COMPREHENSIVE REVIEW OF THE

NORTHWEST ENERGY SYSTEM

Final Report: Toward a Competitive Electric Power Industry

for the 21st Century

► Preamble

► Why Are We Doing This?

► Without Regional Consensus...?

► The Comprehensive Review

► Summary of Recommendations

► Federal Power Marketing — the Bonneville Power Administration

► Columbia River System Governance

► Conservation, Renewable Resources and Low-Income Energy Services

► Consumer Access to the Competitive Market

► Transmission

► Future Power System Role for a Four-State Regional Body

► Federal Power Marketing: The Bonneville Power Administration - Adapting to a Competitive

Environment, Preserving the Benefits of Low-Cost Hydropower for the Northwest

► Goals

► Background

► Recommendations

► Summary

► Disposition of Federal Power

► Priority for Subscriptions

► Phase 1

► Phase 2

► Phase 3

► Phase 4

► Subsequent Subscriptions

► Resale of Power

► The Exchange

► Fish and Wildlife
► Ownership Benefits for the U.S. Treasury

► Stranded Cost

► Customer Advisory Committee

► Bonneville in the Competitive Market

► Governors' Transition Board

► Goals

► Background

► Conservation

► Renewable Resources

► Low-Income Energy Services

► Recommendations

► Conservation

► Local Conservation, Including Low-Income Weatherization

► Regional Technical Forum

► Market Transformation

► Renewable Resources

► Existing Renewable Resource Projects

► New Renewable Resource Projects

► Renewable Resource Research, Development and Demonstration

► "Green Marketing"

► Low-Income Energy Assistance

► Collecting and Allocating the Funds

► The Bonneville Power Administration's Energy-efficiency Services

► Recommendations

► Goals

► Background

► Recommendation

► Electricity distribution utilities

► Electricity service companies

► Policies for structuring competition

► Registration and licensing standards

► Electricity bills

► Balanced competition

► Clarify regulatory authority
► Incentives for reliability and efficient use of local distribution systems

► Transitional Steps

► Unbundled billing

► Separation of local distribution from electricity services

► Provide open transmission system access as soon as possible

► Modify distribution utility service obligations

► Promote development of retail electricity service providers

► Opportunity to recover stranded costs

► Goals

► Background

► Recommendations

► Independent Grid Operator Responsibilities

► Bonneville Power Administration

► Governance

► Wheeling for Retail Loads

► Pricing of Transmission

► Transition Issues

► Background

► Future Roles

► Conservation and Renewable Resources

► The Competitive Marketplace

► Public Participation and Involvement

► Funding

PREAMBLE

The 20 members of the Steering Committee of the Comprehensive Review of the Northwest Energy

System have worked for 11 months to develop the recommendations contained in this final report. These

recommendations represent a consensus of 13 of the 14 voting members of the Steering Committee, a

consensus that has been achieved only by compromise and sacrifice on the part of each of the members
on the Committee. The 14th voting member acknowledges the significant progress made in many areas

but does not believe that suᰔicient progress was made on issues related to fish and wildlife to constitute

a real consensus. His views are presented in Appendix A.

We, the members who voted with the majority, support the report and will work to educate and persuade

others, but our support here does not commit all of the groups we represent. These compromises, as

diᰔicult as some may find them, are worth making for a simple reason: we have more to lose as a region

than we have to gain as disparate interests.

There is still much work to be done. This final report is specific in some areas and general in others. More

detail and further refinement will be required to convert these recommendations into the contracts,

legislative bills, rules and policies that will implement them.

As regional interests work further on these restructuring initiatives, there are bound to be disagreements

and new issues to be resolved within the outlines of these recommendations. However, we believe that

the principles outlined here must remain if any regional consensus is to be hoped for. With a consensus

position, the Pacific Northwest has the best hope of retaining the benefits of the federal hydropower

system and transitioning to a competitive electricity system that will maximize benefits for all consumers

in the region. The work embodied in this report will not easily be replicated if the regional consensus is

destroyed by unilateral actions of any party.

Finally, the Committee recognizes that electric utility restructuring is evolving rapidly and that eᰔorts in

Congress and the states almost certainly will change some of the assumptions underlying this report.

Although our recommendations may not reflect the ultimate end-state of this restructuring, we

nevertheless believe that it does reflect a workable outcome in itself and a very positive step in this

process.

Why Are We Doing This?

The electricity industry in the United States is in the midst of significant restructuring. This restructuring

is the product of many factors, including national policy to promote a competitive electricity generation

market and state initiatives in California, New York, New England, Wisconsin and elsewhere to open retail

electricity markets to competition. This transformation is moving the industry away from the regulated

monopoly structure of the past 75 years. Today we are served by individual utilities, many of which

control everything from the power plant to the delivery of power to our homes or businesses. In the

future, we may have a choice among power suppliers that deliver their product over transmission and

distribution systems that are operated independently as common carriers.
There is much to be gained in this transition. Electricity consumers are already benefiting from

competition in a number of significant ways. Competition in the natural gas industry has helped lower

the cost of electricity produced by gas-fired generating plants. Competition among manufacturers and

developers of combustion turbines has contributed to the availability of less expensive, more eᰔicient

power plants that can be built relatively quickly. Surplus generating capacity on the West Coast

combined with increasing competition among wholesale suppliers has reduced the price utilities must

pay for power on the open market. Broad competition in the electricity industry that extends to all

consumers could result in lower prices and more choices about the sources, variety and quality of their

electrical service.

But, there are risks inherent in the transition to more competitive electricity services. Merely declaring

that a market should become competitive will not necessarily achieve the full benefits of competition or

ensure that they will be broadly shared. It is entirely possible to have deregulation without true

competition. Similarly, the reliability of our power supply could be compromised if care is not taken to

ensure that competitive pressures do not override the incentives for reliable operation. How competition

is structured is important.

It is also important to recognize the limitations of competition. Competitive markets respond to

consumer demands, but they do not necessarily accomplish other important public policy objectives.

The Northwest has a long tradition of energy policies that support environmental protection, energyeᰔiciency, renewable resources, aᰔordable services to rural and low-income consumers, and fish and

wildlife restoration. These public policy objectives remain important and relevant. Given the enormous

economic and environmental implications of energy, these public policy objectives need to be

incorporated in the rules and structures of a competitive energy market.

In some respects, the transition to a competitive electricity industry is more complicated in the

Northwest because of the presence of the federal Bonneville Power Administration. Bonneville is a major

factor in the region's power industry, supplying, on average, 40 percent of the power sold in the region

and controlling more than half the region's high-voltage transmission. Bonneville benefits from the fact

that it markets most of the region's low-cost hydroelectric power. It is hampered by the fact that it has

high fixed costs, including the cost of past investments in nuclear power and the majority of the costs for

salmon recovery. As a wholesale power supplier, Bonneville is already fully exposed to competition and is

struggling to reduce its costs so that it can compete in the market. The transition to a competitive

electricity industry raises many issues for the Bonneville Power Administration and the region. In the

near term, how can Bonneville continue to meet its financial and environmental obligations in the face of

intense competitive pressure? In the longer-term, when market prices rise and some of Bonneville's debt

obligations have been retired, how can the Northwest retain the economic benefits of its low-cost
hydroelectric power when the rest of the country is paying market prices? And finally, what is the

appropriate role of a federal agency in a competitive market? The question is not only whether

Bonneville can compete in the near term, but also, should it be a competitor?

Without Regional Consensus...?

While participants on the Comprehensive Review Steering Committee represented, by design, many

divergent interests, they were fundamentally interconnected through one unifying value. Collectively,

they share an abiding interest in the stewardship of a great regional resource — the Columbia River and

its tributaries. The river is the link that brought all the parties together and unites them in a single,

overriding goal. That goal is to protect and enhance the assets of this great natural resource for the

people of the Pacific Northwest.

The federal power system in the Pacific Northwest has conferred significant benefits on the region for

more than 50 years. The availability of inexpensive electricity at cost has supported strong economic

growth and helped provide for other uses of the Columbia River, such as irrigation, flood control and

navigation. The renewable and non-polluting hydropower system has helped maintain a high quality

environment in the region.

But while the power system has produced significant benefits, these benefits came at a substantial cost

to the fish and wildlife resources of the Columbia River basin. Salmon and steelhead populations have

been reduced to historic lows, and many runs are or are about to be listed under the federal Endangered

Species Act. Resident fish and wildlife populations have also been aᰔected. Native Americans and

fishery-dependent communities, businesses and recreationists have suᰔered substantial losses due in

significant part to construction and operation of the power system. The region's ability to sustain its core

industries, support conservation and renewable resources, and restore salmon runs is clearly threatened

if we cannot reach a consensus regional position to bring to the national electricity restructuring debate.

Without a sustainable and financially healthy power system, funding for fish and wildlife restoration

could be jeopardized.

The governors of Idaho, Montana, Oregon and Washington, in their charge to the Comprehensive Review,

and the Steering Committee in their deliberations, recognized that the electricity industry is changing,

whether we like it or not. The Comprehensive Review is not an initiation of change, but a response to

change. It is an eᰔort to shape that change, to the extent shaping is possible, to ensure that the potential

benefits of competition are achieved and equitably shared, environmental goals are met, and the

benefits of the hydroelectric system are preserved for the Northwest. The region's ability to shape the

change in the Northwest electricity industry depends on its ability to develop a regional consensus. If the

Comprehensive Review fails to result in a consensus for regional action, the electricity industry will still
be restructured. A return to the historical industry structure is not an option. Many of the comments

received during the public hearing process on the Steering Committee's draᴄ recommendations made it

clear that this is not a widely appreciated fact.

What is the likely evolution of the regional electricity market in the absence of eᰔective regional

consensus.

For wholesale power markets, federal policy advancing competition is already in place. The Energy Policy

Act of 1992 and Federal Energy Regulatory Commission (FERC) Order 888 express a strong commitment

to opening access to the transmission system to make possible a competitive wholesale power market.

Transmission will remain a FERC-regulated activity and will be strictly separated from generation to

ensure that transmission owners cannot interfere in the eᰔicient operation of the wholesale power

market. Northwest utilities are already in the process of forming an independent transmission grid

operator, called IndeGO. The purposes of the independent transmission grid operator are to ensure

adequate separation of generation and transmission and to align incentives to ensure eᰔicient and

reliable operation of transmission. Bonneville is participating in the IndeGO discussions and has already

administratively separated its transmission activities from its energy marketing. Further development of

IndeGO will continue regardless of the Comprehensive Review.

Given the strong federal policy commitment to a competitive wholesale power market and an

intensifying need for federal revenues, it is likely that without strong regional support for a diᰔerent

outcome, Bonneville's electricity eventually would be sold at market prices. Further, the incongruity of a

federal agency as a full participant in a competitive market could result in limitations on Bonneville's

market presence. This could be accomplished in many diᰔerent ways, including auctioning the power,

requiring Bonneville to market its power at prices that are tied to a market index, or limiting Bonneville's

marketing of products and services. However it is done, any cost-based regional benefits that are derived

from public or regional preference are likely to be reduced.

Current electricity policy at the federal level reserves retail market competition decisions to the states.

However, recent congressional initiatives leave the degree of future state control in question. In any case,

the pressure for retail access and its momentum are not in question. In the absence of either fairly strong

federal legislation or coordinated regional policy, individual states are likely to move at diᰔerent rates

toward various forms of retail access policy with large power consumers tending to get first access.

Unless adequate safeguards are in place to ensure that the owners of monopoly distribution systems

cannot unfairly influence consumers' retail energy service choices, the development of competitive retail

energy service markets for all consumers will be inhibited. Inconsistent policies among states within an

integrated electricity market will lead to market advantages for some areas, a less eᰔicient market, and

arbitrage opportunities for electricity traders and marketers.
Utilities under competitive pressure to retain their customers will find it diᰔicult to support the various

social and environmental goals they have supported in the past. Competitive markets will support some

social and environmental activity, and recent legislative proposals in Congress suggest that some

programs could be mandated at the national level. However, absent action to place the funding of such

activities with the separate and regulated elements of the market (transmission or distribution),

emphasis on conservation, renewable energy sources and low-income support will decline. The greater

the diᰔerences among states and utilities in the funding of these activities, the more distorted and less

eᰔicient will be the electricity markets.

The "base case" just described has some undesirable features. However, the region has the ability to

manage the transition to competition to avoid or mitigate the undesirable features if it can reach

consensus on the key features of the energy system.

The Comprehensive Review

The governors of Idaho, Montana, Oregon and Washington convened the Comprehensive Review of the

Northwest Energy System to seize opportunities and moderate risks presented by the transition of the

region's power system to a more competitive electricity market. The governors appointed a 20-member

Steering Committee that is broadly representative of the various stakeholders in the power system to

study that system and make recommendations about its transformation. The members of the Steering

Committee are listed in Appendix B. Each governor has a representative on the Steering Committee to

make certain the public is educated about and involved in the Comprehensive Review. In establishing the

review, the governors stated:

"The goal of this review is to develop, through a public process, recommendations for changes in the

institutional structure of the region's electric utility industry. These changes should be designedto

protect the region's natural resources and distribute equitably the costs and benefits of a more

competitive marketplace, while at the same time assuring the region of an adequate, eᰔicient,

economical and reliable power system."

Since January 1996, the Steering Committee has held 30 day-long meetings. In addition, almost 400

people have been involved in more than 100 meetings of various work groups reporting to the Steering

Committee. Hundreds of citizens attended the 10 public hearings that were held throughout the region

on the Committee's draᴄ report. More than 700 written comments were received. This report is the

product of that work. It is a recommendation for restructuring the Northwest electricity industry to meet

the challenges and seize the opportunities inherent in the competitive transition.

SUMMARY OF RECOMMENDATIONS
The main features of the recommendations of the Steering Committee of the Comprehensive Review of

the Northwest Energy System are summarized in the following sections. More detailed discussion of the

recommendations is presented in the following chapters. For purposes of organization, this report is

presented in six main topic areas: federal power marketing; governance of the Columbia River system (a

related topic to federal power marketing); conservation, renewable resources and low-income energy

services; consumer access to the competitive market; transmission; and future power system roles for a

four-state regional body. Issues related to federal power marketing; conservation, renewable resources

and low-income services; consumer access to the competitive market; and transmission were analyzed

and discussed in work groups during the review process. Although described as distinct parts, this is an

integrated set of recommendations, the parts of which are interdependent.

