Northwest Energy Review Transition Board |
John Etchart, Montana |
| 851 SW Sixth Av. Suite 1100 Portland, OR 97204-1348 |
Roy Hemmingway, Oregon |
| Phone 503-222-5161 or 1-800-452-5161 FAX 503-795-3370 |
Mike Kreidler, Washington |
| Todd Maddock, Idaho |
April 21, 1998
TO: Interested Parties
From: Transition Board
Subject: Draft of Strawman Proposal for Stranded Cost Recovery
Transition Board staff have developed a strawman proposal for dealing with a possible insufficiency of Bonneville revenue, attached. This proposal (TB 98-7) will be presented to the Transition Board at its meeting on April 23, 1998. The Transition Board will take comments on this strawman proposal at that meeting, and will continue to take comments and consult with interested parties on this topic, in the process of the development of a Transition Board proposal before July 1.
Staff Strawman Proposal for Stranded Cost Recovery (TB 98-7)
There is some possibility that through a combination of costs and market conditions, the Bonneville Power Administration could experience stranded costs. Stranded costs are usually defined as costs that cannot be recovered at market prices. Bonneville is constrained legally and by the realities of a competitive wholesale power market. As a consequence, on average, it can only charge the lower of cost or market price. It can exceed those prices only for relatively short periods. The staff believes that, under most circumstances, the probability of Bonneville experiencing stranded costs and the likely magnitude of those costs are relatively small. Effective cost management by Bonneville can further reduce the likelihood of stranded costs. However, as a federal agency, Bonneville does not have stockholders who knowingly accepted the risk of losses or who stand to benefit when market prices exceed costs. Congress and the Administration need confidence that, under the most likely conditions, Treasury will not be called upon to absorb long-term losses. Consequently, a stranded cost recovery mechanism is an essential element of a "Northwest Chapter" of federal restructuring legislation.
Conversely, if such a stranded cost recovery mechanism is to be viable with customers, it must not penalize subscribers relative to reliance on the market. It must also have adequate safeguards to assure customers and others that it will not be used unnecessarily and that incentives to effectively manage costs will me maintained.
The following is a strawman proposal by the Transition Board staff that is intended to move discussions toward a proposal that can garner broad support.
Bonneville has long dealt with the possibility that, for a variety of reasons – a few consecutive years of poor hydro conditions, short term market fluctuations, depressed aluminum markets and so on – it could experience lower than planned revenues within a rate period. It has handled this uncertainty by building financial reserves and, in some instances, including some sort of rate adjustment mechanism to ensure an acceptably high probability of Treasury repayment. These mechanisms have been developed in rate cases. Staff believes this is still the appropriate venue for resolving these kinds of problems.
Bonneville’s historic basic cost structure – the fixed costs of the existing system and current operating expenses -- is such that Bonneville’s costs should be below most projections of future market prices. As the Supply System debt is retired beginning in 2012, the reduction in Bonneville’s fixed costs should be sufficient to offset current estimates of possible reductions in the costs of power from new generating facilities. There remains the possibility of unforeseen new technologies that could drive market prices below Bonneville’s basic costs for a prolonged period. This would be good news for consumers but a difficult situation for most electricity suppliers, not just Bonneville. However, we believe the probability of such circumstances sufficiently small that it is not productive to try to develop a mechanism to deal with this situation at the present time.
Major changes to the configuration of the FCRPS (e.g., dam breaching) have the potential to cause significant stranded costs. Because the dams are multi-purpose facilities and there are broad regional interests at stake, the cost consequences of breaching should be spread more broadly than just power users. Because there also are national interests involved, the responsibility for such costs should also be spread more broadly that just the region.
The decision to breach one or more dams will require congressional authorization. At that time, Congress should determine the allocation of the costs of such actions and the mechanisms for recovering those costs.
To be credible, a stranded cost recovery mechanism for Bonneville will have to be able to deal with some level of additional costs beyond those currently authorized by law. Those costs could include additional salmon recovery costs incremental to those already included in the current Biological Opinion (BIOP). They would not, however, include those costs associated with changes in the physical system configuration, e.g. breaching dams, which would require congressional authorization. Another situation that could contribute to stranded costs could be decommissioning costs for WNP-2.
A key feature of this proposal is that at any time, subscriber rates would be below or, at worst, at market prices while still accommodating additional costs of the kinds described above. The proposed mechanism for dealing with this situation is described below.
