INTRODUCTION

The Northwest Power Planning Council (Council) is a four-state interstate compact agency, authorized by Congress to provide oversight over the resource planning of the Bonneville Power Administration (Bonneville) and to design a regional fish and wildlife program to help restore fish and wildlife affected by the region’s hydroelectric system. The Council members are appointed by the governors of Idaho, Montana, Oregon and Washington. The Council is pleased to provide the following comments to the Commission on regional issues regarding ISOs in the Northwest.

RECOMMENDATIONS

1. In order to ensure the sort of transmission pricing reform that the Commission seeks (elimination of pancaked rates, pricing to promote efficient use of and investment in generation, transmission and end-uses) and to ensure open access and continued reliability, the Commission will need to order ISO participation. The Council recommends that the Commission give participants a specific time limit in which to develop an ISO proposal for the Commission. If there is no agreement at the end of that time, the Commission should choose the proposal that best fits its criteria.

2. If the Commission does order ISO participation by jurisdictional utilities, the Commission should seek a mechanism to ensure that federal power marketing administrations (PMAs), such as Bonneville, participate as well. Federal PMAs are prominent transmission owners in the West. In the Northwest, Bonneville owns the majority of the high voltage transmission and an ISO without Bonneville participation would be seriously deficient.

3. If the Commission determines that it has no authority to require ISO participation, it should relax its standard in Order No. 888 for a "single, unbundled, grid-wide tariff" in the interest of voluntary participation. IndeGO’s attempt to reach that target led to a level of cost shifting of embedded system costs that was too high a threshold for voluntary participation. Multiple, utility-specific access charges that incorporate wheeling costs as well as costs of a utility’s own system, employed in a non-discriminatory fashion and each giving grid-wide access, can meet the Commission’s standard for non-pancaked rates. When combined with congestion pricing, they can provide economically efficient pricing meeting the Commission’s standards. This can be done without requiring the kind of cost shifting upon which IndeGO foundered.

4. The Commission should ensure that the reliability functions are strongly represented in the ISO structure by requiring that ISOs be security coordinators and should ensure, for any entities that go part way toward an ISO, that the security coordinator role is incorporated as closely as possible.

DISCUSSION

In early 1996 the four Northwest governors convened the Comprehensive Review of the Northwest Energy System (Comprehensive Review). Expanding on earlier regional discussions, one of the primary issues that was examined was formation of an independent system operator (ISO) for the Northwest. After noting that "[ensuring] equal access and reliability requires that decisions affecting transmission be effectively separated from decisions affecting generation. The necessary separation can be accomplished by the formation of a FERC-regulated independent grid operator … that is responsible for the operation of the transmission assets of multiple owners" the December 1996 final report of the Comprehensive Review called for the following:

• Formation of an independent grid operator, regulated by FERC and including the transmission assets of the Bonneville Power Administration and other owners of major transmission assets in the region.

• Membership … [that would ] be voluntary, but [with] every effort … made to enlist wide participation.

• [An] independent grid operator [that] will necessarily follow FERC principles for independent system operators ….

• [An] independent grid operator … [that would] have operational control over the transmission system and enough operational control of generation to ensure short-term reliability.

• [An] independent grid operator … [that would] also have responsibilities in other areas, such as maintenance, planning and expansion.

• [An] independent grid operator … [that would] have clear incentives to maintain reliability and encourage the efficient use of the system.

• Operating and charging for the use of these [multiple] systems as a single system [that] would also eliminate ‘pancaking’ of transmission rates … and make possible more efficient operation.

• An independent grid operator … [that would] assist in facilitating a competitive power market for customers that take delivery of their power requirements at sub-transmission voltages over facilities they currently do not own.

• Intermittent, as-available and distributed generation … [being] treated fairly in buying and selling necessary ancillary services and the provision of transmission services, and … transmission planning … [following] long-term least-cost planning principles.

During 1997, the Council’s staff participated extensively in the discussions leading up to the initial proposal for IndeGO, an ISO which ultimately included eight western states of the Northwest and Rocky Mountain areas. The Council supported the initial IndeGO proposal with some qualifications.

The Council’s experience with IndeGO suggested several important regional characteristics that influenced, and will continue to influence, any formation of a Northwest ISO. The first of these is the great diversity among the utilities in the Northwest, in size, ownership structure and cost of transmission. A large amount of transmission is owned by non-jurisdictional utilities, primarily by Bonneville, which owns (depending on the geographic and voltage definition) between about 50 and 80 percent of the Northwest high voltage system. Moreover, even among the jurisdictional utilities, the range in transmission system costs is substantial.

The Council’s experience with IndeGO also suggested that an ISO that meets the Commission’s ISO principles is not likely to be formed voluntarily in the Northwest.

Single, Grid-wide Tariff

The institutional diversity meant both that the cost shifting issue was very prominent and that it had to be resolved voluntarily. IndeGO developed a pricing mechanism that met the Commission’s standards for efficient pricing very well. It had a load-based access fee that was not tied to individual transactions to recover embedded system costs. The utility access fees included both the costs of the utility’s own transmission system (which would normally be included in its transmission tariff) and its net wheeling cost as well. It thus encompassed a utility’s total transmission service cost for current transactions.

To facilitate local transmission planning and to move toward the Commission’s goal of a single, grid-wide tariff, IndeGO then proposed to create local access pricing areas within which the individual utility access fees would be averaged. To mitigate cost shifting, however, this averaging was to ramp in over 10 years and increases were further capped at 2.5 percent per year.

A zonal version of congestion pricing was proposed to achieve economic efficiency goals for individual transactions.

The ramped-in access fee averaging was thought to be as close to the Commission’s "single, unbundled, grid-wide tariff" as could be achieved voluntarily. It resulted, however, in cost shifting among the participating utilities that was still considered to be too substantial by a number of participants. The Council believes that, while a single tariff may be desirable, it proved incapable of implementation in a voluntary framework.

However, the Council believes that a properly structured access fee for recovery of embedded system costs, where these costs do not affect individual transactions but are assessed in aggregate as determined by historical loads, as IndeGO proposed, is generally equitable and economically efficient and meets most of the Commission’s efficiency goals. IndeGO proposed the added step of averaging local access fees for different utilities within a local area, which gains in efficiency by avoiding local bus shopping and by rationalizing local transmission planning. However, the Council believes it does not gain enough to overcome the loss due to lack of ISO participation in the first place. Even this level of pricing reform is very unlikely to be achieved voluntarily.

Bonneville Participation

The most important institutional feature of the Northwest transmission system is the prominent role of Bonneville. Historically, Northwest non-federal utilities within the area served by Bonneville have chosen to substitute Bonneville construction and wheeling contracts for their own construction for financial reasons. Thus Bonneville’s transmission share in the region is larger than its power sales share. Even if the Commission were to mandate ISO participation by the jurisdictional utilities, at best a barely adequate ISO would result, confined to the inland Northwest. The Council believes that should the Commission require ISO participation by the jurisdictional utilities, it should seek mechanisms, as it employed reciprocity in Order No. 888, to extend that mandate to the federal power marketing agencies, such as Bonneville.

ISOs and Security Coordinators

Because of the geographic characteristics of the West, and the typically long distances between generation and loads, transmission systems in the West tend to be most prone to stability and voltage-related problems. Increased throughput on the transmission system, which is being driven by a open and competitive wholesale power market, tends to push the system closer to those stability limits. Because of this close relationship, both reliability and efficiency of the system will be best served by an ISO that also has a strong security coordinator responsibility.