Federal Power Marketing — the Bonneville Power Administration

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 Bonneville's

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

is also intended to be consistent with emerging competitive markets and regional transmission solutions.

The mechanism proposed to accomplish these goals is a subscription system for purchasing specified

amounts of power at cost with incentives for customers to take longer-term (15 to 20 year) subscriptions.

Public utility customers with small loads would be able to subscribe under contracts that would

accommodate minor load growth. Subscriptions would be available first to regional customers in a

specified multipart priority order, starting with preference customers, then the direct service industrial

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

currently participating in Bonneville's residential exchange, followed by other regional customers. Nonregional customers could subscribe aᴄer in-region customers. Within each phase of the subscription

process, longer-term contracts would have priority over shorter-term contracts if the system is

oversubscribed.

Longer-term subscribers would have the right to purchase power at cost for the term of the contract.

While the cost of the power from the federal system is currently somewhat above market prices, the costs

are generally expected to be below market prices in the future. Short-term subscribers also get the right

to purchase power at cost. If they wish to be assured the ability to renew their contracts at cost, they

must pay an option fee for the term of their contracts to compensate the U.S. Treasury for the risk of

shorter-term contracts. A sliding-scale option fee, ranging between 2 mills per kilowatt-hour for a fiveyear contract to 0 mills for a 15-20 year contract has been proposed.

The longer-term subscribers assume more risk than current Bonneville customers from the eᰔects of

year-to-year variations in weather, future power system cost increases and changes in market conditions.
For example, if we were to experience lower than expected market prices that are below Bonneville costs

for an extended period of time, the subscribers would still be obligated to pay Bonneville's costs. At the

end of their subscription period, short-term subscribers would be able to let their subscriptions lapse and

buy at market prices. If they let their subscriptions lapse, however, they would not be able to buy at cost

in the future, should that become desirable.

The Steering Committee recognizes Bonneville's existing fish and wildlife obligations and intends that

none of its recommendations aᰔect existing trust obligations or treaty rights. The Steering Committee

further recognizes that the region will need to provide most of the required fish and wildlife funding, but

supports assistance and cost sharing by the federal government. The Committee recommends detailed

multiyear fish and wildlife budgets be developed in government-to-government consultations by federal,

state and tribal authorities. These budgets would be incorporated into Bonneville rate projections,

allowing shorter-term customers certainty regarding fish and wildlife costs. If market prices are above

costs, the Treasury would share in these benefits by getting some percentage of the diᰔerence between

market prices and the cost. The Treasury's share would be applied to accelerate repayment of the federal

debt.

Competition raises the possibility of stranded costs — previously incurred fixed costs that cannot be

recovered at market prices. If successfully implemented, the subscription system should greatly reduce

the possibility of Bonneville experiencing any stranded cost. However, if unmitigable stranded costs

remain, a mechanism for recovery of those costs will be required.

Subscribers may resell power in cases of loss of load and/or to the extent allowed by existing law. Other

commercial transactions by the subscriber would not disqualify the purchase of federal power. The

benefits of purchases for residential and small farm customers of exchanging investor-owned utilities

should be passed on to end users.

The recommendations would have the eᰔect of disposing of much if not all of the firm power available

from Bonneville on a long- or intermediate-term basis. The fact that most of Bonneville's power would be

subscribed at cost would limit Bonneville's market role. Any remaining firm power and other power

products would be sold at Federal Energy Regulatory Commission (FERC)-regulated prices or at

competitive prices, where FERC determines that competitive markets exist. To the extent consistent with

its obligation to repay Treasury, Bonneville should return to its historic role of marketing power

generated by the Federal Columbia River Power System, rather than becoming an aggressive marketer of

products and services in the emerging competitive power market. Bonneville should develop a

quantitative marketing plan. The plan should be presented to a transition board reporting to the

Governors.
In addition, it is recommended that Bonneville would not acquire resources to serve its customers' load

growth except on a direct bilateral basis where the customer takes on all the risk of the acquisition.

Similarly, it is proposed that Bonneville would not sell directly to new retail loads, beyond the existing

direct service industry loads, although it may sell through intermediaries whose transactions would be

subject to state or local jurisdiction.

The Committee recommends that the governors of Idaho, Montana, Oregon and Washington appoint a

transition board to oversee implementation of these and other recommendations. In particular, the

board should periodically determine whether the subscription process is making adequate progress or

whether another approach is necessary.

Columbia River System Governance

The Steering Committee concluded that we cannot expect to achieve both the degree of cost stability the

electricity industry requires to maintain the benefits of the Columbia River power system for the region

and achieve sustainable fish restoration unless we ensure predictability, accountability and eᰔective

governance for the fish and wildlife interests of the river. In short, an eᰔective conclusion of our eᰔort is

not possible without an improved system of river governance that pursues fish restoration as a high

priority.

The Steering Committee was asked by the Northwest governors to focus on the restructuring of the

electricity system and to address the financial stability of the federal power system. The Committee has

done our best to recommend changes to the federal system that accomplish that goal. It fully recognizes

that there are other important, related issues and decisions, including those aᰔecting fish and wildlife,

that must be resolved before a truly comprehensive package can be achieved.

The Steering Committee considered a number of matters related to the governance of the river and the

power system. The role of the Northwest Power Planning Council in river governance was not addressed,

but needs to be. The Governors should hold the Council or its successor accountable for ensuring that the

region is making the most cost-eᰔective use of fish and wildlife funding. River governance is a

fundamental part of any eᰔective response to changes in the electric utility industry. Until governance

deliberations move forward through a government-to-government consultation among federal, state and

tribal authorities, the prospects for a consensus on the regional response to utility restructuring are

diminished and controversial. The Steering Committee requests the governors to initiate a broadly based

discussion of improvements in river system governance that would provide more eᰔective decisionmaking for this complex ecosystem and all of its competing uses.
Conservation, Renewable Resources and Low-Income Energy

Services

The Northwest electric utility industry has a long and successful history of developing cost-eᰔective

conservation and supporting the development of renewable electricity sources, such as wind,

geothermal and biomass energy. In addition, the utilities have played a major role in delivering

weatherization to low-income households and helping low-income households with their energy bills.

Competitive pressures, however, are expected to make significant changes in the ways utilities carry out

these activities in the future. The goal of the Steering Committee's recommendations is to provide for

maximum local control in the implementation of conservation, renewables and low-income energy

services, while establishing an eᰔective minimum standard that ensures stable funding for these

purposes.

To ensure that cost-eᰔective conservation, renewable resource development and low-income

weatherization are sustained during the transition to competition and beyond, the Steering Committee

recommends that by July 1, 1997, and annually thereaᴄer for a period of 10 years, 3 percent of the

revenues from the sale of electricity services in the region ($210 million in 1995) be dedicated to those

purposes. Aᴄer 10 years, this commitment should be re-evaluated. Three percent of revenues is roughly

65 percent of what was spent for these purposes by the region's utilities and Bonneville in 1995.

The Steering Committee recommends that by July 1, 1999, each of the Northwest states enact legislation

that ensures that all electric utilities operating within its borders are meeting the minimum standard for

investment in the development of conservation and renewable resources and provision of

weatherization and energy-eᰔiciency services to low-income consumers. Utilities should demonstrate

compliance with the minimum standard by July 1, 1999. Public utilities may satisfy the standard in

aggregate. If this minimum standard is not being met, the legislation should provide for the assessment

of a uniform system benefits charge that ensures the collection and investment of funds for these

purposes. Due to the rapid emergence of competitive pressures, the Committee strongly recommends

prompt legislative action. Legislation implementing these requirements should be implemented

simultaneously with open retail access.

The Steering Committee proposes that between two-thirds and five-sixths of the funds be retained by

local distribution utilities to carry out locally initiated cost-eᰔective conservation, low-income

weatherization and energy-eᰔiciency services and renewable energy projects. Conservation projects

implemented and funded by large consumers should be credited against the local conservation target,

not including low-income energy-eᰔiciency services. Local utilities would also oᰔer, or allow other

electricity service providers to oᰔer, "green" power to their consumers — power from renewable

assistance energy sources. The Steering Committee recommends that utilities maintain their current
level of low-income energy assistance until states adopt alternative mechanisms for providing these

services. The report recognizes and aᰔirms the energy system's historic role in providing energy

assistance and proposes that states now provide this assistance by establishing a "Universal Electrical

Service Fund" to provide energy bill assistance. This fund could be supported by federal Low-Income

Home Energy Assistance Program (LIHEAP) funds, state or local government funds, other funds and/or by

a retail distribution system access fee or meters charge.

Some conservation and renewable resource activities benefit from regional planning and coordination.

Consequently, it is proposed that between one sixth and one third of the funds be used by a regional nonprofit entity with utility, government, consumer and public interest membership. Its functions would be

to bring about changes in the markets for targeted energy-eᰔiciency products and services that will

improve their market share; to plan and contract for research and limited demonstration of renewable

energy technologies, and to support the development of several megawatts annually of renewable

generating capacity. A regional technical forum would be established to track regional progress toward

the achievement of regional goals and provide feedback and suggestions for improving the eᰔectiveness

of conservation and renewable resource development programs. Funding for these activities should be

collected in part through Bonneville wholesale rates to the extent regional firm loads are served by power

from Bonneville.

How the funds are collected is a matter for state or local decision, as appropriate. The Steering

Committee expects that methods of collection that are competitively neutral and aᰔect all participants in

the market equally will be found to be preferable.

Consumer Access to the Competitive Market

The goals of the recommendations on retail markets and customer choice are to encourage a more

eᰔicient power system, lower electricity costs, increased product choice and greater product innovation

for all consumers. These goals were adopted subject to a commitment to maintain the reliability and

safety of the electrical power system. The Steering Committee concluded that this goal could best be

accomplished by putting in place a competitive electricity market that is driven by consumer choice.

However, there is concern that the benefits of a competitive market may flow unevenly to diᰔerent

classes of consumers and that some small consumers may even suᰔer harm. The report recommends

safeguards intended to help mitigate these concerns.

The Steering Committee recommends that regulators and local utility boards and commissions oᰔer

open access for all customers that desire it no later than July 1, 1999. The Committee recognizes that

some of these regulatory bodies may choose to phase in full retail access. In these cases, a similar phasein of the recommendations on conservation, renewable resources and low-income energy services may

be eᰔected.
Direct access may occur prior to July 1, 1999, however, for direct retail access to be implemented

promptly, several activities must be accomplished. These include the identification of any stranded costs

and, if any stranded costs are determined to exist, the creation of a stranded cost collection mechanism;

unbundling and cost-based pricing of delivery services; pilot programs to explore aggregation for small

commercial and residential customers; the exploration of market index pricing options for residential

and small commercial customers; and implementation of public purposes funding, energy assistance

funding and consumer protection mechanisms consistent with this report's recommendations.

To achieve a competitive retail electricity market requires separation of the distribution and electricity

marketing functions of current retail utilities. This is necessary to ensure that consumers will have

unimpeded access to alternative electricity suppliers, and vice versa, over the wires of the distribution

utility. The distribution utility would continue to be a regulated monopoly responsible for the reliable

and safe delivery of electricity from electric service companies to consumers over local distribution wires.

Electricity service companies will oᰔer a variety of electricity products and services (e.g., firm or

interruptible power, power from renewable resources, peak or oᰔ-peak power, fixed or spot-market

prices) to consumers on a competitive basis and may, in fact, oᰔer other products unrelated to electricity

markets. The electricity services portion of current integrated retail utilities could compete in this market

if the distribution utility function is suᰔiciently separated from the electricity services business to ensure

that control of distribution is not used to advantage the electricity services business.

Putting such a competitive market in place will require a significant transition and ongoing market

maintenance procedures. There is a danger that, until competitive markets have fully developed for all

consumers, some of the benefits of increased competition may be realized primarily by large consumers

at the expense of small consumers. Therefore, the Steering Committee calls for active government

oversight of the transition and active ongoing programs to facilitate and encourage the development of

meaningful market access for all consumer classes and to prevent unwarranted cost shiᴄs among

consumer classes. Specifically, the policy calls for licensing of new electricity service providers,

applicability of consumer protection laws, formal complaint processes, consumer information programs,

and a "provider of last resort" to ensure continued aᰔordable service to all consumers. To further

minimize cost shiᴄs to small consumers, policies should be adopted to provide utilities a fair opportunity

to recover costs of previous investments that may be stranded by the opening of the market. This is

viewed as a transitional problem only, and incentives must be included for utilities to mitigate any

stranded costs they potentially face.

Transmission

Transmission is the "highway system" over which the products of electrical generation flow. If there is to

be eᰔective competition among generators, transmission facilities should be operated independently of

generation ownership. An independent grid operator (IGO) regulated by the Federal Energy Regulatory
Commission with broad membership, including Bonneville and the region's other major transmission

owners, is proposed as a means of ensuring independence of transmission operation and improving the

eᰔiciency of transmission operation. An independent grid operator should also have clear incentives to

maintain reliability and encourage eᰔicient use of the transmission system.

The independent operation of Bonneville's transmission facilities is particularly important to eᰔective

competition among generators in this region because Bonneville's facilities make up a large part of the

regional transmission system. To ensure this independence, it is recommended that Bonneville be legally

separated into two organizations — a power marketing organization to market the power from the

federal power system and a transmission organization to carry out the transmission functions. The

separation of these functions should be structured so that it does not jeopardize or diminish the legal

obligation and ability of Bonneville to meet fish and wildlife and other obligations. A separated federal

transmission owner (e.g., the Bonneville Transmission Corporation) could lease its assets to an

independent grid operator, or could be an independent grid operator and operate other participants'

assets if FERC and the other participants agree.

Legislation will be required to accomplish these goals. While legislation is under consideration,

Bonneville should move quickly to achieve as much administrative separation as possible, and to

participate in eᰔorts to form an independent grid operator that could operate both federal and nonfederal transmission assets.

