Northwest Conservation Act Coalition
September 9, 1997
The Bonneville Power Administration, like almost all generating utilities, faces a cash-flow problem in the transition to a competitive environment. The Northwest Conservation Act Coalition represents the interests of shareholders and beneficiaries of the federal system.
As is true for other utilities, BPA has four strategies available to it to protect its interests and to weather the cash-flow storm: selling futures (subscriptions); refinancing its fixed costs (Treasury deferral); reducing costs (though most of Bonneville's are fixed obligations); and, imposing costs involuntarily on customers (manipulating its market power or imposing a stranded cost charge). Some of these strategies may be bad public policy. It is the charge of the Transition Board to steer Bonneville and the region in the right direction.
If the region cannot agree on how these strategies are applied, it will be left to Congress and the Administration to decide. We argue that such a "status quo scenario" is politically risky for the NW's interests, and potentially chaotic. However, some parties may see that solution as preferable to one in which they cannot escape some over-market contribution to the system. We disagree. The region has benefited from below-market power, coupled with significant investments in the environment, for over 50 years. It still can receive benefits in the future, but only by stepping up to its responsibilities now.
After cost-control measures are put into place and out-of-date subsidies are eliminated, all costs that are unrecoverable by BPA through subscriptions and other sales, are "stranded," and they require someone to pay them. They must be paid either by customers or absorbed by Treasury. Thus allocation of stranded costs, not their determination, is the critical question.
Stranded costs can be allocated to historic users, future users, or both. Each method has its advantages and drawbacks, and each can and will be justified as "fair" by various parties. The paper explores the issues, but takes no position at this time.
NCAC proposes that a "deal" be considered between customers and the Treasury. Customers would agree to pick up some defined maximum of BPA's above-market costs in return for a commitment from the federal government to accept deferral with interest (not absorption) of any excess needed to fully fund the obligations of the system. We thus recommend a one-time determination of the maximum exposure to BPA's above-market costs. Payment by customers would be through a combination of subscription payments and (if needed) a targeted and/or "peanut butter" transmission access charge.
1. A planned solution is better than the status quo scenario.
2. A planned solution is possible, given the dangers of the status quo scenario. Such a solution will require careful crafting, negotiation, and, above all, leadership from the Transition Board, but the political dynamics are in place to achieve a consensus that is salable to DC.
3. Bonneville's problems are not unique. The issue of stranded costs is at the heart of the restructuring debate, and BPA's exposure is actually relatively small in comparison to what utilities in other parts of the country are facing. A stranded cost charge is an integral part of any restructuring effort and fully supported by FERC and the USDOE.
4. Developing a stranded cost recovery mechanism quickly will enhance the subscription process--and reduce the amount which is stranded. Potential subscribers who know their maximum stranded cost exposure in advance, and know other system beneficiaries will share such costs equitably, will be more likely to subscribe.
5. A one-time determination of the maximum above-market cost exposure of those who will be required to pay is preferable to periodic readjustments, but is acceptable only under certain conditions. We recognize that customers facing a world of open retail access want certainty. However, the determined amount must be sufficient to be acceptable to Treasury, because deferral is the backstop if the amount comes up short. Therefore, providing assurance to the federal government that a one-time determination is sufficient to cover BPA's projected above-market cash need will require agreement by the tribes and fishery managers, as well as Treasury. Such agreement depends on achieving significant progress towards river governance agreements and a unified salmon recovery plan. Putting some risk on Treasury provides BPA incentive to cut costs [for a slight variation, see footnote #8].
6. Good arguments exist to require either historic or future users, or both, to share in paying the cost. The preferred solution may be based more on political acceptability than strict cost-causation. Some portion of the total could be charged to transmission as a general surcharge while assigning the rest to historical users in a more directed fashion through a non-bypassable targeted transmission access fee that would flow through to, and follow, end users. A limited amount spread to all transmission users in a "peanut butter" approach can be justified as representing a regional obligation to salmon restoration. We would support the peanut butter concept, however, only with the caveat that if non-historic customers are required to pay, they should be entitled to some share of future BPA benefits.
