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Other speeches, testimony, papers of note
One of my predecessors as acting administrator of BPA, Jack Robertson, used to worry that no one knew who or what BPA is. Before he retired, he used to dream of a day when BPA and energy issues would be featured above the fold on the front page of the region's newspapers.
Well, I've got to say that we have realized Jack's wildest dreams. These days, we tend to breathe a sigh of relief if we're not on the front page. On the other hand, while all this attention to the energy crisis has had its uncomfortable moments, I think the coverage has been really good for the region. I have to compliment the region's media in that they have been covering energy issues extremely thoroughly and with an analytical sophistication that does them credit. The more understanding our citizens have of what we do and what role we play, the better able we as a region will be to make the decisions that determine our energy future.
But, while many of you have heard of BPA, not all of you may know what BPA is. So let me give you a quick snapshot. We are a not-for-profit federal agency that serves the Pacific Northwest. We market wholesale electricity from the Columbia Basin's 30 federal dams operated by the U.S. Army Corps of Engineers and Bureau of Reclamation and the region's only operating nuclear plant at Hanford, which is operated by Energy Northwest. Our customers are public and private utilities and a few large industries. Close to half of the Northwest's electricity comes from BPA. We also operate 75 percent of the region's high-voltage transmission lines, as well as the Northwest portion of the large interties that can ship and receive power from California and the Southwest, Canada and eastern Montana.
We are part of the Department of Energy, but-- despite rumors to the contrary--we are not subsidized by taxpayers. BPA recovers the region's federal power system through the sale of wholesale power and transmission service. We do borrow from the U.S. Treasury for capital investments, but we also repay every dime in full at Treasury's cost of money.
With that said, BPA is more than a utility, much more. I take great pride in our public service mission. We fund the largest fish and wildlife program in the nation. We provide incentives for energy conservation, and we have programs to develop renewable energy and technologies of the future, such as fuel cells.
But our greatest public service benefit is providing clean power at cost. This has fueled the Northwest economy for six and a half decades, and there's little question that our low-cost power has been a cornerstone of this region's economy.
So, speaking of cost brings me to the present. Arguably, BPA has just come through the roughest year in its history, although Peter Johnson, who presided over the termination of two WPPSS nuclear plants, might debate me. This coming October, we will begin a new contract period with our customers and a new set of rates. We spent more than two years in a subscription process that ended last October when we signed contracts with our customers for the next five-to-ten years.
BPA's low-cost power is immensely attractive, and with BPA's rates below market, everyone wanted to get a share. So, our biggest challenge as we began contract negotiations with our customers two years ago was not the price of our power, but its allocation. We had different customer groups--public power, private power and direct service industries--each fighting for a bigger piece of the pie. Our discretion is somewhat limited in that, by law, we have an obligation to serve certain customers.
These include public utility districts, municipalities and cooperatives, as well as investor-owned utilities for their residential and small farm customer load. These latter are served through a complex exchange agreement, which I won't go into now, that allows the benefits of the Federal Columbia River Power System to flow to all residential consumers in the Northwest, whether they are served by public or private power. We've also had a long tradition of serving some electricity-intensive industries, primarily aluminum companies, although they are not public preference customers.
The upshot of the subscription process was that, when the dust cleared, we had about 11,000 megawatts of load to serve but only about 8,000 megawatts of resources. As late as May 2000, it didn't look like too bad of a challenge. We could augment our own resources by going to the market and melding that slightly higher priced power with our low-cost federal power. At the time, we expected to be able to hold the new rates relatively close to the old rates.
But soon after, as we were about 1,000 megawatts into the augmentation effort, the wholesale electricity market took off. In fact, it rocketed into outer space, reaching prices 10 times higher than anything anyone had ever seen in the Western grid. A number of events conspired to set this off, the most notable being California's soured restructuring experiment. But, if you strip away the politics and rhetoric, the fundamental problem was the basic issue of supply and demand. Demand for electricity, particularly on the West Coast, had increased over the last 10 years with population growth and the influx of high-tech industries. Throughout this period, there had been no significant building of new resources. And, for the last six years, the growing problem in the hydropower-dependent Northwest had been masked by good to extremely good water. This year's drought ripped that mask off.
By last December, the wholesale electricity market in the West was a shambles. I can pinpoint the exact moment when the market went vertical because it's exactly when my predecessor, Judi Johansen, left and I assumed the helm of BPA.