Future Power System Role for a Four-State Regional Body

When the Northwest Power Act was passed in 1980, the authors contemplated an extended time of

electricity shortage and the need for increasingly costly large-scale power plants. The Northwest Power

Planning Council was established with two representatives from each of the Northwest states (Idaho,

Montana, Oregon and Washington) to provide the states and the public a role in determining the region's

future need for electricity and how that need could best be met. The Council was also charged with

furthering the goals of: encouraging conservation and renewable resources; helping assure an adequate,

eᰔicient, economical and reliable power system; providing environmental quality; and protecting,

mitigating, and enhancing the fish and wildlife of the Columbia Basin.

The Power Planning Council has been credited with many improvements in electricity planning.

However, in an era in which market forces will play the primary role in determining what plants are built

and what can be charged for their output, the Council's resource acquisition planning role is no longer

relevant. The Steering Committee believes, however. that the remaining goals are still important to the

citizens of the region. The issue is how they are to be achieved in the context of a competitive market.
There is much that is unknown about the competitive future we are about to embrace. As the Northwest

transitions toward a competitive electricity industry, there are roles that the region would want carried

out by a regional body. These roles do not involve resource acquisition planning, regulation or

implementation. They do involve monitoring and analyzing the transition to a competitive electricity

market and informing policy-makers and the public. This will help ensure that the transition to a

competitive market is accomplished eᰔiciently and fairly throughout the region and that the public

values the Northwest has sought from its power system are preserved and enhanced.

These roles include:

Conservation and Renewables — working with regional interests to devise ways of overcoming market

barriers, participating in market transformation activities, providing guidance in meeting the region's

conservation and renewable goals and working with the regional technical forum to track regional

progress;

The Competitive Marketplace — providing information, evaluation and analysis of the evolving

marketplace to ensure full, fair and eᰔective competition throughout the region; and

Public Participation and Involvement— informing and involving interested members of the public on

matters that aᰔect them, their environment and their economy.

The funding of the Northwest Power Planning Council has been through a charge on Bonneville Power

Administration rates. If federal legislation aᰔecting the role of the Northwest Power Planning Council or a

similar regional body is pursued, the question of the level and sources of the funding should be

addressed.

FEDERAL POWER MARKETING: THE BONNEVILLE POWER

ADMINISTRATION — ADAPTING TO A COMPETITIVE

ENVIRONMENT, PRESERVING THE BENEFITS OF LOW-COST

HYDROPOWER FOR THE NORTHWEST

Goals

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.

Background

Bonneville is a federal power marketing agency charged with marketing the power output of the federal

dams on the Columbia and its tributaries. It is a wholesale supplier, marketing power to utilities that, in

turn, sell power to retail consumers. The only exceptions are the direct service industries, which

historically have been served directly by Bonneville. On average, Bonneville markets about 40 percent of

the firm power in the Northwest and substantial, but varying, amounts of nonfirm power. Bonneville is

required to sell its firm power (the power that can be counted upon even under poor water conditions) at

cost under contracts to public agency customers (e.g., municipal utilities, public utility districts,

cooperatives), residential and small farm customers of utilities that are not public agencies, and direct

service industries. Only when it cannot sell all its power within the region is it allowed to market outside

the region. As a result of the Northwest Power Act of 1980, Bonneville also has the responsibility of

acquiring new resources to meet the loads of those customers that choose to place their growing load

requirements on Bonneville.

Historically, Bonneville has been a low-cost supplier of electricity. In recent years, however, Bonneville's

power has lost its price advantage. This has been the result of a combination of factors, including low

natural gas prices, surplus generating capacity on the West Coast, the opening of the competitive

wholesale electricity market and the resulting decline in electricity prices. Bonneville has also

experienced increased costs resulting from requirements for salmon recovery, resource acquisition costs

and other factors. Bonneville's ability to reduce costs is hampered by the fact that a large part of its costs

are fixed. These fixed costs include repayment of debt to the U.S. Treasury for the construction of the

hydroelectric and transmission systems and repayment of the debt for three Washington Public Power

Supply System nuclear power plants.

The opening of wholesale electric competition has put great stress on Bonneville. Bonneville's utility and

direct service industry customers now have a greater degree of choice under amended or new power

sales contracts, and current power sales contracts will expire in 2001. Bonneville has been struggling to

determine its future competitive role and to secure suᰔicient sales to cover its costs and make its

payments to the Treasury and the Supply System. The ultimate risk, should Bonneville be unable to cover

its costs, lies with the Treasury. While this is occurring, many of Bonneville's traditional customers,

particularly those without generating resources, continue to look to the agency as their primary or

exclusive power supplier.
In the future, however, conditions are likely to change. Many industry observers expect that gas prices

and the market price of electricity will eventually rise. In addition, Bonneville's fixed costs can be

expected to fall as debt is paid oᰔ. When this happens, the price of Bonneville's power would be very

attractive. Whether the Northwest will be able to retain these future benefits has been brought into

question, in part due to legislation that would sell federal power marketing agencies. Even if Bonneville is

not privatized, the revenues that a low-cost power producer could generate could be very attractive to

future Congresses, particularly if the Treasury has been called upon to bear the risks of that power

producer when conditions were not so favorable. In this context, a long-term solution that retains the

benefits of the system in the Northwest would be highly desirable.

Finally, there is the question of the appropriate role of a federal agency in a competitive market. Right

now, Bonneville is struggling to compete. In the longer-term, as restructuring proceeds and the electricity

industry becomes more and more competitive, the question may no longer be "can Bonneville

compete?" but "should Bonneville compete?"

Recommendations

Summary

The Steering Committee recommends the institution of a subscription-based system for marketing the

electricity produced by the federal system. The subscription process would maintain the principles of

public and regional preference to the output of the Bonneville system at cost. The recommendation is

designed to facilitate a fully competitive bulk power market and freedom of action by customers.

Simultaneously, it is intended to better balance risk and rewards among customers, Bonneville and the

U.S. Treasury. The subscription system is central to aligning the risks and benefits of the federal power

system, and to reducing the risk faced by the Treasury. Treasury currently faces the risk of market prices

below cost, but does not receive the benefit when market prices are above costs.

Subscribers would contract to purchase power from the system at cost, take or pay, for the period of their

subscriptions, including periods similar to what the region is now experiencing when costs are above

market prices. Subscribers would also be able to purchase at cost when costs are below market levels.

The power product contracted for could vary depending on the requirements of the customer.

Bonneville would not acquire additional resources to serve load growth except on a bilateral contract

basis, where the customer absorbs the risk. However Bonneville could oᰔer short-term products and

services that are responsive to variations in loads from planning estimates to those customers willing to
pay for such services. Bonneville would not sell directly to new retail loads, beyond the existing direct

service industry loads. Moreover, if the system is fully subscribed, there would be no need for Bonneville

to market to retail loads.

No remedy is possible unless Bonneville can eᰔectively manage and control its costs. In this

recommendation, subscribers would gain advisory influence over power-related costs and would have

the ability to call for binding arbitration on certain cost issues under their contracts.

Several provisions of the subscription process are specifically intended to provide benefits to the

Treasury and preclude the need for stranded cost mechanisms. However, to the extent that unmitigable

stranded costs remain, then a mechanism to recover these costs will be required.

The Committee recommended a transition board appointed by the governors, to oversee the

subscription process and report to the governors on its prospects for success, among other potential

tasks.

Disposition of Federal Power

Long-term subscriptions provide stability to Bonneville, the Treasury and customers. However, a number

of customers, particularly those without generating resources, may want to contract for much of their

load in shorter-term intervals as they make the adjustment to new competitive markets.

The core or basic product of federal power marketing is energy from the federal system. Depending upon

limitations of availability, contracts for this product should be available to regional customers at cost.

Customers may then purchase other services that are individually priced by Bonneville to change this

energy into a product that meets their needs, or alternatively they may provide it themselves. In addition,

customers may be willing to purchase the energy for diᰔering periods of time or with diᰔerent obligations

placed on Bonneville. This aᰔects the degree of risk the Treasury is absorbing, and in turn should be

reflected in the price the customer is required to pay.

One product could be provided for customers with predictable loads, or ones that acquire load shaping

services from another entity. Alternatively, Bonneville would oᰔer a take-and-pay arrangement for

customers that want to rely upon Bonneville to serve their actual monthly loads. The latter service would

cost more in order to cover the revenue uncertainty that Bonneville would face as a consequence.

Long-term subscribers get the right to purchase power at cost for the term of the contract, up to 20 years.

While the cost of the power from the federal system is currently somewhat above market prices, the cost

is generally expected to be below market prices in the future. For potential subscribers to make a longterm commitment to Bonneville, particularly at a time when the agency's rates are above market,
Bonneville needs to take actions that push the envelope of cost reductions. In addition to the agency's

own initiatives in reducing costs, long-term contracts need to be structured in a manner that is very

explicit regarding the limitations on the customer's obligation to pay.

Short-term subscribers also get the right to purchase power at cost, paying the same general costs as the

long-term customers. For at least the short-term following 2001, renewable contracts of shorter duration

place an element of potential risk on the Treasury, associated with customers leaving if Bonneville costs

became significantly higher than market. Because of this, the short-term subscribers are required to pay

an option or subscription fee if they want to reserve the right to re-subscribe at cost aᴄer the contract

expires. The option fee would enable the customer to either extend the cost-based contract, or to reduce

or terminate loads on Bonneville at the end of the existing contract commitment. The option fee is a

premium payment reflecting the risk to the system and to the Treasury of shorter-term contracts. A

customer also has the choice of purchasing cost-based power without paying an additional option fee

under the initial oᰔering. However, at the end of that customer's purchase term, that customer will be

able to purchase power from Bonneville only at market-based rates. This further purchase ability does

not imply preferential access at market prices.

The option fee should be priced to reflect its value, while at the same time not making it economically

and competitively prohibitive. Using a range of market conditions and assumptions regarding Bonneville

costs, Bonneville and the Northwest Power Planning Council have identified a sliding scale option fee

ranging from 0 mills/kilowatt-hour for long-term (i.e., 15- to 20-year) contracts to 2 mills/kilowatt-hour for

five-year contracts. Bonneville should prospectively develop competitively priced tools that balance risks

and rewards between shorter-term and longer-term load commitments and that reflect the overriding

purpose of compensating the Treasury for the risk associated with shorter-term contracts. Short-term

subscribers could continue to purchase short-term in the future by purchasing subsequent option fees, or

they could convert to long-term contracts without subsequent option fees.

The subscribers assume a greater level of risk than in the current system. For example, if the region were

to experience lower than expected market prices that are below Bonneville costs for an extended period

of time, the long-term subscribers would still be obligated to pay Bonneville's costs. Short-term

subscribers would be able, at the end of their subscription period, to let their subscriptions lapse, but

may elect to stay, hoping to realize the longer-term savings associated with the system. There would be a

higher level of annual probability of Treasury payments, placing more risk on the subscribers from the

eᰔects of year-to-year variations in weather, future power system cost increases (e.g., the cost of

generator rewinds and other necessary maintenance and upgrades) and changes in market conditions.

The process for the disposition of federal power should be completed by 2001, so that the results can be

in place when Bonneville's existing contracts expire. The term of the contracts would be determined by

the individual subscribers, during their initial subscriptions for firm power. Although 20 years would
provide maximum contract certainty for Bonneville under current law, it is in the agency's best interest

not to have all contracts expire at the same time, as is the case in 2001. Firm power would be subscribed

for by month with appropriate ancillary delivery services. Any remaining firm power and other products

should be sold at prices regulated by the Federal Energy Regulatory Commission (FERC) or at competitive

prices, where FERC determines that competitive markets exist, and revenues should be used to reduce

costs to the subscribers.

At the end of a contract, whether long or short-term, the purchaser has a right of first refusal to renew the

contract for subsequent periods so long as the appropriate option fee has been paid. The initial

subscription, and any subsequent ones, would follow a specific priority order. Any power that is freed up

as a result of non-renewal of contracts would be oᰔered to others at cost through the same priority

structure described below.

Priority for Subscriptions

The priority order for subscriptions would be implemented in a sequential multiphase process.

Customers could elect to split their subscriptions between long- and short-term contracts. The phases

are structured so that publicly owned utilities get first priority; direct service industries and

representatives of residential and small farm customers of investor-owned utilities get second priority;

other regional customers, such as representatives of investor-owned utility commercial and industrial

customers, get next priority; and non-regional customers get last priority. Within this overall framework,

there is an emphasis on long-term subscriptions, so that, to the extent there is a conflict due to oversubscription within a phase, subscription term would be the tie-breaker, with the longer-term having

priority. Customers having long-term contracts or those that paid an option fee should have broad rights

to extend, renew or convert their contracts to longer-terms, up to 20 years, at any time during the

contract life, independent of the length of the existing contract, provided at the time of renewal they

have a qualified load.

Phase 1

In the first phase, loads of regional public utilities and cooperatives would subscribe with no limitations

on the term, within the current 20-year maximum. The first phase would be reserved for publicly owned

utilities to subscribe up to the average of the contractual entitlements of the highest two consecutive

years of the 1997-2001 contract period, plus some provision for minor load growth of small fullrequirements utilities representing in the aggregate no more than 1,000 average megawatts of Bonneville

load. Additional load growth of these small utilities and the load growth of other public utilities may be

met through bilateral contracts or tiered rates.

Phase 2
During the second phase, the direct service industries and the residential and small farm customers of

the investor-owned utilities (through their representatives, described below) would be allowed to

subscribe with no limitations on term, within the current 20-year maximum. The direct service industries'

subscriptions would be limited by the average of the contractual entitlements of the highest two

consecutive years of the 1997-2001 contract period. Each investor-owned utility customer subscription

would be limited by the average total actual regional exchange load of its residential and small farm

customers, again, in the two highest consecutive years between 1997 and 2001. If there is oversubscription, subscription term will serve as the tie breaker, with the longer-term having priority.

For the purposes of the subscriptions, investor-owned utility residential and small farm customers could

be represented by investor-owned utilities or other entities that serve Northwest residential or small

farm loads, as certified by state regulators. The benefits of purchases for these customers should be

passed through to the end users.

