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BPA Offers Power-Selling Rules with Gaps by Ted Sickinger The Oregonian, July 20, 2007

Starting in 2011 - Negotiations aren't over, but so far there's little for PGE customers to cheer

The Bonneville Power Administration issued a long-awaited, much-debated -- and in the end, incomplete -- policy proposal Thursday describing rules it will follow after 2011 when it comes to selling wholesale power generated at 31 hydroelectric dams and a nuclear plant in the region.

BPA sells electricity to 130 public utilities and a handful of industrial companies in the Northwest at cost-based rates that are about half the wholesale market price. It's also required to make payments to residential and small-farm customers of private utilities so they, too, benefit from the federal hydrosystem.

BPA-generated power is becoming more valuable as regional energy demand increases, prices for power generated with fossil fuels rise and states implement renewable energy mandates. Consequently, customer groups have spent the past five years haggling with the agency over how to apportion BPA benefits after 2011 -- savings likely to be in the neighborhood of $50 billion over the life of new 20-year contracts.

BPA says its new policy will promote rate stability in the region and allow its public utility customers to make their own decisions about energy resources.

While much remains to be negotiated, public utility groups said Thursday that they were pleased the order was finally out, so negotiations could move forward on specific products and prices BPA will offer.

Advocates for residential customers of private utilities such as Portland General Electric and Pacific Power, however, had little to cheer. Thursday's proposal was conspicuously absent any mention of the benefits that will flow to residential and small-farm customers of private utilities, as well as the aluminum companies that buy some power directly from BPA.

In late May, BPA suspended $28 million in monthly payments to residential customers of private utilities because a federal court ruled that the agency failed to follow the required formulas for calculating the payments when it reached a settlement with private utilities in 2001.

That decision was hailed by public utilities, who have preference rights to BPA's power and contend that the improper payments were driving up their rates.

But BPA's action led to an immediate rate increase of about 14 percent for customers of private utilities. It also undermined the tentative settlement the agency had reached with private utilities governing the payments after 2011. The size of the residential exchange is also dependent on the amount of power sold to aluminum companies, so the agency was forced to table the discussion of those controversial contracts.

Last month, U.S. Sen. Ron Wyden, D-Ore., and Rep. Earl Blumenauer, D-Ore., asked the federal power marketing agency to hold off issuing its policies governing long-term contracts until it settled the residential exchange crisis.

Instead, the agency decided to strip its policy proposal of rules dealing with the residential exchange, while going ahead with rules governing contracts with public utilities. The agency says it needs to proceed with those negotiations to give the public utilities time to buy or build the additional energy resources they need for the post-2011 period.

New rate structure

Even absent the residential exchange issue, the policy released Thursday is likely to have a substantial effect on regional energy markets. It includes a new tiered-rate structure that gives public utilities the right to buy a fixed amount of power from BPA at cost-based rates for the next 20 years. Beyond that, however, they will have to buy power from BPA at market rates, go to the market themselves, or build their own power plants.

That's a major departure from past practice, when BPA was obliged to serve any demand from a public customer and blend the cost into its existing system. The result was that during periods of high prices, such as the 2001 energy crisis, BPA was forced into the market to buy high-priced power for its customers, which wrought havoc with its budget and other programs.

While BPA says its new policy will promote rate stability, it's not at all clear how more than 100 utilities that have traditionally relied on BPA to serve their needs will fare in the open market and whether there will be a stampede of utilities looking to develop new generation.

"That's a major issue for the region," said John Saven, executive director of the Northwest Requirements Utilities, a group of utilities that have historically relied on BPA as their primary or exclusive source of energy.

More work to do

On Thursday, BPA chief executive Steve Wright said there was a slew of work left before the agency can negotiate and draft final contracts. The agency must establish how much power each of its customers is entitled to, run a rate case to determine its costs and prices, and complete development of specific products and services.

Meanwhile, the residential exchange "has taken over our agency in many respects . . . trying to define a consensus-based and non-consensus-based process for moving forward," he said.

BPA announced Thursday that it would not be pursuing a rehearing of the federal court's decision on the residential exchange. Instead, the agency is hoping public and private utilities can reach a legally and politically sustainable compromise on the payments that the agency can then ratify.

Wright reiterated Thursday that the agency intends to offer contracts to all its customers at the same time, as he pledged to Oregon's congressional delegation last month. He said he couldn't guarantee that all parties will be satisfied with the details, but that BPA won't leave residential exchange benefits up in the air while it goes forward with contracts for public utilities.

"It's daunting," Wright said of the agency's workload in the coming year, "but it's doable."