And what a winter we faced. The unheard of happened in California with rolling blackouts under relatively light loads. No one expected this since California is a summer-peaking system. This meant that the surplus power we were used to getting in winter from California would not be coming our way. On top of that, we were in the second worst water year in the 71 years we've been keeping record.
I have to say, there were some scary days this past winter when the Northwest teetered on the brink of power shortages. In one four-day period last January, we spent 50 million dollars on power purchases. These costs gave us a pretty strong signal that supply was drying up fast. Overall, we spent over a billion dollars on power purchases this year, but even that was not nearly enough. It was only through extraordinary measures, such as paying aluminum smelter to shut down; buying power and water back from willing farmers; foregoing hydro operations that benefit fish, such as spilling water at dams; and exchanging power with California at ratios favorable to the Pacific Northwest that we've been able to meet reliability standards and preserve financial solvency.
I particularly want to extend our appreciation to the Corps of Engineers, Bureau of Reclamation, National Marine Fisheries Service and Environmental Protection Agency, all of whom worked diligently to help us manage the hydro system through this challenging period. And Energy Northwest, which manages the region's nuclear plant, worked with us to keep power flowing this past winter and spring. All these combined actions allowed us to preserve both power reliability and our financial solvency. As a result, we were able to mitigate our financial losses this year, thereby reducing the impact on next year's rates. This allows us to maintain the financial capability to buy power when necessary.
So this brings us to April. We still needed to purchase another 2,000 or so megawatts for the upcoming five-year contract period, from 2002 to 2006. When we calculated the cost of continuing to arrange purchases in this overheated market, it was apparent that it would take more than a 250 percent rate increase to recover our costs.
We knew this would be unacceptable because it would be disastrous for our economy. An independent study confirmed that such a rate increase would result in 25,000 jobs lost in the Northwest. The signals from the Federal Energy Regulatory Commission, known as FERC, were generally that the West Coast needed to take care of its own problems and should not count on FERC to impose price caps. We anticipated that, as new supplies were developed, market prices would eventually settle out. The big challenge was getting through the next 18 months to two years.
In April, we set a goal to reduce our rate increase to a double-digit number, and we had only three months to pull this off. Looking at lessons we learned from California, it became clear that the only recourse was to reduce our exposure to the market.
That's when we asked our customers to take some extraordinary actions. We asked our aluminum customers to delay the restart of their smelters for another one-to-two years. That meant aluminum workers would have to wait longer to go back on the job. However, the industry had already told us they doubted they could operate if electricity rates rose above $30 a megawatt hour. The 250 percent rate increase we were looking at would have translated into a rate of approximately $80 a megawatt hour. If we had to buy the power to serve the industries, the rate increase would likely have put them out of business, possibly permanently. Furthermore, the same increase would have had disastrous consequences for other customers and the businesses and industries they serve.
The alternative we offered was to cover their costs of staying down, plus provide pay and benefits to their workers during the downtime. That was far cheaper than buying the power to serve them under their new contracts, which gives you an idea of how bad the market was. All but one of our industrial customers took us up on the deal. Kaiser Aluminum has been the only holdout.
At the same time, we also called on our utility customers, both public and investor-owned, to reduce their load on BPA by up to 10 percent. We weren't prescriptive but invited them to be creative, and by and large they were. We asked them to consider various means for getting load off the BPA system, including curtailment, conservation and adding generation.
We were still making buyouts and concluding transactions right up to our deadline for submitting a revised rate proposal to FERC at the end of June. We didn't pin down the actual rate until the day before we sent rates to FERC. I know this sounds nuts, but all of us were staggered that we got the rate increase down to as low as 46 percent. And, yes, I know it sounds crazy to call a rate increase of this magnitude good news. But given where we were just 90 days before, it was extremely good news. We here in the Northwest didn't just dodge a bullet, we dodged a cannon ball.
The region's utilities and industries deserve a great deal of credit for their response. Clark PUD in Vancouver and PacifiCorp, based here in Portland, were the first public and investor-own utilities, respectively, to step up to the plate with load reductions. And, while I'm calling people out, I am particularly proud of our own employees who worked many long and hard hours in the load reduction effort. I don't know that anyone would have bet on such a relatively good outcome. Yes, we bought power back, but at prices averaging $20 a megawatt-hour when prices at the time were over $200 a megawatt-hour. We invested $250 million for a six-month period, but saved ratepayers $4 billion over a year. It also meant that a net of 25,000 jobs were saved. It meant that, while aluminum smelters would be down for some time, they weren't out of business permanently and their workers would be paid.