Phase 3

The third phase would be for other regional wholesale and direct service industry loads. Each

subscription is limited by the subscriber's total regional load. To the extent there is over-subscription in

this phase, longer-term subscriptions will have priority.

Phase 4

In the fourth phase, Bonneville could sell to regional wholesale and direct service industry loads at

market prices for those who wish to buy only at market prices in the future. In addition, Bonneville could

sell "excess" federal power for periods up to seven years to out-of-region customers. "Excess" is a defined

term in recent legislation. Power sold in this phase would be sold subject to current law. As a principle,

the Steering Committee believes that in-region customers of Bonneville should have the ability to secure

non-recallable Bonneville contracts of a time period at least equal to out-of-region customers of

Bonneville.

Subsequent Subscriptions

To the extent firm power becomes available as a result of non-renewal of contracts, the remaining power

will be oᰔered through the same multiphase process described above. Customers that elect not to

subscribe to Bonneville, or that subsequently allow short-term subscriptions to lapse would be served at

market prices in the future. Contracts subject to recall for public preference under current law would be

subject to recall only for loads of new public utilities and aᴄer a waiting period of up to five years from

formation of the utility, depending on the availability of power.

Resale of Power
Subscribers may resell the power for which they have subscribed for the remaining term of the contract

in cases of loss of load and/or to the extent allowed by existing law. Power will be considered to be

delivered to regional loads if, at the time of delivery, the subscriber serves qualifying loads equal to or

greater than the amount delivered. Other commercial transactions by the subscriber should not

disqualify the purchase of federal power.

The Exchange

As a result of the Northwest Power Act of 1980, Northwest utilities have the right to sell to Bonneville an

amount of power equal to that required to serve their residential and small farm customers at the

utilities' average system costs and receive an equal amount of power at Bonneville's average system cost.

In reality, this is an accounting transaction. No power is actually delivered. This was intended to be a

mechanism to share the benefits of the low-cost federal hydropower system with the residential and

small farm customers of the region's investor-owned utilities. As a result of decisions made by Bonneville

in its most recent rate case, those benefits have been reduced. The Steering Committee acknowledges

that the residential and small farm consumers of exchanging investor-owned utilities will be adversely

aᰔected by the reduction of exchange benefits. Congress intervened for one year to stabilize the

exchange benefits. However, on October 1, 1997, there will be rate increases to the residential and small

farm customers of the exchanging utilities. The Steering Committee encourages the parties to continue

settlement discussions and to explore other paths to ensure that residential and small farm loads receive

an equitable share of the benefits of the federal base system.

Fish and Wildlife

The Steering Committee recognizes that fish and wildlife restoration and mitigation obligations exist and

expressly intends that none of its recommendations should be implemented in a way that alters,

amends, diminishes or repeals the trust obligations of the federal government, or the treaty and other

rights of the tribes, including those rights associated with tribal hunting and fishing, water and other

natural resources.

The Committee recognizes that the cost of additional fish and wildlife restoration investments beyond

those currently contemplated in the fish and wildlife Memorandum of Agreement is unknown. Additional

costs could be incurred, particularly if measures are undertaken to restore historic river conditions in

some segments of the Columbia River Basin. The Committee believes that the region will need to provide

the bulk of those fish and wildlife restoration funds. At the same time, the Committee emphasizes the

importance of an energy industry restructuring package that shares the future benefits of the power

system among the parties in the region. The Committee believes that the federal government should

provide additional assistance and share the costs in the restoration eᰔort, particularly given the
provisions of the U.S./Canada Pacific Salmon Treaty, the Endangered Species Act and the fact that federal

land and water management practices have had an adverse eᰔect on fish and wildlife populations that

are being protected and restored with regional ratepayer funds.

The Committee further recommends that flexible, but detailed, multiyear fish and wildlife budgets are

essential to the accountability and fiscal management of the restoration eᰔort and should be developed

in government-to-government consultations by the federal, state and tribal sovereign governments on a

rolling five-year basis. Budgets of this kind will help discipline the restoration eᰔorts and will help provide

relative certainty for the power system and fish and wildlife managers.

This recommendation assumes that suᰔicient information will be available before 2001 to prepare a fiveyear fish recovery budget, and that the input from this process could be incorporated into Bonneville rate

projections. This process should provide shorter-term customer certainty regarding fish costs, and the

opportunity for fixed five-year rates, as Bonneville is currently oᰔering through 2001.

Ownership Benefits for the U.S. Treasury

Currently, the overall "risk taker" regarding Bonneville's responsibility to meet financial targets is the U.S.

Treasury, as the recipient of annual debt payments from Bonneville. To the extent that Bonneville secures

revenues to cover all costs including Treasury payments, there is no incremental risk to the Treasury.

However, in the event that Bonneville's revenues are not suᰔicient to cover its costs, including Treasury

obligations, the shortfall would be handled as a deferral of any diᰔerence between the Treasury

obligation and the actual payment.

It is financially unstable and politically undesirable to anticipate a federal power marketing agency

operating in an environment in which the Treasury faces excessive financial risk and/or a probability that

there will be a deferral of obligations on a recurring basis.

During the last 13 years, Bonneville has not deferred a Treasury payment. Also, with newly adopted rates,

Bonneville is not projecting a deferral for the five-year period through 2001. However, the amount of

money involved is significant, which in turn makes the risk to the federal government significant.

Between 2002 and 2006 Bonneville is scheduled to pay a total of $2.063 billion to the Treasury, with a net

present value of $1.661 billion. Over a 25-year period, these amounts are $11.848 billion, with a net

present value of $5.029 billion.

Bonneville faces in 2001 an environment in which customer contracts expire, markets may be lower than

agency costs and there is uncertainty regarding fish mitigation costs. In the longer-term, market

conditions should change to Bonneville's favor, but not necessarily by 2001. A solution needs to be found
that both improves Treasury's position from the status quo, and over time oᰔers an incentive to the

federal government to continue operating Bonneville. Four actions are recommended to address this

situation.

1. As referred to in other sections, Bonneville needs to pursue all actions possible in the short-term to

cut costs, thereby giving the agency the best opportunity to either meet or come close to competitive

market prices with cost-based products, thereby retaining a strong customer base.

2. To the extent that there is a deferral of any portion of the Treasury payment in any year, this should

become an immediate repayment obligation when Bonneville's costs fall below market. When

Bonneville has an opportunity to adjust rates and there is a projected positive difference in

Bonneville's favor between market and cost, the next set of rates would remain at market for a

sufficient period to fully recover any obligations that had been deferred from the previous period.

3. As described in the section on "Disposition of Federal Power," shorter-term subscriptions will pay an

option fee or other higher price that would prospectively reimburse the Treasury for losses or

deferrals due to the short term of the subscriptions. This revenue should be used by Treasury to

accelerate repayment of Bonneville's debt.

4. When Bonneville's cost-based rates are below market, customers would agree that subsequent rates

would contain an additional share of the difference between an indexed market rate and cost-based

rates. This share would be paid to Treasury as a "repayment acceleration payment" as a supplement

to each annual obligation. The customers still benefit to the extent that these funds are being applied

against Bonneville Treasury payments, which will reduce their future costs over time. The U.S.

Treasury benefits in that it is receiving cash that is otherwise not due until a future date. This

provision would apply to the extent that market prices exceed cost-based rates where the costs

include any repayment of past deferrals due to the previous provisions.

Stranded Cost

The Committee believes that the recommendations in this report, prudently implemented, should

dramatically reduce any risk that Bonneville would need to seek stranded cost recovery. Nevertheless,

Bonneville, like other Northwest utilities, faces the prospect of load loss due to increased competition

associated with greater customer choice at the wholesale and retail levels. It is this Committee's

expectation that Bonneville will do all that it can to manage its costs and take other appropriate actions

to avoid a stranded cost charge. However, to the extent unmitigable stranded costs remain, then a

mechanism to recover these costs will be required.

Customer Advisory Committee
Customers, particularly those signing up for long-term commitments, need to have an eᰔective

mechanism to assure them that Bonneville's revenues and costs over time reflect the intent of their

power sales contracts. Existing federal legislation allows for appointments of advisory committees to

assist agencies such as Bonneville, without exercising formal governance responsibilities. The Bonneville

administrator would continue to report to the Department of Energy, but would receive strong customer

input through an advisory committee. The committee would consist mainly of subscribers, but also

would include representatives of other interests. The committee would review Bonneville's budget

requests, overall capital budgeting levels and operating cost levels, rate setting, key marketing issues,

and provide input into the power-related capital and operating cost decisions of the Corps of Engineers

and the Bureau of Reclamation. The committee would provide input to decision-making authorities on

fish-related matters. However, final decisions regarding fish measures should remain squarely within the

purview of the existing or future mechanisms for river governance.

Although the advisory committee should be helpful in establishing policy direction for the power

operations of Bonneville, it is not the primary or exclusive mechanism for subscribers to determine their

business relationship with Bonneville. New power sales contracts will define the nature of the business

relationship between Bonneville and individual customers. These contracts will have common features

and unique characteristics depending upon the types of services the customer is buying from Bonneville.

It is proposed that the contracts contain an ability for subscribers to call for binding arbitration on

specific power cost-related items that do not aᰔect implementation of fish recovery measures.

Bonneville in the Competitive Market

Bonneville should plan to achieve suᰔicient net revenues from unsubscribed products to meet Treasury

payments and maintain cost-based rates to subscribers. Speculative risk to Treasury and subscribers

should be minimized. To the extent consistent with its obligation to repay Treasury, Bonneville should

return to its historic role of marketing power generated by the Federal Columbia River Power System,

rather than becoming an aggressive marketer of products and services in the emerging competitive

power market. A quantitative plan for marketing should be presented to the transition board described

below reporting to the four Northwest governors.

This recommendation would have the eᰔect of disposing of much if not all of the firm power available

from Bonneville on a long- or intermediate-term basis. The fact that most of Bonneville's power would be

subscribed at cost would limit Bonneville's market role. Any remaining firm power and other unbundled

power products would be sold at prices regulated by FERC or at competitive prices, where FERC

determines that competitive markets exist. This approach is intended to provide means for Bonneville to

meet its financial obligations, but Bonneville's role in competitive markets must be further defined to

respond to concerns about a governmental entity as a participant in these markets.
In addition, Bonneville would not acquire resources to serve its customers' load growth except on a direct

bilateral basis, where the customer takes on all the risk of the acquisition. However, Bonneville would be

making spot-market power purchases suᰔicient to: 1) supplement monthly firm hydro energy in meeting

current firm loads, and 2) store water for flow augmentation to help rebuild fish populations. This

recommendation distinguishes these spot-market purchases, which are not necessarily required to be on

a bilateral contract basis, from purchases to meet load growth, which are required to be on a bilateral

contract basis.

Finally, Bonneville would not sell directly to new retail loads, beyond the existing direct service industry

loads, though it may sell through intermediaries whose transactions would be subject to state or local

jurisdiction.

Governors' Transition Board

To ensure public accountability, regional acceptance and prompt implementation of the Committee's

recommendations, the governors should appoint a high-level board. This board shall be known as the

Northwest Energy Review Transition Board (../transitionboard/Default.asp). The Board should remain in

place until the recommendations of the Review are implemented or 2001, whichever is sooner.

The Board will work with regional interests and Bonneville in a public process to oversee the subscription

process and provide liaison with the Northwest congressional delegation and aᰔected constituencies.

The Board periodically should determine whether Bonneville and its customers are making adequate

progress on the subscription process or, if they are not likely to succeed on a timely basis, whether

another approach is necessary. The Board should periodically report its findings to the governors.

The Transition Board would review Bonneville's progress on the development of procedures for oᰔering

and pricing products and services, and Bonneville's role in the competitive market. The Board also would

assist the region in responding to federal legislation.

In addition, the Board should be responsible for making recommendations to assist in implementation of

the Review's recommendations.

COLUMBIA RIVER SYSTEM GOVERNANCE

Perhaps the central challenge the governors of our four states have given the Comprehensive Review is to

advise them as to how the many benefits of the Columbia River system can best be preserved. The

Steering Committee has struggled with this challenge and has made considerable progress. At a time

when the electricity industry is already engaged in monumental regulatory and related changes, the
challenges the river system faces bring an additional dimension of instability that is particularly

unsettling. The region cannot expect to achieve both the degree of cost stability the electricity industry

requires to maintain the benefits of the Columbia River power system for the region and achieve

sustainable fish restoration unless it ensures predictability, accountability and eᰔective governance for

the fish and wildlife interests of the river. In short, an eᰔective conclusion of the Committee's eᰔort is not

possible without an improved system of river governance that pursues fish restoration as a high priority

The Steering Committee was asked by the Northwest governors to focus on the restructuring of the

electricity system and to address the financial stability of the federal power system. The Committee has

done its best to recommend changes to the federal system that accomplish that goal. The Committee

fully recognizes that there are other important, related issues and decisions, including those aᰔecting

fish and wildlife, that must be resolved before a truly comprehensive package can be achieved. As the

governors consider the Steering Committee's recommendations, they should use the opportunity to

consult with the appropriate federal, state and tribal authorities and urge that the fishery issues are

moved forward with the same level of zeal and dispatch in a parallel process on the same schedule as

implementation of these recommendations. Addressing both power and fish concerns will help achieve a

consensus in the region that will benefit our eᰔorts as federal restructuring legislation advances.

The Steering Committee considered a number of matters related to the governance of the river and the

power system. The role of the Northwest Power Planning Council in river governance was not addressed,

but needs to be. River governance is a fundamental part of any eᰔective response to changes in the

electric utility industry. Until governance deliberations move forward in government-to-government

consultation among federal, state and tribal authorities, the prospects for a consensus on the regional

response to utility restructuring are diminished and controversial.

To ensure accountability, the governors should insist that the Council or its successor agency include in

its Columbia River Basin Fish and Wildlife Program a prioritized budget for investments in fish and

wildlife measures, including the relative priority of operational changes to the hydropower system. The

governors should hold the Council or its successor accountable for ensuring that the region is making the

most eᰔective use of available fish and wildlife funding.

