Comprehensive Review of the Northwest Energy System
After the National Energy Policy Act of 1992 began the steady restructuring and deregulation of the nation’s electricity industry, the Bonneville Power Administration found itself in an unusual and troubling position. Bonneville is the federal agency that sells nearly half of the electricity consumed in the Northwest. Bonneville’s long-captive customers suddenly had the opportunity to leave the Bonneville system for lower-cost providers of electricity. In the mid-1990s, there were concerns that Bonneville’s high fixed costs, including its past investments in nuclear power plants through the Hydro-Thermal Power Program, and costs for fish and wildlife recovery would make it uncompetitive in the wholesale power marketplace.
The key issue, in fact one that had been around since construction of Grand Coulee and Bonneville dams began in the early 1930s, was whether a power-supply entity like Bonneville should be public or private and who would control the generation, sale and transmission of power from federal dams. In January 1996, at the request of the governors of Idaho, Montana, Oregon and Washington, a committee of 20 persons with expertise in energy, environmental restoration, economics, and government began a year-long investigation of Bonneville’s current and future activities in a process called the Comprehensive Review of the Northwest Energy System. In December 1996, the Comprehensive Review reported its recommendations, which included a proposal that Bonneville begin selling its power by subscription in blocks and at prices that would be set in the contracts. Long-term subscription — up to 20 years — would be favored in order to provide financial security to Bonneville. Short-term contracts would be allowed, but with a premium, or “option fee,” if the customer wished to continue buying from Bonneville after the expiration of the contract.
The Review participants reasoned that selling power by subscription would align the cost benefits and risks of access to low-cost federal power, compared to buying power on the open market where prices are more volatile, and ensure that Bonneville would make its annual debt repayments to the federal Treasury. Subscription sales also would provide some surety of adequate funding for fish and wildlife recovery, and the Review participants recommended that multi-year budgets be developed and incorporated into Bonneville’s rate predictions. Bonneville adopted some of the Review recommendations, including 10-year — not 20-year — subscription sales. But Bonneville worried about losing customers, too. Many, in fact, took large portions of their load off Bonneville and tried their luck in the wholesale market.
Market prices were favorable until late 2000 and the first six months of 2001. During that period, the West Coast power supply dropped, particularly in the Northwest where a drought caused the second-lowest Columbia River runoff in 72 years of record-keeping. The lost hydropower was equivalent to the power demand of four cities the size of Seattle. At the same time, California’s five-year-old experiment with its own deregulated energy system, which featured an energy pool into which suppliers sold and from which utilities purchased, usually through short-term contracts, was in the throes of a spectacular failure that resulted in huge rate increases and the bankruptcies of the two largest utilities in the state. Market prices shot up by factors of 10 and more. Prices that had been relatively stable around $25 per megawatt-hour jumped to more than $200 and stayed there for months.
Many Bonneville customers, seeking relief from the high-priced market, placed large portions of their load back on Bonneville, as they were permitted to do by law. As a result, Bonneville was forced to buy large amounts of power on the expensive wholesale market. In 2001, Bonneville nearly $3 billion on wholesale power to augment its power supply. Bonneville passed these costs on to customers, and the result was double-digit rate increases.
In 2002, a group of Bonneville’s customers borrowed some of the ideas from the 1996 energy review to develop a proposal for Bonneville’s future role in the energy marketplace. Reasoning that competition and deregulation are here to stay, the customers proposed that Bonneville sell its power in the future through subscription and that customers be guaranteed a portion of the output of the FEDERAL COLUMBIA RIVER POWER SYSTEM, not just a number of megawatts. Thus customers would share the risk of power surpluses and deficits and would be responsible for meeting their own demand for power in the future in excess of the power they purchase from their “slice” of the federal power system. Bonneville officials were interested in the concept, as it promised relief from potentially expensive ventures into the high-priced market.
As the Comprehensive Review made clear, energy industry deregulation created a unique set of problems for Bonneville, a federal agency required to meet all of the demand its public utility customers place on it. Drought, the failed deregulation experiment in California, and the fact that West Coast power demand continued to grow through the 1990s while the power supply remained essentially static, exacerbated the problems for Bonneville. Dividing the output of the federal system among Bonneville’s customers may be a way out of the deregulation dilemma.
The concept gained additional focus in ongoing discussions among Bonneville, its customers, and public interest groups in a process called the “Regional Dialogue” that lasted several years and culminated in 2006 with a proposal for power sales after 2011, when current power sales contracts will expire. From the Regional Dialogue discussions, Bonneville proposed what it called a new paradigm for its power sales, essentially a derivation of the Comprehensive Review proposal: After 2011, Bonneville would limit its firm power sales to its preference customers — publicly owned utilities — to an amount approximately equal to the output of the federal Columbia River Power System. This lowest-cost power would be called Tier 1. Each customer would be allocated an amount of Tier 1 power derived from a calculation that includes the customer’s load in 2010, and the customer would be responsible for any additional power over the course of the 20-year contract period (Bonneville would make a small amount of power available at its expense to augment the federal system if necessary to ensure that all of its customers have enough federal power to meet their loads in 2010). As their loads grow during the 20-year contract period, customers could buy additional power from Bonneville — but a higher rate than Tier 1, a rate that would reflect the cost to Bonneville of acquiring the power. Or, customers could make their own arrangements to buy additional power or invest in energy efficiency measures to reduce their demand for power.
Bonneville planned to make its final policy decisions in late 2006, in a sense bringing to a close and accepting many of the recommendations — notably allocating the federal power among preference customers and selling the power through 20-year contracts — that came out of the Comprehensive Review of the Energy System 10 years earlier.