As can be seen from this discussion, there is no lack of controversy in allocating BPA's stranded costs. However, NCAC is convinced that the Transition Board and the region cannot shy away from the task if we want to provide Bonneville with the financial security needed to fulfill its many responsibilities.
We believe our proposal can garner the regional and Federal acceptance that is necessary for a long-term solution. It can be summarized relatively simply. Basically we propose that all of BPA's stranded costs be allocated to either historic or future users, or both, but that the above-market portion of that cost be limited to give customers certainty. This places some risk of cash flow on Treasury deferral, but only on certain conditions including Treasury assurance to fishery managers and tribes that full funding for salmon restoration efforts will not be jeopardized.
Northwest Conservation Act Coalition
The Northwest Conservation Act Coalition (NCAC) represents interests with deep concerns over the outcome of federal restructuring. In a fundamental way, we represent many of the "shareholders" of the Bonneville Power Administration (BPA). Our organization was founded for the purpose of protecting the principles enunciated in the Conservation and Power Planning Act: maintaining and improving a system to deliver a clean environment, abundant with fish and wildlife; and, affordable power to all in the Northwest. These goals have been put at risk by changes in the marketplace into which Bonneville must sell. However, while at risk, these goals can still be pursued successfully if the region can come together at this critical time.
The problem the region faces, simply put, is that Bonneville faces a cash flow problem for the next several years. The problem (and much of its solution) is not unique to BPA, but is faced by most utilities as the energy industry transitions to competition. A combination of factors is to blame: the loss of previously captive customers; poor resource decisions; and, falling market prices due to lower gas prices, new gas turbine technology; and a significant generation surplus. Bonneville, like other generating utilities, is faced with the inability to recover the fully amortized cost of its assets in a surplus commodity market that sets prices at only the fuel and O&M cost of fossil-fueled plants. Bonneville, like other utilities, must therefore have a strategy to collect above-market costs.
We see only four ways for utilities to deal with this problem:
1. Induce customers to voluntarily pay an above-market premium for the privilege to receive below-market pricing in the future. For BPA, this is the subscription process. IOUs can do this by selling options or futures if they are pretty certain their costs are going down compared to the market.
2. Refinance current fixed obligations. For Bonneville this means getting Treasury to accept some deferred payments without incurring dangerous political fallout.
3. Cut costs. It is difficult to cut sunk, fixed costs, which dominate BPA's budget. We are concerned, of course, that Bonneville will cut costs relating to its public purpose obligations while casting a blind eye at politically protected black holes such as the Supply System, irrigation subsidies and water withdrawals, and Corps and BuRec operations.
4. Impose involuntary charges on customers by taking advantage of monopoly niches, raising transmission rates, or assessing stranded cost charges.
Each of these strategies, as the problem in general, is not particular to, or only available to, Bonneville. Observers should not be shocked that the federal government, just like other shareholders, believes it has the authority and obligation to pursue all four strategies if necessary to protect its interests. All four strategies are also interconnected, affect each other, and cannot be viewed separately from the complete package. As the representatives of important "shareholders" of this system, we strongly support the vigorous application of all four of these strategies to maintain our shareholder value and continued generation of valuable environmental and economic dividends. Just like other shareholders in the restructuring debate, we will aggressively resist the attempts of some customers to game the system and avoid, shift or bypass their responsibilities to maintain the health of the Columbia River eco-system or capture more than their fair share of its benefits.
Restructuring the Federal energy system will involve redesigning numerous pieces of an interlocking puzzle: transmission; river governance and fish and wildlife funding; subscriptions; public purpose programs; etc. Providing the frame for all the pieces is the question of BPA's ability to meet its financial obligations.
While this paper focuses on stranded cost recovery mechanisms, we believe that ultimately Bonneville's financial security also rests on the ability of the region to come to a long-term resolution of the financial and decision-making process and actions to restore Columbia and Snake River salmon and steelhead. Without such a global solution, it will be impossible to have a successful subscription process and/or viable stranded cost recovery mechanism, and impossible to separate BPA's transmission and generation functions.