For some, the issue of river governance appears as intractable as any the region has ever faced. However,

there is reason for hope. Many of the stakeholders have been working together in various forums. The

Committee believes consensus is possible and believes it is important to pursue it on a schedule that

ensures that the issue can be addressed expeditiously.

The Steering Committee requests the governors to initiate a broadly based discussion of improvements

in the river system's governance mechanisms that would provide for more eᰔective decision-making for

this complex ecosystem and all of its competing uses.
CONSERVATION, RENEWABLE RESOURCES AND LOWINCOME ENERGY SERVICES — REFLECTING THE VALUES AND

MEETING THE NEEDS OF NORTHWEST CITIZENS

Goals

Three clear goals are proposed for conservation, renewable resources and low-income energy services:

► Conservation — to ensure that all cost-effective electric efficiency opportunities are captured in a

manner consistent with increasingly competitive electricity markets.

► Renewable resources — to continue to develop renewable resources in the region.

► For residents of the Northwest who must live on limited incomes — to ensure low-income consumers

are adequately, affordably and fairly served in a competitive electricity market.

The Steering Committee believes that the goals for conservation and renewable resources should be

achieved by relying, wherever possible, on market forces to accomplish cost-eᰔective conservation and

renewable resources. However, the Steering Committee recognizes that the market for energy-eᰔiciency

services may not capture all cost-eᰔective conservation. Similarly, potentially valuable renewable

resource technologies, which are not currently economically competitive, may benefit from regional

investments that reduce their future costs. The Steering Committee also recognized that competitive

markets are unlikely to provide households with limited incomes with means to meet their basic

electricity services needs at the same level and quality they currently enjoy.

The Steering Committee is recommending that during the transition to a competitive electricity market,

the region's retail electricity suppliers should commit 3 percent of their retail energy service revenues

(estimated to be approximately $210 million in 1995) to facilitating the development of cost-eᰔective

conservation and appropriate renewable resource options, and sustaining appropriate low-income

energy services. The Steering Committee recommends that tariᰔs, rates or other fees imposed to collect

these funds be implemented simultaneously with implementation of open retail access.

The Steering Committee acknowledges the resolutions and letters of support for public purposes that

were submitted by the region's public utilities commenting on the draᴄ proposal. Committee members

urge these publicly-owned power systems to honor their commitments. The Steering Committee believes

that its recommendations provide for maximum local control while establishing an eᰔective minimum

standard that ensures stable funding for the public purpose recommendations.

Background
Conservation

For nearly two decades, electric utilities in the Northwest have been the dominant force behind the

development of conservation. The rationale for utilities' active pursuit of conservation stemmed from the

fact that, until quite recently, the cost of new power generation exceeded the price charged consumers

for electricity. Individual consumers were not paying the full cost of new generation, so acquiring new

generating resources to serve new loads raised everyone's rates. When utilities acquired conservation at

a lower cost than new generation, the total cost of electricity for all consumers was less.

Conservation faces a diᰔerent environment today than it did just a few years ago:

► The costs of new resources avoided by conservation are lower, leaving fewer conservation measures

cost-effective.

► Retail electricity prices for many consumers are currently above the marginal cost of new generation.

This means that these consumers have greater economic incentive to invest in conservation than do

utilities.

► Competitive pressures, particularly retail access, make it more difficult for utilities to include the cost

of conservation programs in their rates. If a utility adds the cost of conservation invested in one

customer's home or business to the rates charged to all its customers, some customers may seek an

alternative supplier whose costs do not include conservation.

Despite these changes, conservation that costs less than alternative sources of power remains available

for development in the region. For example, in its 1996 draᴄ power plan, the Northwest Power Planning

Council estimated that approximately 1,500 average megawatts of conservation would be cost-eᰔective

to develop in the region over the next 20 years. This is roughly equivalent to the electricity demand of a

city half again as large as Seattle. There is some controversy about these estimates. The Steering

Committee has not independently verified the Council's draᴄ estimates, nor does it endorse them.

However, even if these estimates are significantly reduced, the amount of cost-eᰔective conservation

remaining to be developed appears large enough to warrant eᰔorts to ensure that it is developed.

There is currently some momentum behind conservation in the region. This momentum is created by

existing utility activities, and the funding already committed to those activities, as well as market forces.

This momentum could prompt the development of approximately one-third of the region's cost-eᰔective

conservation potential over the next few years. By the year 2000, however, competitive pressures on

utilities and persistent market barriers could cause the rate of conservation development to decline

below the rate necessary to capture all of the region's cost-eᰔective conservation potential. On the other

hand, utility customer service eᰔorts and the actions of the market could result in an adequate pace of
conservation development. Today, we do not know how much conservation will be developed by the

market or by utility eᰔorts, nor do we know what the true nature of the utility business will be in the

future.

The Steering Committee is concerned about what happens during the transition and about what

conditions will prevail aᴄer the turn of the century. Many of the market barriers to development of

conservation resources still exist: lack of reliable information; diᰔerent economic incentives for owners

and renters, and manufacturers and consumers; and energy prices that do not fully reflect the

environmental costs of that energy. The Committee expects the competitive market for eᰔiciency

products and services to be stimulated by the opening of competition. However, the market for eᰔiciency

services is still immature. The development of this market should be closely monitored, particularly in

the industrial and large commercial sectors where most of the conservation potential is thought to exist.

The experience thus far from countries that have already opened up their electricity markets to

competition seems to indicate that the market for eᰔiciency products and services will not develop

quickly without special attention.

Renewable Resources

Renewable resources can oᰔer unique social and energy system benefits. These benefits include

environmental value, such as the avoidance of carbon dioxide emissions that may be contributing to

global climate change; resource diversity; and local economic benefits. Some applications of renewable

resources, for example, the use of solar photovoltaics in remote locations, are cost-eᰔective today.

However, utility-scale solar, wind and geothermal technologies still are more expensive than gas-fired

combustion turbines and current market prices. For example, several renewable resource projects

designed to confirm various technologies under Northwest conditions are being developed by Northwest

utilities and Bonneville. As a result of recent declines in the price of new power generation, these projects

are anticipated to produce electricity that is from one and one-half to four times more costly than gasfired combustion turbines. In an increasingly competitive electricity market, additional renewable

resources may not be developed unless their economics improve or consumers demonstrate a

willingness to purchase their power at somewhat higher prices because of their environmental benefits.

Though few renewable resources are cost-eᰔective in the near-term, ensuring that renewables are

available for future development may have appreciable economic value. An unexpectedly rapid rise in

natural gas prices and/or the adoption of carbon dioxide control measures could favorably alter the

economics of renewables. For instance, although such estimates are inherently uncertain, it has been

estimated that the imposition of a carbon tax of $40 per ton in the year 2005 could increase the lifetime

benefits of developing renewables in the Northwest to just under $1 billion compared to $28 million in

the no-carbon-tax case.
Low-Income Energy Services

Programs to ensure that low-income consumers are adequately and fairly served include: 1) energyeᰔiciency services, 2) energy assistance, and 3) customer service practices. Energy-eᰔiciency services

include traditional weatherization, creative eᰔiciency programs and consumer education. Energy bill

assistance includes emergency assistance, rate discounts, percentage-of-income payment plans, fuel

funds, traditional payment assistance programs, such as the federal Low-income Heating Energy

Assistance Program and integration of services with other social service agencies.

Approximately 14 percent of the households in the Northwest are estimated to have incomes below 125

percent of federal poverty guidelines. This amounts to 540,000 households. About 55 to 65 percent of the

dwellings occupied by low-income households that are heated with electricity have yet to be fully

weatherized. This translates into between 165,000 and 235,000 electrically heated homes, apartments

and mobile homes that are not as energy eᰔicient as they should be given current and expected future

electricity costs. This means higher electricity bills for those who can least aᰔord them.

Historically, low-income energy service programs have been funded by a combination of federal, state

and utility sources. In 1995, roughly $19 million per year was provided for low-income weatherization

assistance in the Northwest. The region's utilities and Bonneville provided about 40 percent ($7 million)

of these funds. Also in 1995, approximately $39 million was provided for bill payment assistance of some

type. The region's utilities provided about 40 percent ($16 million) of this assistance, with all of the

remaining funds coming from federal sources.

In recent years, there has been a substantial reduction in the level of federal contribution to these

programs. For example, federal funding of Low-income Heating Energy Assistance Program in

Washington State was reduced by 42 percent between 1994 and 1995. State and utility contributions

have not been increased to oᰔset the reduction in federal funding.

Recommendations

To ensure that cost-eᰔective conservation, renewable resource development and low-income

weatherization are sustained during the transition to competition and beyond, the Steering Committee

recommends that, by July 1, 1997, 3 percent of the revenues from the sale of electricity services in the

region be dedicated in aggregate over the region to those purposes for a period of 10 years. The

Committee believes that it is appropriate to re-evaluate this commitment at the end of the ten year

period. Based on 1995 revenues, this amounts to approximately $210 million per year. This $210 million is

65 percent of what was spent for these purposes in 1995 by the region's utilities and Bonneville.
The Steering Committee recommends that by July 1, 1999, each Northwest state adopt legislation that

ensures that all electric utilities operating within its borders are contributing to the development of

conservation and renewable resources and providing weatherization and energy-eᰔiciency services to

low-income consumers. The legislation should set forth a minimum standard for retail distribution utility

investments in conservation and renewable resources and the provision of weatherization and energyeᰔiciency services to low-income consumers. If by July 1, 1999, this minimum standard is not otherwise

being met, the states should provide for the assessment of a uniform system benefits charge that ensures

the collection and investment of funds for these purposes. Due to the rapid emergence of competitive

pressures, the Steering Committee strongly recommends prompt legislative action.

The Steering Committee believes that the majority of these funds are most appropriately used at the

local level. Consequently, as much as five-sixths of the funds could be retained by local distribution

utilities to carry out locally initiated programs to develop cost-eᰔective conservation, increase the use of

renewable resources and provide low-income weatherization and energy-eᰔiciency services. The

Steering Committee also believes that retail distribution utilities should have the option of supporting

the use of renewable resources through local initiatives. Local distribution utilities, to the extent they

chose to exercise the option to develop renewable resources or provide incentives for renewable

resource marketing, will be able to retain the greatest proportion of these funds.

Some conservation and renewable resource activities may, however, benefit from regional planning and

coordination. The Steering Committee recommends that between one-sixth nor and one-third of the

funds be used by a regional non-profit agency with consumer, utility, government and public interest

membership. Its functions would be to bring about changes in the markets for targeted energy-eᰔiciency

and renewable resource products and services that will improve their market share; to plan and contract

for research and limited demonstration of renewable energy technologies; and to support the

development of renewable generating capacity. The approximate allocation of funds to diᰔerent

purposes is shown in Table 1.

A Regional Technical Forum would be established to develop standardized protocols for verification and

evaluation of energy savings, to track regional progress toward the achievement of the region's

conservation and renewable resource goals and to provide feedback and suggestions for improving the

eᰔectiveness of conservation and renewable resource development programs in the region. The Steering

Committee's specific recommendations are described in detail in the following sections.

Conservation

Conservation was divided into two areas for action: local and regional conservation. Local conservation

covers those actions designed to influence on-site consumer eᰔiciency choices. Local conservation also

includes low-income weatherization activities. Regional actions include the establishment of a regional
technical forum and a non-profit entity to carry out conservation market transformation.

Local Conservation, Including Low-Income Weatherization

The Steering Committee recommends that the region's retail distribution utilities allocate at least 2

percent of the revenues from sales of electricity and distribution services toward the development of

cost-eᰔective conservation and low-income weatherization and energy-eᰔiciency services for the next 10

years. This investment would be approximately $140 million per year based on 1995 revenues. The

Steering Committee also recommends that approximately 52 percent (roughly $110 million per year) be

allocated to local conservation investments and that 14 percent (about $30 million per year) be allocated

for local investments in low-income weatherization in the region. Customers that use large amounts of

electricity should be credited for documented cost-eᰔective conservation investments made in their

facilities. Such credits should not include their contribution to regional market transformation and

renewable resource research and demonstration eᰔorts and low-income weatherization and energyeᰔiciency service costs. The Steering Committee recommends that local conservation eᰔorts and lowincome weatherization funding be provided through direct contributions from the region's retail

distribution utilities. Similar to the new Bonneville/State agreement, utilities are encourage to use the

existing state/local agency low-income weatherization system as a means of accomplishing this work to

avoid duplication.

Table 1. Annual Allocation of Funds to Conservation, Renewable Resources

and Low-Income Energy Services

Purpose Percent of

electricity

revenues

Percent of public

purpose funding

$ Millions based on

1995 revenues

Local Conservation 1.6% 52% $110

Low-Income Weatherization 0.4% 14% $30

New Renewable Resources 0.0% - 0.49% 0.0% - 16% $0 - $34

Total — Local Administration and

Implementation

2.0% - 2.49% 67% - 83% $140 - $174

Conservation Market

Transformation

0.43% 14% $30

Renewable Resource Market

Transformation

0% - 0.49% 0% - 16% $0 - $34
New Renewable Resources

[Retail distribution utilities may

dedicate their share of these funds

to acquiring renewable resources

through locally initiated

programs.]

Renewable Resource Research 0.01% >1% $1

Renewables Development and

Demonstration

0.07% 2% $5

Total — Regional Administration

and Implementation

0.52 % - 1.0% 17% - 33% $36 - $70

Total 3.0% 100% $210

For purposes of tracking regional progress on conservation and low-income weatherization, the Steering

Committee recommends that all retail distribution utilities and state and local low-income

weatherization service providers adopt and publish an annual report of their conservation and lowincome weatherization achievements. This report should identify at least the amount of conservation

achieved by economic sector, the number of dwellings occupied by low-income households that were

weatherized and level of utility investment in these areas. The Committee also recommends that utilities

make this report available to the non-profit entity established to carry out regional market

transformation for conservation and renewable resources so that regional eᰔorts can be eᰔectively and

eᰔiciently coordinated with local eᰔorts.

