Comment on document 2003-18

Comment on document 2003-18

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December 12, 2003 Mr. Mark Walker Director Public Affairs Northwest Power and Conservation Council 851 S.W. Sixth Avenue, Suite 1100 Portland OR. 97204-1348 RE: NorthWestern Energy (NWE) comments on NPCC paper, The Future Role of Bonneville in Power Supply Dear Council Members; Thank you for this opportunity to comment on your issue paper. The leadership of the Council in this matter is essential to the eventual resolution of many critical issues facing the region. The customers have made significant progress on many issues, but the most fundamental and difficult issue, allocation, remains unresolved. At some point pressure must be brought to bear on the customers to provide the necessary impetus for resolution and implementation of a stable solution to the Bonneville (BPA) restructuring conundrum. The leadership of the Council is the preferable source of the necessary pressure, as the region has already paid a huge price for its inability to deal with these issues. It is an unfortunate irony that the benefits we strive so hard to protect have become a burden to the region in recent years. It is a failure of the region’s public process that BPA has not yet been restructured consistent with a stable regional power industry. Fundamentally this discussion is not just about BPA, but also about the region’s economic health. The efficient provision of electricity is a significant part of the foundation of the region’s economic ...

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1
December 12, 2003
Mr. Mark Walker
Director Public Affairs
Northwest Power and Conservation Council
851 S.W. Sixth Avenue, Suite 1100
Portland OR.
97204-1348
RE:
NorthWestern Energy (NWE) comments on NPCC paper, The Future Role of
Bonneville in Power Supply
Dear Council Members;
Thank you for this opportunity to comment on your issue paper.
The leadership of the
Council in this matter is essential to the eventual resolution of many critical issues facing
the region.
The customers have made significant progress on many issues, but the most
fundamental and difficult issue, allocation, remains unresolved.
At some point pressure
must be brought to bear on the customers to provide the necessary impetus for resolution
and implementation of a stable solution to the Bonneville (BPA) restructuring
conundrum.
The leadership of the Council is the preferable source of the necessary
pressure, as the region has already paid a huge price for its inability to deal with these
issues.
It is an unfortunate irony that the benefits we strive so hard to protect have
become a burden to the region in recent years.
It is a failure of the region’s public
process that BPA has not yet been restructured consistent with a stable regional power
industry.
Fundamentally this discussion is not just about BPA, but also about the
region’s economic health.
The efficient provision of electricity is a significant part of the
foundation of the region’s economic well being.
BPA must be restructured in a manner
that maximizes the efficient provision of electricity throughout the region.
The Council, given the Regional Act’s goal of assuring an adequate, efficient, economic,
and reliable (AEE&R) power system in the region, has responsibility to see that these
issues are resolved in a manner that is in the best interests of the region as a whole.
To
date the Council has accepted the customers’ progress and provided them the necessary
time and moral support to pursue negotiations.
At some point in the near future the
Council must step up its leadership role and address outstanding issues from the
perspective of the region’s best interests.
As the Council’s paper makes clear, time is
becoming scarce if we are to avoid another blow to our regional economy.
While it is
unlikely we will experience another energy crisis of the previously unimaginable 2000-1
magnitude, the region has not recovered from it, and cannot afford another period of
dysfunction in the wholesale power market.
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Response to Question 1:
In general the Council’s analysis of the issues and problems is constructively focused,
with two notable exceptions.
First, in defining the source of the problem, the Council
mixes “fundamental problems” and “created problems,” which causes confusion.
The
problem statement would be more useful in furthering the regional discussion if these
were differentiated and focus was placed on the fundamental problems.
If the region is
able to address the fundamental problems effectively, the created problems go away.
An
example of this confusion is evident in the second and third sentences of the opening
paragraph under “What’s the Problem?”
The Council states:
“Bonneville’s financial vulnerability arises in part from it dependence on a highly
variable hydroelectric base and the effects of a sometimes very volatile wholesale
market.
Another source of vulnerability arises from the asymmetric nature of the
obligations between Bonneville and many of its customers and how Bonneville
has historically chosen to implement its obligations.”
Bonneville’s financial vulnerability does not arise from its dependence on either a highly
variable hydro base or a volatile wholesale market.
Rather, its financial vulnerability
arises from its management choices, as shaped and constrained by its asymmetric
obligations, that cause the volatile wholesale markets and hydro variability to become
sources of financial vulnerability.
Furthermore, BPA’s buying and selling decisions are a
major contributor to the volatility of the wholesale markets.
In other words, BPA
management decisions have created the situation in which variable hydro and volatile
markets cause financial vulnerability.
The Council’s second sentence outlines the
fundamental problems that need to be focused on, BPA’s obligations and how BPA
management has chosen to implement them.
One result of the restructuring of BPA’s
obligations and management prerogatives should be that BPA no longer helps create, and
is no longer vulnerable to volatile wholesale markets, and that hydro variability is no
longer a cause of huge financial uncertainty.
