7/28/2009

On July 21, 2009, the Bonneville Power Administration ("BPA") issued its Final Record of Decision ("ROD") in the 2010 BPA Rate Case. In the ROD, BPA provided a detailed rationale for charging wind generators a Wind Integration Rate ("WI Rate"). Although the final rate of approximately $5.70/megawatt-hour ("MWh") for "wind integration" or "wind balancing" services is less than half the rate that BPA initially proposed ($12/MWh), it is a signal to the wind industry that transmission providers may change course as they react to increasing amounts of wind being integrated into the grid.

BPA, in its role as the Pacific Northwest's largest transmission provider, is responsible for maintaining reliability of the transmission system. To do so, it must balance both loads (the electrical power consumed by customers) and resources (generation from hydro, thermal, and wind power plants) on its system. BPA must hold reserves it can deploy to keep the grid in balance when generation does not meet the moment-to-moment demand for electricity. BPA sets aside a portion of its hydro resources to provide balancing services for both wind and load.

Historically, BPA has charged its preference customers¹ for the costs of providing regulation and following reserves under its "embedded cost" allocation. Regulation reserves are used to balance moment-to-moment differences between generation and load. Following reserves are used to balance larger differences between generation and load over a longer time period within a given hour. BPA's embedded cost allocation represents the fixed costs of BPA's use of certain hydro resources associated with providing these reserves.

BPA now allocates a portion of the embedded cost of holding reserves to wind generators through the WI Rate. The WI Rate also includes an embedded cost component that accounts for use of a third category of reserves known as "imbalance reserves," which compensate for the differences between a generator's schedule and generation within an hour. This within-hour imbalance capacity charge is separate from and in addition to the imbalance energy charge imposed on other generators. BPA has essentially allocated between its preference and wind generator customers fixed generation costs that were once paid entirely by preference customers. In addition, BPA's WI Rate charges wind generators for certain "variable" costs—costs that wind generators argue are actually BPA's opportunity costs.

Background on BPA's Proposed Wind Integration Rate

BPA's effort to charge wind generators for wind balancing services first emerged in the 2009 WI Rate Case. Pursuant to a settlement agreement, BPA's wind generator customers agreed to pay a WI Rate in exchange for BPA's commitment to implement operational advances that would bring down the cost of providing wind integration services in the future.

In the 2010 BPA Rate Case, BPA initially proposed a WI Rate of $2.72/kilowatt-month, or roughly $12/MWh—a 400% increase from the 2009 WI Rate. (The rate is based on nameplate capacity and therefore varies somewhat depending on a project's capacity factor). BPA's wind generator customers argued that this rate would have a chilling effect on renewable energy development in the region, thereby preventing the region from meeting the Obama Administration's clean energy goals. Throughout the proceedings, BPA seemed skeptical that a WI Rate would either deter the development of renewable energy in the region or drive wind out of BPA's system and onto the systems of other balancing authorities.

Summary of BPA's Final Record of Decision

BPA determined that the wind integration charge was necessary because the combination of the rapid growth of the wind fleet and the wind generators' scheduling inaccuracies required BPA to hold a significantly larger amount of reserves in order to provide balancing services and preserve system reliability. In contrast, wind generators argued that BPA's proposed rate would impose excessive and duplicative charges on wind generators based on flawed methodologies, in violation of Federal Energy Regulatory Commission ("FERC") policy.

BPA acknowledged in its ROD that once BPA's wind generator customers were made aware of their scheduling inaccuracies and the effect on BPA operations, they began taking steps to improve their scheduling accuracy. Over the next several months, the wind generators made significant improvements. The $5.70/MWh WI Rate set in the ROD is lower than the BPA initial proposal partly due to BPA holding a level of reserves commensurate with the wind fleet's demonstrated improvement in scheduling accuracy.

Potential Output Curtailment

Although the $5.70/MWh WI Rate is much more palatable than BPA's initial proposal of a $12/MWh rate, it comes with an important tradeoff: a potential for increased wind generator curtailments pursuant to BPA's Dispatcher Standing Order 216 ("DSO 216"). Under DSO 216, when BPA is close to exhausting the reserves it has set aside to provide wind balancing services, it can direct wind generators to lower their output if they are generating more than their schedules or impose reductions in their transmission delivery schedules if the wind generators are generating less than their schedules.

Increased reliance on DSO 216 provides a mechanism for BPA to maintain the reliability of the power system regardless of the accuracy of wind schedules and provides a strong incentive for greater scheduling accuracy. BPA was therefore able to set a WI Rate associated with a much higher level of scheduling accuracy than was initially advocated by BPA. By assuming higher scheduling accuracy, BPA will be able to hold less reserves for wind balancing, thereby bringing down the rate. However, in the ROD, BPA has reserved the right to increase the rate if it encounters obstacles to effectively implementing DSO 216 and is required to increase the amount of reserves set aside for wind balancing as a result.