Regional Technical Forum

The Steering Committee recommends the formation of a Regional Technical Forum. The Congress

directed Bonneville and the Northwest Power Planning Council to establish a forum to develop

standardized protocols for verifying and evaluating conservation savings. The Steering Committee

recommends that in addition to the charge given it by Congress the Regional Technical Forum should

also track progress toward achievement of the region's goals for conservation and renewable resource

development and provide feedback and suggestions for improving the eᰔectiveness of conservation and

renewable resource development programs. The Regional Technical Forum should conduct periodic

reviews of the region's progress toward meeting its conservation and renewable resource goals at least

every five years. These periodic reviews should acknowledge changes in the market. Any recommended
changes for improving the eᰔectiveness of conservation and renewable resource programs should be

communicated to the appropriate decision-makers. The Regional Technical Forum should be composed

of representatives of utilities, other electricity service providers, government and public interest groups.

Market Transformation

The Steering Committee calls for the region's retail distribution utilities to mount a coordinated eᰔort to

transform markets for eᰔicient technologies and practices. The intent of market transformation is to

undertake activities that will increase the market share of targeted eᰔiciency products and services that

will be sustained aᴄer incentives or other support are withdrawn. A successful example is the eᰔort to

improve the eᰔiciency of manufactured housing in the Northwest. Utilities initially paid significant

incentives for the construction of very eᰔicient manufactured homes. As a consequence, the demand for

such homes was so great that it was possible to remove the incentives while still capturing a high

percentage of the market.

Because markets invariably cut across utility and jurisdictional boundaries, it makes most sense to

pursue these eᰔorts regionally. This eᰔort should establish a non-profit organization to manage

conservation market transformation ventures for the region. This organization's governing body should

consist of consumer, utility, government and public interest representatives. This organization should

have a planned life of at least 10 years in recognition of the time required to permanently transform

markets and the range of markets or end-uses to be targeted. The recent formation of the Northwest

Energy Eᰔiciency Alliance, whose initial funding is coming from approximately equal contributions by

Bonneville customers through Bonneville's rates and the region's investor-owned utilities, appears to be

consistent with the Steering Committee's recommendations. The Steering Committee believes that

approximately 0.43 percent of retail distribution utility revenues (approximately $30 million per year in

1995) should be allocated for conservation market transformation. [ Bonneville currently funds publiclyowned utilities' shares of the regional conservation market transformation eᰔort. Aᴄer 2001, funding for

conservation market transformation, renewable research and development, and direct application

renewables should be collected through Bonneville rates in proportion to the share of regional firm loads

that are served by federal resources. Investor-owned utilities, publicly owned utilities and direct service

industrial customers whose regional firm loads are served in whole or in part from resources other than

direct or indirect federal purchases would fund the remainder independently.]

Renewable Resources

The Steering Committee considered a range of options for meeting its goal for developing renewable

resources in the region. The Committee's recommendations for renewable resources are described

below.
Existing Renewable Resource Projects

The Steering Committee calls for the sponsors to complete the current wind and geothermal

demonstration and pilot projects. Funding these projects is the responsibility of the respective project

sponsors and is not included as part of the revenues to be committed to the development of new

renewable resources.

New Renewable Resource Projects

The Steering Committee also recommends that renewable resource market transformation activities be

planned and carried out by the newly established non-profit entity charged with conservation market

transformation. Alternatively, retail distribution utilities may dedicate the equivalent of their share of the

regional renewable resource market transformation funds to locally initiated programs. Such funds

should be earmarked toward defraying the above-market costs of renewable resources. Among many

options, the utility could use its share of the funds to provide incentives for "green marketing" programs

(i.e., the sale of power from qualifying renewable resources), acquire renewable resources or have

marketers bid to leverage the utility's share to yield the greatest value for its customers. Whether

regionally sponsored or locally initiated, renewable resource market transformation activities should

focus initially on the development of new renewable resource technologies, including solar, wind,

geothermal, hydroelectric (outside of protected areas as defined by the Council, and other federal or

state agencies and statutes) and low-emission organic, non-toxic biomass. Depending on the success of

green marketing to consumers in the region, additional renewable resource development may occur. The

Steering Committee recommends that approximately 0.49 percent (approximately $34 million per year

based on 1995 revenues) of the region's retail revenues be invested annually to facilitate renewable

resource market transformation. The Steering Committee believes that utilities should be permitted to

invest renewable resource funds with Bonneville in order for the agency to make new renewable resource

purchases on their behalf.

Renewable Resource Research, Development and Demonstration

The Steering Committee recommends that the region's retail distribution utilities to allocate

approximately $1 million per year for research, and $5 million per year for development and

demonstration of distributed renewable resources. These funds would be used by the non-profit entity

established to carry out market transformation for conservation and research, development and

demonstration of renewable resources.

"Green Marketing"
The Steering Committee recommends that retail distribution utilities should provide for so-called green

marketing to individual consumers in advance of full retail open access. Retail distribution utilities may

accomplish this by oᰔering their retail consumers renewable resources or by permitting other energy

service providers to sell renewable resources to their retail consumers.

Low-Income Energy Assistance

The Steering Committee recognizes and aᰔirms the energy system's historic role in providing energy

assistance to low-income consumers. The Steering Committee calls for utilities to maintain their current

level of low-income energy assistance until such time as states adopt alternate mechanisms for providing

these services. These alternatives should ensure that electricity prices are as low as possible and that

energy-eᰔiciency and consumer services, such as level payment mechanisms, remain in place until they

are supplanted by other approaches. The Committee further recommends that states now ensure this

assistance by establishing a Universal Electrical Service Fund. This fund could be supported by federal

Low-Income Heating Energy Assistance Program funds, state or local government funds, other funds

and/or by a retail distribution system access fee or meters charge, Qualified low-income (i.e., incomes 125

percent or less of the federal poverty level) customers would be entitled to receive from all electricity

suppliers the bill assistance or rate discount needed to ensure that they do not pay more than a fixed

proportion (e.g., 5 percent) of their income for electric energy services. All electricity suppliers could draw

from the Universal Electrical Service Fund to provide the bill assistance needed to serve each qualified

low-income customer, plus a standard administrative cost. Existing retail distribution utility low-income

energy assistance program expenditures should be credited toward any required contributions to the

Universal Electrical Service Fund.

Collecting and Allocating the Funds

The Steering Committee believes that a new mechanism is needed to ensure adequate and stable

funding for conservation, renewable resources and low-income energy-eᰔiciency services. This

mechanism must be compatible and consistent with a competitive market. The committee recommends

that before July 1, 1999, each Northwest state enact legislation that: [ Only a portion of the State of

Montana falls within the region. This presents a unique situation that may require that state legislation

enacted to implement the Steering Committee recommendations in Montana be structured diᰔerently.]

1. Establishes a minimum standard for electric distribution utility investments in conservation,

renewable resources and the provision of weatherization and energy-efficiency services for lowincome consumers. This standard should apply equally to publicly owned and investor-owned

utilities.

2. Determines the minimum annual investment per state based on a total regional investment target of
3 percent of regional electrical service revenues (estimated to be $210 million in 1995). The Steering

Committee acknowledges that a revenue-based approach to allocating collection of these funds will

be inequitable in some instances, for example, in high distribution cost/low density systems. In such

instances, alternative approaches may be employed provided that the overall minimum investment

target is met. Investor-owned utilities, direct service industrial customers and public utilities as

groups should allocate their investments according to Table 1, above.

3. Permits each distribution utility to determine how it collects revenues sufficient to meet this

minimum standard in accordance with its existing regulatory structure, while recommending that

allocations be based on cost of service standards.

4. Requires that utilities demonstrate compliance with the minimum investment standard on or before

July 1, 1999, and annually thereafter. Individual publicly owned utilities should be provided the

option of demonstrating compliance with the minimum investment standard "in the aggregate" by

participating in collaborative/consortia efforts with other utilities. States should establish

mechanisms to determine utility compliance with the minimum investment standard.

5. Authorizes the imposition of a non-bypassable, local distribution system access charge (meter fee) on

customers served by any distribution utility that fails to demonstrate compliance with the minimum

investment standard. This fee should collect revenue equivalent to that distribution utility's

minimum standard for annual investment in conservation, renewable resources and the provision of

weatherization and energy-efficiency services for low-income consumers.

The Steering committee recommends that legislation establishing the minimum requirements set forth

above should be implemented simultaneously with legislation implementing open retail access. The

timing and details of the implementation of these recommendations should be directly linked to the

timing and details of implementing the open retail access recommendations in the following section.

The Steering Committee is concerned that, due to competitive pressures, utility investments in

conservation, renewable resources and low-income weatherization and energy-eᰔiciency services are

being reduced. To ensure a smooth transition and provide an early indication of potential problems, the

Committee recommends that by July 1, 1997, each utility provide evidence that it will thereaᴄer meet the

minimum standard described above. Evidence could take the form of state statutes; tariᰔ, rate or other

filings; adoption of rate ordinances; budget resolutions by the utility's governing board; or other

aᰔidavits that specify the funding level to be dedicated to these purposes. If utilities representing at least

90 percent of the regional end-use loads do not provide such evidence by July 1, 1997, then the Steering

Committee recommends that the region seek federal backup to take eᰔect July 1, 1999.

The Steering Committee makes no recommendations as to how individual utilities should collect the

funds — whether through a charge based on volume of kilowatt-hours sold, through a distribution access

charge that is independent of or less directly related to kilowatt-hour sales, or some other method. The
Steering Committee believes that the region should rely on the appropriate regulatory bodies to

establish methods of collection. However, the Steering Committee is mindful of the fact that how the

charge is collected can have eᰔects on both equity among customers and the competitive balance

among diᰔerent suppliers or fuels. The Committee is also aware that significant diᰔerences in how the

charge is collected can alter the competitive balance among retail distribution systems. The Steering

Committee believes that regulatory bodies will find it preferable to collect these charges in ways that do

not distort competitive balance.

The Bonneville Power Administration's Energy-eᰔiciency

Services

Due to controversy regarding the proposed scope of Bonneville's Energy Services Business (ESB),

Congress has asked the Comprehensive Review Steering Committee to address the competitive

implications of ESB activities; the appropriate level of capitalization for these activities; and provisions to

minimize cross-subsidies from power marketing and transmission revenues.

By way of background, Bonneville has proposed that its future energy-eᰔiciency eᰔorts be comprised of

three elements:

1. Declining support for its historical ("legacy") programs.

2. upport for regional market transformation efforts.

3. Market development" activities designed to augment the market for energy-efficiency services,

particularly in federal facilities and through bilateral contracts with its wholesale power customers.

Currently, these activities are grouped together as energy services. The first two activities are not at issue.

The market development activities have raised two primary concerns:

1. The original proposal for an Energy Services Business included a variety of activities that were

perceived to put Bonneville in competition with private sector energy-efficiency business in a finite

market.

2. Various parties were skeptical that the market development activities could be self-supporting,

particularly to the extent that safeguards were put in place to prevent Bonneville from competing

with private energy-efficiency providers.

To resolve the first of these concerns, Bonneville worked extensively with the Northwest Energy Eᰔiciency

Council (a trade organization representing energy-eᰔiciency businesses) and other regional parties to

develop principles that would focus Bonneville's market development activities on increasing the market
for privately-delivered energy services, rather than competing in that market. In the following

recommendations the Steering Committee expands upon those principles.

To respond to the second concern, the Committee proposes to limit Bonneville's net spending and

capital borrowing during Fiscal Years 1997 - 2001 to levels substantially below Bonneville's October 31,

1996 proposal. The Committee has concerns about Bonneville's ability to control costs in the long run.

However, the Steering Committee has neither the time nor the inclination to micro-manage Bonneville's

staᰔing and accounting methodologies. Rather, the Committee proposes to resolve these concerns by

putting tight limits on Bonneville's net expenditures on this activity.

Recommendations

1. Bonneville's energy-efficiency activities are not a "business." The purpose of these activities is to

serve Bonneville's statutory directive to promote cost-effective energy-efficiency investments. The

Committees consider it unlikely that these activities will completely recover their costs without

unduly competing with private enterprises. To address concerns about the net cost of these activities,

the Committee proposes borrowing and spending caps in items 11 and 12 below.

2. Bonneville's role in market development should be structured and managed to enlarge energyefficiency markets beyond that which is being profitably captured by private business.

3. Bonneville's market development activities should be limited to markets or individual situations that

are not currently accessible, viable, or profitable for the private sector energy-efficiency industry.

4. Bonneville's market development activities should be designed and implemented to take full

advantage of private sector energy goods and services. These activities should not favor one

competitor over another.

5. Bonneville will act primarily as a facilitator/aggregator of transactions for services provided by its

partners.

6. Specific Bonneville market development activities will be discontinued when they become viable and

profitable for the private sector energy-efficiency business.

7. An advisory board should be established immediately to monitor Bonneville's compliance with these

restrictions. The advisory board should consist, among others, of private businesses that could be

adversely affected by Bonneville's failure to comply with these restrictions, as well as power and

transmission customers. Bonneville should consult with and report to this board at regular intervals,

and the board should report concerns to the Northwest Power Planning Council.

8. Bonneville's market development activities should be limited to its regional power sales contact

customers and federal agencies. Bonneville should provide energy-efficiency services for federal

agencies in cooperation with the serving utility or when the serving utility cannot or elects not to

provide those services itself.

9. Agencies and customers contracting for market development services should repay the full cost of
those services, including repayment of loans at the appropriate U.S. Treasury rate.

10. Any Bonneville organizational unit or activity currently named "Energy Services" should be renamed

"Energy Efficiency." This is intended to clarify that previous proposals to undertake a broad spectrum

of other retail services have been dropped, and to preclude Bonneville support for load-building

activities that are inconsistent with Bonneville's conservation directives.

11. Bonneville's use of U.S. Treasury capital should be limited to $5 million per year and restricted to

federal projects. This represents a reduction of roughly 50 percent relative to Bonneville's October 31,

1996 proposal, and a reduction of $71 million relative to the final rate case figure. Capital borrowed

from the U.S. Treasury should be repaid in full by the participating federal entity. All third party

borrowing shall be non-recourse to Bonneville.

12. Bonneville's net costs for market development activities should not exceed $8 million for the Fiscal

Years 1997-2001. Bonneville's energy-efficiency activities should be self-supporting by September 30,

1999 or these activities should be terminated.

