October 20, 1997
Phil Moeller
Legislative Assistant to Senator Gorton
Sent via fax to: 202-224-9393
Dear Mr. Moeller:
This letter is in response to your request for suggestions for a Northwest Title of a national electric power restructuring bill. I have been asked to write to you on behalf of the following northwest investor owned utilities (IOUs): Idaho Power Company, The Montana Power Company, PacifiCorp, Puget Sound Energy Inc., Sierra Pacific Resources and The Washington Water Power Company. The recommendations contained in this letter and the attached draft legislation have been developed by these utilities following consultation with various other Bonneville customers. The Direct Service Industries worked with the IOUs on drafting the enclosed legislation and support its adoption.
Our perspective is one shaped by the rapid formation of competitive wholesale electric power markets. The IOUs are currently engaged in restructuring their businesses to respond to changing national and regional energy policies and regulations encouraging the formation of competitive power markets. The transition to competition is made more complex in the Northwest because of the existence of the Bonneville Power Administration (BPA), a federal agency and the dominate federal transmission and power provider that controls most of the region’s high voltage transmission and approximately half of the region’s electric generation.
Participation of a federal agency in competitive markets poses unique and serious public policy questions. This letter and the attached legislation do not address the propriety of such federal participation in competitive markets. Rather, the IOUs have been working with other regional interests in a process led by the Transition Board that was appointed by the Governor’s of the four Northwest States to implement the recommendations of the Regional Review. Historically, the utilities that generated and sold electricity also owned and operated the high-voltage transmission lines that carried the electricity to the lower-voltage local distribution networks for delivery to end users. Generating and wholesale marketing of electricity are now competitive due in large part to the Federal Energy Regulatory Commission’s (FERC) regulations and orders that require IOU owners of transmission to operate their transmission as a common carrier and to provide open access to all wholesale competitors. However, the high-voltage transmission lines remain natural monopolies because in most cases it is prohibitively expensive to build alternative transmission facilities.
Generally, utilities that are competing for wholesale power sales and that also own monopoly transmission lines are regulated to prevent their using those monopoly facilities to gain an anti-competitive advantage in marketing power. Exercising its authority under the Federal Power Act, the FERC prevents such behavior by investor-owned utilities. FERC requires the IOUs to provide access over their transmission lines to other wholesale power sellers and buyers under the same rates, terms and conditions as the IOUs use those lines for their own wholesale power transactions. Additionally, FERC regulates what IOUs can charge for transmission service.
However, the FERC does not have the same authority to regulate the rates, terms and conditions for transmission service over BPA's facilities. This gap in national energy policy and regulation jeopardizes operation of a competitive power market in the Pacific Northwest where BPA owns more than half the high-voltage transmission facilities and markets nearly half the power consumed.
The Comprehensive Review of the Northwest Energy System ("Regional Review") chartered by the four Governor’s last year recognized this problem. In its December 12, 1996, Final Report, the Steering Committee wrote: "The primary goal of the Steering Committee's recommendations for transmission is a transmission system whose structure and operation help ensure a fully competitive generation market." (p.36) [ The Committee went on to state: "Since Bonneville's transmission facilities make up a large part of the regional transmission system, these facilities operational independence from Bonneville power marketing considerations is particularly important. Therefore, Bonneville's power marketing and transmission functions should be fully and legally separated.... to promote competitive practices and to avoid the problem of self-dealing between the generation apparatus and the transmission system. This approach is consistent with the direction of federal energy restructuring policy being implemented around the country. " . . . both generation and transmission are valuable federal assets and their revenues are currently collected for deposit in the Bonneville Power Administration Fund. Further... the receipts to the Fund are now legally bound to meet Bonneville's financial obligations, which include payment of the Washington Public Power Supply System (WPPSS) bonds, other Bonneville financial obligations, and the agency's fish and wildlife mitigation and restoration requirements, as necessary. Accordingly, the Committee recommends that any separation of generation and transmission - -whether by administrative or legislative means -- be achieved in such a way that it does not jeopardize or diminish the legal obligation and ability of Bonneville to meet fish and wildlife and other obligations." (p.37) Then, a few sentences later, the Committee concluded: "Legislation will be necessary to accomplish the separation of Bonneville's transmission and generation functions. Legislation should also subject Bonneville's transmission to FERC regulation that is equivalent to FERC regulation of investor-owned utilities." (p.37)]
Upon receiving the Steering Committee's Final Report in December, 1996, the four Northwest Governors created a Transition Board to work toward implementation of the report's various recommendations. The Transition Board, in turn, invited interested regional parties to work in a Transmission Work Group (TWG) to develop by the end of 1997 legislation to implement the transmission recommendations. Representatives of BPA preference utilities, BPA direct service industrial customers, the region's investor-owned utilities, environmental and consumer groups, WPPSS and BPA have been meeting as the TWG throughout 1997.