It meant improved reliability since the bulk of the load reduction came about through conservation or curtailment. The Northwest Power Planning Council estimates that the load reduction exercise cut the probability of shortfalls this winter from approximately 25 percent to 12 percent. I also believe that, by staying out of the market, BPA played a key role in bringing market prices down throughout the West. And, in fact, prices are down substantially, such that, in the last month, they are approaching pre-energy crisis levels.
So, thanks to incredible regional cooperation, our short-term strategy worked. The region avoided economic disaster. We helped preserve system reliability. And, BPA stayed financially solvent this year. This latter point is key to preserving the benefits of the federal Columbia hydro system for the Northwest. You may have heard of the Northeast-Midwest coalition -- a group of business, political and other interests -- that has mounted a visible lobby in Congress to either do away with BPA or force us to charge our customers whatever the market will bear, rather than just cover our costs. Their agenda is to eliminate an economic advantage the Northwest enjoys in attracting business and industry. Their mantra is that we are taxpayer subsidized, which we are not. As I noted earlier, we repay taxpayers fully. The coalition's definition of a subsidy appears to be charging less than market prices. But, if we were ever to fail to make our Treasury payment on time and in full for the taxpayer investments in the hydrosystem, we would give the coalition's charges credibility.
Preserving our financial solvency also is critically important to our ability to preserve funding for the region's fish and wildlife program, particularly efforts to save endangered fish. BPA is the principal source of funds for this effort.
So now we come to the point where I tell you that, good as this effort has been, more -- much more -- is needed. The entire effort to bring the rate increase to a manageable level and to keep the lights on during this drought year was simply short-term crisis management. I'm here today to tell you we cannot rest on our laurels and succumb to the siren song that things are better or, worse yet, that there never really was an energy crisis.
We cannot forget that we got through this period only by draconian efforts and some considerable hurt. We are still curtailing loads. Aluminum smelters and other manufacturing operations are still shut down. We compromised our commitment to fish protection because of concerns over electricity reliability and financial solvency. We have incurred environmental costs because of the operation of emergency diesel generation.
If I leave you with any message today, it is that we cannot be lulled into a false sense of security by the current lower market prices. Otherwise we are doomed to repeat history.
What we need now is to forge the same regional cooperation we just saw and focus it on building an energy infrastructure for the Northwest that will ensure reliable electricity supply, without environmental compromise, without industries shut down, without sacrificing our fish and wildlife, and without sacrificing our low-cost power.
Let me outline the areas I believe we need to focus on as we map out our energy future.
First, obviously we need to ensure there is adequate new generation to meet the needs of a growing population and a growing economy. We need low-cost kilowatt-hours added to our system from a variety of sources, including gas-fired generation, wind power and investments in the existing hydropower system. Wind power, in particular, is looking quite promising as a new renewable power source for the Northwest – but that’s another speech.
Second, we cannot turn to generation alone. We must refocus on using energy efficiently. Energy efficiency has tended to ebb and flow depending on the price of market power. We need to create sustainable energy efficiency programs that are maintained through high and low market periods. These programs must reflect the realities of an evolving electricity market where consumers will no longer be captive to a single power supplier. We need to dispel the notion that conservation only means doing without. True energy efficiency means maintaining the same amenity levels but using less energy to do so.
Third, it is not enough to develop energy supplies if we cannot deliver that energy to the cities, towns and farms in our region. The Northwest's high-voltage transmission system is stretched to the limit. Other than one interregional transmission line, there has been no major new transmission built in the Northwest since 1987. Yet, with dozens of developers lining up to develop power for the future, we've got to be able to deliver that power where it's needed. The critical path for developing new generation will be transmission construction because it is more difficult to site and build transmission than generation.
Fourth, while hydropower will remain the basis of our region's electricity system, it is not likely to be a major piece of new supplies. While additional wind power and other renewables should make a significant contribution, much of the future electricity generation is likely to come from combustion turbines fueled by natural gas. They have advantages in that they can be sited and built relatively quickly, and they have relatively low air emissions. We must ensure that we have the gas pipeline capacity and storage to provide the fuel for these resources.
