December 17, 2002 1

Northwest Power Planning Council Recommendations on the 

Future Role of Bonneville in Power Supply

Summary

For the past several months, the Northwest Power Planning Council (Council) has 

participated in the Regional Dialogue on the Future Role of the Bonneville Power 

Administration in Power Supply. At least two immediate factors were the impetus for the 

Regional Dialogue. First, the power supply contracts of Bonneville’s Direct Service 

Industrial (DSI) customers expire in 2006. The companies must know if they can expect 

service from Bonneville after 2006, and Bonneville must know how much power to 

supply in order to secure the necessary resources. A second and very significant factor is 

that after more than a year of discussions, the majority of Northwest utilities, both public 

and investor-owned, large and small, urban and rural, appear to have coalesced around a 

proposal that would significantly alter Bonneville’s future role in power supply. It is 

significant that these disparate interests would agree on a number of issues that have been 

in dispute for many years. This fact alone deserves careful consideration. 

These interests did not come together by accident. They came together out of recognition 

of a set of problems that, if not resolved, could threaten the reliability of the regional 

power supply and the ability of the Northwest to retain the benefits of the Federal 

Columbia River Power System. These problems are not the fault of the Bonneville 

Power Administration. Rather, they are the consequence of a mismatch between how 

Bonneville is called upon to operate and the realities of the evolving electricity system. 

The problems include:

• Periodic lack of clarity regarding load-serving responsibility;

• Lack of clear economic signals to many parties in the region regarding the true 

costs of new power supplies and the value of alternatives;

• Exposure of Bonneville to high electricity market risks resulting from the periodic 

ability of customers to place load on or take load off of Bonneville; 

• A perception of inequality in the distribution of the benefits of the federal power 

system within the region.

• The financial risk to the U.S. Treasury and the resulting political risk to the longterm interests of the region if at some time, Bonneville is unable to absorb the 

risks of uncertain loads, a highly variable hydroelectric system and a potentially 

volatile wholesale market.

These observations are not new. They were recognized formally more than seven years 

ago during the Comprehensive Review of the Northwest Energy System, which was 

authorized by the region’s governors.1 Many of the aims of the proposals on 

Bonneville’s future that were offered by the Joint Utility Customers and the Public 

Interest Groups during the Regional Dialogue reflect conclusions reached in the 

Comprehensive Review. 

 

1 Comprehensive Review of the Northwest Energy System, Document Number CR96-26, December 12, 1996.
December 17, 2002 2

The Council participated in the Regional Dialogue public meetings around the region and 

reviewed the written comments and proposals that were submitted. In light of those 

proposals and comments and the Council’s own analysis of Bonneville’s situation, the 

Council makes the following recommendations for Bonneville’s consideration as it 

prepares a blueprint for its future role in power. The Council’s recommendations 

primarily are concerned with issues of efficiency and less with issues of equity. 

However, if equity issues are not adequately addressed in any final proposal, the 

likelihood of success will be small. 

Long Term Contracts –

The Council supports 20-year contracts because they will provide contractual protection 

from the efforts of those outside the Northwest to appropriate the benefits of the federal 

Columbia River system; demonstrate regional commitment to the federal system and 

buffer Bonneville and thereby the Treasury from the risks of losing or gaining loads with 

shorter contracts. The Council recognizes the customers’ concern that with shorter 

contract terms, they lose an important tool for exercising discipline on Bonneville’s costs. 

However, the Council finds the customers’ proposals for a custome r advisory committee 

with enforceable powers, or “off-ramps” at which customers can take some load off 

Bonneville if it fails to meet cost targets, to be problematic. The Council encourages 

Bonneville and the customers to focus on process remedies that ensure customers and 

other interests have the opportunity to probe and contest Bonneville’s costs. Bonneville’s 

political accountability will continue to be an important control on Bonneville’s costs. 

While the Council has reservations about customer cost control mechanisms with 

enforceable power, the Council is willing to consider such a mechanism. However, it 

must be shown that the mechanism does not jeopardize the goal of long-term stability for 

Bonneville and is not merely a means to reduce funding for important programs and 

activities that are unpopular with customers. The Council encourages Bonneville, the 

customers and other interests to continue the dialogue on this issue. The Council is 

willing to make itself available to Bonneville, the customers and other interests to help 

forge a solution.

Power Products – Slice –

The Council supports offering the slice product and expanded use of that product. This 

product meets the needs of some customers; it results in greater diversity in the electricity 

market; it lessens Bonneville’s impact on the market and its exposure to market and 

hydropower risk; it improves the liquidity of the power market; and, it provides clarity 

with respect to responsibility for meeting load growth and clear economic signals

regarding the cost of serving load growth. However, the Council is concerned about the 

ability of some individual slice customers to handle the risk associated with the slice 

product.

The Joint Customers have proposed provisions for surcharging all slice customers when 

one or more cannot make timely payment to Bonneville. The Council believes this is a 

significant constructive response. The Council encourages Bonneville and the customers 
December 17, 2002 3

to make sure the provisions are robust enough to not jeopardize Bonneville’s ability to 

make its Treasury payments.

The Council recommends that slice customers be allowed flexibility in the operation of 

their slice so long as non-power constraints, including fish constraints, are not violated. 

From the standpoint of reliability, it is essential that Bonneville retain the ability to take 

unilateral actions on the whole system in the case of a power system emergency. 

However, the Council recommends that the issue be studied to ensure that the authority to 

take unilateral actions does not create incentives to compromise fish operations. At the 

same time, slice customers must be treated fairly, and Bonneville must be allowed to 

operate the system as a whole in the case of emergency. 

Power Products – Requirements -- 

The Council supports Bonneville offering of a requirements product, as it meets the needs 

of many customers in the region. However, the Council is concerned about the lack of 

clarity regarding responsibility for meeting load growth once any surplus federal base 

system resources have been absorbed. The Council recommends that Bonneville clearly 

indicate that the load growth of customers receiving this product will be served by tiered 

rates or the equivalent that charges the cost of the new resources needed to meet load 

growth. To do otherwise would perpetuate conflict between growing and non-growing 

utilities and not send appropriate price signals to the customers. 

Power Products – Block

The Council supports Bonneville providing a block power product independent of the 

slice product. However, the Council believes that the block power product should be 

conditioned as described in the Joint Customer Proposal – that the costs Bonneville 

incurs in shaping power to the blocks be passed on to the block customer and that the 

block product not contain a load growth element. This is essential to aligning benefits 

and risks, providing clarity with regard to load responsibility and clear economic signals 

regarding the cost of load growth.

Investor-owned Utility/Publicly owned Utility Settlement

The Council supports settling the issue of the level of benefits provided the residential 

and small farm customers of investor-owned utilities. To do so will reduce intra-regional 

animosities and give a broader cross-section of the region direct involvement in the well 

being of the federal system. The settlement proposes a relatively simple and transparent 

representation of an equitable sharing of the benefits of access to federal power based on 

the residential exchange concept. It uses the cost of power from a combined cycle 

combustion turbine as a surrogate for the cost of providing power to the residential 

customers of investor-owned utilities. There are questions that can be raised about this 

approach. However, this is an equity issue, and agreement among the parties to the 

settlement is strong evidence that equity has been achieved. 

However, there are implications for Bonneville’s costs. Council staff has analyzed the 

differences between the Joint Customer Proposal benefits and the current subscription 

benefits For the period 2007-2011 using the Council’s draft medium and medium low 
December 17, 2002 4

natural gas and electricity market price forecast. The differences were relatively small 

with the current subscription benefits somewhat greater in one case and somewhat lower 

in the other. In either case, the impact on Bonneville rates was less than a mill in either 

direction. The differences are largely attributable to the volatility of the subscription 

benefits with electricity market price. 

We encourage the parties to reach out beyond those directly at the table to ensure that 

there is broad agreement that the solution is equitable. If there is not equity, the 

customers may ultimately not settle. Or even if they do, other parties may challenge the 

settlement in the courts. This would increase the risk that the goals of the proposal would 

not be met. 

Service to Direct Service Industries

The contracts for service to the Direct Service Industries (DSIs) expire in 2006. The 

companies need to know if they will continue to receive power at Bonneville’s average 

cost in order to make decisions about the future of their plants. Bonneville needs to know 

whether it needs to acquire resources for those plants. Current contracts would supply 

approximately half of the smelter load in the region. However, at current world 

aluminum prices and Bonneville power rates, little smelter load can operate 

economically. If aluminum prices improve and Bonneville rates are not too high, more of 

the region’s capacity could operate. Given forecasts of aluminum and electricity prices, 

many smelters are likely to be “swing” plants, operating only when relative prices of 

power and aluminum permit. The Council recognizes that the DSIs are important to local 

economies in the region but also recognizes that acquiring power to serve these loads will 

increase costs for other consumers and industries in the region. 