As the Council points out in its discussion,
BPA management has been provided with recommended courses of action that would
mitigate these created problems.
For example, in broadly disregarding the recommendations of the Comprehensive
Review, the Administrator’s Subscription Record of Decision greatly exacerbated the
power crisis of 2000-1 by overselling the Federal Base System (FBS) by 3300MWA in a
time of regional resource deficit.
The Administrator chose to disregard the
recommendations that addressed these fundamental problems and would have prevented
BPA from being an exacerbating part of the crisis.
In April of this year BPA published a
report of unprecedented candor that concluded: “We dramatically switched directions
during the 2000-2001 period from that of the Comprehensive Review, and that led to
misaligned activities and inefficiencies” (executive summary p.vi).
That this did occur,
and that it could occur again in the future, and cause a potentially significant negative
impact on the region’s economy, is the problem.
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The second exception NWE would like to note regards the lack of analysis and discussion
of an issue that is clearly stated in the problem statement, and that is the repercussions
BPA’s financial crises have on the health of the regional economy.
The analysis seems to
assume that what is good for BPA is good for the region.
While this is the optimal
solution, it does not necessarily follow that a solution that provides BPA with financial
stability will also be good for the region as a whole.
What is good for the region is a
solution that equitably allocates the benefits in a long-term stable manner, while also
accomplishing the Regional Act’s goal of an AEE&R regional power system.
Re-
structuring BPA in a manner that facilitates the emergence of a robust competitive
wholesale power market is essential to realizing this goal.
Fundamental to a robust
wholesale market is a clear understanding of who has responsibility to acquire or contract
for resources to serve what load.
And, of course, this is where the Council’s discussion
of “asymmetrical obligations” is on point.
The confusion caused by the asymmetrical
obligations of BPA relative to its customers is where the necessary precise definition of
roles needed for an efficient market breaks down.
In deciding the who, what, and how of
allocation of Federal power that would be best for BPA and the region, the facilitation of
a robust competitive power market must be a paramount principle.
The customer proposal that was developed in 2002 was an honest effort that for many
reasons did not reach fruition.
While many significant issues were dealt with, many
others were not.
These other issues are the most difficult and contentious, and therefore
precluded the settlement proposal from being finalized.
Some of these contentious issues
are: What limits would be placed on BPA’s obligation to acquire and provide marginal
resources?
What sort of contracts would be offered to the various POU customers?
How
would BPA’s costs be controlled?
The definition of IOU customer benefits was not
acceptable to all the POUs.
The allocation of the IOU benefits was not addressed.
The
structure of the deal did not provide sufficient IOU/POU interest alignment to hold
together.
Basically, the outstanding issues concerned allocation and directly related
issues.
Response to Question 2:
NWE agrees with the Council’s assessment that a more limited Bonneville role in power
supply is essential to the best interests of the region as a whole.
Ideally BPA’s role
should be limited to managing the sale of the FBS in long-term Slice contracts.
To the
extent their involvement is expanded beyond that basic role, the best interests of the
region as a whole will be compromised.
Passing a clear definition of the obligation to
serve all marginal load demands to the region’s numerous distribution utilities would do
more to solve the region’s chronically dysfunctional electricity industry problems than
any other single decision.
This would be accomplished by enabling development of an
efficient competitive wholesale power market, a necessary element of an AEE&R
regional power system.
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Response to Question 3:
The chance to address Bonneville’s future role in power supply in a
timely
manner has
long since passed.
BPA’s asymmetrical obligation structure, translated through
subscription implementation, was the portal through which the $5-6B 2000-1 power
market disaster infected the region.
That said, addressing this issue should be the top
priority of the entire industry leadership in the region, so as to avoid another period of
severe power market dysfunction.
Response to Question 4:
Overall the principles offered by the Council, which broadly reflect the Joint Customer’s
principles, are reasonable.
Unfortunately they do little to further the regional discussion
and decisions that must take place to reach a stable industry structure.
It is with this in
mind that NWE provides the following observations for the individual principles.
NWE
feels that implementation of these principles in the manner outlined below would be in
the best interests of the region as a whole, as well as further the Act’s goal of an AEE&R
regional power system.
However, we continue to support the efforts of the customers to
reach a mutually agreeable settlement.
Long Term Contracts:
NWE is in full agreement.
Bonneville’s Primary Role:
NWE is in full agreement.
Bonneville’s augmentation purchases should be on a bi-lateral contract basis that aligns
benefits and costs.
NWE believes that if augmentation takes place it should be on a bi-
lateral contract basis only.
The development of rate mechanisms that purport to
accomplish alignment of benefits and costs, will provide a fertile ground for BPA to cross
subsidize and will result in contentious cost allocation litigation between customer and
contract groups.
Bonneville’s role should be limited contractually.
NWE agrees with this goal, but feels
that legislation that defines the new roles is necessary.
Recent history provides abundant
evidence that BPA and customer differences cannot be contained by contracts.