It has been suggested that the consideration of a stranded cost recovery mechanism is not timely and will have a "chilling effect" on the subscription design and implementation process. However, in every other restructuring discussion in the country the issue of stranded cost has been an integral and necessary part of the debate and ultimately one of the conditions for restructuring. [FERC Order 888 states, for example (p. 443, 454) that, ". . . we must address the costs of the transition to a competitive industry by allowing utilities to recover their legitimate, prudent and verifiable stranded costs simultaneously with any final rule we adopt requiring open access transmission. . . . We are faced with an industry transition in which there is the possibility that certain utilities will be left with large unrecoverable costs or that those costs will be unfairly shifted to other (remaining) customers. That is why we must directly and timely address the costs of the transition by allowing utilities to seek recovery of legitimate prudent and verifiable stranded costs. . . . "We are issuing the Stranded Cost Final Rule simultaneously with the Open Access Final Rule because we believe that the recovery of legitimate, prudent and verifiable stranded costs is critical to the successful transition of the electric industry to a competitive, open access environment. [emph. added.] ] Lack of certainty regarding a stranded cost recovery mechanism would, in our opinion, make it much more difficult for customers to commit to a subscription process--even though a successful process could mean that a stranded cost charge will never be needed. Therefore NCAC applauds the Transition Board's decision to develop a stranded cost mechanism by November, and believes the action will enhance the subscription design process, not delay it.
Skeptics have suggested that it is unrealistic to think the region can come to the degree of agreement needed to submit itself to a stranded cost mechanism. Some also feel that there is no need to come up with a stranded cost mechanism, because BPA will be able to--inappropriately in our opinion--cost-cut its way out of any financial problems. This reasoning is essentially an argument that the status quo is satisfactory enough--or at least not unpleasant enough--that the urgency required to get parties to make necessary compromises is not present.
We do not agree with these arguments. Conservation and renewable investments are being decimated, and fish and wildlife restoration continues in chaos and cross-purposes. The Clinton Administration has also made it quite clear that the region must pay its bills, and Congressional threats to Bonneville are also very real. [See for example, Federal Power Dinosaurs: Reforming TVA and PMA's in a Competitive Electricity Environment , Northeast-Midwest Institute, 1997.] Furthermore, the advantages to the region of enabling BPA to join (or operate) an IGO and the problems with BPA's present stranded cost collection authority (see Status Quo Scenario below) should be recognized by all parties. These factors should, in our opinion, provide the regional will to support the successful implementation of a stranded cost recovery mechanism.
Any successful Northwest restructuring effort must be founded on political reality. That reality, we believe, will ultimately come down to a political deal between a (united) region on one side and Congress and the Administration on the other. The ingredients for such a deal--transmission separation; river governance; adequate fish funding and actions; and significant regional contribution towards BPA's financial stability--are clear. It is now the Transition Board's task to come up with the recipe. A stranded cost recovery mechanism is key to any resolution.
If the region cannot agree on a stranded cost recovery mechanism, Bonneville will, by default, rely on its current authorities. The Administration will also insist on some form of stranded cost recovery authority with any national restructuring legislation. We believe none of the options will be popular, and some are poor public policy for the NW's unique circumstances. We discuss these briefly:
Using BPA's dominant market power in ancillary services to raise revenues.
Bonneville's hydro resources can supply shaping and load following services much cheaper than can be supplied by thermal resources. These products have been sold by BPA at prices significantly below market. A recent evaluation by Resource Data International [Public Utilities Fortnightly , June 1, 1997] , for example, estimated PGE's stranded costs to be about zero. When asked how that could be possible given the company's Trojan liability, the response was that the capacity contract PGE had with BPA was so underpriced compared to its market value, that the profits would cover about half of Trojan's $1 billion liability! (PGE's low-cost hydro resources covered the other half, bringing PGE's net loss in a deregulated world to about zero.) The problem with allowing BPA to raise its ancillary service prices is that the agency has significant, almost monopoly, market power for these products. (Many in the region are dependent on these services and will not like this option. They'd rather have someone else pay for BPA's "stranded" costs than see these prices rise.)
Raising transmission rates--and manipulating transmission access.