The TWG has spent a large portion of this time identifying: (1) the requirements FERC would have to impose on BPA if new legislation directed FERC to impose on BPA transmission the same, or "strictly equivalent", [ The draft also would subject surplus BPA power sales to equivalent FERC regulation. FERC would regulate only those BPA power sales that are not made pursuant to subsections (b), (c) or (d) of Section 5 of the 1980 Regional Power Act and where FERC has determined that BPA has market power. While such FERC regulation of BPA power sales has not been considered by the TWG, such regulation would be consistent with the recommendation of the Regional Review Steering Committee's Final Report. At p.5, the Report states: "The recommendations would have the effect of disposing of much if not all of the firm power available from Bonneville on a long or intermediate-term basis. The fact that most of Bonneville's power would be subscribed at cost would limit Bonneville's market role. Any remaining firm power and other power products would be sold at Federal Energy Regulatory Commission (FERC)-regulated prices or at competitive prices, where FERC determines that competitive markets exist ." (Emphasis added.)] requirements as it imposes upon IOUs' transmission; and (2) the instances in which there is a compelling need for any such legislation to permit the FERC to deviate from the requirements it imposes upon IOUs' transmission.
In recent weeks, representatives of the IOUs and representatives of some of the BPA customers that have been participating in the TWG have begun using the information developed in the TWG to try to develop draft legislation for implementing the Regional Review's recommendation that "[l]egislation should also subject Bonneville's transmission to FERC regulation that is equivalent to FERC regulation of investor-owned utilities." This draft (copy attached) of the proposed legislation has not been reviewed by the TWG due to your short time frame. The IOUs will engage the TWG in this discussion as soon as the current delay in TWG meetings, requested by the public agencies for work on issues associated with stranded costs, is concluded.
The drafters of the attached proposed legislation have tried to craft language that:
1. Would separate BPA's transmission activities from its power marketing activities and give the FERC the authority to regulate and enforce that separation.
2. Would achieve the Regional Review's recommendation that the legislation "subject Bonneville's transmission to FERC regulation that is equivalent to FERC regulation of Investor-owned utilities" and would depart from "strict-equivalency" only where discussion in the TWG has revealed a compelling rationale for doing so.
3. Ensures that all BPA receipts, whether from the sale of power or transmission service, remain available (as recommended in the Final Report) "to meet Bonneville's financial obligations, which include payment of the Washington Public Power Supply System (WPPSS) bonds, other Bonneville financial obligations, and the agency's fish and wildlife mitigation and restoration requirements, as necessary." The draft would do this by creating separate "transmission" and "power sales" accounts in the single Bonneville Fund and providing for inter-account loans if one account (e.g. power sales) is deficit and the other (e.g. transmission) has a surplus. However, the draft would not permit Bonneville to include costs of one of its functions (e.g. power sales) in the other's (e.g. transmission) revenue requirement for the purposes of ratemaking. This prohibition is consistent with FERC regulation of IOU transmission and would ensure that Bonneville could not shift power costs into its general transmission rates. Such cost shifting would violate the most fundamental precepts of FERC rate regulation. Consequently, preventing any such cost shifting will be an essential element of any legislation to implement the Regional Review's recommendation for "equivalent" regulation.
4. Prohibits BPA from becoming a retail utility by limiting BPA’s sales to only those end-use customers (DSIs) that it has historically serviced. This explicit prohibition is necessary because of BPA’s assertions (correct or not) that it has existing authority to sell at retail to commercial loads.
The Regional Review studied the electric energy system and made recommendations to separate Bonneville's transmission from its power sales and require regulation of Bonneville's transmission by FERC. It recommended that Bonneville's surplus power sales where Bonneville has market power be subjected to FERC regulation that is "equivalent" to regulation of IOUs. The Regional Review also recommended that Bonneville's transmission function participate in an independent system operator (ISO). The purposes of this section are therefore: (1) separation of Bonneville’s transmission from its power sales, (2) require equivalent regulation of BPA’s transmission by FERC, (3) require equivalent regulation of BPA surplus power sales, where Bonneville has market power and (4) remove impediments to BPA becoming a member of an ISO, should one be approved by the FERC.
The BPA activities regarding transmission are separated from those regarding the sale or disposition of electric power. FERC is directed to adopt regulations implementing such separation and is authorized to require the creation of additional positions in Bonneville, as the Commission determines appropriate to implement the separation of Bonneville's activities. This section was intended to do two things. First, allow the Commission to determine the degree of separation between BPA’s transmission and power functions, through regulations, thereby allowing the Commission to increase the degree of separation if necessary to effectively implement Commission policies and orders. Second, subject BPA to the same degree of separation as currently applies to IOUs, given that the Commission has imposed the IOU functional separation measures through regulations.