In light of the foregoing, the Council recommends that limited service be provided to 

DSIs at Bonneville’s industrial rate in an amount not to exceed 600 MW. An initial offer 

of up to 100 megawatts per smelter should be made. This would provide all smelters in 

the region (there are nine) the opportunity to structure power supply strategies that might 

allow them to operate. If more than six smelters participate, the 600 megawatts should be 

distributed equally among them. If less than 600 megawatts is taken in the initial offer, 

those smelters that wish to take an additional allocation should be allowed to do so, 

provided that the total does not exceed 600 megawatts and the smelters offer Bonneville 

resources in amounts equal to the incremental amount of power received from 

Bonneville. Any obligation of Bonneville to purchase a resource from the DSI customer 

should cease if and when the customer no longer purchases power from Bonneville. In 

addition, a total of 50 megawatts for non-smelter DSI loads should be provided. 

The power should be offered in such a way that:

ß Contracts allow Bonneville to capture benefits of DSI load interruptibility and 

provision of reserves to offset the cost of DSI service to other customers. The 

interruptibility provisions should ensure that smelter workers are appropriately 

compensated. 

ß Bonneville includes contract provisions to help maintain aluminum plant 

operation during periods of low aluminum prices and adequate electricity 
December 17, 2002 5

supplies, provided this can be accomplished without imposing additional costs on 

other customers. This recognizes that given likely future world aluminum 

markets or Northwest electricity prices, aluminum smelter loads are likely to be 

volatile and uncertain for the region. 

ß The smelters are encouraged reduce dependence on Bonneville power in the longterm. 

The Council also supports consideration of credit support for DSIs that develop 

incremental generating resources that would be contractually dedicated to serving that 

portion of the in-region smelter load not served by Bonneville.

Conservation

The Council believes it is imperative that any proposal to fundamentally change 

Bonneville’s role in power supply include a realistic approach to ensuring that the region 

develops cost-effective conservation. The fact that Bonneville’s customers can bring 

loads back to Bonneville at the end of the contract period makes the achievement of all 

cost-effect conservation a continuing priority. The thrust of the customer proposal that 

makes more customers responsible for meeting their load growth is a major step in the 

right direction. It is, however, not sufficient given the disincentives to utility investment 

in conservation, even though it is a lower-cost resource. 

The Council believes that Bonneville should establish conservation budgets based on 

Bonneville’s share of regional conservation potential identified in the Council’s 

Northwest Power Plan and estimated program costs to capture that conservation. 

However, conservation savings targets and mechanisms should be designed to capture 

conservation on all loads of preference- customer utilities, not just the part served by 

Bonneville.

While the Council believes the establishment of Bonneville’s conservation budgets 

should be based on load served by Bonneville, it also believes that Bonneville has the 

obligation and authority to establish conservation targets and to develop mechanisms to 

ensure conservation is captured for the entire load of its preference customers, not just the 

portion served by Bonneville. Bonneville should use its authorities to the fullest extent 

possible to ensure the region attains conservation goals established for the entire retail 

load of customers that can place load on Bonneville. 

The Council believes that Bonneville’s obligations and authority with respect to investorowned utility (IOU) conservation is limited to the residential and small farm loads of 

those utilities that are subject to the residential exchange. The Council, however, will 

continue to encourage and support the work of the states’ utility regulatory commissions 

to use their authorities and least-cost planning regulations to ensure that the cost-effective 

conservation on all the IOU load is accomplished. 

The Council supports elements of the Joint Customer and Public Interest Group proposals 

that would 1) rely on the Council’s power plan to define the cost-effective resource; 2) 

rely on proven delivery mechanisms; 3) provide stabilized and enhanced funding for 
December 17, 2002 6

conservation over the duration of the new contracts; 4) reinforce the role and capabilities 

of the Regional Technical Forum; and 5) provide a mechanism for ensuring that costeffective conservation is implemented. 

Conceptually, the Council supports the use of a mechanism like the Conservation and 

Renewables Discount to support local implementation. However, the existing 

mechanism must be redesigned to ensure cost-effective acquisitions, encourage best 

practices and minimize the cost of acquisition consistent with achieving the savings. The 

mechanism also must limit expenditures on activities that do not clearly support the 

development of tangible savings and ensure accountability. 

The Council believes the mechanism should be designed to reduce the need for any 

Bonneville backstop mechanism. A better alternative would be to work with utilities at 

the outset to identify good opportunities and approaches. Then, the discount could be 

provided incrementally, addressing the local utilities’ immediate cash flow requirements. 

Subsequent payments would be made on demonstration of progress. Bonneville would 

step in only as a last resort.

The Joint Customers have argued that this approach is not necessary. They prefer a 

mechanism in which customers are granted the full discount at the outset and only 

charged if a customer fails to take the actions necessary to achieve its target. The 

Council is willing to give consideration to such a model, but only if there are frequent 

(annual) progress checks and the ability for Bonneville to take action if necessary in 

response to the results of those progress checks. 

The Council believes a broader range of conservation activities should be carried out at 

the regional level than is envisioned in the customer proposal. This is because there are a 

number of activities that can be carried out more effectively if they are approached on a 

coordinated regional basis with local implementation. 

Renewable Resources

Both the Joint Customer Proposal and the proposal of the public interest groups call for 

acquiring renewable resources, the costs of which may be above market prices, through a 

mix of Bonneville and local utility actions. The Council supports the broad outline of 

these approaches. In addition, the Council would emphasize the important role that 

Bonneville has played in research, development and demonstration for renewables and 

recommend a continued role for Bonneville in that area. 

In general, the Council supports some level of acquisition of renewable resources at costs 

higher than the market price of electricity where such acquisition is justified by the 

additional values that renewables can bring to the power system. The Council is 

currently developing its Fifth Power Plan. For this plan the Council is developing the 

tools that will permit valuing benefits such as mitigation of fuel, market price, and 

environmental risks. The Council’s plan should guide renewable resource development 

in the region. 
December 17, 2002 7

Unfortunately, this work cannot be done in time to inform the negotiations going on 

between the Joint Customers and the Environmental Groups regarding the level of 

support for renewable acquisitions. The Council encourages the parties to provide some 

flexibility, such as establishing floors and ceilings for renewable funding, that can 

accommodate the results of the Council’s planning when it becomes available. 

Fish and Wildlife

The Council supports the joint customers’ intent that the combination of 

slice/block/requirements operations will not affect the determination and implementation 

of Bonneville’s fish and wildlife obligations. Under the proposal, Bonneville, the Corps 

of Engineers and the Bureau of Reclamation will continue to meet the federal 

government’s Indian trust and treaty responsibilities. No changes are proposed in river 

operations required by NOAA Fisheries and the Council. In addition, Bonneville’s 

customers will continue to pay the costs associated with Bonneville’s fish and wildlife 

obligations. To the extent that slice contracts reduce pressure on Bonneville to alter 

system operations to meet load, this would be beneficial to fish and wildlife. 

Furthermore, greater clarity with respect to load responsibility should result in more 

timely development of new resources and reduce the potential periods of resource 

inadequacy. This should reduce the frequency with which the region would be forced to 

compromise fish operations on the hydropower system to maintain power supply 

adequacy. The Council recognizes that to the extent there are more slice customers, these 

customers may take a greater interest in decisions about river operations. While this may 

change the dynamics of fish and wildlife decision-making, the responsibility continues to 

reside with the federal agencies.

Background

Over the last decade, the Northwest Power Planning Council has observed and 

participated with the Bonneville Power Administration as it worked to define its role in 

the rapidly changing electricity industry. In the mid-1990s, Bonneville was buffeted by 

changes in the competitive wholesale power market. Very low market prices for power 

caused Bonneville customers to seek modification of their existing contracts to allow 

them to “diversify” their power supplies by taking load off Bonneville. This caused real 

concern about the ability of Bonneville to continue to meet its financial obligations to the 

U.S. Treasury. At the same time, it was recognized that in the long run, after 

Bonneville’s obligations for repayment of the Washington Public Power Supply System 

had been fulfilled, Bonneville power would be extremely attractive in almost any 

electricity market. There was concern about whether Bonneville could remain solvent 

and continue to deliver the long-term benefits of the Federal Columbia River Power 

System to the region.

The Governors of the Northwest States were sufficiently concerned that they convened 

the Comprehensive Review of the Northwest Energy System. The Review, which was 

facilitated by the Northwest Power Planning Council, engaged 20 regional leaders in 30 

day-long meetings and many additional working group meetings over the course of a 

year. While the Comprehensive Review was concerned generally about the changes 

going on in the electricity industry, much of its attention was focused on the future role of 
December 17, 2002 8

the Bonneville Power Administration. The goals of the Comprehensive Review with 

respect to Bonneville were stated as follows:

The Steering Committee's goals for federal power marketing are to: 1) align the benefits 

and risks of access to existing federal power; 2) ensure repayment of the debt to the U.S. 

Treasury with a greater probability than currently exists while not compromising the 

security or tax-exempt status of the Bonneville Power Administration's (Bonneville's) 

third-party debt; and 3) retain the long-term benefits of the system for the region. This 

recommendation is also intended to be consistent with emerging competitive markets and 

regional transmission solutions. 