We agree with BPA and WPPSS bondholders, among others, that the agency has the legal authority and obligation to raise its transmission rates to recover any shortfall from other business lines. This could be done in a "peanut butter" fashion or targeted at historical customers. [FERC's decision in Order 888 preferred the directed approach over a "peanut butter" approach spread to all transmission users regardless of whether they "deserve" to receive it.] One, or a combination of transmission surcharges may well end up being the agreed-upon approach for the collection of stranded costs, but we believe it would be preferable to have the particular allocation decided by the region as part of a global solution rather than simply leaving this contentious decision up to Bonneville's discretion.
BPA could also manipulate its transmission access policy to benefit its power business. The agency has been accused of doing so in the past. Most importantly, forcing Bonneville to rely on such measures will prevent its ability to join an IGO.
Deferring Treasury payments.
Ultimately Bonneville can cover its losses by deferring its Treasury payments. We believe this is unacceptable without prior agreement in the context of a global solution. As many in Congress and the Administration have told the NW during the Comprehensive Review, the political risks of such a policy are great, because it will be viewed as the equivalent of bankruptcy. We will not list the risks here beyond repeating the obvious that sizable or repeated deferrals will threaten any future claim the NW has to the benefits of below-market power in the future.
To summarize, while the status quo option (perhaps better characterized as the "muddle through" option) is possible, it contains many risks. Having the region understand those risks is an important task for the Transition Board in developing the political will to come up with a better solution.
1. "Fair enough" allocation of costs such that most customer groups are willing to support the deal.
2. Able to withstand legal tests.
3. Gives enough payment certainty to be acceptable to the federal government so that the benefits of the Bonneville system can be preserved for the region.
4. Gives enough funding certainty to treaty tribes, fishery agencies and advocates that measures they are advocating can be paid for, now and in the future.
5. Gives enough certainty to customers of the total above-market cost exposure they may be required to pay.
6. Does not threaten WPPSS bond security.
7. Provides sufficient incentive for BPA to continue cost control efforts.
It is important to design any recovery mechanism so that it encourages reasonable cost-cutting. But cost cutting alone cannot guarantee that BPA will bring its costs below market, because most of Bonneville's costs are fixed, unlike the competition that is much more thermally based. In addition, cost-cutting can become a code word for abandoning fish restoration efforts and conservation and renewables investments.
For all the pressure on Bonneville to cut costs, NCAC has seen little commitment to address the largest potential targets. The two biggest areas for real cost savings are the continued operation of WNP-2, and huge irrigation subsidies. These candidates for cuts are sacrosanct. Pious calls for cost-cutting to deal with all of BPA's obligations should be seen as a sham unless WNP-2 and irrigation are on the table.
BPA has refused, thus far, to subject WNP-2 to competitive pressures. Simply marketing the power of the project separate from the life-support it is given by the rest of the FBS would quickly flush out this subsidy. Those who think WNP-2 power was a good deal could bid to buy its output. If not enough bid, the plant would be closed. BPA won't do this, because it knows what the decision of the market would be, but fears the political fallout of the loss of Richland jobs. This proposal is not without BPA precedent. BPA is marketing its renewable projects separately from its other resources--essentially saying renewables, but not nuclear power, must face the market.
Savings available: approx. $100 million/year [The operating and new capital cost of the plant has been reported by WPPSS to be 24.6 mills/kwh for FY97 compared to the market value of about 20 mills. While evidently uneconomic, even this number is a sham calculation. Because the plant was out for months because its power was not needed (as has occurred for the last three years due to good water conditions), WPPSS credits itself for the imaginary kwhs it would have generated if the power had been salable. Its actual cost for actual power generated work out to over 30 mills/kwh. In addition, BPA estimates that terminating the plant will tighten the market surplus and raise prices another half mill or so which would raise revenues from other BPA sales. ]
The cost of water withdrawals and below-cost irrigation subsidies (some Bureau projects pay less than 1 mill/kwh for power) are another area ripe for savings. Statements made during the Comprehensive Review by water user representative Darryl Olsen documented the tremendous profits farmers and ranchers are making from these tremendous subsidies. Their numbers showed ten- to twenty-to-one profits for each dollar of subsidy provided. Perhaps someone could politely ask them to reduce that to nine- to nineteen-to-one by eliminating the subsidies.
