II. Summary of Recommendations
he 20 members of the Steering Committee of the
Comprehensive Review of the Northwest Energy System have worked for 11 months to develop
the recommendations contained in this final report. These recommendations represent a
consensus of 13 of the 14 voting members of the Steering Committee, a consensus that has
been achieved only by compromise and sacrifice on the part of each of the members on the
Committee. The 14th voting member acknowledges the significant progress made in many areas
but does not believe that sufficient progress was made on issues related to fish and
wildlife to constitute a real consensus.
We, the members who voted with the majority, support the report and will work to educate and persuade others, but our support here does not commit all of the groups we represent. These compromises, as difficult as some may find them, are worth making for a simple reason: we have more to lose as a region than we have to gain as disparate interests.
There is still much work to be done. This final report is specific in some areas and general in others. More detail and further refinement will be required to convert these recommendations into the contracts, legislative bills, rules and policies that will implement them.
As regional interests work further on these restructuring initiatives, there are bound to be disagreements and new issues to be resolved within the outlines of these recommendations. However, we believe that the principles outlined here must remain if any regional consensus is to be hoped for. With a consensus position, the Pacific Northwest has the best hope of retaining the benefits of the federal hydropower system and transitioning to a competitive electricity system that will maximize benefits for all consumers in the region. The work embodied in this report will not easily be replicated if the regional consensus is destroyed by unilateral actions of any party.
Finally, the Steering Committee recognizes that electric utility restructuring is evolving rapidly and that efforts in Congress and the states almost certainly will change some of the assumptions underlying this report. Although our recommendations may not reflect the ultimate end-state of this restructuring, we nevertheless believe that it does reflect a workable outcome in itself and a very positive step in this process.
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he main features of the recommendations of the
Steering Committee of the Comprehensive Review of the Northwest Energy System are
summarized in the following sections. More detailed discussion of the recommendations is
presented in the sub-sections of this appendix. For purposes of organization, this report
is presented in six main topic areas: federal power marketing; governance of the Columbia
River system (a related topic to federal power marketing); conservation, renewable
resources and low-income energy services; consumer access to the competitive market;
transmission; and future power system roles for a four-state regional body. Issues related
to federal power marketing; conservation, renewable resources and low-income services;
consumer access to the competitive market; and transmissions were analyzed and discussed
in work groups during the review process. Although described as distinct parts, this is an
integrated set of recommendations, the parts of which are interdependent.
The Steering Committee's goals for federal power marketing are to: 1) align the benefits and risks of access to existing federal power; 2) ensure repayment of the debt to the U.S. Treasury with a greater probability than currently exists while not compromising the security or tax-exempt status of Bonneville's third-party debt; and 3) retain the long-term benefits of the system for the region. The recommendation is also intended to be consistent with emerging competitive markets and regional transmission solutions. The mechanism proposed to accomplish these goals is a subscription system for purchasing specified amounts of power at cost with incentives for customers to take longer-term (15 to 20 year) subscriptions. Public utility customers with small loads would be able to subscribe under contracts that would accommodate minor load growth. Subscriptions would be available first to regional customers in a specified multi-part priority order, starting with preference customers, then the direct service industrial customers of Bonneville and the residential and small farm customers of those investor-owned utilities currently participating in Bonneville's residential exchange, followed by other regional customers. Non-regional customers could subscribe after in-region customers. Within each phase of the subscription process, longer-term contracts would have priority over shorter-term contracts if the system is oversubscribed.
Longer-term subscribers would have the right to purchase power at cost for the term of the contract. While the cost of the power from the federal system is currently somewhat above market prices, the costs are generally expected to be below market prices in the future. Short-term subscribers also get the right to purchase power at cost. If they wish to be assured the ability to renew their contracts at cost, they must pay an option fee for the term of their contracts to compensate the U.S. Treasury for the risk of shorter-term contracts. A sliding-scale option fee, ranging between two mills per kilowatt-hour for a five-year contract to zero mills for a 15-20 year contract has been proposed.
The longer-term subscribers assume more risk than current Bonneville customers from the effects of year-to-year variations in weather, future power system cost increases and changes in market conditions. For example, if we were to experience lower than expected market prices that are below Bonneville costs for an extended period of time, the subscribers would still be obligated to pay Bonneville's costs. At the end of their subscription period, short-term subscribers would be able to let their subscriptions lapse and buy at market prices. If they let their subscriptions lapse, however, they would not be able to buy at cost in the future, should that become desirable.