While
contracts may be a reasonable method for initially defining roles, legislation should be
immediately pursued to solidify the newly defined roles.
Long-term contracts require openness, cost control, and trust.
Under normal business
relationships between peers, good contracts provide this foundation.
However, in the
case of BPA, with its unique legislated existence and abilities, the peer-to-peer
relationship does not exist, and new legislation will be needed to accomplish these
objectives.
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Any allocation of the FBS should be equitable and consistent with federal law.
Historically, and presently, BPA’s administrative allocation of the FBS has resulted in an
inequitable allocation of the benefits and resulting tensions between the customers.
BPA
has repeatedly diverged from the foundation of the Regional Act, which is rate parity.
NWE believes that a one-time (perhaps phased-in) allocation of the FBS that
accomplishes a starting point of approximate rate parity, is the best approach that is
workable and equitable.
Such an approach would also facilitate an AEE&R power
system, consistent with the Regional Act.
A significant amount of the FBS should be offered as Slice:
NWE believes that
allocating the entire FBS as Slice is the foundation for a durable long-term solution.
Offering any less than 100% of the system as Slice embeds future contentious customer
differences and undermines many fundamental objectives, such as cost control, equitable
allocation, minimizing litigation, rebuilding of trust in BPA management, and
development of an efficient wholesale power market.
Perhaps most importantly, a 100%
Slice allocation would align all power customers interests relative to BPA.
Such an
allocation approach would not necessarily preclude BPA from offering Slice
“management services” to customers that desire such a service and are willing to pay for
its costs.
Just as 0% Slice and BPA meeting all load growth would be the worst outcome
for the region as whole, 100% Slice and BPA serving no load growth would be the best.
An equitable allocation of the FBS benefits to IOU Residential customers must be
accomplished in a clear and transparent way.
NWE is in full agreement.
Service to DSIs:
NWE believes that the most valuable service the region could provide
for the DSIs, and the region’s entire industrial base, is restructuring BPA in a manner that
maximizes the robustness of our competitive wholesale power market, so that our
region’s industry is not put at a competitive disadvantage relative to the rest of the
country, and the world.
Continued development of cost effective conservation and renewable resources.
NWE is
in full agreement.
NWE suggests that a mechanism that would enable this goal, as well
as furthering other elements of a robust restructuring of BPA, would be to require BPA to
acquire conservation and renewables for all long-term augmentation purchases.
The
augmentation resources would form a separate resource pool and eligible customers
would sign long-term bi-lateral contracts to take power from the pool.
Fish and Wildlife:
NWE supports cost effective expenditures.
Additional Comments:
A principle that the customers have adopted that the Council has not, is alignment of the
long-term interests of all the customers relative to BPA.
The considerable acrimony that
presently inhibits settlement efforts is proof of the need for this principle to assure a
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durable long-term solution.
A measure of divergence from rate parity would provide a
good indication of the misalignment of interests among customer groups.
The one significant principle that is lacking in both the Council’s and the Joint
Customer’s statements of Principles, and that NWE believes is a paramount principle for
the best interests of the region as a whole, is that Bonneville must be restructured in a
manner that maximizes the probability of the development of a robust competitive
wholesale power market.
The stated reluctance on the part of many customers to support
what seems to be an obviously beneficial principle is confusion that such a statement is
actually clandestine support for FERC’s “SMD.”
It is unfortunate some customers are
unable to sufficiently differentiate these items, as they are not significantly related.
In the
unlikely event that FERC actually accomplishes an implementation of SMD, it will likely
be a costly failure in the Northwest if we do not restructure Bonneville consistent with a
competitive market.
Meanwhile, the restructuring of Bonneville will have no impact on
the eventuality of SMD.
Ironically, if the region is unable to develop an efficient
market, FERC will be given good reason for forcing SMD on the region.
An efficient competitive wholesale marketplace would provide numerous benefits to the
region.
Obviously it would provide a mechanism for the efficient buying and selling of
resources, and it would provide a mechanism for tested utility resource plans through
efficient Request for Proposals.
Most importantly, the health of the regional economy, as
heavily influenced by the relative competitiveness of our industrial base, is significantly
impacted by how efficient our competitive wholesale market is.
NWE encourages the NPCC to assume a leadership role in addressing BPA’s future role
in power supply immediately.
We would suggest the Council begin a public process to
address this issue, and call for proposals for the future long-term allocation of the FBS.
We encourage the Council to finalize these principles with the best interests of the
region’s economy foremost in mind.
The Council’s principles will provide customers
and interested parties a framework for developing ideas as to how to best implement
allocation.
They also provide the Council with a means to analyze all proposals.
The
Council process, by providing an open forum for all interested parties to provide ideas for
consideration, is the best forum available to the region for resolution of these issues.
If
you have questions regarding these views, please call Mark Stauffer at (406) 497-3269.
Sincerely Yours,
Patrick R. Corcoran
Mark A. Stauffer
Vice President, Regulatory Affairs
Manager, Regional Power Issues