Some of the key elements of the Review’s recommendations were:

• Marketing the output of the system to regional customers at cost under long-term 

(preferably 20-year) contracts;

• An equitable sharing of the benefits of the federal system with the residential and 

small farm customers of the region’s investor-owned utilities;

• Limiting Bonneville’s exposure to the risk of resource development by acquiring 

new resources to serve customers’ load growth only through bilateral contracts 

with those customers. 

• Ensuring that conservation and renewable resources continued to be developed by 

providing sustained funding through a “system benefits charge” amounting to 

approximately 3 percent of revenues from the retail sale of electricity.

Subsequently, efforts were made to implement elements of these recommendations 

through a “subscription” process, in which customers entered into new contracts for 

service for Fiscal Year 2002 and beyond. The contract lengths turned out to be 

predominantly for 10 years rather than 20. Bonneville remains responsible for meeting 

the load growth of many of these customers and does so by “melding” the cost of new 

resources with the power of the Federal Base System. However, a number of customers 

decided to purchase a new product – “a slice of the system” -- that gives them a 

percentage of the output of the Federal Base System, whatever that output might be. 

Those customers are responsible for meeting their load growth and paying the cost and 

managing the risk of the variable output of their slice of the system. 

Unfortunately, the timing of the subscription process and signing of new contracts 

coincided with the onset of a drought and a dramatic upturn in the power market prices. 

The net effect was a significant increase in the loads placed on Bonneville in Fiscal Year 

2002 and beyond, and the need for Bonneville to secure additional resources to serve 

those loads during a period when prices were at historical highs. Bonneville’s current 

financial difficulties are in large part the consequence of those high costs, combined with 

lower-than-expected revenues from secondary power sales in the recently depressed 

power market. In retrospect, it could be argued that if responsibility for meeting load 

growth had been more clear in the late 1990s, additional resources might have been 

added to the system and the power crisis of 2000/2001 might not have been as severe. 
December 17, 2002 9

As part of the new contracts, Bonneville, investor-owned utilities and the state utility 

regulatory commissions worked out a means of sharing the benefits of the federal system 

between residential and small farm customers of investor-owned utilities. This 

arrangement, however, has been challenged in the courts. Unless that challenge is settled 

amicably, the region could face continued animosity between public and private power 

entities. 

Based on the experience of the last decade, the Council believes that changes in the way 

Bonneville markets federal power in the future are necessary. In less than 10 years, 

Bonneville has gone through a swing from losing load and increased risk of not making 

its Treasury payments to increased load and additional power supply costs during adverse 

market conditions. This could force either large rate increases or reduced probability of 

Treasury repayment. The ability of public utility customers to periodically place load on 

Bonneville or take it off exposes Bonneville to inordinate market risk. Unlike other 

wholesale suppliers, Bonneville cannot refuse a public customer’s request to serve its 

load. Customers will want to take load off of Bonneville when market prices are low and 

Bonneville’s fixed costs make it difficult for it to compete. Conversely, customers will 

want to place additional loads on Bonneville when market prices are high, forcing 

Bonneville into a high-cost market. This translates into risk that Bonneville will not be 

able to make full and timely payment of its Treasury debt. With much of the rest of the 

country envious of the Northwest’s access to federal system power at cost, failure to 

make Treasury payments increases the risk that the region may not be able to preserve the 

benefits of the system.

A corollary to the risk associated with load uncertainty is the uncertainty of developing 

new resources. Will Bonneville be purchasing for a customer’s load growth, or will the 

customer purchase for its own needs? When would the purchase decision be made? 

How does the timing of that decision fit with the timing of resource development? Will it 

be a short-term purchase that doesn’t support development of new resources, or will it be 

long-term? This uncertainty puts reliability and price stability at risk. In the most recent 

situation, had Bonneville known earlier what its load obligation was going to be, it might 

have been able to enter into supply contracts at attractive prices rather than at the inflated 

prices in 2000-2001. The same would be true if the customers had been acquiring the 

resources. 

Bonneville also has a very large presence in the power market. One of the basic 

characteristics of a well-functioning, competitive market is many buyers and many 

sellers. Bonneville is frequently a very large seller, such as when it is marketing 

secondary power, and sometimes a very large purchaser, as when it must acquire 

additional resources to meet new loads placed upon it or to shape the output of the system 

to load. In either event, Bonneville’s actions can move the market, frequently not to its 

own advantage or the advantage of other regional participants. This is not market 

manipulation. This is just the effect of the size of Bonneville’s presence in the market. 

The pricing of Bonneville’s power at average or melded cost is also a long-standing issue 

affecting the efficiency of the market. Average pricing shields the customer from the true 
December 17, 2002 10

costs of load growth and inefficiency. It does not provide the price signal that would 

make, for example, the development of local efficiency improvements or combined heat 

and power applications attractive. The cost of new resources added to meet the needs of 

growing customers also raises the rates of those with stable or declining loads and creates 

tension between those two customer groups. While Bonneville could change its pricing 

practices, it has not. 

Allocating benefits of the Federal Columbia River Power System between the customers 

of publicly owned utilities and those of investor-owned utilities is also a continuing issue. 

The Northwest Power Act was created at least in part to ensure an equitable sharing of 

those benefits. The Act created the “residential exchange” that was intended to share the 

benefits of the federal system with the residential and small farm customers of investorowned utilities. However, implementation of the exchange satisfied no one. Public 

utilities believed the benefits to residential customers of the investor-owned utilities were 

too high. The investor-owned utilities believed the exchange was manipulated to reduce 

the benefits their customers were due. The resulting animosity is dangerous when 

regional unity is needed to protect the benefits of the federal system. 

Finally, Bonneville’s responsibilities for developing conservation and renewable energy 

resources are difficult to fulfill in the current environment. In the mid-1990s, Bonneville 

found itself competing in a competitive wholesale power market. This was made more 

difficult because other market participants did not have similar responsibilities. When 

the Comprehensive Review addressed this issue, Bonneville’s customers assured the 

Review that they would continue to develop conservation independently. Some clearly 

did. However, in aggregate, conservation acquisitions fell to levels well below the costeffective levels identified in the Council’s Fourth Northwest Power Plan (1998). While 

conservation enjoyed resurgence during the high market prices of 2000-2001 and the 

subsequent retail rate increases, it is unclear how it will fare in the future. Conservation 

and renewables expenditures have historically been treated as relatively discretionary 

when Bonneville experiences rate pressures. This inevitably leads to the roller-coaster 

pattern of activity observed in the past. The Review recommended sustained funding for 

conservation and renewables supported through a system benefits charge. While two 

states in the region followed through on this, at least in part, others have not yet done so. 

It is time to re-examine how conservation and renewables are developed, and the role of 

Bonneville in that development.

Goals for Bonneville’s Future Role in Power Supply

The Federal Columbia River Power System managed by the Bonneville Power 

Administration is the centerpiece of the Northwest’s power system. Significant changes 

in Bonneville’s future role in power supply are not trivial considerations. On the other 

hand, there are indications that the current structure may not be sustainable and may lead 

to inefficiencies in the development and operation of the power system. A careful 

consideration of changes to the system probably is overdue. However, changes should 

only be undertaken if the goals are clear, and only if the region has reasonable confidence 

that the changes will lead to achieving those goals. The Council believes the relevant 

goals are:
December 17, 2002 11

• To preserve and enhance the benefits of the Federal Columbia River Power 

System for the Northwest;

• To not increase and, preferably, to reduce the risk to the U.S. Treasury and 

taxpayers; 

• To achieve an equitable sharing of the benefits of the federal power system;

• To develop and maintain widespread support for the federal system and reduce 

conflicts within the region

• To better align the costs and benefits of access to federal power; 

• To maintain and improve the adequacy and reliability of the Northwest power 

system;

• To improve clarity regarding responsibility for meeting loads;

• To provide clear signals regarding the value of new energy resources;

• To lessen Bonneville’s exposure to market risk;

• To lessen Bonneville’s impact on the market; 

• To satisfy Bonneville’s responsibilities for conservation and renewable resource 

development; 

• To satisfy Bonneville’s responsibilities with respect to fish and wildlife; and

• To accomplish these goals at the lowest possible cost to the region’s consumers. 

The Counc il has reviewed the proposals and comments received during the Regional 

Dialogue process on the future of Bonneville in order to identify those elements that do 

or do not further the goals. The focus was primarily on “efficiency” issues, i.e., how to 

make the regional system function better, rather than issues of equity. However, unless 

the relevant parties are satisfied that equity issues have been successfully resolved, it is 

unlikely that any of the proposals can go forward. Consequently, achieving an equitable 

resolution of those issues is a necessary condition. 

 Recommendations

Contract Term

Although long-term (i.e. 20-year) contracts are not common in today’s electricity 

industry, the Council favors 20-year sales contracts as proposed by the Joint Customers. 