The Steering Committee recognizes Bonneville's existing fish and wildlife obligations and intends that none of its recommendations affect existing trust obligations or treaty rights. The Steering Committee further recognizes that the region will need to provide most of the required fish and wildlife funding, but supports assistance and cost sharing by the federal government. The Committee recommends detailed multi-year fish and wildlife budgets be developed in government-to-government consultations by federal, state and tribal authorities. These budgets would be incorporated into Bonneville rate projections, allowing shorter-term customers certainty regarding fish and wildlife costs. If market prices are above costs, the Treasury would share in these benefits by getting some percentage of the difference between market prices and the cost. The Treasury's share would be applied to accelerate repayment of the federal debt.
Competition raises the possibility of stranded costs — previously incurred fixed costs that cannot be recovered at market prices. If successfully implemented, the subscription system should greatly reduce the possibility of Bonneville experiencing any stranded cost. However, if unmitigable stranded costs remain, a mechanism for recovery of those costs will be required.
Subscribers may resell power in cases of loss of load and/or to the extent allowed by existing law. Other commercial transactions by the subscriber would not disqualify the purchase of federal power. The benefits of purchases for residential and small farm customers of exchanging investor-owned utilities should be passed on to end users.
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. To the extent consistent with its obligation to repay Treasury, Bonneville should return to its historic role of marketing power generated by the Federal Columbia River Power System, rather than becoming an aggressive marketer of products and services in the emerging competitive power market. Bonneville should develop a quantitative marketing plan. The plan should be presented to a transition board reporting to the Governors.
In addition, it is recommended that Bonneville would not acquire resources to serve its customers' load growth except on a direct bilateral basis where the customer takes on all the risk of the acquisition. Similarly, it is proposed that Bonneville would not sell directly to new retail loads, beyond the existing direct service industry loads, although it may sell through intermediaries whose transactions would be subject to state or local jurisdiction.
The Committee recommends that the governors of Idaho, Montana, Oregon, and Washington appoint a transition board to oversee implementation of these and other recommendations. In particular, the board should periodically determine whether the subscription process is making adequate progress or whether another approach is necessary.
The Steering Committee concluded that we cannot expect to achieve both the degree of cost stability the electricity industry requires to maintain the benefits of the Columbia River power system for the region and achieve sustainable fish restoration unless we ensure predictability, accountability and effective governance for the fish and wildlife interests of the river. In short, an effective conclusion of our effort is not possible without an improved system of river governance that pursues fish restoration as a high priority.
The Steering Committee was asked by the Northwest governors to focus on the restructuring of the electricity system and to address the financial stability of the federal power system. The Committee has done our best to recommend changes to the federal system that accomplish that goal. It fully recognizes that there are other important, related issues and decisions, including those affecting fish and wildlife, that must be resolved before a truly comprehensive package can be achieved.
The Steering Committee considered a number of matters related to the governance of the river and the power system. The role of the Northwest Power Planning Council (NWPPC) in river governance was not addressed, but needs to be. The Governors should hold the Council or its successor accountable for ensuring that the region is making the most cost-effective use of fish and wildlife funding. River governance is a fundamental part of any effective response to changes in the electric utility industry. Until governance deliberations move forward through a government-to-government consultation among federal, state and tribal authorities, the prospects for a consensus on the regional response to utility restructuring are diminished and controversial. The Steering Committee requests the governors to initiate a broadly based discussion of improvements in river system governance that would provide more effective decision-making for this complex ecosystem and all of its competing uses.
The Northwest electric utility industry has a long and successful history of developing cost-effective conservation and supporting the development of renewable electricity sources, such as wind, geothermal and biomass energy. In addition, the utilities have played a major role in delivering weatherization to low-income households and helping low-income households with their energy bills. Competitive pressures, however, are expected to make significant changes in the ways utilities carry out these activities in the future. The goal of the Steering Committee's recommendations is to provide for maximum local control in the implementation of conservation, renewables and low-income energy services, while establishing an effective minimum standard that ensures stable funding for these purposes.
To ensure that cost-effective conservation, renewable resource development and low-income weatherization are sustained during the transition to competition and beyond, the Steering Committee recommends that by July 1, 1997, and annually thereafter for a period of 10 years, three percent of the revenues from the sale of electricity services in the region ($210 million in 1995) be dedicated to those purposes. After 10 years, this commitment should be re-evaluated. Three percent of revenues is roughly 65 percent of what was spent for these purposes by the region's utilities and Bonneville in 1995.