For this situation, the triggering mechanism would be an actual deferral of payments to Treasury. Using actual deferral as the trigger could have adverse political consequences. However, because that is so, it is also an incentive for Bonneville to aggressively manage costs to avoid deferral. If Bonneville found it necessary to defer a Treasury payment, it would initiate a stranded cost process subject to the approval of the Federal Energy Regulatory Commission.
Under most definitions, stranded costs exist only if there are costs that cannot be recovered at market prices. Bonneville must, on average, price at cost. Bonneville typically establishes a fixed rate for a rate period that covers its anticipated costs. If it subsequently is subject to unanticipated costs of the kind described above, it might not be able to fully recover those costs at its set rates, even if those costs could be recovered at below-market prices. Some have argued that in such a situation, Bonneville should recover those additional costs through a mechanism like a transmission surcharge. However, the possibility of Bonneville charging its power customers below-market rates while putting additional costs on its transmission customers seems risky. Such a situation would engender considerable opposition, would arguably lessen the incentive for Bonneville to effectively manage its costs and might give ammunition to those who would have Bonneville and the other power marketing authorities sell at market prices.
In light of those considerations, staff is proposing that before any stranded costs are recovered through a transmission charge, if subscriber rates were below market, subscriber rates would first have to be raised to the lower of:
1. The rate necessary to recover the amount of the deferral in the succeeding year; or
2. Market prices as measured by an appropriate index of market prices established as part of the stranded cost process.
Costs not recovered in the first stage would be recovered through transmission charges. The charges, in aggregate, would be limited to $100 million in any year, up to a total of $500 million. The duration of the recovery mechanism would be 15 years – a period long enough to take Bonneville to the point that Supply System debt will have been largely paid off.
In order to achieve rough equity among the current users and historical beneficiaries of the Federal Columbia River Power System, the transmission charges would be of two kinds:
• Half of the total would be recovered through a uniform transmission surcharge. The charge would be levied in the form of a charge for access to the transmission system based on the demand placed on the system in the year in which the deferral occurred. This approach is intended to encourage efficient use of the system, in contrast to the effect of a charge levied on kWh transmitted, which would penalize the marginal transaction.
• Half of the total would be recovered through directed transmission charges. The charges would be determined by the Federal Energy Regulatory Commission to be, to the extent possible, proportional to the historic benefits received by customers from the purchase of power from Bonneville. The charge would be levied as a fee for access to the transmission system.
Any recovery from the transmission system would be treated as an obligation of the Power Business Line to the Transmission Business Line that would be repaid with interest when conditions permit.
It is essential that customers and others have confidence that there are adequate safeguards to ensure that Bonneville cannot misuse its ability to recover stranded costs. To provide that confidence, the following safeguards would be employed:
• Stranded cost recovery could only be implemented in the case of an actual deferral of Treasury payments.
• Reserves would be used to the fullest extent to avoid deferral.
• The administrator must make full use of his authority under section 4(h)(10)(c) of the Northwest Power Act before implementing stranded cost recovery.
• To implement any of the stages of stranded cost recovery Bonneville would have to carry out a rate proceeding. The Administrator’s decision would be reviewed by the Federal Energy Regulatory Commission (FERC). The function of the FERC review would be to see that Bonneville was adequately mitigating the stranded costs through opportunities to reduce costs and increase revenues. This authority would be subject to constraints. Those constraints would include the need to assure the security for the Washington Public Supply System net billing and other third party financing; assure repayment of the federal debt over a reasonable number of years, satisfy the requirements of the Endangered Species Act, and so on. FERC would not have authority to judge on the prudence of past expenditures. It could, however, disallow avoidable costs on a going-forward basis.
Bonneville’s costs may be below market prices for some periods. When that is the case, 40 percent of the difference should be collected from subscribers and be used for accelerated repayment of federal debt. An appropriate market index would be established and used for this purpose. If the stranded cost mechanism were triggered, contributions for the purpose of "sharing the benefits" would be suspended.
The intent of this mechanism is to demonstrate an additional benefit to the Treasury. At the same time, it would reduce Bonneville’s interest payments and benefit subscribers. However, if system configuration changes are authorized by Congress and undertaken, the amount by which debt has been reduced will be treated as a (4)(h)(10)(c)-like credit against power system responsibility for the costs of system configuration changes.