The primary reason is that Bonneville, unlike other participants in the wholesale power 

market, when offering contracts must provide power to those public customers that 

choose to place their net load on Bonneville. Conversely, those customers are under no 

obligation to keep that load on Bonneville at the end of a contract period and have, in 

fact, been successful in gaining relief from existing contracts when it was advantageous 

to do so. The region has observed the result, with customers pressuring Bonneville to 

take load off Bonneville when market prices are low and bringing load back to 

Bonneville when prices are high. In both instances, this behavior precipitated a financial 

crisis for Bonneville and put the ability to make Treasury payments at risk. While this 

risk would still exist at the beginning and end of the contract period, a 20-year contract 

will at least minimize the opportunity for this behavior within the limits established by 

current law. 
December 17, 2002 12

An additional benefit of a long-term contract is that it will provide contractual protection 

against extra-regional efforts to take away or dilute the benefits of the Columbia River 

System for the Northwest. While this issue has been relatively dormant for the last few 

years, it could flare again. Contractual protections, while not perfect, would be another 

tool that the region and its Congressional delegation could use to protect the benefits for 

the region. Twenty-year contracts would also demonstrate the willingness of the region 

to back the federal system and accept its risks as well as its benefits over a long term.

The customers are concerned that with 20-year contracts they lose important leverage in 

controlling Bonneville’s costs, i.e. the ability to take load off Bonneville if their costs get 

out of control. The customers have proposed the formation of a customer cost advisory 

committee with “enforceable” powers to provide them with the leverage they believe the 

need. Alternatively, they have suggested “off-ramps” where customers could take some 

load off Bonneville if the cost targets stipulated in their contracts are not met. 

The Council has concerns about both these approaches. Giving a non-federal body such 

as a customer advisory committee enforceable powers over decisions about Bonneville’s 

costs would not be legal. Ultimately, such decisions reside with the Administrator. 

Similarly, load off-ramps would not make legitimate costs go away and would make it 

necessary for Bonneville to raise rates on its remaining load or increase the risk of failing 

to make a Treasury payment. 

The Comprehensive Review called for the creation of a customer advisory committee and 

a contractual ability for the customers to call for binding arbitration on specific matters 

unrelated to fish and wildlife spending. If Bonneville can subject itself to binding 

arbitration this may be a viable approach, as long as it is not used as a means to cut back 

important activities that are not popular with customers. 

The Council believes it is most appropriate to focus on process remedies that ensure that 

customers and other interests have opportunities to examine, probe and contest 

Bonneville’s costs and make their views known in Bonneville’s decision-making. This 

could be in the context of a rate case or through some other forum. Ultimately, 

Bonneville is politically accountable. If Bonneville is not responsive to legitimate 

concerns, Bonneville can be -- in fact, it has been in the past -- held accountable by the 

Congressional delegation and the Governors. 

Although the Council has reservations about customer cost control mechanisms with 

enforceable power, the Council is willing to consider such a mechanism. However it 

must be shown that it does not jeopardize the goal of long-term stability for Bonneville 

and is not merely a means to reduce funding for important programs and activities that 

are unpopular with customers. The Council encourages Bonneville, the customers and 

other interests to continue the dialogue on this issue. The Council is willing to make 

itself available to this process to help forge a solution. 
December 17, 2002 13

Finally, the Council believes that 20-year contracts must, in fact, be 20-year contracts. 

The objectives of long-term contracts will be negated if customers can force renegotiation 

at shorter intervals. 

Slice Service

A significant component of the Joint Customers’ proposal is that Bonneville offer a “slice 

of the system” product. With the slice product, the customer gets a percentage of the 

federal base system output and pays the corresponding percentage of the base system 

costs. The slice customers also get a limited amount of flexibility in the operation of 

their slice (e.g., some storage, pondage, and limits on the rates at which energy can be 

released) that allow them to have some control over when they take their share. 

Bonneville establishes the limits on that flexibility to ensure that the obligations and 

constraints on the system can be met. Because of the variability of the hydropower 

system, the output of the federal system can be quite large in some years and much 

smaller in others. In some months and years, slice customers will have secondary 

hydropower to sell. In others, they will be purchasers. It is up to the slice customer to 

manage the variability in the output, and the market opportunities and risks that entails. 

By the same token, these customers are not exposed to risks associated with the 

operational and marketing decisions made by other slice customers or Bonneville. The 

slice contract also would not have a growth component. The slice customer is 

responsible for meeting its own load growth. 

The Council supports the offering of the slice product and believes that there will be a 

significant amount of load that takes the slice product. Bonneville currently has 

approximately 1,600 average megawatts of slice contracts. While there has certainly 

been a learning curve for both Bonneville and the customers, the slice product has proven 

to be operationally feasible. The Council would expect new slice contracts to reflect this 

learning to address issues that have arisen. 2002, with its low market prices and 

Bonneville’s cost exposure, has probably been less advantageous to slice customers than 

they had hoped. Some current slice customers may choose not to contract again for the 

slice contract. But others may decide that there are advantages to the slice product over 

the longer term. The Council does not believe there should be a minimum amount of 

load that must go slice or that obstacles should be placed in the way of those who wish to 

purchase other power products. Customers should have the opportunity to choose so long 

as they pay the full costs of the power products they choose. 

There are a number of reasons why the Council believes a significant portion of the 

federal system should be sold through slice contracts. A number of slice customers, each 

with somewhat different load and resource characteristics, each making their own 

operating and marketing decisions within the operational limits established by 

Bonneville, will result in greater diversity in the electricity market, potentially lowering 

overall risk. And because there will be more buyers and sellers, the market will be more 

liquid, reducing the impact that any one player has on the market. 

Another reason the Council supports the slice product is because the slice customers are 

responsible for meeting their own load growth. This aligns the benefits and costs of 
December 17, 2002 14

resource acquisition, eliminating conflicts between growing and non-growing utilities. It 

also means that slice customers see clear economic signals regarding the cost of new 

resources and the relative value of local opportunities in conservation, load management, 

and distributed generation, including generation on the customers’ side of the meter. The 

clarity with respect to the load-serving responsibility should also result in more efficient 

resource acquisition and a greater assurance of maintaining resource adequacy. Smaller 

and more dispersed resource decisions will also minimize the impact on the market and 

probably lead to greater resource diversity. 

The slice product also reduces Bonneville’s direct exposure to hydro and market risk. 

The risk associated with the slice product is transferred to the slice customers. However, 

Bonneville’s real risk is reduced only to the extent that the individual slice customers are 

able to manage their share of the risk. The Council is concerned about the exposure of 

individual slice customers to hydro/market risk – risk that could be large in relation to an 

individual customer’s ability to hedge that risk. If customers fail to make timely payment 

to Bonneville, Treasury payments could be at risk.

The existing slice contracts already contain provisions intended to ensure the credit

worthiness of the slice customer. However, the fact that Bonneville has indicated 

concern about the financial ability of current slice customers to handle the risk suggests 

Bonneville is concerned that these provisions may not be adequate. The Joint Customer 

Proposal has responded to this concern by including “step up” provisions where all slice 

customers would accept a surcharge to cover the shortfall if there are customers who are 

unable to make their payments on time. This is a significant constructive response; 

however, it needs to be developed in considerably more detail. Is there a timing issue 

that might leave the Treasury payment at risk even though in the long run Bonneville 

would recover the costs? How robust a mechanism is this? What if multiple customers 

find themselves in financial trouble? The Council encourages Bonneville and the 

customers to make sure that the provisions ensure Bonneville will be able to make full 

and timely payments to the Treasury. 

The Council does not agree with the argument that slice will necessarily result in a lessthan-optimum operation of the power system. From the standpoint of optimizing the 

physical output of the system, this could very well be the case. However, from the 

standpoint of optimizing the economic value of the system to the customers, it is not 

necessarily the case. Slice customers will optimize operations of their slice, within the 

flexibility allowed, to maximize the economic value they derive from the system, given 

the characteristics of their own loads, resources and so on. 

The Council does not support the Public Interest Groups’ proposal that slice customers 

get no flexibility in the operation of their slice. To do so would forego the diversity 

benefits of the slice product and forego the potential for greater value to be derived from 

the system. It is Bonneville’s responsibility to establish the constraints on flexibility 

accorded slice operators to ensure meeting fish and wildlife and other non-power 

constraints. As long as slice customers operate within those flexibility limits, there 

should be no significant impact on fish and wildlife. 
December 17, 2002 15

Maintaining reliability is a top priority. Consequently it is imperative that Bonneville 

retain rights to take unilateral actions on the whole system in case of emergency. There 

should be a proportional sharing of any costs from such operations with the slice 

customers. The Joint Customer Proposal also suggests that any revenues from such 

operations be similarly shared. This provision has raised the concern that it may create 

an incentive to compromise fish operations. The Council understands the reason why 

slice customers should share in revenues as well as the costs of emergency operations. 