Up to now, I have focused largely on infrastructure issues, but there are three other critical policy issues that we have to resolve if we are to have a sound energy system. First among these issues is the future of our fish and wildlife. As many of you know, the Federal Caucus, a group of federal agencies that serve the region, along with states and tribes, has been working on a plan to implement the Biological Opinion that governs recovery of our endangered salmon and steelhead. There have been years of study and debate behind this plan, which builds on many things that are already underway. Now, it's time to move forward aggressively to implement this recovery effort, in coordination with the Northwest Power Planning Council's fish and wildlife program.
Failure to save our endangered fish is more than an environmental issue. Such a failure will most certainly have widespread impacts on our economy due to the requirements of the Endangered Species Act. If the recovery effort is turned over to a so-called God Squad or the courts, it is out of the hands of the region. We could see impacts that would further degrade the federal hydro system capability, impacts that will exacerbate our supply problems. Put starkly, if we fail to save these fish, we will have put at risk the region's richest resource -- its hydro system.
Another critical policy issue is determining who is responsible for serving the region's load. The role BPA plays in this region, its future and its management, will be an integral part of this discussion. We must think through the issue of BPA's role in the evolving power markets.
The 1980 vision for BPA, under the Northwest Power Act, was that BPA would be a wholesale resource provider serving the needs of the region's retail utilities and direct service industries. Then, in 1996, the region conducted a Comprehensive Review of the Northwest energy system. The long-term vision for BPA that came out of that review was for BPA to be a niche marketer and not an acquirer of resources to meet load growth. It was envisioned that, as a result of wholesale deregulation, a number of independent marketers would provide the resources of the future. However, none of these new providers so far has any responsibility to serve load. Thus, BPA customers that in 1995 had ventured into the market when it appeared market prices would stay low, came storming back to BPA during our subscription contract offerings. What a difference five years can make.
Today, new resources are being developed independently in this region. But there is no clarity about who has long-term responsibility to serve load and, consequently, no guarantee that the power from these resources will be sold in the region.
Many customers are counting on BPA to serve their load, not only for the next five years, but also beyond that, and it looks like more load than BPA has resources for. However, because of the risks in today's erratic market, we are not willing to buy resources for periods longer than we have contracts for. We need to resolve the issue of who is obligated to serve load.
And finally, a key policy issue will be the ultimate shape and scope of the regional transmission system. The Administration and the Federal Energy Regulatory Commission are strongly supporting the formation of independent regional transmission organizations, known as RTOs, throughout the nation. We in the Northwest have been working on "RTO West" for at least two years. The impetus toward RTOs is to facilitate deregulated wholesale energy markets that have been deregulated since 1992 and to improve overall system reliability by having a single, independent entity manage the region's transmission transactions, as opposed to a fragmented approach. We expect that an RTO could also, if properly formed, ultimately reduce costs by eliminating pancaked rates, which occur when power is transmitted over multiple connecting lines, and the sender is charged by each individual owner.
Participants in RTO West include BPA, the Northwest's investor-owned utilities, Sierra Pacific in Nevada, Utah Power and Light, and B.C. Hydro in Canada. Each transmission owner would continue to own and maintain its own facilities and lines but would hand over real-time operation, such as sales and scheduling, to RTO West.
Although the region's transmission owners are well along in developing a structure and bylaws for RTO West, there are several critical decisions to be made that will determine the impact of RTO formation on consumers. I am urging everyone to pay attention to this issue because it has far-reaching and long-lasting implications for all electricity users in the region.
The challenges I have touched on today are only a few of the issues that need resolving if we are going to have a vibrant energy infrastructure for this region, for ours is an extremely complex system. But I believe they are the key issues. I think there is a tremendous challenge ahead, but I am not pessimistic. I see a dim light at the end of this long tunnel. At the very least, we know what the challenges are, and we know what we need to do. Right now, it's to make a concerted push at all levels to ensure the infrastructure investments are made that will mean our energy system can remain the envy of the rest of the country and the world.
And I feel a sense of urgency about this. It is imperative that we deal with all of these issues if we are to preserve the benefits of a tremendous resource. The Columbia River, along with its tributaries, is the crown jewel of the Northwest. It is the highway for moving goods from our interior to our ports and back. It is a recreational wonderland that attracts people from all over the world. Its waters have turned arid land into a cornucopia of crops. It provides the cleanest, cheapest renewable energy in the nation. And, I believe that it can also provide safe spawning grounds and passage for our fish. These are benefits of incalculable value that we must preserve.
It will take all of us, especially the support of folks such as you, to make this happen. I would urge the City Club to engage these issues, to take positions and support this effort. It is both our environmental and our economic futures that are at stake.