The Steering Committee recommends that by July 1, 1999, each of the Northwest states enact legislation that ensures that all electric utilities operating within its borders are meeting the minimum standard for investment in the development of conservation and renewable resources and provision of weatherization and energy-efficiency services to low-income consumers. Utilities should demonstrate compliance with the minimum standard by July 1, 1999. Public utilities may satisfy the standard in aggregate. If this minimum standard is not being met, the legislation should provide for the assessment of a uniform system benefits charge that ensures the collection and investment of funds for these purposes. Due to the rapid emergence of competitive pressures, the Committee strongly recommends prompt legislative action. Legislation implementing these requirements should be implemented simultaneously with open retail access.
The Steering Committee proposes that between two-thirds and five-sixths of the funds be retained by local distribution utilities to carry out locally initiated cost-effective conservation, low-income weatherization and energy-efficiency services and renewable energy projects. Conservation projects implemented and funded by large consumers should be credited against the local conservation target, not including low-income energy-efficiency services. Local utilities would also offer, or allow other electricity service providers to offer, "green" power to their consumers — power from renewable assistance energy sources. The Steering Committee recommends that utilities maintain their current level of low-income energy assistance until states adopt alternative mechanisms for providing these services. The report recognizes and affirms the energy system's historic role in providing energy assistance and proposes that states now provide this assistance by establishing a "Universal Electrical Service Fund" to provide energy bill assistance. This fund could be supported by federal Low-Income Home Energy Assistance Program (LIHEAP) funds, state or local government funds, other funds and/or by a retail distribution system access fee or meters charge.
Some conservation and renewable resource activities benefit from regional planning and coordination. Consequently, it is proposed that between one sixth and one third of the funds be used by a regional non-profit entity with utility, government, consumer and public interest membership. Its functions would be to bring about changes in the markets for targeted energy-efficiency products and services that will improve their market share; to plan and contract for research and limited demonstration of renewable energy technologies, and to support the development of several megawatts annually of renewable generating capacity. A regional technical forum would be established to track regional progress toward the achievement of regional goals and provide feedback and suggestions for improving the effectiveness of conservation and renewable resource development programs. Funding for these activities should be collected in part through Bonneville wholesale rates to the extent regional firm loads are served by power from Bonneville.
How the funds are collected is a matter for state or local decision, as appropriate. The Steering Committee expects that methods of collection that are competitively neutral and affect all participants in the market equally will be found to be preferable.
The goals of the recommendations on retail markets and customer choice are to encourage a more efficient power system, lower electricity costs, increased product choice and greater product innovation for all consumers. These goals were adopted subject to a commitment to maintain the reliability and safety of the electrical power system. The Steering Committee concluded that this goal could best be accomplished by putting in place a competitive electricity market that is driven by consumer choice. However, there is concern that the benefits of a competitive market may flow unevenly to different classes of consumers and that some small consumers may even suffer harm. The report recommends safeguards intended to help mitigate these concerns.
The Steering Committee recommends that regulators and local utility boards and commissions offer open access for all customers that desire it no later than July 1, 1999. The Committee recognizes that some of these regulatory bodies may choose to phase in full retail access. In these cases, a similar phase-in of the recommendations on conservation, renewable resources and low-income energy services may be effected.
Direct access may occur prior to July 1, 1999, however, for direct retail access to be implemented promptly, several activities must be accomplished. These include the identification of any stranded costs and, if any stranded costs are determined to exist, the creation of a stranded cost collection mechanism; unbundling and cost-based pricing of delivery services; pilot programs to explore aggregation for small commercial and residential customers; the exploration of market index pricing options for residential and small commercial customers; and implementation of public purposes funding, energy assistance funding and consumer protection mechanisms consistent with this report's recommendations.
To achieve a competitive retail electricity market requires separation of the distribution and electricity marketing functions of current retail utilities. This is necessary to ensure that consumers will have unimpeded access to alternative electricity suppliers, and vice versa, over the wires of the distribution utility. The distribution utility would continue to be a regulated monopoly responsible for the reliable and safe delivery of electricity from electric service companies to consumers over local distribution wires. Electricity service companies will offer a variety of electricity products and services (e.g., firm or interruptible power, power from renewable resources, peak or off-peak power, fixed or spot-market prices) to consumers on a competitive basis and may, in fact, offer other products unrelated to electricity markets. The electricity services portion of current integrated retail utilities could compete in this market if the distribution utility function is sufficiently separated from the electricity services business to ensure that control of distribution is not used to advantage the electricity services business.