The Council recommends that this issue be studied to ensure that incentives are not 

created to compromise fish operations while also ensuring fair treatment of the slice 

customers and allowing Bonneville the ability to operate the system as a whole in the 

case of a real power system emergency. 

Bonneville’s Power Business Line (PBL) should continue to provide ancillary services to 

the Transmission Business Line (TBL) as a system obligation, with revenues credited to 

the defined federal base system. When and if a market for ancillary services is 

established, then slice customers can participate directly in selling ancillary services to 

the TBL. 

Requirements Service

The requirements product is the traditional Bonneville product whereby Bonneville is a 

full-service power provider, providing power shaped to the customer’s load and meeting 

the customer’s load growth. The Council supports the offering of a requirements product 

primarily because it meets the needs of the region’s smaller customers. However, the 

Council believes that some changes in the product are necessary to meet the Council’s 

goals. Currently, the requirements product includes load growth and melds the cost of 

resources purchased to serve load growth with the costs of the federal system. The 

problem with this is two-fold. First, it results in a misalignment of the cost and benefits 

of new resources. Non-growing utilities bear part of the cost of the resources purchased 

to serve the load growth requirements of growing utilities. Second, the low melded rate 

obscures the actual cost of new resources. Consequently, requirements customers do not 

see the actual value of conservation or local generating resources and have less incentive 

to pursue cost-effective alternatives. While in the past Bonneville has considered 

implementing a tiered rate to address these issues, it has always backed down in the face 

of customer opposition. 

The initial public draft of the Joint Customer Proposal was clear that once any excess 

base system resources allocated to the requirement pool had been used, growing 

requirements customers would face the actual cost of power acquired to meet their load 

growth, either through bi-lateral arrangements with Bonneville or a tiered rate 

mechanism. However, this was not clear in subsequent drafts of the proposal. The 

Council believes that it is essential that requirements customers see the costs of resources 

that must be purchased to meet their load growth. Failure to do so will perpetuate the 

inequities and inefficiencies of the current melded pricing. 
December 17, 2002 16

Customer representatives have told the Council that once load growth in the requirements 

pool exceeds the unused capacity of the federal system available to the requirements 

pool, if any, load growth should be met through a tiered-rate mechanism. The Council 

supports that approach and asks that it be made explicit in any Bonneville proposal. The 

Council supports the ability of requirements customers to take responsibility themselves 

to acquire resources to serve their load growth, so long as notice provisions are such that 

Bonneville is not exposed to the costs of acquiring resources for these customers. 

Block Sales

In general, the current block product consists of heavy-load-hour and light-load-hour 

blocks of power that may be constant for a year or vary month to month. The amount of 

the block purchased for any period may not exceed a reasonable estimate of the 

customer’s net requirements for that period. The product has a load growth component in 

that the customer can pay “step up” charges for amounts over the first-year amount. 

The Joint Customer Proposal does not permit the purchase of the block product 

independently. To get the block product, the customer must first purchase a slice and, for 

an additional charge, may convert all or part of the slice to block for all or part of the 

contract period. The conditions placed on the block product are: 1) that the blocks are 

fixed at their first year levels for the duration of the contract (i.e., no load growth 

component), 2) the costs of the block are set by Bonneville to recover the additional costs 

of serving the customer’s block shape, and 3) there is a true-up to ensure that 

Bonneville’s actual costs in serving the block are recovered. 

The Council supports the ability of customers to purchase a block product outright. 

Requiring the customer to first purchase a slice might somewhat increase the amount of 

slice product sold. But, while the Council appreciates the diversity benefits associated 

with the slice product, other benefits, such as alignment of costs and benefits, clear 

economic signals as to the cost of load growth and clarity with respect to responsibility 

for load growth can be accomplished by conditioning the block sales as proposed in the 

Joint Customer Proposal. The Council recommends offering a block product directly 

provided that the sale is conditioned as proposed in the Joint Customer Proposal. 

IOU/POU Settlement

The Council is very much in support of achieving a resolution of the issue of benefits for 

the residential and small farm customers of investor-owned utilities (IOUs) for a 

significant period. Accomplishing this would be an indication of having achieved an 

equitable sharing of the benefits of the federal system between the customers of publicly 

owned utilities and the residential and small farm customers of the investor-owned 

utilities; it would resolve significant public/private disputes and would result in a broader 

cross-section of the region seeing a direct, long-term interest in preserving the Federal 

Columbia River Power System for the region. 

The Council sees the proposed settlement in the Joint Customer Proposal as an attempt to 

create a transparent surrogate for the residential exchange provisions of the Northwest 

Power Act. The residential exchange was intended to provide the benefits of access to 
December 17, 2002 17

federal power to the residential and small farm customers of investor-owned utilities, and 

it set up an elaborate process for achieving this objective. However, many people 

perceived the process as a “black box” that was subject to manipulation. 

The surrogate that the Joint Customers proposed is an annual cash payment to the IOUs 

equal to the difference between the cost of serving 3,300 average megawatts of IOU 

residential and small-farm load with power from a combined cycle combustion turbine 

(CCCT) and serving them at the net cost of the slice product (net of the value of the 

secondary power the slice customers receive). The cost of power from the CCCT would 

be determined by an equation in which the 10-year rolling average cost of natural gas is 

the primary variable. Because it would be based on documented, historical data, it would 

be very difficult to manipulate. And, because the rolling average gas price is used, the 

volatility associated with natural gas prices is greatly reduced. 

There are certainly questions that can be raised about the model the Joint Customers 

chose to use in the settlement. However, this is a question of equity. The only ones who 

can really judge whether the settlement is equitable are the parties to the settlement. The 

fact that there is agreement between the parties is strong evidence that equity has been 

achieved. 

At the same time, it is important to recognize that there are those who have not been 

parties to the negotiations who will weigh in on any agreement that has been reached. 

The settlement has implications for Bonneville’s rates. The Council estimates that the 

impact is approximately $1.50 per megawatt hour for every $100 million by which the 

settlement exceeds the current subscription benefits to the residential customers of IOUs.

The Council has analyzed the benefits to the IOU customers under both the Joint 

Customer Proposal and the current subscription agreement for the years 2007 through 

2011. The subsequent years were not analyzed because the subscription agreement does 

not extend past 2011. A new agreement would have to be reached for the post-2011 

period or the residential exchange provisions of the Act would come into play. What we 

can say with certainty is that it would be a contentious process, and the outcome is 

uncertain.

For the 2007-2011 analysis, Council staff used Bonneville’s spreadsheet model along 

with the Council’s draft medium and medium low natural gas and electricity market price 

forecasts. The differences between the Joint Customer Proposal benefits and the current 

subscription benefits were relatively small. In the case of the medium forecasts, the 

current subscription benefits were somewhat greater. In the case of the medium low 

forecasts, the Joint Customer Proposal benefits were greater. In either case, the impact 

on Bonneville rates was less than a mill in either direction. The differences are largely 

attributable to the volatility of the subscription benefits with electricity market price. If

stability is important, the Joint Customer Proposal provides greater stability. 

Because the settlement can have some impact on Bonneville rates, it is likely that large 

end-use customers of publicly owned utilities and, potentially, the DSIs, will have 
December 17, 2002 18

significant interest in the settlement. The parties should ensure that there is broad 

satisfaction with the equity of the solution. If there is not, the customers will ultimately 

not settle, or even if they do, the settlement will be challenged in the courts by other 

parties. In either case, it is possible that the goals sought by the parties and the Council 

will not be achieved. 

Initial Allocation

The Joint Customers propose that slice customers be allocated their slices of the system 

first and then the remainder be available for requirements service. This is predicated on 

analysis that indicates that there should be sufficient base system power available to serve 

the needs of the requirements customers with some left over to serve their load growth 

for some time.

If, for whatever reason, that analysis proves incorrect, additional resources would have to 

be added to the system and the cost would fall entirely on the requirements pool.

Requirements customer representatives have indicated that is a gamble they are willing to 

take in return for the possibility that there would be sufficient power to cover their load 

growth for some time. The Council is concerned that gamble may not look as attractive 

as planning evolves over the coming months and could prove a stumbling block to a final 

settlement. The Council encourages Bonneville and the customers to consider 

alternatives that would lessen that possibility. 

Service to Direct Service Industries

There are currently approximately 2,800 megawatts of aluminum smelter load in the 

Northwest, although only a small fraction of that load is currently in operation. This 

comprises the great majority of Bonneville’s Direct Service Industry (DSI) load. The 

current contracts expire in 2006. These contracts are take-or-pay contracts with the DSIs 

subject to liquidated damages and amount to a total of 1,440 megawatts, or about half the 

potential load.2 Both Bonneville and the DSIs need to resolve the question of DSI service 

after 2006 – the DSIs to be able to make plans for their facilities after 2006 and 

Bonneville to know to what extent it needs to augment its system to serve DSIs. While 

there is some dispute about whether the DSIs have a legal right to new contracts for 

power supply at Bonneville’s melded rate, the fact that Bonneville limited the current 

contracts to 1,440 megawatts suggests that the DSIs rights are limited at best. 

