As it was wrapping up business for 2012 and heading off for the holidays, the Federal Energy Regulatory Commission ("FERC") left a lump of coal in Bonneville Power Administration's stocking in the form of two orders rejecting Bonneville's efforts to address wind generation curtailments during periods of over-generation. Together, the orders put Bonneville's efforts to address the over-generation problem nearly back to square one.
As we have previously explained in greater detail, the rapid growth of the Pacific Northwest's wind industry in the last decade has, at times, produced too much of a good thing. When high spring-time flows on the Columbia coincide with high winds in the Columbia Gorge, the combined output of the region's wind generation fleet and the hydroelectric dams exceeds regional electric demand. The situation is further complicated because Clean Water Act standards on dissolved gases designed to prevent gas bubble trauma in aquatic species limit the extent to witch Bonneville can spill water, requiring it to run water through hydroelectric turbines instead.
This week's FERC orders arise from Bonneville's efforts to deal with this devilish concatenation of circumstances. Lacking other options to maintain the balance between generation and demand necessary for reliable operation of the regional grid, Bonneville initially set forth a plan, dubbed "Environmental Redispatch," that would require wind generators to curtail production once Bonneville exhausts other options such as backing down the region's thermal generation fleet. Wind generators would, in return, receive replacement power generated by the federal hydro system at no cost. While, at first glance, this solution seems reasonable, it created serious problems for the region's wind generation fleet, primarily because wind generators receive the Production Tax Credit ("PTC"), which has been a key element of most wind generation financing in the region, only if they generate. Curtailments also create other costs for wind generators, such as the loss of Renewable Energy Credits and potential violations of contractual minimum generation requirements. For these reasons, a coalition of Northwest wind generators filed a complaint against Bonneville at FERC in July 2011 seeking to overturn the Environmental Redispatch protocol.
On December 7, 2011, FERC issued an order granting the complaint. FERC concluded that Bonneville's treatment of wind generation under the Environmental Redispatch protocol constituted discriminatory treatment in violation of Section 211A of the Federal Power Act and ordered Bonneville to file a non-discriminatory tariff. The December 7 order is of particular significance because it marks the first time FERC has exercised its authority under Section 211A, the so-called "FERC Lite" provision, which gives FERC limited authority over publicly-owned transmission systems like Bonneville's. The December 7 order and related filings are available here. This week's FERC orders arise in the aftermath of the December 7 order.
In the first order, FERC denied petitions for rehearing of the December 7 order that were filed by Bonneville and many other parties, primarily representing Bonneville's public power customers. In the second order, FERC rejected key elements of Bonneville's attempt to comply with the December 7 order, dubbed the "Oversupply Management Protocol" ("OMP").
Under the OMP, Bonneville proposed a system in which generators would be compensated for the lost opportunity costs. Generators would submit documents demonstrating their opportunity costs to Bonneville in advance and, when curtailments are required to keep the regional grid in balance, Bonneville would order curtailments, paying generators according to their stated curtailment costs. Bonneville would curtail the least expensive generation first and work its way up the cost curve until sufficient curtailments are achieved. Bonneville proposed that the costs of such curtailments be divided evenly between wind generators and Bonneville's other customers, so that each class of customers would pay 50% of curtailment costs.
FERC's order approves the skeleton of the OMP, but strikes its heart. That is, FERC generally approved the approach of paying generators to curtail based upon their demonstrated opportunity costs, but rejecting the 50/50 cost-splitting approach as discriminatory against wind generators. Who should bear the cost of curtailments is, of course, the central question Bonneville has been attempting to resolve, and FERC's order drops this hot eggnog squarely back in Bonneville's lap.
Together, this week's FERC orders augur further escalation in "wind war" litigation in the New Year. It is likely that Bonneville and others will appeal FERC's order denying rehearing to the Ninth Circuit or the D.C. Circuit. Meanwhile, Bonneville will be faced with a contentious regional process to develop an alternative to the 50-50 cost-sharing approach rejected by FERC in the OMP order.
If you have any questions about the FERC or Bonneville matters discussed here or other matters related to the utility industry, Bonneville, or FERC, please contact a member of GTH's Energy, Telecommunications and Utilities practice group. We have years of experience in FERC and BPA matters, the Northwest's energy industry, complex administrative matters, appellate litigation, and related fields.