. First, BPA or NEWCO as BPA's successor could provide some agreed amount of funding to the RGB for these purposes as part of BPA's (or NEWCO's) annual costs. This is what BPA does today, but BPA's obligations in this respect are currently uncontrolled: they can and must be controlled in the future, whether NEWCO succeeds BPA or not.

Second, if NEWCO does succeed BPA, then NEWCO should be able to earn revenues in excess of its costs. Some portion of those "excess" revenues -- effectively, any profits from NEWCO's operations -- can also be earmarked for use by the RGB, or the Northwest States, to help achieve the goals Mike lists.

Finally, achieving these goals is not only -- or even primarily -- a function of funding. My paper was filled with examples, and other examples abound:

Efficiency standards should govern all new structures, motors, and appliances.
Energy Service Companies ("ESCOs") can provide cost-effective retrofits for consumers if we allow them (and require utilities) to use the electricity meters of those consumers as a billing mechanism.
Priority access to available transmission capacity can help stimulate financing for renewable resources.
In a competitive power market, brokers and aggregators can (and are beginning to) purchase bulk power on behalf of numerous small, low-density rural utility systems. By so doing, they can help cut rates for end users to lower levels than those a "low density discount" can achieve in an inefficient, non-competitive system.

D. CONCLUSION

I welcome Mike's paper. I'm glad we agree on so much. I believe the region can accomplish the goals, and preserve the values, Mike espouses. I'm confident we can do so through a competitive power market. But the essence of a competitive market is not to charge people more than necessary. Before we begin designing added taxes, costs, and fees -- which I consider to be surcharges in search of a purpose -- let's at least work together, creatively, to consider alternatives that don't force people to pay more than they really need to.

Footnote1

Mike's paper references California's decision to separate the "excess" cost of nuclear plants from the costs to be recovered in future competitive power rates. But the problem in California is entirely different. There, and in other high-cost regions of the U.S., power rates that include the costs of nuclear plants are very high indeed, and far above current and foreseeable competitive market rates. In the Northwest, and particularly on BPA's system, this simply is not true. BPA's enormous low cost hydro base allows the blended costs of that hydro system and of BPA's nuclear obligations to remain competitive. BPA teeters on the brink of noncompetitiveness currently because of other, non-fixed (and hence controllable) costs -- and because of limitations on BPA's ability to compete.

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