Putting such a competitive market in place will require a significant transition and ongoing market maintenance procedures. There is a danger that, until competitive markets have fully developed for all consumers, some of the benefits of increased competition may be realized primarily by large consumers at the expense of small consumers. Therefore, the Steering Committee calls for active government oversight of the transition and active ongoing programs to facilitate and encourage the development of meaningful market access for all consumer classes and to prevent unwarranted cost shifts among consumer classes. Specifically, the policy calls for licensing of new electricity service providers, applicability of consumer protection laws, formal complaint processes, consumer information programs, and a "provider of last resort" to ensure continued affordable service to all consumers. To further minimize cost shifts to small consumers, policies should be adopted to provide utilities a fair opportunity to recover costs of previous investments that may be stranded by the opening of the market. This is viewed as a transitional problem only, and incentives must be included for utilities to mitigate any stranded costs they potentially face.
Transmission is the "highway system" over which the products of electrical generation flow. If there is to be effective competition among generators, transmission facilities should be operated independently of generation ownership. An independent grid operator (IGO) regulated by FERC with broad membership, including Bonneville and the region's other major transmission owners, is proposed as a means of ensuring independence of transmission operation and improving the efficiency of transmission operation. An IGO should also have clear incentives to maintain reliability and encourage efficient use of the transmission system.
The independent operation of Bonneville's transmission facilities is particularly important to effective competition among generators in this region because Bonneville's facilities make up a large part of the regional transmission system. To ensure this independence, it is recommended that Bonneville be legally separated into two organizations - a power marketing organization to market the power from the federal power system and a transmission organization to carry out the transmission functions. The separation of these functions should be structured so that it does not jeopardize or diminish the legal obligation and ability of Bonneville to meet fish and wildlife and other obligations. A separated federal transmission owner (e.g., the Bonneville Transmission Corporation) could lease its assets to an independent grid operator, or could be an independent grid operator and operate other participants' assets if FERC and the other participants agree.
Legislation will be required to accomplish these goals. While legislation is under consideration, Bonneville should move quickly to achieve as much administrative separation as possible, and to participate in efforts to form an independent grid operator that could operate both federal and non-federal transmission assets.
When the Northwest Power Act was passed in 1980, the authors contemplated an extended time of electricity shortage and the need for increasingly costly large-scale power plants. The NWPPC was established with two representatives from each of the Northwest states (Idaho, Montana, Oregon and Washington) to provide the states and the public a role in determining the region's future need for electricity and how that need could best be met. The Council was also charged with furthering the goals of: encouraging conservation and renewable resources; helping assure an adequate, efficient, economical and reliable power system; providing environmental quality; and protecting, mitigating, and enhancing the fish and wildlife of the Columbia Basin.
The NWPPC has been credited with many improvements in electricity planning. However, in an era in which market forces will play the primary role in determining what plants are built and what can be charged for their output, the Council's resource acquisition planning role is no longer relevant. The Steering Committee believes, however. that the remaining goals are still important to the citizens of the region. The issue is how they are to be achieved in the context of a competitive market.
There is much that is unknown about the competitive future we are about to embrace. As the Northwest transitions toward a competitive electricity industry, there are roles that the region would want carried out by a regional body. These roles do not involve resource acquisition planning, regulation or implementation. They do involve monitoring and analyzing the transition to a competitive electricity market and informing policy-makers and the public. This will help ensure that the transition to a competitive market is accomplished efficiently and fairly throughout the region and that the public values the Northwest has sought from its power system are preserved and enhanced.
These roles include:
Conservation and Renewables — working with regional interests to devise ways of overcoming market barriers, participating in market transformation activities, providing guidance in meeting the region's conservation and renewable goals and working with the regional technical forum to track regional progress;
The Competitive Marketplace — providing information, evaluation and analysis of the evolving marketplace to ensure full, fair and effective competition throughout the region; and
Public Participation and Involvement — informing and involving interested members of the public on matters that affect them, their environment and their economy.
The funding of NWPPC has been through a charge on Bonneville's rates. If federal legislation affecting the role of the NWPPC or a similar regional body is pursued, the question of the level and sources of the funding should be addressed.
NOTE: For a complete copy of Comprehensive Review of the Northwest Energy System - Final Report - Toward a Competitive Electric Power Industry for the 21st Century, contact Jim Middaugh, NWPPC, 851 S.W. 6th Ave. Suite 1100, Portland, OR 97204-1348; telephone: 800-222-3355. Electronic versions of the report are also available for downloading at
Enernet (HTML version)
Northwest Power Planning Council (MS Word version)
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The print version of the 1997 Biennial Energy Report is available free of charge. To order, contact Julie Palakovich at (360) 956-2098, or send e-mail to wepg@ep.cted.wa.gov.