| Full Committee Hearing Testimony: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hearing: | To receive testimony on California's Electricity Crisis and Implications for the West | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Date and Time: | January 31, 2001, 9:30 a.m. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Location: | Senate Hart Office Building, Room SH-216 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Witness Name and Title: | Tom Karier, Council Member, Northwest Power Planning Council, Spokane, WA | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Testimony: | Good morning, Chairman Murkowski and members of the Committee, and thank you for the opportunity to testify today on behalf of the Northwest Power Planning Council. My name is Tom Karier and I am one of Washington State Governor Gary Locke’s two appointees to the Northwest Power Planning Council. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Council is an agency of the states of Idaho, Montana, Oregon and Washington. Under the Northwest Power Act of 1980, the Council conducts long-range electric energy planning and analysis, and also prepares a program to protect, mitigate and enhance fish and wildlife of the Columbia River Basin that have been affected by hydropower dams. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In my testimony, I will briefly recount the results of the Council’s October 2000 analysis of the reasons behind the high electricity prices in the West, discuss the current condition of the Federal Columbia River Power System, which provides about 40 percent of the Pacific Northwest region’s electricity, describe some of the impacts of the current crisis on Northwest electric utilities and their customers, and offer our recommendations for how to address the problem. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| To begin, we believe six key events are contributing to the current power crisis in the West. These are: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The wholesale power market created by California’s electricity restructuring is dysfunctional, needs fixing and has affected other western states. The remedies ordered by the Federal Energy Regulatory Commission have yet to have a significant effect. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction of new power plants and new conservation and renewable resources during the last decade did not keep pace with growing demand for electricity. In the Northwest, for example, demand for electricity has grown 24 percent in the past decade while generating capacity has grown by only 4 percent. When California is factored in, the gap between demand and supply is even greater. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Below-average rainfall and snowpack in 2000 contributed to poor hydropower conditions in the Northwest. Snowpack runoff is predicted to be 68 percent of normal this year; the elevation of Lake Roosevelt behind Grand Coulee Dam is the lowest in 25 years. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The price of natural gas, the fuel of choice for thermal power plants in the Northwest, had doubled last summer and now is over three times the price it was last year at this time. . | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Some California power plants had to shut down for unplanned or scheduled maintenance or because they violated air quality regulations. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The loss of flexibility in the operation of the hydroelectric system due to Endangered Species Act requirements has derated the system by more than 1,000 megawatts. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| I will explain these in more detail later in my testimony, but for now let me say that each of these events would cause problems in isolation, but in combination they have created "The Perfect Storm" for western utilities and their customers. Of these key events, we are most concerned at the moment about the outlook for hydropower generation. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In a normal year, the volume of the Columbia River runoff between January and July is 106 million acre feet, measured at The Dalles Dam. In early January, the forecast for January through July 2001 was 80 million acre feet, or 75 percent of normal. Last week, the forecast was revised downward to 72 million acre feet, or just 68 percent of normal. By way of comparison, the worst January-July period on record was 50 percent of normal. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Obviously, this is a dry winter in most of the Northwest. Precipitation in the Columbia River Basin so far is 63 percent of normal, and the weather forecast for the next two weeks is, in a word, dry. Reservoirs behind dams in the Columbia River system currently are about 49 percent full; typically in January, the reservoirs would be about 65 percent full. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As for hydropower generation, in a normal year the Federal Columbia River Power System will produce about 15,500 average megawatts. This year, with current predictions of runoff, the system is expected to produce much less. To put that in perspective, given the driest conditions on record, which are 50 percent of normal, the current system would produce about 11,500 average megawatts. We may be dangerously close to that this year. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| We can hope for above-average precipitation for the remainder of the winter and no unusually cold weather that would boost electricity consumption. But clearly, the outlook is not good. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Meanwhile, many electric utilities in the Northwest recently announced substantial rate increases in response to high market prices. 1 In fact, several utilities have raised rates to their retail customers as much or more than utilities in California. Businesses and industries that use large amounts of power are suffering. To better understand the impacts, the Council recently convened a panel representing four Northwest utilities that have been affected differently by the current crisis. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Briefly, here is what we learned: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tacoma Public Utilities implemented a 50-percent rate surcharge, which amounts to a 43-percent increase to residential customers and 75 percent to industrial customers. Dry weather is impacting Tacoma’s hydropower operations, forcing the utility to make purchases in the spot market. Tacoma spent $60 million for power in December and is facing continuing high prices with cash reserves of only $130 million. The utility has secured diesel generators with 50 megawatts of capacity, called for conservation, imposed the rate surcharge, and is also planning to take on $100 million in debt to get through the rest of the winter. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tillamook Public Utility District in rural western Oregon is facing market exposure of $20 million, while the utility’s total annual budget is about $11 million. Tillamook joined with several other rural utilities to buy a portion of its load on the market several years ago, and today the utilities’ combined power bill has ballooned to $117 million. While Tillamook recently announced a new agreement with Bonneville, Tillamook has asked its large customers to discuss cutting back electricity consumption. But these customers have orders to fill and are reluctant to jeopardize their production. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Puget Sound Energy of Bellevue, an investor-owned utility with some 900,000 customers, reported it is in a precarious stage of load/resource balance. Rising prices for natural gas are squeezing the utility’s finances while Puget is operating with a five-year residential rate freeze. The utility may ask the state Utilities and Transportation Commission for emergency rate relief. High prices have caused some of Puget’s industrial customers who are on market-indexed rates to shut down or curtail production. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Clark Public Utilities, which serves about 130,000 customers in the Portland suburb of Vancouver, Washington, recently raised its rates 20 percent to meet the increased price of natural gas and power from its generating plant, which supplies about half its load. Currently, the remainder comes from investor-owned utilities under long-term contracts, but those expire in July and Clark anticipates another rate increase in the fall when it goes back on the Bonneville system. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Last week the Bonneville Power Administration announced that a vastly increased demand for its products, beginning in October, will force the agency to make significant market purchases to augment the federal system. As a result, Bonneville is proposing an average 60-percent rate increase over the next five-year rate period, beginning October 1, 2001. Bonneville acknowledged that the first year could be significantly higher than 60 percent, and some Bonneville customers are anticipating rates as much as 100 percent higher. Given the current market situation and the projected spring runoff, Bonneville believes it needs revenues that average annually about $1.3 billion more than its estimates made just last May. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| There is other bad news, as well. Idaho Power Company recently announced its power purchases are $121 million above expectations and may require a 24-percent rate increase. Utah Power & Light is proposing a 19-percent rate increase. Moody’s Investor Service recently changed the credit rating of Seattle City Light to negative because of concerns that low water levels will impact the utility’s hydropower generation and force more power purchases on the spot market. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Industries are hurting, too. Recent news stories report on smelters, paper mills, chemical makers and mines in the Northwest that either are shutting down or curtailing production in response to high electricity prices. These include six aluminum smelters in Oregon, Washington and Montana, and also other major industries in Tacoma, Seattle, Bellingham, Butte, Portland, and elsewhere. Ironically, some can make more money selling their contracted power back to the supplier than they can by operating. In turn, this allows the supplier to avoid purchasing more expensive power on the market. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Not all the news is bad, however. Bonneville has been able to exchange surplus power with California on a two-for-one basis, and California has already returned significant amounts of that power. This has helped Bonneville avoid running the hydrosystem harder to meet its load. However, other utilities in the Northwest, which have been ordered to sell surplus power to California, remain concerned that they will not be paid for their power. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mr. Chairman, as I noted earlier in my testimony, there are multiple reasons for the current power crisis on the West Coast. Two years ago, the Northwest Power Planning Council initiated a study of the adequacy of the Northwest’s power supply. This study was motivated by the observation that while the region had enjoyed several years of robust economic growth and, consequently growth in the demand for electricity, there had been very little in the way of new generation development. At the same time, efforts to improve the efficiency of electricity use in the region had been reduced dramatically because of the uncertainty of utility restructuring. This raised the concern that under conditions of high stress, the system might not be able to fully meet the region's power needs to serve load and to maintain the reserves essential to a reliable system. Conditions of high stress involve combinations of high weather-driven loads, poor hydropower conditions and forced outages of thermal and hydropower generating units. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The study, which we completed in early 2000, concluded that: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| There is an increasing possibility of power supply problems over each of the next few winters (December, January, February), reaching a probability of 24 percent by 2003. This takes into account both regional resources and the availability of imports. The level and duration of the possible shortfalls could be relatively small – a few hundred megawatts for a few hours – or quite large – a few thousand megawatts for extended periods. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The region would need the equivalent of 3,000 megawatts of new capacity to reduce the probability to a more acceptable 5-percent level. That new capacity should take the form of new generation, conservation and economic load management, i.e., reductions or shifts in consumer loads that make economic sense for the consumer and the power system. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| It was unlikely that market prices would be sufficient to stimulate the development of sufficient new generation in that time frame. This meant that in the near-term, an even higher priority needed to be placed on developing economic load management opportunities. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| While this study generated a good deal of interest, it is difficult for people to get too excited about probabilities generated by arcane computer models. However, last summer, and again this winter, developments in the power system captured the attention of the industry and the public. Those developments resulted in unprecedented high prices in Western power markets, including the Northwest. Average prices for power were well over $200 per megawatt-hour, occasionally reached $700 per megawatt-hour or more, and peaked on December 11 at $5,000 per megawatt-hour on the Mid-Columbia trading hub. At the low end, that is more than 10 times the previous high, and at the high end more than 100 times. In short, prices are phenomenally higher than in past years. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Council believes that high spot-market prices are a tangible manifestation of the fundamental problems identified in the Council's power supply adequacy study of last winter. That is, the prices are an indicator of current scarcity. Last summer, the system, which already was facing tight supplies, was further stressed by combinations of unusually high loads, poor hydropower conditions and forced outages of thermal units. There is little in the way of price-responsive demand to mitigate these prices. Those who had available supply were able to ask for and receive high prices. This combination of factors is precisely what led to the power supply adequacy problems identified in the Council's study. These factors apply not only to the Northwest but also to the entire Western Interconnection. There are some additional factors related to the design of the California electricity market, but they should not obscure the basic underlying problem. Absent some action, the next similar event could result in not only high prices but also a failure of the Northwest system to meet loads. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In the following paragraphs I will summarize the evidence regarding the factors affecting Western market prices, focusing in some detail on the last week of June 2000, the period in which the highest prices of the summer were observed. While prices at times were higher in December, we believe the reasons for the high prices last summer and so far this winter are the same. I will also offer our recommendations for actions to mitigate future price excursions and potential power supply adequacy problems. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Demand Growth Without Similar Growth in Supply | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As noted above, the Council believes the high prices are symptomatic of an overall tightening of supply, exacerbated by a number of factors. Some of these factors are physical and economic, others are related to the relative immaturity of the competitive electricity market and the uncertainties involved in the transition from a regulated structure. The physical and economic factors include unusually high weather-driven demands throughout the West, an unusual pattern of hydropower generation, a high level of planned and forced outages of thermal generating units, and high natural gas prices. The factors related to market immaturity and transitional uncertainties include the lack of a demand-side price response in the market, inadequate utilization of risk mitigation strategies, insufficient investment in new generation, and other factors related to the design and operation of the California market. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Between 1995 and 1999, peak loads in the Western Systems Coordinating Council area increased by nearly 12,000 megawatts, or by about 10 percent. The increase would have been even more if 1999 hadn’t been a relatively mild weather year. Generating capacity available during peak load months did not keep pace with peak load growth, increasing only 4,600 megawatts. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| When growth in demand outpaces growth in power resources, the result is a narrowing of reserve margins. This implies more efficient utilization of existing capacity and was an anticipated benefit of moving to a competitive generation market. However, if it proceeds to the point of putting reliability at risk and destabilizing prices, it is a problem. The period of the highest prices in the summer of 2000 coincided with a period in which loads in the Northwest, California and the Desert Southwest were at high levels as a result of high temperatures throughout the West. In the Northwest last June, peak loads were approximately 3,400 megawatts greater than one year earlier while in California loads were approximately 1,400 megawatts higher. As we moved into the winter, high heating loads, poor hydro conditions and an extraordinary amount of generating capacity out of service in California drove prices even higher. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lack of New Energy Conservation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| We also know that efforts to improve the efficiency of electricity use, that is, conservation, have fallen off considerably in recent years. This is largely the result of the uncertainty created by the restructuring of the electricity industry. Utilities, which were the primary vehicle for conservation development, generally reduced their efforts because of concerns about creating potentially stranded investment. They also expressed concerns about the need to raise rates to cover conservation costs and the revenues lost as a result of conservation. Council staff has estimated that if the Northwest had maintained its level of investment in conservation at its 1995 level through the last three years of the decade, we would now be using the equivalent of the total output of a combined cycle combustion turbine less electricity. The average cost of saving that electricity is a fraction of the current market price of power. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unusual Snowpack and Runoff | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| An unusual pattern of Columbia River runoff last summer also contributed to the power problem. While runoff was expected to be normal, in fact the spring runoff came somewhat earlier and higher than normal. By May and June, runoff and hydropower generation were less than normal. Hydropower generation in late June was approximately 6,000 megawatts less than the previous year. As I noted earlier, runoff this spring is expected to be far below normal. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Thermal Plant Outages | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outages at thermal plants also contributed to the problems last summer. Maintenance at thermal plants frequently is planned for the May-June period when abundant hydropower typically is available. In addition, plants do break down, sometimes when it is least desirable to do so. We have attempted to identify Northwest thermal units that were either on planned outages or forced outage status during the last week of June. This was done by examining the generation data reported to the Western Systems Coordinating Council and supplemental data that was provided by Northwest generators. These combined data sets represent about 85 percent of the thermal capacity in the Northwest. From these data it appears that approximately 1,500 megawatts of capacity were out on a long-term basis, either planned or extended forced outages, and another 2,400 to 2,700 megawatts were on short-term forced outage status in late June, when temperatures -- and power prices -- peaked. As noted earlier, power plant outages in California this winter have exacerbated an already tight supply picture. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rising Natural Gas Prices | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rising prices for natural gas, a primary fuel for thermal power plants, also contributed to the high power prices. Between the summer of 1998 and the summer of 2000, natural gas prices at Sumas on the Washington/British Columbia border increased from about $1.50 per million Btu to $3.30. Prices in Southern California increased over the same period from about $2.40 to $4.18. Prices moved substantially higher during late August and September. During mid-September, prices at Sumas were $4.60 and prices in Southern California were over $6.00, although the California prices were affected by a serious pipeline explosion. Prices have stayed approximately at those levels, or slightly higher, since then. Current prices at Sumas exceed $6 per million Btu. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depending on the gas-fired generating technology used, for every $2 increase in natural gas prices the cost of generating electricity increases between $15 per megawat t-hour and $22 per megawatt-hour. However, the increase in natural gas prices, while contributing significantly to higher electricity prices, cannot come close to explaining the increase in peak electricity prices. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Lack of a Market for Demand Reduction | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Our analysis of the western market also disclosed a systemic problem associated with the immaturity of the competitive electricity market, which is the lack of a demand side to that market. Demand responsiveness to price is important to an efficiently operating market. Demand responsiveness is an essential mechanism to balance supply and demand. Without some degree of demand responsiveness, there is no check on the prices that can be charged when supplies are tight, except for artificial caps. This is particularly critical when supplies are stretched to their limits. Under those circumstances, a relatively small degree of price responsiveness can have a relatively large reducing effect on prices, and could also mean the difference between maintaining service and curtailing it. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currently, at any given hour, the amount of electricity demand is virtually independent of wholesale price. This is because the vast majority of electricity consumers do not see market prices in anything approaching real time and, for the most part, have done little if any thinking about how they could reduce their demand if power were very expensive. The Council is not advocating retail access as a means of achieving price responsiveness. The states are making their decisions about when and how much to open their retail markets to competition. But developing price-responsive demand does not require passing real time market prices on to all consumers. It does mean, however, that those suppliers who see wholesale prices should act as intermediaries between the market and consumers to effect load reduction or shifting that is in the mutual economic interest of the consumer and the power system. We believe this will develop in time, and that the current high prices will help motivate that development. In the past several months several hundred megawatts of price responsive load reduction have been put under contract by Northwest utilities. However, given the tight supplies and high prices now affecting the market, the Council believes that continued effort should be devoted to encouraging and facilitating the demand side of the market. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The California Effect | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Among the Western states, California's electricity industry is farthest down the restructuring path. California’s path is, in many ways, quite different than most other examples. California created a market structure that is quite centralized and complex. For most of its life, the California market has yielded competitive power prices. However, under periods of stress, we believe that the sheer size of the California market, in combination with the characteristics of its structure and the incentives it creates, clearly have resulted in prices that are higher than they might be otherwise. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The problems associated with the California market have been the subject of intense scrutiny in recent months. We generally believe that the steps ordered by FERC to shift California investor-owned utilities out of reliance on a spot market for the majority of their supplies and into longer-term contracts for supply is the right direction. As you know, however, implementation of such steps is clouded by the potential insolvency of these utilities. Quick resolution of these problems is essential. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recommendations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mr. Chairman, based on our analysis of the West Coast market, we offer the following recommendations: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1. Encourage Greater Use of Risk Mitigation Mechanisms | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| One of the characteristics of a commodity market is the emergence of mechanisms to manage risk, and electricity is rapidly becoming a commodity market. These mechanisms include actual physical forward contracts for supply, futures contracts, financial hedging mechanisms, and so on. These mechanisms can limit exposure to high prices. At the same time, however, there is always the risk that they will prove more costly than the spot market. As noted earlier, we believe the limitations on forward contracting by California utilities was a contributing factor to the price extremes of this summer and fall. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| We believe the same is true of other market participants in the Northwest and elsewhere. While opportunities to enter into forward contracts and other hedging arrangements have existed, it may be that the protracted period of low market prices for electricity lulled some market participants into believing they had no need for such mechanisms. The extreme volatility of the market has been revealed. We believe this will spur the development and use of risk mitigation tools. Every effort should be made to encourage their development and use. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Had more market participants been able to take steps to protect against risk, it is likely that the price volatility impacts would have been moderated. Forward contracting is also a vehicle by which new entrants in the generation market can limit their downside risk, thereby facilitating the development of new generation. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. Monitor the Market for its Ability to Provide Sufficient Capacity and Fuel for Reliability Purposes | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Council's analysis of power supply adequacy indicated that market prices would not be sufficient to support the development of "merchant" power plants, which sell into the spot market exclusively, until 2004. Current prices have changed that situation. The Council has also done analyses looking at actual market prices over the past year to see if they would be sufficient for a new entrant to cover its variable operating costs and its fixed costs and earn a reasonable rate of return. Until last summer, the answer was "no." | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Since then, however, given the electricity and gas prices experienced over the past year, the answer has become "yes." With higher prices, a couple of plants not considered in the Council's adequacy study have begun construction. In the Northwest, there are now 1,276 megawatts of capacity under construction that should come on line in 2001 through 2002. There are another 2,977 megawatts that already have site certificates, 1,291 megawatts of which we judge to be "active" projects, and another 3,060 megawatts that are in or have begun the siting process. The major factor that will determine how many of these plants go forward will be the developers' assessments of future market prices and the willingness of potential purchasers to enter into longer term contracts. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Almost all of these plants are natural-gas-fired combustion turbines, although the developer of a 24-megawatt wind farm in northeastern Oregon recently announced plans for a 300-megawatt expansion of that site. Nearly all of the proposed thermal plants are located within reasonable proximity to natural gas pipelines. There is a similar story to be told elsewhere in the West. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The degree of developer activity is encouraging. However, if we were to experience a few years of relatively warm, wet winters and cool summers, market prices probably would fall, and many of the active projects might become inactive. If followed by a dry spell and a hot summer or a cold winter, we would be up against the supply limits again. Similarly, we are concerned about this hydro-induced volatility on the market for development of new gas pipeline capacity. New pipeline capacity is needed to fuel most new generation. We must ensure that mechanisms in both electricity and gas markets can signal pipeline expansions when needed. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The question this possibility raises is whether we can rely on the market, and various risk-mitigation mechanisms, to provide sufficient capacity for reliability purposes. And if not, what are the options for ensuring that there is capacity and fuel available to ensure reliability and mitigate excessive price spikes. The Council intends to pursue this question. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3. Initiate Efforts to Develop the Demand Side of the Market | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| While the lead time for the development of new combined-cycle generation is relatively short, there will be a period during which the region and the West are vulnerable to further price spikes and possible reliability problems. Developing the demand side of the market has the potential for somewhat shorter lead times. Price-responsive demand can help mitigate price spikes and potentially avert reliability problems. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Northwest has a great deal of successful experience in increasing the efficiency of electricity end-use as a resource. The region needs to reinvigorate those efforts in light of the market prices we are experiencing. However, the region in particular needs to move aggressively to implement price-responsive demand management – reducing loads during periods of high prices or shifting the loads to periods of the day when prices are lower. The bad news is that this region has relatively little experience with these approaches. The good news is that there should be significant untapped potential. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As noted earlier, the Council is not advocating retail access as means of achieving price responsiveness. The states are making their decisions about when and how much to open their retail markets to competition. However, the Council believes that market-like mechanisms in which the consumer receives a significant part of the benefit will be most effective. Pilot programs were initiated last year in the region in which the serving utility and the load-reducing consumer share the cost savings of avoided power purchases (or the revenues from selling the freed-up power on the market). These programs appear to have been successful, although limited in scope. The greatest potential for such partnerships probably exists within industry and large commercial buildings. What can be done will vary from building to building and process to process. Nevertheless, if provided the incentive, the Council believes people will rise to the challenge. Creating these incentives should be a priority for the utilities of the region. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4. California Should Correct the Incentives In Its Market Structure That Contribute to Excessive Prices and Volatility | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quick implementation of the FERC's order for reforming the California market is essential. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5. Until the Market Stabilizes, Data for Monitoring and Evaluating the Performance of the Market Should be Available on a Timely Basis | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| One thing we learned last summer was that it is difficult to obtain the data necessary to monitor and evaluate the performance of the market. Despite the fact that utilities in the Northwest were extremely cooperative, there was a delay of many weeks before the relevant data could be obtained. We understand the possible commercial sensitivity of this information. We believe, however, that there should be arrangements possible that both protect the commercial value of the information and make it possible for independent parties to evaluate market performance on a timely basis. Until the market has stabilized and the public has greater confidence in its operation, this should be a high priority for market participants and organizations like the Western Systems Coordinating Council, California authorities and regional transmission organizations as they are formed. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 6. Electricity Emergency Processes and Procedures Need to be in Place | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Council determined in its October report that getting the processes and procedures in place that would be used in the event of an actual supply emergency should be a priority. Until new generation comes on line and demand-side programs can be implemented, there is significant probability that our emergency readiness will be tested. Necessary elements include an inventory of the actions that could be taken, the trigger points for taking these actions, clear definition of roles and responsibilities, and a communications plan to inform the public. We are pleased that efforts to accomplish this were established -- and successfully utilized -- this winter involving the Pacific Northwest Utilities Conference Committee, the Northwest Power Pool, Bonneville, the Power Planning Council, the Northwest states, and the region’s utilities. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 7. Conserve Energy | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| We all can do our part by conserving energy. In recent months, electric utilities and the news media have bombarded us with energy-saving ideas -- insulate your attic, caulk around your windows, install a programmable thermostat and replace incandescent light bulbs with compact fluorescents. Each of these will save energy. On a larger scale, the Power Planning Council, Bonneville and others have developed an exhaustive list of more than 1,000 energy-saving techniques and applications that could be implemented in homes, businesses and industries. The list was developed by an association of energy conservation experts known as the Regional Technical Forum and will be utilized by Bonneville to calculate energy savings under the conservation discount proposed for the 2002-2006 rate period. The measures and information about their energy savings are posted on the Council’s website, along with their estimated cost. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In summary, our recommendations amount to a call for the West to fix the current problems while investing in the future. We must ensure that utilities and consumers remain financially solvent until new sources of generation and demand reduction moderate prices. Perhaps the only good thing that can be said for the current crisis is that it offers the West an opportunity to think carefully about our future power supplies and take steps to ensure adequate investments in conservation, renewable energy and new base-load generation. These developments would be aided by a coordinated effort to streamline siting processes throughout the West so that we retain the essential environmental and community safeguards while avoiding unnecessary delays. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mr. Chairman, that completes my testimony, and I would be pleased to answer any questions. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||