The future of several of the region’s plants is questionable. Several are old, relatively 

inefficient and relatively high-cost producers compared to the rest of the industry. The 

long-term trend in aluminum prices has been downward, and the expectation of 

significant amounts of new smelter capacity in China and elsewhere suggests that at least 

for a few years aluminum prices are likely to stay relatively low. The industry average 

price of power of $20 per megawatt-hour is well below Bonneville’s current rate, 

suggesting that many of the plants in this region are likely to be “swing” plants, operating 

only when aluminum prices are high and/or Northwest electricity prices are very low. 

However, the Council staff have seen analyses that suggest there is some smelter capacity 

 

2

 If a take-or-pay customer does not take the contracted amount, it is subject to liquidated damages in the amount of the difference 

between what Bonneville would have received at the applicable rate and what it was able to recover selling the power on the market. 
December 17, 2002 19

in the region that can operate profitably with aluminum prices at or somewhat above 

current prices with electricity prices in the low $30s to high $20s per megawatt-hour. 

The question of Bonneville service to the DSIs is a difficult one. On the one hand, 

acquiring resources to serve the DSIs could add something like 50 cents to $1 per 

megawatt-hour for each 500 megawatts of DSI load served, depending on the cost of the 

resources acquired. These costs will have adverse impacts on other consumers in the 

region. On the other hand, DSIs are important elements of some local economies in the 

Northwest. 

In light of the foregoing, the Council recommends that limited service be provided to 

DSIs at Bonneville’s industrial rate in an amount not to exceed 600 megawatts. An initial 

offer of up to 100 megawatts per smelter should be made. This would provide all 

smelters in the region (there are nine) the opportunity to structure power supply strategies 

that might allow them to operate. If more than six smelters participate, the 600 

megawatts should be distributed equally among them. If less than 600 megawatts is 

taken in the initial offer, those smelters that wish to take an additional allocation could do 

so provided that the total does not exceed 600 megawatts and the smelters offer 

Bonneville resources in amounts equal to the incremental amounts of power received 

from Bonneville. Those must be resources that Bonneville judges to be competitive and 

demonstrate that the smelters have taken steps to be able to supply their own power 

independent of Bonneville. This may not include purchases from Bonneville preference 

customers. Any obligation of Bonneville to purchase a resource from the DSI customer 

should cease if and when the customer no longer purchases power from Bonneville. In 

addition, a total of 50 megawatts for non-smelter DSI loads should be provided. 

The power should be offered in such a way that:

ß Contracts allow Bonneville to capture benefits of DSI load interruptibility and 

provision of reserves to offset the cost of DSI service to other customers. The 

interruptibility provisions should ensure that sme lter workers are appropriately 

compensated. 

ß Bonneville includes contract provisions to help maintain aluminum plant 

operation during periods of low aluminum prices and adequate electricity 

supplies, provided this can be accomplished without imposing additional costs on 

other customers. This recognizes that given likely future world aluminum 

markets or Northwest electricity prices, aluminum smelter loads are likely to be 

volatile and uncertain for the region. 

ß The smelters are encouraged reduce dependence on Bonneville power in the longterm. 

To reduce the cost of providing service, the Council recommends that DSI contracts be 

structured to ensure that Bonneville can capture the value of interruptibility of the DSI 

load to offset the costs of serving that load. There are three forms of interruptibility that 

are potentially of value. First, there are very short-duration interruptions for system 

stability purposes. Second, there are economic interruptions of a few hours duration that 

would allow Bonneville to sell the power at high market prices. This requires that 
December 17, 2002 20

smelter operations be modified to permit cutting back to a partial load operation. Finally, 

there are long-duration curtailments in the event of poor water or power supply 

conditions, such as were experienced in parts of 2000 and 2001. The ability to curtail 

DSI loads under such conditions reduces the need to have standby generation available. 

Bonneville should analyze the cost and benefits of such operations. 

The Council recommends that contract terms be limited to 10 years with the condition 

that the amount available to DSIs for a subsequent contract period would be further 

reduced.

Finally, the Council recommends that Bonneville consider providing credit support to 

DSIs that develop generating resources that they are willing to dedicate to serving inregion smelter loads not served by Bonneville.

Conservation 

The Council believes it is imperative that any proposal to fundamentally change 

Bonneville’s role in power supply include a realistic approach to ensuring that the region 

fully develops all cost-effective conservation. The Council believes that capturing costeffective conservation has great value in reducing long-run regional electricity costs and 

will require continued vigilance and encouragement as the structure of the electric 

industry evolves. The region’s interest in acquiring this conservation is not changed 

under any revised federal power marketing approach. Least-cost planning and 

implementation should continue to be carried out region wide. The Council believes 

Bonneville should use the full extent of its authorities to ensure all cost-effective 

conservation is captured in a timely way. 

The Joint Customers propose that more Bonneville customers see marginal wholesale 

prices and take more responsibility for meeting load growth. This will improve price 

signals and more clearly communicate the value of conservation. This is a step in the 

right direction. It is not, however, sufficient to relieve Bonneville of its charge to 

promote and give first priority to cost-effective conservation, for two reasons. First, there 

are still disincentives to acquiring conservation from the utility-interest perspective, even 

at marginal wholesale prices. Conservation is a capital-intensive resource, which places 

it at a disadvantage when compared to low short-run market prices or resources whose 

costs are predominantly fuel costs. Further, conservation makes rates go up somewhat in 

the short term due to lost-revenue effects and its capital-intensive nature (assuming 

conservation expenditures are expensed rather than capitalized), even though it makes 

total costs lower in the long term. 

Second, securing cost-effective conservation in an effective way requires coordinated 

planning and implementation among many entities. The best approaches require a 

combination of coordinated local utility efforts, regional efforts, local, state and federal 

governments, system benefits charge administrators, market transformation and sufficient 

administration. The mix of approaches changes over time as efficiency technologies and 

markets for products and services change. Bonneville’s interest extends both to 

conservation approaches best done regionally and approaches best implemented at the 
December 17, 2002 21

local level. Consequently, the Council believes Bonneville should retain a strong and 

active role in the coordinated planning and implementation of conservation efforts across 

the region.

The extent of the conservation obligation

Bonneville has broad authorities for retaining an active and strong role to promote the 

acquisition of conservation even under the proposed settlement, in which some customers 

agree not to place additional loads on Bonneville for the duration of the contract. 

Bonneville retains an interest because at the end of the 20-year contract period, public 

customers will be able to bring loads back to Bonneville. To the extent that the costeffective conservation has not been acquired, loads brought back to Bonneville could be 

unnecessarily high.

The proposals of the Joint Customer Group and the Public Interest Groups share some 

common themes that the Council supports. These include using the Council’s integrated 

resource plans to guide conservation targets and budgets while stabilizing and enhancing 

funding for conservation over the duration of the new contracts. The proposals each 

support the concept that both regional and local approaches to conservation 

implementation are needed and should be supported through Bonneville. Both proposals 

recognize the need to reinforce the role and capabilities of the Regional Technical Forum. 

Both proposals acknowledge the value of relying on existing institutions and proven 

delivery mechanisms. Both share the goal that the mechanisms developed do, in fact, 

ensure implementation of the cost-effective conservation that they target. 

However, the joint customers and the public interest groups diverge on several key 

conservation issues. One of these is the extent of the conservation obligation that resides 

with Bonneville – whether it is for all customer loads or only the portion of loads placed 

on Bonneville, how the funding for conservation would be collected, and the basis by 

which Bonneville would allocate the funds collected to various conservation activities. 

The Council believes that Bonneville should establish conservation budgets based on 

Bonneville’s share of regional conservation potential identified in the Council’ power 

plan and estimated program cost to capture that conservation. However, conservation 

savings targets and mechanisms should be designed to capture conservation on all loads 

of preference-customer utilities, not just the part served by Bonneville. The Council will 

estimate energy conservation potential for the region as a whole. This estimate has 

historically been divided between public and private utility pools, by residential, 

commercial, industrial, and irrigation uses and by existing versus new buildings and 

equipment. It could further be apportioned to public and private loads served by 

Bonneville to identify conservation budgets for the portion of loads served by Bonneville. 

While the Council believes the establishment of Bonneville’s conservation budgets 

should be based on load served by Bonneville, it also believes that Bonneville has the 

obligation and authority to establish conservation targets and to develop mechanisms to 

ensure conservation is captured for the entire load of its preference customers, not just the 

portion served by Bonneville. Bonneville has interest in seeing the entire conservation 
December 17, 2002 22

potential is tapped because that load may return to Bonneville and because conservation 

accomplishments cannot be segregated based on whether or not the load is served by 

Bonneville. Bonneville should use its authorities to the fullest extent possible to ensure 

the region attains conservation goals established for the entire retail load of customers 

that can place load on Bonneville. There are several methods to accomplish this including 

placing terms and conditions on a conservation rate discount mechanism. 