Costing Methodology

Critics have argued that the rate ultimately set by BPA is not cost-based, partly due to both the way in which BPA allocated its embedded costs and its decision to charge wind generators for costs to account for lost "surplus" sales as a result of holding generation in reserve. Throughout the proceedings, wind generators argued that the costs denominated as "variable costs" by BPA are really "opportunity costs," in violation of FERC policy, which prohibits charging for both embedded and opportunity costs in the provision of transmission services. In response to these arguments, BPA removed a portion of its variable cost allocation, acknowledging that it could be considered a double-count. Aside from this adjustment, the ROD upheld the inclusion of costs for both lost surplus sales and embedded costs. BPA gave a nod to the concerns raised by the wind generators, noting that there could be other flaws in its methodology, depending in part on whether costs it categorizes as variable are in fact opportunity costs. The ROD explained that because BPA is grappling with the complex issue of how best to integrate large quantities of wind, it will be revisiting its costing methodology in the future, as it gains more experience with wind integration issues.

Also of note is BPA's replacement of its Intentional Deviation Penalty with a new "Persistent Deviation Penalty." Whereas the Intentional Deviation Penalty applied to intentional, inaccurate scheduling of resources for economic gain, BPA dropped it in favor of a penalty for large, persistent deviations that appear consistent with more extreme wind ramping events. BPA argues the penalty is needed to promote better scheduling and help preserve system reliability. As a consequence, wind generators will now be subject to a 125% penalty charge after four consecutive hours of schedule deviations that exceed 15% of the schedule for the hour and 20 megawatts. Generators may apply for a waiver of the penalty if they can demonstrate mitigating actions to reduce the deviation or extenuating circumstances.

Self-Supply Option

An important area of agreement between BPA and the wind generators is the need for BPA to unbundle the costs of providing balancing services to allow for self-supply. Wind generators that self-supply all or a portion of wind balancing services (regulation, following, and/or imbalance reserves) will receive a credit against the WI Rate. However, the self-supply option will not be available until the second year of the rate period, as BPA must first undertake certain operational advances to enable self-supply. BPA has committed to working with the wind community on establishing self-supply options and protocols.

BPA committed to taking additional concrete steps to facilitate the integration of more wind. Of particular note, BPA is paying for the installation of 16 wind anemometers that will provide data to wind operators at five-minute intervals, in order to facilitate more accurate scheduling. Finally, BPA agreed to exempt small wind generation (projects of 20 MW or less) from the WI Rate for the first year of the 2010-11 rate period.

FERC Approval

The WI Rate is subject to FERC approval and confirmation under the Northwest Power Act, which provides for limited review by FERC with the primary focus on the adequacy of the rate to ensure that BPA's revenues are sufficient to repay the Federal Treasury. FERC does not apply its traditional rate-making policies to BPA. If BPA has satisfied the standards of the Northwest Power Act, FERC is required to approve and confirm its rates even if they do not conform to FERC's own rate-making standards. As a policy matter, however, there are voices inside and outside the government that question whether a federal power marketing agency such as BPA should charge rates that could be deemed unlawful if charged by FERC-regulated public utilities.

Implications for Future Wind Integration

This case signals the increasing attention to the cost of integrating larger quantities of wind into the grid. In the Pacific Northwest, the WI Rate is not likely to go away anytime soon (if at all), and it is unclear whether the rate will go up or down in future rate periods. The direction of the BPA rate will depend on policy directives from within and outside BPA, as well as operational improvements by both wind generators and transmission providers. One very positive aspect of the BPA Rate Case was BPA's expression of willingness to continue to engage the wind community in tackling the issues associated with integrating wind and working toward the needed operational advances. Making operational changes will be critical to integrating renewable energy in a cost-effective manner, both in the Pacific Northwest and elsewhere.

As projects are planned, wind generators should be prepared to address wind integration issues and the additional uncertainty they create. In particular, wind developers should ensure that power purchase agreements are drafted with actual and potential wind integration charges in mind. Wind generators outside of BPA's control area should also be prepared for the wind that is blowing their way, as wind integration issues are already beginning to crop up in other parts of the country, and are likely to do so in the future—if they haven't already.

Stoel Rives attorneys Stephen Hall and Dina Dubson represented the Northwest Wind Group, a coalition composed of Renewable Northwest Project and five major wind energy developers—BP Alternative, Columbia Energy Partners, enXco, Horizon Wind Energy, and RES America Developments Inc.—in the 2010 BPA Rate Case. If you have any questions, please contact:

Stephen Hall at (503) 294-9625 or schall@stoel.com
Dina Dubson at (503) 294-9675 or dmdubson@stoel.com
Pamela L. Jacklin at (503) 294-9406 or pljacklin@stoel.com
Marcus Wood at (503) 294-9434 or mwood@stoel.com
Bill Holmes at (503) 294-9207 or whholmes@stoel.com
Jennifer H. Martin at (503) 294-9852 or jhmartin@stoel.com
Jason A. Johns at (503) 294-9618 or jajohns@stoel.com

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¹ BPA's preference customers are cooperatives or public bodies, such as municipalities and public utility districts, that have priority access to federally generated power pursuant to law.