Savings available: approx. $100-150 million/year [Conservative estimates given in Comprehensive Review discussions reflecting lost revenue from uncompensated water withdrawals that would have generated electricity and below-market sales of power for irrigation pumping.]
While these have gone virtually unmentioned, there has been much attention focused on the need for generic, unspecified cost cutting. We support improved efficiency and a tightly run organization, however not at the expense of service quality and reliability, or Bonneville's other important public obligations.
Fish costs are always a handy target, and many blame BPA's problems on these costs. But cutting fish restoration costs without improving delivery and accountability will only produce more litigation and controversy. We have long advocated joint federal, tribal and state river governance with a binding dispute resolution process, and a unified salmon recovery plan. We believe that only by resolving this issue can costs be contained and salmon and steelhead be restored.
NCAC favors systematic, professional and independent performance audits of Bonneville, COE and BuRec operations. Such audits would not second-guess the goals of these operations, but only determine if they can be accomplished more efficiently. While efficiency audits would be quite valuable, the more difficult decisions that drive Bonneville's costs are policy-driven. These include the major questions of, for example, the degree of BPA risk-taking in the market, the irrigation and WPPSS decisions cited above, and, of course, river policy. These are tough questions, without doubt, but no real global solution can be forthcoming without confronting them. We have suggested solutions, including calling for a unified and securely funded salmon recovery plan. The Transition Board can play a large role in determining if these policies will be settled by the current muddle of conflicting entities, or through a more effective and accountable institutional solution. We urge the Transition Board to address this issue seriously.
After cost-control measures are put into place and out-of-date subsidies eliminated, all costs that are unrecoverable by BPA through subscriptions and other sales are "stranded" and they require someone to pay them. BPA is not a private corporation with shareholders available to absorb such costs. Therefore questions which would be relevant to private utilities such as, "What costs should be included in the determination of transition costs?" are really questions about the allocation of stranded costs between customers and the Treasury. For this reason the FERC rules on stranded costs, which were directed at wholesale private utilities, and allow for the disallowance of certain costs and little recovery of future stranded costs, are not adequate or strictly applicable to the Bonneville situation. There can be no "disallowance" of particular BPA costs. Someone must pay, be it Federal taxpayers, regional ratepayers, or other purchasers of BPA products. That said, FERC Order 888, which is not legally binding on Bonneville, can give guidance on the methodology for calculating and allocating the costs and some legal precedent supporting BPA's authority to implement a recovery mechanism.
Moreover, whatever the legal arguments for and against applying the FERC rules to BPA, we believe that ultimately political reality will dictate the degree of sharing (if any) between Treasury and the different regional parties to cover all of BPA's stranded costs. Thus it is incumbent upon the Transition Board to seek a political and technical solution and not rely too heavily on stranded cost recovery formulations from other venues which apply to entities with either shareholders or captive customers.
The categorization of BPA's stranded costs into different types (e.g., costs incurred before or after some date; generation vs. fish costs; WPPSS debts vs. other costs; etc.) cannot be used to classify some as "recoverable" and others as not. All costs that BPA cannot recover through sales will ultimately be paid, the question is, by whom, and over what time frame? However, such categorization may be useful for the purpose of allocating different costs to various parties. For example: only those who advocated for WPPSS 1 & 3 pay WPPSS sunk costs; or, only historical customers pay "past" costs while others pay "future" costs; or, Treasury agrees to defer some costs over a certain threshold paid by customers, etc. The issue then becomes, for those who believe some particular cost should not be charged to them, to find someone else to pay it. Thus allocation of stranded costs, not their determination is the critical question.
Finally, another important allocation issue is the assignment of BPA's stranded costs to energy, demand, or other factor. NCAC considers BPA's stranded costs to be composed of WPPSS and outstanding conservation debt. Without those debts, the hydro system would not have any stranded costs, even including the measures many advocates and scientists are recommending as to drawdowns and the Lower Snake dams. The hydrosystem, even with mitigation, can support itself. Conservation (which generates no revenue) and WPPSS (which loses revenue) cannot. Their sunk costs are stranded in any sense of the word.