Bonneville’s obligations and authority with respect to investor-owned utility conservation 

is, we believe, limited to the load subject to the IOUs’ residential and small farm loads 

that are subject to the residential exchange. The Council, however, will continue to 

encourage and support the work of the states’ utility regulatory commissions to use their 

authorities and least-cost planning regulations to ensure that the cost-effective 

conservation for all the IOU load is accomplished. The Council is prepared to work with 

the commissions and, where applicable, the agencies administering state systems benefits 

charges, to accomplish this goal. 

Local Implementation 

The Council believes a rate discount-like mechanism similar to the current Conservation 

and Renewables discount can be an effective way to encourage local utility conservation 

acquisitions. However, the existing mechanism was intended to keep regional utilities “in 

the game” at a time when conservation activity was at low ebb. If it is to serve as the 

primary mechanism for ensuring that the region captures all cost-effective conservation, 

the mechanism needs to be modified. After review of the existing mechanism, the 

Council believes it should be redesigned to assure it is producing targeted cost-effective 

conservation. Bonneville should evaluate the performance of the discount mechanism 

under its initial year of operation to identify elements that are successful and areas that 

could benefit from improvement. The Council believes Bonneville should begin the 

transition to a revised discount mechanism as soon as possible, regardless of the outcome 

of the settlement discussions, because the mechanism is in place now and will continue 

through the end of the current rate period. 

The Council has several recommendations regarding the discount mechanism:

ß Bonneville can ensure conservation addressed under the discount is cost-effective 

by qualifying measures and programs based on their cost-effectiveness. Currently, 

the approved measure list allows the rate discount for measures regardless of their 

cost-effectiveness. While this may have spurred rate discount activity in the 

initial year of operation, it is counterproductive in the long run, increasing the cost 

of the regional power system. 

ß Under guidance from the Regional Technical Forum and the Council, Bonneville 

should tailor rate discount incentives to encourage the best measures and practices 

and, where appropriate, to encourage regionally coordinated efforts. The ability 

to provide more or less incentive for some programs and measures can be used by 

Bonneville as a tool to help manage the overall coordination of conservation 

activity throughout the region, supporting timely initiatives or filling gaps as 

necessary.
December 17, 2002 23

ß Bonneville should include incentives to minimize the cost of conservation 

acquisition to the region, without sacrificing cost-effective savings. The current 

Conservation and Renewable Discount system pays for the value of the avoided 

power purchases. The result can be very high credits to the utility for little actual 

investment on the utility’s part. 

ß Bonneville should establish criteria to assure credit is claimed for incremental

investment in cost-effective conservation activity.

ß Bonneville should provide more specific criteria for, as well as maintain limits on, 

expenditures on infrastructure, research and development, contributions, 

education and information programs and other activities that don’t produce or 

clearly support the development of tangible savings. The Council supports the 

need for activities that don’t produce tangible savings. But in aggregate, the 

discount mechanism should produce a portfolio of efforts that is cost-effective 

including costs of activities that produce intangible savings.

ß The mechanism should include protocols for timely and informative selfevaluation of local conservation efforts. Evaluation is a key tool to help 

customers identify successes and needed improvements in the mix of conservation 

activities they adopt. The RTF should make recommendations to Bonneville on 

what efforts would benefit most from evaluation. 

ß The Council believes it is preferable to design the mechanism to reduce the 

incidence and magnitude of any Bonneville “backstop,” should utilities not 

qualify to claim their discount. A backstop in which Bonneville is expected to 

collect charges from customers that fail to implement sufficient conservation puts 

Bonneville in a difficult position in relation to its customers. As a consequence, it 

is less likely to be implemented and will result in lost conservation opportunities. 

The Council’s clear preference is that Bonneville provide the discount 

incrementally on demonstration of progress – not solely rely on the threat of 

taking back the discount for inaction after the fact. An initial discount payment 

should be provided to address the customers’ cash flow requirements. But 

subsequent discounts should be made on demonstration of progress. 

The Joint Customers have argued that this approach is not necessary; they prefer a 

mechanism in which they are granted the full discount at the outset and only 

charged if a utility fails to take the actions necessary to achieve its target. The 

Council is willing to give consideration to such a model, but only if there are 

frequent (annual) progress checks and the ability for Bonneville to take timely 

action if necessary in response to the results of those progress checks. 

ß Bonneville should not require a decrement in the customers’ net requirements for 

savings achieved. Such a decrement would be a strong disincentive to active 

participation by the customers in the development of conservation. The Council 

believes that Bonneville has sufficient discretion in its periodic determinations of 

a utility’s net requirements to ensure that utilities are not penalized by their 

conservation achievements. 
December 17, 2002 24

ß Bonneville should credit activities undertaken under state system benefit charge 

programs that result in incremental investment in new cost-effective conservation 

and satisfy other program requirements such as evaluation.

ß Finally, the Council recommends that the mechanism should be designed to 

reduce the incidence and magnitude of any Bonneville “backstop,” should utilities 

not qualify to claim their discount. A backstop in which Bonneville is expected to 

collect charges from customers that fail to implement sufficient conservation puts 

Bonneville in a difficult position in relation to its customers. As a consequence, it 

is unlikely to be implemented and will result in lost conservation opportunities in 

the interim. 

It is far preferable that Bonneville work with customers, up front, to implement good 

opportunities and approaches and to structure incentives to encourage local utility 

conservation. This approach would require that Bonneville work with customers on 

developing annual conservation plans providing customers with some assurance that 

utility conservation efforts will qualify for the discount while at the same time providing 

an opportunity to minimize and direct potential backstop activity. Bonneville should step 

in and invest in conservation to make up for a shortfall only where the customer 

consistently does not demonstrate progress, or where local utilities choose to have 

Bonneville administer local programs. Bonneville and the customers should develop a 

mechanism for resolving disputes regarding demonstration of progress. 

Regional Implementation

The Council concurs with both the Public Interest Groups and Joint Customers proposals 

that there will continue to be the need for a regional implementation of activities 

including low-income weatherization, research and development, market transformation 

and evaluation. The Council also supports the idea that some level of certainty between 

regional versus local pools will provide stability. At the same time, some degree of 

flexibility to modify amounts in the respective pools must be maintained due to the 

changing nature of the conservation resource. However, the groups have not come to 

agreement on how much should be regional implementation versus local acquisition. The 

customers generally favor a larger local component. The Council believes that there is a 

broader range of activities that should be carried out at the regional level than envisioned 

in the Joint Customer Proposal, including significant efforts in support of the Regional 

Technical Forum, coordinated program development and management, evaluation efforts 

and overall administration. 

The need for regional activity is a result of the nature of the conservation resource and the 

fact that much of it cannot be developed effectively on a piecemeal basis. Conservation 

experience over the last decade provides many examples of regional implementation and 

coordination providing valuable benefits and reducing the cost of conservation. For 

example:

ß The market-transforming efforts of the Northwest Energy Efficiency Alliance 

developed retail supply chains necessary to the successful local delivery of 8 

million compact fluorescent light bulbs during the 2001 energy crisis. Both 
December 17, 2002 25

regional market transformation efforts and local utility rebates were required 

in that effort. 

ß Codes and standards are upgraded in cycles that require coordinated planning 

and implementation efforts between demonstration of technologies often best

carried out at the local level and code adoption efforts that are best carried out 

at the state or national level. 

ß Regionally designed programs can reduce the cost and deployment time for 

efforts like efficient beverage vending machines, where there are a small 

number of beverage companies that service most of the region’s equipment. 

ß Regionally consistent program designs, standards, specifications and in some 

cases “incentives” enhance the effectiveness of conservation delivery in 

certain sectors of the economy so that third-party providers are not faced with 

inconsistent requirements across utility boundaries. 

ß Regional coordination can identify areas where early-stage research and 

development are needed to facilitate technology transfer and fill the pipeline 

of emerging efficiency measures and practices. 

ß And finally, regional coordination can identify and address gaps where efforts 

are needed to address hard-to-reach markets or end users.

A coordinated approach on a regional or greater level is necessary to effectively and 

inexpensively tap energy conservation potential. The Council recommends that 

Bonneville take a strong and proactive role in coordinating conservation efforts across the 

region by 1) allocating a significant fraction of its conservation budget to regionwide 

acquisition approaches; 2) taking a key role in the coordination of conservation efforts 

across the region 3) tailoring incentives to promote local utility programs that support 

regional initiatives; and 4) providing financial support for the Regional Technical Forum 

and for program evaluation. 