13. Bonneville should revise its October 1995 record of decision for firm non-requirements products and

services contracts by replacing the "Energy Services" section with an "Energy-Efficiency" section that

incorporates a final plan for energy-efficiency activities consistent with the restrictions herein. The

energy-efficiency plan should not include activities listed in the original Record of Decision "Energy

Services" section except those directly related to energy-efficiency. Other new activities listed in the

original Record of Decision "Energy Services" section should not be offered by any part of Bonneville

in competition with the private sector.

CONSUMER ACCESS TO THE COMPETITIVE MARKET —

ENSURING THE BENEFITS OF COMPETITION FOR ALL

Goals

The goals of the Comprehensive Review Steering Committee recommendations on retail markets and

consumer choice are to encourage a more eᰔicient power system, lower electricity costs, increased

product choice and greater product innovation for all consumers. These goals were adopted subject to a

commitment to maintain the reliability and safety of the electrical power system. The Steering

Committee concluded that these goals could best be accomplished by putting in place a competitive

electricity market driven by consumer choice. This section describes the background of facts and trends

that led to this decision, then describes the recommended vision of a competitive retail electricity market

driven by consumer choice, and finally lays out several steps that should be taken to accomplish a

transition to this competitive market by July 1, 1999.

Background
The Steering Committee's decisions about competition and consumer choice in retail electricity markets

were made in the context of the changes already occurring in regulation, legislation, and electricity

markets themselves. The changes that aᰔect retail markets are more recent than the changes in

wholesale markets, but they are a natural extension of those changes. The Federal Energy Regulatory

Commission's Order 888 will force open wholesale markets for electric power, but it leᴄ decisions about

retail electricity markets to the states.

During the past year, most states have initiated processes to address the question of retail competition. A

variety of conclusions have been reached. Some states, such as California, have established schedules

and passed legislation for moving to retail competition. Others, such as New Hampshire and Illinois, have

developed pilot programs to test the feasibility of retail competition in electricity. Others have allowed

retail wheeling rates for large consumers on a case-by-case basis. There is enough action at the state

level on retail competition to establish a perception of tremendous momentum toward a more

competitive retail electricity market. "It's inevitable," was a phrase heard oᴄen during the Comprehensive

Review process.

In spite of the high level of state activity in this area, or perhaps because of the uneven progress by states,

national legislation has been introduced to require retail competition in electricity markets nationwide.

Colorado Representative Dan Schaefer introduced a bill entitled "The Electricity Consumers' Power to

Choose Act". This bill would give all consumers the right to choose their electric service provider by

December 2000. A similar bill, the "Electric Power Competition Act of 1996," has been introduced by

Massachusetts Representative Edward Markey.

The strong momentum toward retail competition reflects the current feasibility of some large consumers

acquiring their own electricity supplies in the wholesale market. Prices of wholesale power oᴄen are

below the price industries are paying their local utility and the potential savings are an important factor

in businesses' bottom lines. Large users are quick to point out that they buy almost nothing at retail

except for electricity. Similarly, power marketers are anxious to provide power and services to large

consumers. Both energy marketing companies and large users support more open retail power markets.

Opening up retail markets only to large users, however, is highly controversial and would, in all

likelihood, limit the potential benefits that could be gained from more active competition. The major

concern is that additional costs would fall on small captive customers as a result of large consumers

acquiring their electricity elsewhere and leaving stranded costs behind. Without some agreement on how

to recover stranded costs, there is a clear temptation to pass those costs on to captive customers.

The surest way to prevent shiᴄing of costs to small captive customers is to free them to acquire their

power supplies from alternative sources, just like the large consumers. When consumers have choice

among electricity suppliers it is very diᰔicult to subsidize other consumers at their expense. However,
unlike the wholesale market, there is currently no well developed competitive retail electricity market.

There are many important issues to be addressed and several technical problems to be solved before a

widely available retail electricity market can be developed.

One of the major concerns raised is that of continued universal service at aᰔordable prices. Reliable

electricity supplies are a fundamental component of modern lifestyles and public safety. Some are

concerned that few competitive electricity suppliers will come forth to serve small consumers, especially

low-income consumers, at aᰔordable rates. There may be increased need for consumer protection

standards and information and education to help consumers make decisions about a product that is

invisible, but essential to modern life. Some form of oversight may be needed to ensure a truly

competitive retail market and to keep separate the regulated and competitive portions of the electricity

system. In addition, more sophisticated billing and metering systems will be needed to keep track of the

vastly increased number of participants in the market.

Some of these problems are best solved by allowing the market the opportunity to develop. Others

require government intervention and oversight. The Steering Committee recommendation attempts to

balance these two categories of need by allowing the market to develop while, at the same time,

specifying solutions to important social concerns that arise with retail competition and setting an

ambitious target to achieving full retail competition.

Recommendation

The Steering Committee recommends that beginning no later than July 1, 1999, all retail distribution

utilities oᰔer open retail market access for those customers that desire direct market access. The

committee recognizes that states, regulatory agencies, or retail distribution utility governing bodies may

authorize plans that provide a transition or phase-in to full retail market access. In these specific cases,

that may result in a similar transition or phase-in of the full implementation of the public purpose

recommendations that are linked to the open access recommendation.

Direct access may occur prior to July 1, 1999. However, it is recommended that in order to provide for

direct retail access on the schedule in this report, several activities must be accomplished promptly.

These include the identification of any stranded costs and, if any stranded costs are determined to exist,

the creation of a stranded cost collection mechanism that does not cause cost shiᴄing; resolution of any

outstanding contractual issues; unbundling and cost-based pricing of electricity delivery services; pilot

programs to explore aggregation for small commercial and residential consumers; the exploration of

market index pricing options for residential and small commercial consumers; and implementation of

public purposes funding, energy assistance funding and consumer protection mechanisms consistent

with this report's recommendations.
The implications of this statement are far reaching. It will completely change the structure of the retail

electricity market. It implies significant actions not only by utilities, but by state legislatures, regulators,

and local governing boards of publicly-owned utilities. These recommendations are oᰔered with the

intent of aiding the appropriate regulatory bodies as they address these issues.

For consumers to have real choices in electricity supply, they must have unimpeded access to alternative

electric service providers. Similarly, new energy service providers must have access to consumers

through the local distribution system on a non-discriminatory basis with no advantage to the incumbent

utility. The only way to eᰔectively ensure these conditions are in place is to require division of the

incumbent utility into two separate business lines; one a regulated electricity distribution utility and the

other an electricity service company that competes on an equal basis with other energy service

providers. The Steering Committee concluded that legal divestiture of the energy services component is

not required, given that adequate regulatory safeguards are in place to assure independence of the two

businesses. Some companies may find it advantageous to legally separate, but the Steering Committee

recommendation does not require it.

Electricity distribution utilities

The electricity distribution utility formed by separating utility functions will be a regulated monopoly

responsible for the safe and reliable delivery of electricity over the network of local distribution wires.

This utility will have an obligation to connect any consumer to the electricity grid, but will not ultimately

be responsible for acquiring the electricity that it delivers. The distribution utility will provide open and

non-discriminatory access to the local distribution grid to any electricity supplier. The distribution utility

may be the point of collection of funds to support public purposes, such as conservation, renewable

resources, stranded cost recovery, and low-income weatherization and bill support. Initially, the

distribution utility may provide metering and billing services on an unbundled basis; that is, with the

separate components of the electricity costs itemized. However, metering and billing may ultimately

become a separate competitively provided service.

Electricity service companies

The remainder of the current retail electric utility, aᴄer separation from the distribution business, will

compete with other electricity service providers to serve end-use consumers. This company will oᰔer a

variety of electricity products and services to consumers in an eᰔort to win as many customers as

possible, or as suits its business strategy. It may rebundle such separate products and services as bulk

electricity supply, transmission, shaping to load patterns, maintenance of reserves, and distribution. The

transmission and distribution would be acquired from the regulated utilities that provide such services,

while the electricity generation, shaping and reserves may be bought in the competitive power

generation markets or supplied from plants the company owns. The electricity service company will
probably utilize various financial derivatives to provide risk mitigation services, such as fixed-price

products. It may not have any defined service territory or be limited to only one line of business. It may

oᰔer natural gas, oil, energy-eᰔiciency services, and even cable television along with its electricity

products. Due to the nature of electricity, the electricity service company will probably be licensed by

state or local authorities and be subject to consumer protection standards. The Steering Committee

recommended that the Bonneville Power Administration, the region's federal power marketing agency,

not compete in this competitive retail energy services business.

Policies for structuring competition

The Steering Committee developed a number of guidelines for state and local policy-makers to

implement in order to be ready for retail competition by July 1, 1999. These were referred to as market

maintenance procedures because they are intended to facilitate the eᰔicient and fair operation of a

competitive retail electricity market. Many of these guidelines are concerned with putting consistent

requirements in place for all market participants.

Registration and licensing standards

Consistent registration or licensing standards should be established for all market participants suᰔicient

to protect consumers and the delivery infrastructure from abuse. Regulators or local agencies should be

equipped with the authority to correct abuses should they occur, by reviewing and revoking licenses or

by assessing financial penalties.

All market participants serving residential and small commercial consumers should fall fully within the

jurisdiction of state consumer protection laws and regulations. Consumer protection legislation and

regulations should be adopted or applied to address issues including, but not limited to, credit terms,

disconnection of service, standardized billing information, redlining and discriminatory pricing, unfair

trade practices and fraud, service quality, and consumer privacy.

Electricity bills

Standardized information should be available on monthly bills, or other appropriate media, which would

convey information about the provider's resource portfolio, environmental characteristics of that

portfolio and a consumer satisfaction index. If itemized costs appear on consumer bills, disclosure should

be complete, not partial. For example, charges for stranded cost recovery, transmission, distribution, lowincome assistance, generation by type, demand-side management, and renewables should be included.

Energy bills should include a place for the consumer to lodge complaints concerning service abuse. A

neutral resolution mechanism for disputes between consumers and their energy service providers should

be established within regulatory bodies or local agencies.
Balanced competition

Policies should be established to ensure that competition among established power providers and new

market entrants is based on the value of services and products provided to the consumers and not on

variations in the regulatory or market requirements faced by these categories of retail service providers.

Consistency should be established among market participants in access to consumers, responsibilities

for protection of consumers and for maintenance of a competitive market (open access, service

obligation, product labeling, etc.). To the degree possible, regionally consistent policies concerning

meters charges should be established. Similarly, where the commercial transactions of established

providers are taxed, the transactions of new entrants should be equally burdened.

Clarify regulatory authority

The restructuring of the retail electricity market will necessitate some changes to established

government responsibilities relating to the electricity industry. The relationship between state or local

utility regulatory agencies and state consumer protection agencies and laws needs to be clarified, or, if

necessary, new institutions may need to be established. Responsibility for low-income assistance for

electricity bills and the funding of that assistance needs to be decided. The relationship between federal

regulatory authority and state and local regulatory authority to accomplish public policies (through the

use of meters charges, local distribution charges, or other means) and to oversee the competitive market

for retail services should be clarified.

Incentives for reliability and eᰔicient use of local distribution systems

Distribution system charges will remain regulated to ensure reliability, eᰔiciency and appropriate cost

allocation. Local distribution and delivery services should be priced and regulated in a manner that

fosters reliability and the eᰔicient use and expansion of the facilities.

Transitional Steps

The Steering Committee identified a number of transitional steps that should be taken to help complete

the development of a competitive retail market by July 1, 1999. State legislatures, regulators, local

governing boards and utilities should begin to implement these steps as soon as possible. To the extent

possible, decisions and actions by public policy makers during the transition should not create an

advantage or impose a disadvantage on any group of competitors, nor preclude later actions to enable

the development of eᰔicient markets.

Unbundled billing
Consumers' electricity bills currently show one price for delivered electricity. The various components of

the cost are not identified, that is, the components are bundled into one charge. These components may

include, among others, bulk electricity supply, shaping services, reliability reserves, transmission, local

distribution, and conservation program costs. Consumers will be better educated about electricity

services and better prepared to make separate decisions about some of these products and services in

the future if they begin to see the separate components on their bills now. Therefore, utilities should

begin to unbundle, that is, itemize, the components of consumers bills for informational purposes in

preparation for separate pricing in the future.

Separation of local distribution from electricity services

Utilities should reorganize their companies to functionally separate local distribution service from retail

electricity services. Separate accounting systems should be developed in preparation for the side-byside, but independent, existence of a regulated distribution utility and a competitive retail electricity

service company. Full legal separation of the two functions is not required as long as regulators and local

governing boards put in place the necessary safeguards to prevent utilities from using their monopoly

positions in distribution to influence their market positions in the competitive electricity services

business.

Provide open transmission system access as soon as possible

Utilities, working with their regulators or local governing boards, should provide open and nondiscriminatory access to the local electricity distribution system as soon as possible. Utilities should

develop open access tariᰔs for this purpose. Making such services available will help the competitive

electricity services business develop and will provide early identification of any problems associated with

operating in an open access retail market environment. The lessons learned will feed into the more

formal restructuring process and help ensure its successful implementation.

Modify distribution utility service obligations

Most utilities currently have a regulatory obligation to serve, that is provide retail electricity services to all

consumers in their service territory. In the market envisioned by the Steering Committee, such an

obligation is inconsistent. Instead, the distribution utility should have an obligation to connect all

consumers to the electricity services market through their distribution system. Neither the distribution

utility, nor its aᰔiliated electricity service company, will have any special obligation to provide electricity

supplies and services to consumers in the restructured electricity market. Regulators and local governing

boards need to alter the utility service obligation requirements to be consistent with a competitive

electricity services market.
Promote development of retail electricity service providers

To eᰔectively serve all types of consumers, it is important to gain experience in competitive retail

electricity markets and to put in place conditions that encourage its development. In addition to the

unbundling and open access tariᰔs described above, state legislatures and regulators are encouraged to

establish an orderly transition to direct access to competitive retail electric service markets. An orderly

transition would facilitate the market's development while ensuring that all consumer classes benefit

and that unwarranted cost shiᴄing is prevented. Particular concern exists for the small consumer. Pilot

programs should be designed and implemented to encourage the development of aggregators who can

provide competitively priced power for small consumers. States should recognize that eᰔective

competition may not materialize in all market segments. They should be prepared to consider alternative

means to address this problem when it occurs, including, but not limited to, authorizing local units of

government to aggregate small consumers.