BPA's transmission activities and surplus power sales are subjected to the just and reasonable standard of the Federal Power Act, consistent with the Regional Review’s recommendations and FERC’s regulation of all other public utilities [ Whenever we use "public utilities" we use it as it’s used in the Federal Power Act.] . Bonneville is subjected to all provisions of the Federal Power Act (FPA) except Sections 207, 209, 212(i), 303, and 305. Section 303 of the FPA allows the Commission to apply different accounting regulations to U.S. agencies. Section 305 prohibits interlocking directorates and prohibits utility officials from dealing in securities. Section 207 allows state commissions to file complaints with the FERC to argue that utilities are furnishing inadequate interstate service. Section 212(i) is the law currently applicable to Federal Columbia River Transmission System. Thus, in all material respects, this section subjects BPA to all of the FPA provisions that apply to public utilities; including, the just and reasonable, non-discriminatory and non-preferential requirements for rates, terms and conditions, the Commission’s complaint proceedings, hearing proceedings, and interconnection requirements.
To achieve the Regional Review’s recommendation that - "[a]ny remaining firm power and other unbundled power products would be sold at prices regulated by FERC or at competitive prices, where FERC determines that competitive markets exist", this section provides for FERC jurisdiction over BPA’s sales of surplus power.
The authority of FERC to order transmission under the Federal Power Act and the accounting requirements applicable to public utilities under the Federal Power Act are applied to BPA. Appeals from Commission action with respect to Bonneville are pursuant to the Federal Power Act.
The bill grandfathers existing contracts from the requirements of the bill, except to the extent the contracts include adjustable rates. For those existing BPA transmission contracts with generally adjustable transmission rates, the rates (but not the terms and conditions) are subjected to Federal Power Act standards and procedures to ensure consistent regulation of BPA’s transmission rates.
Because of anomolies created by the fact that BPA’s distribution facilities are not regulated by the states, the bill would subject BPA’s distribution facilities to the FERC’s jurisdiction to avoid a potential regulatory gap.
BPA transmission rates are to be determined in accordance with generally accepted ratemaking principles for public utilities as determined by FERC. The costs and revenues of the generation, sale, or transmission of electric power by the Administrator are required to be accounted for in the same manner as required under sections 301 and 302 of the Federal Power Act and the regulations of the Commission. Section 303 allows special treatment for federal facilities and is therefore not applied in order to impose the same accounting requirements that exist for all public utilities. The costs and revenues of the generation, sale, or transmission of electric power by the Administrator are functionalized to generation or transmission in accordance with generally accepted rate-making principles for public utilities, as determined by the Commission.
To the extent that there are loans (permitted under Section 9 below) from the Transmission Account to the Power Sales Account within the Bonneville Fund the loans are deemed repaid in setting BPA's transmission rates to avoid cross subsidies between power and transmission.
Recognizing that BPA does not have investors that could take the loss for investments found by FERC to be imprudent, Section 5 requires the Commission’s preapproval for significant transmission investments. Except as may be provided explicitly by Congress, BPA is not to make any significant investment in transmission plant without FERC prior approval.
Section 6 provides for informal consultations with customers prior to Bonneville submitting its rates to the FERC because of concerns some of the region’s preference agencies have raised in the TWG. For the same reason, the bill also would require BPA rate hearings to be conducted in the region. This section also precludes ex parte communications between Bonneville and the Commission because (although others do not agree) Bonneville believes such communications are allowed under the FERC’s regulations (18 C.F.R. 385.2201). It also requires courts to defer to the FERC’s interpretation of the Federal Power Act and FERC’s interpretation of BPA’s organic legislation to avoid conflicting interpretation of FERC and BPA statutes. Reviewing courts will accord Bonneville the deference accorded to a public utility. Section 9(e) of the Northwest Power Act will not apply to judicial review of FERC’s actions under this Act.
This section would prevent BPA from anti-competitive actions such as tying its transmission service to the purchase of Federal power or from imposing conditions on transmission service except as permitted by the FERC. This section would also require BPA to base eligibility for transmission service upon the FERC’s criteria.
It prohibits BPA from constructing low voltage facilities and discourages BPA’s retaining existing local distribution facilities after a certain date and also requires Bonneville to offer the local distribution facilities to those customers that take service over those facilities.
Statutory restrictions on BPA’s participation in a FERC approved and regulated ISO are removed, but BPA's participation is not mandated.
This section precludes BPA from entering into new electric power deals with retail customers other than the DSIs. All new BPA power sales are to be made only to wholesale purchasers that resell the power to others.