The Council recommends that Bonneville budget for regional implementation based on 

the guidance in the Council’s power plan and recommendations of the Regional 

Technical Forum. The Counc il fully expects the regional/local share of conservation 

efforts will change significantly over time as the region successfully completes some 

conservation initiatives and as new technologies and initiatives are identified. Budget 

allocations to regional versus local implementation should be flexible enough to 

accommodate up to a 30 to 50 percent regional share to cover both regional acquisition 

and coordinated planning and the administrative support such as the Regional Technical 

Forum and evaluation efforts. Bonneville should retain the flexibility to contract with 

utilities or other parties to implement regional acquisition programs. Bonneville should 

evaluate regional-approach programs and measures to improve cost and savings estimates 

and the efficacy of program design and implementation. The Council recommends that 

the RTF make recommendations to Bonneville on the scope and timing of such 

evaluations.

Regional Technical Forum

The Council recommends that, beginning as soon as possible, the Regional Technical 

Forum (RTF) be more formalized as a technical body, with dedicated funding, a small 
December 17, 2002 26

staff and members that are independent of financial interests resulting from its 

recommendations. The Regional Technical Forum is a pivotal implementation tool for the 

region under any future role of Bonneville. The Council recommends a 13- to15-member 

RTF board selected by the Council. Members would be paid for their time similar to the 

Council’s Independent Economic Advisory Board. A majority of board members would 

be from entities not eligible for the credit or rebate mechanisms, in order to avoid 

conflicts of interest. Utilities and other users of the credit or rebate mechanisms would be 

kept to a minority. Approximately three people would staff the RTF board and provide 

administration. The staff would be housed inside the Council. 

The RTF would:

ß Identify and catalogue costs and savings of conservation measures and programs;

ß Make recommendations on how best to coordinate conservation approaches 

among the many entities in the region; 

ß Make policy recommendations to Bonneville on areas where the settlement 

agreement has flexibility, such as the local/regional allocation determinations;

ß Identify evaluation needs and make recommendations for systematic evaluation 

of performance;

ß Make recommendations for research, development and demonstration. 

Role of the Council 

The Council would continue to periodically prepare a regional power plan that identifies 

cost-effective levels of energy conservation, regional conservation savings targets and the 

estimated programmatic cost to acquire the conservation to achieve those targets. The 

Council would estimate the regional savings targets by customer pool, including pools for 

preference customers and the small-farm and residential customers of IOUs. Sufficient 

continued funding of the Council’s planning activities is critical to establishing credible 

conservation and renewable resource targets and budgets. 

The Council would also select RTF members and house the RTF staff. In collaboration 

with the RTF, the Council would make recommendations to Bonneville on 

• Bonneville’s conservation targets and budgets;

• The mix of regional versus local program approaches and associated budgets 

best suited to capture that conservation;

• The structure of incentives in the discount mechanism;

• Appropriate levels of Bonneville conservation planning and coordination 

activities and prioritization of regional conservation initiatives; 

• Levels of activity and budget for research and development; 

• Levels of activity and budget for evaluation of conservation efforts;

• Elements within the budget that may change from rate period to rate period to 

reflect changes in technology, standards, cost-effectiveness and other key 

factors; and 

• The evaluation and reporting mechanisms necessary to ensure accountability. 
December 17, 2002 27

The Council would continue to work with the region’s regulatory commissions and local 

boards to encourage conservation activities and investments sufficient to capture all costeffective conservation in the region.

Renewables

Both the Joint Customer Proposal and the Public Interest Group proposal call for 

acquiring renewable resources, the costs of which may be above market prices. In both 

proposals, acquisition is accomplished through a mix of Bonneville and local utility 

actions, with the ability of Bonneville to take action if local utility acquisitions do not 

reach target levels. The Council supports the broad outline of these approaches. In 

addition, the Council emphasizes the important role that Bonneville has played in 

research, development and demonstration for renewables and recommends a continued 

role for Bonneville in that area. 

In general, the Council supports some level of acquisition of renewable resources at costs 

higher than the market price of electricity where such acquisition is justified by the 

additional values that renewables can bring to the power system. The Council is 

currently developing its Fifth Northwest Power Plan. For this plan the Council is 

developing the tools that will permit valuing benefits such as mitigation of fuel, market 

price and environmental risks. The plan will also incorporate the best information 

available regarding the trends in the costs and performance of generating resources 

including renewables and the latest information and analysis regarding the integration of 

intermittent renewables into the power system. The Council’s plan should guide 

renewable resource development in the region. 

Unfortunately, this work cannot be done in time to inform the negotiations going on 

between the Joint Customers and the public interest groups regarding the level of support 

for renewable acquisitions. The Council encourages the parties to provide some 

flexibility, such as establishing floors and ceilings for renewable funding, that can 

accommodate the results of the Council’s planning when it becomes available. 

Fish and Wildlife

The Joint Customers intend that the combination of slice/block/requirements operations 

will not affect the determination and implementation of Bonneville’s fish and wildlife 

obligations. Under the proposal, Bonneville, the Corps of Engineers and the Bureau of 

Reclamation will continue to meet the federal government’s Indian trust and treaty 

responsibilities. No changes are proposed in river operations required by NOAA 

Fisheries and the Council. In addition, Bonneville’s customers will continue to pay the 

costs associated with Bonneville’s fish and wildlife obligations.

The Council agrees that these are appropriate objectives. The proposal must not alter any 

of Bonneville’s and the Council’s current fish and wildlife obligations and 

responsibilities. Fish and wildlife operations must continue to be developed as “nonpower” constraints and decided in forums that are not focused on maximizing power 

generation. As well, Bonneville’s direct expenditures on fish and wildlife activities must 

continue to follow the process currently guided by the Council and Bonneville to meet 
December 17, 2002 28

the objectives of the Northwest Power Act, Endangered Species Act and other federal 

statutes.

There are three primary areas relating to fish and wildlife operations and expenditures 

that concern the Council, in general: 1) river operations, 2) Bonneville’s budgeted and 

actual fish and wildlife funding levels, and 3) fish and wildlife project review and 

selection.

With regard to river operations, the Council would not support changes to the current 

processes that specify operational parameters for the Federal Columbia River Power 

System, and does not believe the Joint Customer Proposal would result in such changes. 

The biological opinions and the Council’s program must be taken into account as they are 

currently. Except in the case of regional power emergencies, the federal system must be 

operated in a manner to meet the objectives of the biological opinions, and the Corps and 

Bureau of Reclamation must take the Council’s program into account during their 

decision-making processes. Bonneville will continue to be required to act in a manner 

consistent with the Council’s program. The Council does not believe that the changes 

proposed should increase the incidence of regional power emergencies. 

The Council historically has been concerned about, and involved in, determining the 

annual funding level of Bonneville’s fish and wildlife program. Although the Joint 

Customer Proposal should not affect the process by which Bonneville’s expenditure 

levels are established currently, the Council would support a more regular, if not formal, 

regional process to determine annual spending levels. For example, the re-establishment 

of a process to develop formal memoranda of agreement that would specify funding 

levels for Bonneville rate periods, or some other period of time, would be welcomed in 

assuring the region’s fish and wildlife interests that Bonneville’s obligations will be met. 

But regardless of the method used, a transparent process that involves all regional entities 

and the public must be established and made available to ensure adequate funding levels.

The Joint Customer Proposal will not alter the current regional process for reviewing and 

selecting fish and wildlife projects funded by Bonneville. Section 4(h)(10)(D) of the 

Northwest Power Act will still be in effect. It requires independent scientific review of 

project proposals by the Independent Scientific Review Panel, and final funding 

recommendations to Bonneville will still be made by the Council after examining the 

reviews made by both the fish managers and the ISRP. The Joint Customer proposal in 

no way alters this process or diminishes the responsibilities of any of the parties that 

implement this section of law.

The Council also recognizes that there are potentially direct advantages for fish and 

wildlife that may result from implementing the Joint Customer Proposal. For example, 

slice contracts may result in a significant and direct benefit to fish and wildlife 

populations by reducing Bonneville’s obligation to serve loads in excess of the output of 

the federal base system in low water years. Bonneville would be under less pressure to 

alter spill and flow to squeeze more electricity out of the system to satisfy its power sales 

contracts if a greater portion of its obligations were capped by the system’s firm energy 
December 17, 2002 29

generating capability. It is unclear exactly what the overall impact would be of a 

combination of slice/block/requirements contracts, but it appears that for every slice 

contract there would be a diminution of pressure on Bonneville to alter system operations 

to meet load. If so, this would be beneficial to fish and wildlife.

In addition, one of the important objectives of the Joint Customer Proposal is to clarify 

who has responsibility for acquiring new generating resources. Having a clear 

understanding of this, in combination with a properly functioning electricity market that 

provides the appropriate economic incentives for the development of new resources, 

would make it more attractive for the region’s utilities to acquire new resources. The 

development and acquisition of new resources would reduce pressure to alter 

hydrosystem operations in low water years, and thus would be beneficial to fish and 

wildlife populations.

Some believe that slice customers will feel they have a greater stake in the operational 

decisions affecting the power system and will take a more active role in those processes. 

They are further concerned that this will change the dynamic of decision-making. 

However, the decisions themselves remain the responsibility of the federal agencies 

acting under the applicable federal laws.