A "green" power marketing program should be developed to introduce varied products to consumers and

to provide an opportunity for renewable resources to compete in the retail electricity market based on

their environmental characteristics and price.

Finally, a provider-of-last-resortmechanism should be maintained to accommodate those who cannot

choose a supplier or for whom no suppliers materialize. Such a mechanism could include a last-resort

supplier of energy at aᰔordable rates, or could be a system of random assignment of electricity service

providers to consumers who have not been able to eᰔectively access the market.

Opportunity to recover stranded costs

Opening up the retail electricity market to competition raises the possibility that some utility costs

become stranded; that is, a utility may not be able to recover the full costs of some previously rate-based

assets. To the extent that stranded costs are a problem, utilities may resist competition and may attempt

to shiᴄ stranded costs onto captive customers. To facilitate the transition and reduce cost shiᴄing

incentives, utilities should be given a fair opportunity to recover legitimate, non-mitigable stranded

costs. Any policies on stranded cost recovery should preserve a strong incentive for utilities to mitigate

stranded costs to the greatest extent possible. Recovery of non-mitigable stranded costs may be

accomplished through exit fees or distribution access fees. However, it should be clear that stranded

costs are transitional in nature and recovery provisions should be limited in duration and amount

recovered.

TRANSMISSION — OPEN-ACCESS HIGHWAY FOR

COMPETITION IN GENERATION
Goals

The primary goal of the Steering Committee's recommendations for transmission is a transmission

system whose structure and operation help ensure a fully competitive generation market. The

recommendations are also designed to improve the eᰔiciency of use of the transmission system and to

maintain the system's reliability as the pressures of competition on utilities increase.

Background

If consumers are to realize the benefits of competition in the generation of electricity, competitors in that

market must have equal access to the transmission system. The Federal Energy Regulatory Commission

(FERC) has recognized the critical importance of equal access, as demonstrated in its Orders 888 and 889,

and has indicated that its policy goal for transmission is to facilitate a fully competitive wholesale market

for generated electricity. The Steering Committee expects FERC to move ahead with the definition of

rules to make sure that all competitors have non-discriminatory access to the transmission system.

If a single party owns both transmission and generation, there is potential for the owner to increase the

profits of its generation by limiting transmission access to competitors. That owner is also subject to

competitive pressures that may serve as a disincentive to needed investments in transmission

maintenance and expansion. These pressures may also encourage operating on the edge of reliability

limits. To ensure equal access and reliability requires that decisions aᰔecting transmission be eᰔectively

separated from decisions aᰔecting generation. The necessary separation can be accomplished by the

formation of a FERC-regulated independent grid operator, or independent grid operator (referred to in

the FERC Order 888 as an independent system operator, or ISO) that is responsible for the operation of

the transmission assets of multiple owners. Operating and charging for the use of these systems as a

single system would also eliminate "pancaking" of transmission rates (paying a diᰔerent rate to each

transmission owner over whose system a power transaction is scheduled) and make possible more

eᰔicient operation.

Recommendations

The Steering Committee recommends the formation of an independent grid operator, regulated by FERC

and including the transmission assets of the Bonneville Power Administration and other owners of major

transmission assets in the region. Membership should be voluntary, but every eᰔort should be made to

enlist wide participation.

Independent Grid Operator Responsibilities
The Northwest's independent grid operator should have operational control over the transmission

system and enough operational control of generation to ensure short-term reliability. The independent

grid operator will also have responsibilities in other areas, such as maintenance, planning and expansion.

The independent grid operator should have clear incentives to maintain reliability and encourage the

eᰔicient use of the system. The independent grid operator will necessarily follow FERC principles for

independent system operators, and may include modifications agreed to by participants and approved

by FERC. Load control centers could be maintained locally, if participants prefer. The Steering Committee

recommends that intermittent, as-available and distributed generation should be treated fairly in buying

and selling necessary ancillary services and the provision of transmission services, and that transmission

planning should follow long-term least-cost planning principles.

Bonneville Power Administration

Since Bonneville's transmission facilities make up a large part of the regional transmission system, these

facilities operational independence from Bonneville power marketing considerations is particularly

important. Therefore, Bonneville's power marketing and transmission functions should be fully and

legally separated (including separated funds). Bonneville's generation and transmission systems should

be separated to promote competitive practices and to avoid the problem of self-dealing between the

generation apparatus and the transmission system. This approach is consistent with the direction of

federal energy restructuring policy being implemented around the country.

In addition, the Committee is aware that both generation and transmission are valuable federal assets

and their revenues are currently collected for deposit in the Bonneville Power Administration Fund.

Further, the Committee understands that the receipts to the Fund are now legally bound to meet

Bonneville's financial obligations, which include payment of the Washington Public Power Supply

System (WPPSS) bonds, other Bonneville financial obligations, and the agency's fish and wildlife

mitigation and restoration requirements, as necessary. Accordingly, the Committee recommends that

any separation of generation and transmission — whether by administrative or legislative means — be

achieved in such a way that it does not jeopardize or diminish the legal obligation and ability of

Bonneville to meet fish and wildlife and other obligations.

The resulting Bonneville Transmission Agency or Corporation should become a full participant in the

independent grid operator. If other participants agree that the interests of the new Bonneville

transmission entity have been suᰔiciently separated from the interests of power marketing, it could be

the regional independent grid operator.

Legislation will be necessary to accomplish the separation of Bonneville's transmission and generation

functions. Legislation should also subject Bonneville's transmission to FERC regulation that is equivalent

to FERC regulation of investor-owned utilities.
Governance

The makeup of the independent grid operator governing board should follow FERC guidelines, which

require that no individual market participant or class of market participants have the ability to control

the independent grid operator. It could include owners and users, state and regional regulatory entities

on an ex-oᰔicio basis (similar to the Northwest Regional Transmission Association and the Western

Regional Transmission Association) and at least some independent outside representatives from the

broader public, or it could be fully independent of owners and significant users.

Wheeling for Retail Loads

The independent grid operator, in providing wheeling for retail loads, would be governed by rules set out

in FERC Order 888. These rules would allow such wheeling if it is authorized by the state or utility in which

the retail load is located. The Steering Committee recommends that Bonneville honor the same rules

until it becomes a participant in an independent grid operator.

Pricing of Transmission

Transmission pricing becomes increasingly important as the transmission system is used by more parties

and transactions become more market-based. Some pricing practices used in the past would give users

inappropriate signals for their use of transmission in the expected competitive environment of the future.

Past pricing practices could also give inaccurate signals regarding the location of power resources and

the expansion of transmission system capacity. These issues are being addressed by both the Northwest

and Western Regional Transmission Associations. The Steering Committee recommends that pricing of

services provided by the independent grid operator, which will be subject to FERC regulation, should

follow principles being developed through the regional transmission associations.

Transition Issues

During the period that the legislation is under consideration, Bonneville should move to accomplish as

much separation of generation and transmission as is possible by administrative measures. In addition,

Bonneville should participate in eᰔorts to form an independent grid operator that could operate both

federal and non-federal assets.

An independent grid operator should assist in facilitating a competitive power market for customers that

take delivery of their power requirements at sub-transmission voltages over facilities they currently do

not own. In the transition to an independent grid operator, Bonneville should work with these customers

to ensure that fair pricing mechanisms, reasonable transition periods and opportunities for utilities to

gain control over delivery facilities are available.
FUTURE POWER SYSTEM ROLE FOR A FOUR-STATE

REGIONAL BODY

Background

When the Northwest Power Act was passed in 1980, the authors contemplated an extended period of

electricity shortages. Many believed that the shortages could only be averted through the construction of

increasingly costly, large-scale power plants. The participation of the federal Bonneville Power

Administration was believed to be essential to the financing of these plants. As part of the bargain struck

in return for this expansion of Bonneville's authority, the Northwest Power Act established the Northwest

Power Planning Council. The Council, which is made up of two representatives of each of the governors

of the states of Idaho, Montana, Oregon and Washington, was directed to further the following goals:

► To encourage conservation and efficiency in the use of electric power;

► To encourage the development of renewable resources;

► To assure the region of an adequate, efficient, economical and reliable power supply;

► To provide for the participation and consultation of the states, local governments, consumers,

customers, users of the Columbia River system and the public at large in:

▷ the development of regional plans and programs related to energy conservation, renewable

resources and other resources, and protecting, mitigating and enhancing fish and wildlife

resources;

▷ facilitating the orderly planning of the region's power system;

▷ providing environmental quality; and

▷ the protection, mitigation and enhancement of the fish and wildlife, and their habitat, of the

Columbia River Basin.

The Power Planning Council has been credited with many improvements in electricity planning.

However, in a competitive environment, market forces will play the primary role in determining when and

what generating resources are built and what can be charged for their output. In such an environment,

Bonneville will no longer play a central and key role in resource development and the Northwest Power

Planning Council's regional planning and oversight of Bonneville's resource acquisitions are no longer

relevant.

Future Roles
While the Council's power acquisition planning role is no longer relevant, the remaining goals of the

Power Act are ones the Steering Committee believes are still important to the citizens of the region. The

issue is how they are to be achieved in the context of a competitive market. The Steering Committee

believes that moving to a competitive electricity industry can yield benefits and could, if properly

structured, achieve many of those goals . There is, however, much that is unknown about the competitive

future. How the transition to the competitive future is accomplished is of critical importance to achieving

those goals and, more broadly, to the region's economic and environmental interests. As the Northwest

moves toward a competitive electricity industry, there are roles that should be carried out by a regional

body. These roles involve monitoring and analyzing the transition to a competitive market and informing

regional policy-makers and the public. These roles are important if the transition is to be accomplished

eᰔiciently and fairly throughout the region and if the public values the Northwest has sought from its

power system are to be protected. These roles do not include resource acquisition planning, regulation or

implementation. Aᴄer some period of development of the competitive market, certainly less than 10

years, the need for a continuing regional role should be re-evaluated. The transitional roles include the

following:

Conservation and Renewable Resources

The recommendation for conservation and renewable resources relies heavily and appropriately on local

action to overcome market barriers. In some instances, such market barriers are uniquely local. In others,

however, barriers cut across local boundaries. Consequently, there remains a need for an entity like the

Council to identify the barriers and work with regional interests and others to devise mechanisms to

overcome them. The Council or a regional entity like the Council should also be an active participant in

the non-profit entity established to carry out market transformation for conservation and renewables,

both for its expertise and its unique regional perspective. The recommendation recognizes that there is

value in providing guidance and suggesting standards for meeting the region's conservation and

renewable resource goals. This is consistent with the Council's historic role and should be carried out by

a regional body like the Council. Finally, the recommendation also recognizes the need for tracking and

reporting progress regionwide. A regional body like the Council, working with power suppliers, industry,

governments and public interest representatives in the context of the Regional Technical Forum

recommended in an earlier chapter, is an appropriate way to accomplish these tasks.

The Competitive Marketplace

Competition will create a regional, and probably Westwide, electricity market. While an individual utility

approach will remain important for regulation of the distribution function, much of the market activity

will occur across utility and across state boundaries. There will be many new non-utility and nonregulated actors in this market. In addition, diᰔerences in market structure and rules among and within

states can result in market friction and create opportunities for market participants to arbitrage these
diᰔerences to the detriment of consumers and overall market eᰔiciency. The development of the market

should be monitored for potential problems of market power or structural market ineᰔiciencies until the

new structure is mature. Carrying out this monitoring, promoting information sharing and coordinating

resolution of multistate issues is an appropriate role for a four-state regional body like the Council.

Included in this role is the need for some level of continued regional review of the Bonneville Power

Administration. This recommendation should result in a less aggressive market role for Bonneville.

Bonneville's administrator will, however, continue to have a great deal of discretion. While Bonneville is

in a position to exercise significant market power, regional review of Bonneville and its market role is

important.

Eᰔicient functioning of the electricity market depends in large part on access to relevant information by

all market participants. The Steering Committee is confident that as the market matures, mechanisms

will develop to provide that information broadly. During the transition, however, access to such

information is likely to be uneven. It would be desirable to have a regional body that provides

information, evaluation and analysis relevant to the evolving marketplace to help the development of

full, fair and eᰔective competition throughout the region.

Eᰔicient functioning of the competitive electricity market also depends on the eᰔicient operation and

expansion of the regional transmission system. As open access is put in place through the work of the

regional transmission associations and during the creation and early operation of an independent grid

operator, the Council's overall regional perspective will help to keep the transition on track toward its

goal of an eᰔicient market.

Finally, the competitive market has uncertain implications for the quality of our environment. For

example, some are predicting significant increases in emissions as a result of competition. The eᰔect of

the competitive electricity market on key environmental indicators needs to be monitored and evaluated

and, if necessary, policy-makers assisted in developing market-oriented corrective mechanisms.

Although the Council should have no regulatory responsibility in this area, monitoring, analyzing and

working with policy-makers are appropriate roles.

Public Participation and Involvement

One of the primary charges given the Northwest Power Planning Council under the Northwest Power Act

was to facilitate public participation and involvement on issues related to electricity and fish and wildlife

in the region. The Council has attempted to fulfill this charge by maintaining an extensive public

information and public outreach program, both through its central oᰔices and its oᰔices in each of the

Northwest states. In some respects, the competitive market will give consumers a much greater say in the
electricity industry than they have had before. Nonetheless, a four-state body with the ability to inform

and involve interested members of the public on matters that aᰔect them, their environment and their

economy across the region will continue to be of value.

Funding

The funding of the Northwest Power Planning Council has been through a charge on Bonneville Power

Administration power rates. If federal legislation aᰔecting the role of the Northwest Power Planning

Council is pursued, the question of the level and sources of the Council's funding should be addressed.

APPENDIX A: DISSENTING OPINION (/reports/96-26/appendix-a-dissentingopinion/)

APPENDIX B: MEMBERS OF THE STEERING COMMITTEE (/reports/96-

26/appendix-b-members/)