The Future Role of the Bonneville Power Administration in Power Supply

Introduction and Summary

The crown jewel of the Northwest Power System is the federal Columbia River Power System (FCRPS). The FCRPS consists of 31 dams on the Columbia River and its tributaries. On average, it supplies approximately 45 percent of the region's power. This federal hydropower is priced at cost and is sold by the Bonneville Power Administration primarily to publicly owned electric utilities. While construction of the FCRPS was financed by the federal government, the debt is repaid by Northwest electricity users. Interest rates on the federal debt are now equal to market rates.

Despite the fact that Bonneville has not deferred any payments to the U.S. Treasury since the early 1980s, it is continually attacked by organizations like the Northeast-Midwest Institute[1] and its congressional allies as being subsidized by the federal government. Critics advocate privatizing Bonneville or requiring Bonneville to sell its power at market prices to benefit U.S. taxpayers as opposed to selling at cost to Northwest consumers who paid for the system and are paying to restore fish and wildlife affected by the dams. While these proposals have not yet gained sufficient political support to move ahead, fighting them has been a continuing battle for the region's utilities, governors, the Council and the congressional delegation. Moreover, each time Bonneville finds itself in financial difficulties with Treasury repayment at risk, the pressure for 'reform,' such as privatization, intensifies.

Over the last decade, the disparity between the cost of Bonneville's power and the market rates for wholesale power frequently has not been large and, in fact, at some times has been disadvantageous to Bonneville's customers. Nonetheless, the base of federal hydropower is likely to be a low-cost resource for many years to come. Preserving this benefit for the Northwest consumers who pay for it should be a high priority for the region. However, preserving the benefit in the face of recurring financial crises at Bonneville will be difficult. Thus it is time to re-examine Bonneville's role in regional power supply and whether that role can continue as it has in the past without jeopardizing the region's legacy of reasonably priced power.

This paper outlines the problems Bonneville and the region have faced in recent years. It appears these problems are likely to continue unless Bonneville's role in regional power supply changes. The paper reviews the potential solutions developed through several public processes carried out over the last decade, including the Comprehensive Review of the Northwest Energy System, carried out in 1996, the follow-on Bonneville Cost Review and finally the Joint Customer Proposal and Regional Dialogue of 2002. One common element of these processes was the recommendation that Bonneville sell the federal power through long-term contracts (20 years) to reduce uncertainty and help protect the region from external efforts to appropriate the benefits of the FCRPS. Another common recommendation was to limit Bonneville's and the region's exposure to risks of the wholesale power market by limiting Bonneville's role in serving loads beyond the capability of the FCRPS. This could be accomplished through bilateral contracts, in which customers bear the cost and risk of resources Bonneville has to acquire in order to augment the federal system and serve load. For various reasons, efforts to implement these and other recommendations developed in the public processes have stalled.

The Council believes the region should address the question of Bonneville's future role in the regional power supply now, before another crisis develops. The Governors of the four Northwest states have recognized that perpetuating uncertainty regarding Bonneville's role risks the adequacy and economy of the region's power supply. The Governors asked the Council and Bonneville to reinitiate the Regional Dialogue, which was suspended in 2002 while Bonneville addressed its most recent financial crisis. As a result, a number of discussions with representatives of customers, regulators, industry, and environmental interests were held. The major conclusion drawn from these discussions is that while some things may have changed and need to be reexamined, many of the basic elements of the 2002 Joint Customer Proposal still have regional support and could form the foundation for moving forward.

The Council proposes the following principles or characteristics to guide the region in addressing the question of Bonneville's future role. These principles reflect 1) the Council's understanding of circumstances that may have changed in the last year; 2) the perspectives expressed during the recent discussions; and 3) the Council's review of the original Joint Customer Proposal and its subsequent December 2002 recommendations on the future role of Bonneville.[2]

Proposed Principles for the Future Role of Bonneville

  • The goal should be long-term contracts (20 years) both to protect the system from interventions from outside the region and to reduce uncertainty for both the customers and Bonneville.
  • Bonneville's primary role, in addition to transmission, should be managing the operation and marketing the output of the Federal Columbia River Power System. The FCRPS is a multipurpose public resource and Bonneville has a record of real expertise in its operation and marketing.
  • Bonneville's role in providing power beyond the capability of the federal base system should be limited to bilateral contracts or rate mechanisms that align the benefits and costs. This would limit Bonneville's exposure to market risks and reduce the uncertainty regarding who will be acquiring additional resources thereby reducing an impediment to resource development.
  • Bonneville's role should be limited contractually. Although most customers' contracts run through 2011, these changes need to be enacted as soon as possible so as to protect the regional resource from outside interference and clarify the outlook for resource development
  • Customer agreement to long-term contracts will require at minimum that Bonneville: 1) provide customers and others greater openness regarding their costs, the factors driving those costs and the decisions affecting them BEFORE decisions are made; 2) implement cost-reducing process improvements; and 3) rebuild trust with the customers and others that Bonneville is a good business partner.
  • Revising Bonneville's role in acquiring and pricing the output of additional resources will require an allocation of the federal base system resources and benefits. Any allocation method for the FBS should be equitable and consistent with federal law while creating a broad constituency for Bonneville.
  • A significant amount of the system should be offered as a 'Slice' product . The slice product effectively distributes hydro risk and, by virtue of more diverse decision-making, should reduce the impact of hydro variability on the market.
  • Benefits should be provided for the residential and small farm customers of the region's investor-owned utilities in a way which is judged to be equitable by the parties and that is clear and transparent and not subject to manipulation by any of the parties.
  • The question of service to the DSI's must be addressed. If power is made available to DSIs, the amount and term should be limited and contracts should be structured to allow Bonneville to capture benefits of DSI load interruptibility and provision of reserves. The smelters should be encouraged to reduce dependence on Bonneville power in the long-term.
  • Any solution must contain a mechanism for ensuring continued regional development of cost-effective conservation, as determined through the Council's plans. While limiting Bonneville's role to develop new power supplies to bilateral arrangements with customers is a major step in the right direction, it is not sufficient to ensure the development of cost-effective conservation given the disincentives to utility investment in conservation. Reliance on local implementation is appropriate so long as there is a focus on cost-effectiveness and accountability and a backup mechanism is included to ensure that conservation is implemented. A direct Bonneville role in implementation is appropriate where there are economies of scale or other benefits from Bonneville's direct involvement.
  • Similarly, a mechanism is required for ensuring that cost-effective renewable and high efficiency resources are developed and that the ability of the hydropower system to support the development of intermittent renewable resources, through the flexibility of the hydropower system, should not be unduly impaired.
  • Bonneville's ability to implement its fish and wildlife obligations must not be impaired.

Questions for Public Comment

The Council is interested in public comment on the following:

  1. Do you think the analysis of the problems and issues presented in the paper is accurate? If not, how is it inaccurate?
  2. Do you agree that a more limited role for Bonneville in power supply as described in principles is appropriate? If not, why?
  3. Do you think the question of Bonneville's future role in power supply needs to be addressed in the near future? If not, why?
  4. Do you think the principles or characteristics proposed by the Council are appropriate guidance for consideration of Bonneville's future role? If not, why?

[1] E.g. see Rethinking Bonneville — Why BPA Must Be Reformed, Richard Munson, Northeast-Midwest Institute, 2001.

[2] Final Recommendations on the Future Role of Bonneville, Council Document 2002-19, December 17, 2002.