The WPPSS plants are base-load units, while conservation investments are normally categorized as serving both base-load and peaking needs, depending on measure. Both were built to serve firm loads. The allocation methodology, one could argue, should therefore be based on users' firm energy and demand to reflect the nature of the stranded costs. On the other hand, the single Bonneville fund, which ultimately bears the risk of stranded costs, is supported by and depends upon all sales, including transmission, non-firm and surplus sales. Advocates of this position maintain that all types of purchases are in fact benefits of the Bonneville system, so that all users should help pay BPA's stranded costs regardless of which products they actually purchase. This would argue for an allocation methodology based on revenues instead of loads. NCAC has not yet determined its position on this issue.
There is a fundamental choice between allocating costs on an Historic Use basis, vs. a Future Use basis. Each method has its advantages and drawbacks, and each can and will be justified as "fair," by various parties. For that reason it may be advantageous to allocate some proportion of BPA's stranded costs to one method and the rest to the other. In any case, it is important for the Transition Board to understand the significant implications of each choice.
Historic Use. This method assigns each current and former customer a percentage of BPA's stranded costs based on the customer's historic purchases. The charge would not depend on how much power a customer uses in the future nor from whom they acquire it. It could be determined by a one-time estimate or revisited periodically. New customers who had not previously purchased from BPA would not pay the charge.
Justification for using this method can be found in both the cost-causation principle and FERC's stranded cost rules. It follows from cost-causation that those who caused BPA to incur unavoidable and now unrecoverable costs should pay those costs. It is also clear that historic customers who purchased cost-based products were sharing in the benefits of the system. The long-lived dams, nuclear plants, and conservation investments were built on behalf of these users, so they should pay according to how much they used. FERC recognized in Order 888 that a host utility should have the right to charge "legitimate, prudent and verifiable" stranded costs to departing customers in circumstances where contracts with customers had no stranded cost provisions, even if the contract contained a notice of termination provision, if there was a "reasonable expectation" that service would be continued beyond the contract period. [While FERC put the burden of proof, in the form of a rebuttable assumption, on the host utility to prove the reasonable expectation, it clearly delineated criteria for such a rebuttal. Those criteria depend on the facts of each case. FERC offered some examples of grounds to rebut the presumption: lack of access to alternative suppliers at the time the contract was signed; failure of a customer to object to the imposition of long-lived resource acquisitions; communications between supplier and customer concerning the customer's load in system planning; the host's obligation to offer follow-on contracts or other legal mandate to serve. The "reasonable expectation of continued service" can be easily established in the case of BPA's power contracts. We provide two examples: First during the contentious arguments over whether WNP-1 and 3 should be terminated, most public utilities, DSIs and Bonneville maintained that the plants should be completed because Bonneville had an obligation to serve after that time and was thus required to acquire new resources. Secondly, in similar discussions over BPA's proposal to acquire Tenaska, NCAC was one of the few who argued that the power was unneeded, partly because contracts with DSIs and public utilities would soon expire. Again the public record is replete with demands from these entities, and statements from Bonneville, that the obligation to serve after 2001 was justification for going ahead with the commitment.]
While simple in concept, there are contentious issues that must be resolved to put the historic use method into practice:
1. How many years back does one go to determine usage? FERC recommends going back three years from the termination of the last contract. Another argument can be made that one should go back to the beginning of the contract (1981) because customer usage has changed too much in the last few years. We take no stand on this issue.
2. Are Exchange sales counted? The Residential Exchange can either be seen as a monetary transaction--in which case there would be no stranded cost--or a two-way power sale. In the latter case, stranded costs would also be two-way, with BPA owing stranded costs to the IOUs if they had any from retail restructuring, and the IOUs paying a share of Bonneville's. Again, we have no position other than to insist that end-users not be forced to pay twice: for their own utility's stranded costs and Bonneville's.
3. Are out-of-region and nonfirm sales included? Spreading out the cost to more parties obviously dilutes the impact. One can argue that all users who purchased at cost rather than market certainly shared the benefits of the system, and therefore should share in paying its costs. The same argument can be made about customers who will have priority subscription rights in the future. However non-firm sales and short-term contract sales with call-back rights are hard to justify under FERC's "reasonable expectation of continued service" standard.