This section creates two accounts (one for transmission and the other for power sales) within the Bonneville fund and establishes a loan mechanism between these two accounts to allow for variability in costs and revenues in either function. The purpose of this language is to make clear that contractual obligations to third parties are not impaired by this Act. Loans are only allowed where there is a surplus dollar amount in one account and a deficit in the other. The deficit function may borrow the surplus amount provided that this loan is repaid subject to terms, conditions and interest established by the Commission. As stated above, for purposes of determining transmission rates, any borrowing from the transmission account shall be deemed to have been repaid with interest prior to the period for which the rates are being determined.
Within one year after the passage of this Act, the Commission is to adopt regulations providing for the recovery of any BPA stranded costs imposed upon Bonneville by departing customers. These regulations provide that customers that did not impose stranded costs upon Bonneville are not obligated to pay such costs on behalf of other customers. The Commission’s methodology for determining the amount of Bonneville’s stranded costs is to be consistent with the methodology used by the Commission in determining stranded costs for public utilities. The Commission is also directed to adopt regulations providing for the recovery of any stranded costs imposed upon a utility as a consequence of Bonneville granting transmission service that allows departing utility customers to by-pass the utility’s transmission system.
In addition to the regulations which the Commission is required to adopt pursuant to this Act, the Commission may adopt other regulations and issue such orders as it deems appropriate to implement the provisions of this Act.
Section 6 of the Transmission System Act, which addresses eligibility for Bonneville transmission services, is repealed. Section 208 of the Urgent Supplemental Appropriations Act of 1986, which addresses use of Federal funds to study certain proposals for transfers out of Federal ownership, management or control, is repealed. Section 212(i) of the Federal Power Act, which contains Bonneville-specific provisions of the National Energy Policy Act of 1992, is repealed. Other Statutes need to be reviewed and there maybe sections that need to be repealed.
As you are probably aware, the BPA customers are currently engaged in discussions on the design of a stranded cost recovery mechanism and IOUs are working with them. Our proposals for a stranded cost recovery policy are consistent with FERC determination and regulation. We expect to continue discussions with the other BPA customers, the Transition Board and other interest groups.
We join with all of BPA’s customers in hoping that the subscription process that is currently under discussion here will be successful and eliminate any need for a stranded cost recovery mechanism. However, we agree with the Transition Board that stranded cost recovery should be addressed.
The following principles are designed to lead to a stranded cost recovery mechanism that is only used in the event that legitimate stranded costs occur. Such mechanism:
1. Must not diminish BPA’s incentive to reduce its costs and become more efficient.
2. Must not become a mechanism for paying for avoidable future power costs (e.g. should not create environmental externalities by shifting avoidable future generation related costs to a taxing mechanism).
3. Should not create disincentives for those who decide to remain with BPA under the subscription process at cost. This means that the stranded cost recovery mechanism will need to be targeted to those BPA power customers for whom BPA incurred generation related costs. To this end, FERC regulations should provide that customers that did not impose stranded costs upon Bonneville are not obligated to pay such costs on behalf of other customers.
4. The entirety of BPA's generation must be considered in determining if it has any stranded power costs. Customers that choose to stop purchasing power from BPA and that contractually own generation that has been acquired by BPA, should not be allowed to shift their contractual resource obligations to others through a stranded cost recovery mechanism.
We believe that the proposed legislation achieves these principles by applying a consistent policy and regulatory framework led by FERC. The issues associated with stranded cost recovery are complex, uncertain and not likely to be subject to a negotiated settlement. For these reasons, the IOUs recommend that FERC be given the authority to determine if BPA has stranded costs and to design stranded cost recovery regulations that will provide a fair and equitable resolution of this problem.
We want to emphasize that the Transition Board continues to work with all interest groups on this and other issues related to the Regional Review’s recommendations and we are hopeful a consensus-based comprehensive proposal can be developed over the next couple of months. We encourage you to work with the Transition Board in the development of a complete Northwest Title. Clearly, these topics are controversial and difficult to implement if there is not a broad base of support in the region.
Thank you for the opportunity to provide you with our perspective on achieving consistent energy policy through the application of FERC regulation of Bonneville transmission that is equivalent to the regulatory requirements for all public utilities in the nation. Our hope in providing you with this draft legislation is that the regulatory oversight of Bonneville’s transmission can be made equivalent to that for all other public utilities in the nation. Through application of consistent statutory and regulatory policies a truly competitive electric power marketplace can be created in the region and nationally. We concur with you that there are substantial benefits for consumers of the creation of this new competitive energy marketplace and we would be pleased to provide you further assistance if requested.
Sincerely,
James Litchfield
Consultant to the IOUs
President
Litchfield Consulting Group