Future Use. A different way to allocate the stranded costs is to look forward in order to eliminate the need to assign historical amounts to each customer. It can well be argued that the long-lived obligations that make up BPA's stranded costs were incurred not only for past customers, but for future customers as well. In this method, each customer pays a proportion of stranded costs based on present and future use, not on past use. This method also requires some contentious decisions be made.
For Bonneville this method would entail deciding how to define "use." Some possible options:
(a) "Use" is any use of the BPA transmission system--e.g., a non-directed ("peanut butter") transmission surcharge on BPA transmission rates.
(b) "Use" is any use of the BPA transmission system by customers who are eligible (if subscription rights follow the recommendations of the Comprehensive Review) to get the future benefits of the system--whether they decide to subscribe or not--e.g., preference customers, DSIs; and residential and small farm customers of IOUs and other in-region subscribers. Their eligibility to receive the benefits of the system obligates them to pay the stranded costs.
(c) [Inverse of (b)] All transmission users must pay a portion of BPA's stranded costs, but in so doing acquire an option for future rights to BPA cost-based power if and when BPA gets below market--i.e., those who are forced to pay when BPA is "in trouble" are given some benefit when BPA is out of the woods.
In general this approach spreads costs to some who will argue that they did not "cause" BPA's problems. Clearly, historic and non-historic users will take opposing views on the historic or future use mechanisms. A compromise may be useful. NCAC takes no position on this issue at this time.
Treasury's share. NCAC believes that an important element of any allocation mechanism may be to give customers some measure of maximum above-market cost exposure. (Note that above-market costs are not the same as stranded costs. We believe that customers must eventually pay all of Bonneville's stranded costs, but a portion may be deferred to the future, to be paid back when BPA's costs are below market. Above-market costs, on the other hand, are much more difficult for customers to pay in a competitive world.) BPA's customers want their obligation to pay above-market costs to be limited. A one-time determination and allocation of above-market costs, with Treasury deferral required if actual costs are above the estimate, accomplishes this goal. [A variation on this approach may provide more incentive to BPA to cut costs: customers and Treasury would share any above market costs, rather than customers paying all of a first portion and Treasury then taking over for amounts above that.] (Treasury deferral is not the same as Treasury absorption. All deferrals will be paid back with interest when BPA's costs are below market. Treasury deferral is simply the line of credit needed to assure customers of a cap on their total above-market exposure.)
We believe that no deal is possible without these three elements: consistent and adequate funding for present and future fish restoration; payment of all of BPA's stranded costs by customers; and, the provision of some above-market-cost certainty to customers. These elements may only be reconciled, given market uncertainty, with a willingness on Treasury's part to accept deferrals (paid back with interest) under specific circumstances. But such deferrals will only be accepted in defined circumstances and as part of a global solution. NCAC believes the NW delegation will be able to secure such a solution only if it can show the country that the region is covering all of BPA's stranded costs--especially given the rates and stranded costs other regions are paying as they go through restructuring.
As we stated earlier, all of Bonneville's costs not recovered from sales are stranded and must be paid by someone either explicitly, through a recovery mechanism, or by default through Treasury deferrals. However, even given an arrangement with Treasury to accept some risk, there must be a method to calculate the system's stranded costs.
This problem is not unique to Bonneville. The determination of stranded costs for any utility requires either a difficult estimate of the difference between the utility's costs and market prices over a very uncertain future (for purposes of a one-time determination), or a periodic determination of actual stranded costs. Many feel that making a one-time forecast for BPA is even more difficult than for other utilities given its uncertain fish, nuclear decommissioning and Tenaska obligations.
The risk of over- or under-collection inherent in a one-time determination can be reduced through ongoing true-ups based on actual costs. However such a policy increases the uncertainty faced by customers trying to operate in a competitive environment. A one-time determination would give customers certainty of their maximum total exposure to above market costs--and BPA some funding certainty--which may be preferable to trying to continually revisit the issue. (FERC also recommends a one-time determination as opposed to continual true-ups.) If a one-time determination is relied upon, actual stranded costs in excess of the determination would have to be borne by Treasury deferral to be repaid with interest when BPA's costs are below its revenues. (Substantial over-collection of stranded costs could result in a rebate to customers, or kept by Treasury as payment for its risk-taking.)
NCAC understands the advantages to customers of a one-time determination, but could only accept such a proposal if it were coupled with explicit Treasury agreement to accept deferrals if necessary.
The actual calculation of BPA's stranded costs involves forecasting the difference between Bonneville's future revenues and costs over a time frame when it is believed BPA's costs will be above market. [The calculation for an IOU in the typical restructuring context is different. It is a determination of the present value of the difference between the utility's costs and revenues over the physical lifetime of the utility's assets. This method presumes the utility will never again be subject to cost-based rate regulation. However for BPA the time frame is limited to the period when BPA is expected to be over market. Because after that, subscribers will be entitled to cost-based rates once again.] Such costs must include adequate funding for salmon restoration measures recommended by tribes and fishery scientists including the mothballing of the four Lower Snake River dams and draw-down of John Day.
The region can use Council staff estimates of costs and revenues as a good starting point for this discussion. However, given the huge uncertainties involved, and the continuing debate on future fish costs, we believe the final number may be more politically crafted then computer-model driven. That specter seems daunting, but cannot be avoided. However, we maintain that the ultimate amounts, when spread either to historic or future customers, or both--while limiting customers' above-market liability through Treasury deferral--will still be much less than other regions of the country have had to shoulder. In any case, the costs cannot be avoided, and it will be much better for the region if their allocation is controlled by the region instead of imposed by Washington DC.
1. A planned solution is better than the status quo scenario.
2. A planned solution is possible, given the dangers of the status quo scenario. Such a solution will require careful crafting, negotiation, and, above all, leadership from the Transition Board, but the political dynamics are in place to achieve a consensus that is salable to DC.
3. Bonneville's problems are not unique. The issue of stranded costs is at the heart of the restructuring debate, and BPA's exposure is actually relatively small in comparison to what utilities in other parts of the country are facing. A stranded cost charge is an integral part of any restructuring effort and fully supported by FERC and the USDOE.
4. Developing a stranded cost recovery mechanism quickly will enhance the subscription process--and reduce the amount which is stranded. Potential subscribers who know their maximum stranded cost exposure in advance, and know other system beneficiaries will share such costs equitably, will be more likely to subscribe.
5. A one-time determination of the maximum above-market cost exposure of those who will be required to pay is preferable to periodic readjustments, but is acceptable only under certain conditions. We recognize that customers facing a world of open retail access want certainty. However, the determined amount must be sufficient to be acceptable to Treasury, because deferral is the backstop if the amount comes up short. Therefore, providing assurance to the federal government that a one-time determination is sufficient to cover BPA's projected above-market cash need will require agreement by the tribes and fishery managers, as well as Treasury. Such agreement depends on achieving significant progress towards river governance agreements and a unified salmon recovery plan. Putting some risk on Treasury provides BPA incentive to cut costs [for a slight variation, see footnote #8].
6. Good arguments exist to require either historic or future users, or both, to share in paying the cost. The preferred solution may be based more on political acceptability than strict cost-causation. Some portion of the total could be charged to transmission as a general surcharge while assigning the rest to historical users in a more directed fashion through a non-bypassable targeted transmission access fee that would flow through to, and follow, end users. A limited amount spread to all transmission users in a "peanut butter" approach can be justified as representing a regional obligation to salmon restoration. We would support the peanut butter concept, however, only with the caveat that if non-historic customers are required to pay, they should be entitled to some share of future BPA benefits.
As can be seen from this discussion, there is no lack of controversy in allocating BPA's stranded costs. However, NCAC is convinced that the Transition Board and the region cannot shy away from the task if we want to provide Bonneville with the financial security needed to fulfill its many responsibilities.
We believe our proposal can garner the regional and Federal acceptance that is necessary for a long-term solution. It can be summarized relatively simply. Basically we propose that all of BPA's stranded costs be allocated to either historic or future users, or both, but that the above-market portion of that cost be limited to give customers certainty. This places some risk of cash flow on Treasury deferral, but only on certain conditions including Treasury assurance to fishery managers and tribes that full funding for salmon restoration efforts will not be jeopardized.