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Oversupply Litigation Milestone: FERC Approves BPA Oversupply Management Protocol

October 20, 2014 posted by Eric Christensen

At its monthly meeting last week, the Federal Energy Regulatory Commission ("FERC") approved the Bonneville Power Administration's "Oversupply Management Protocol," marking a major litigation milestone in Bonneville's controversial efforts to address those periods when the combined output of federal dams and wind generation in the Pacific Northwest exceeds electric demand in the region and in areas where power can be exported. While FERC's decision does not resolve the litigation, it is a major step toward final resolution of the matter.

As we have previously discussed at length, the oversupply problem arises when heavy spring runoff in the Columbia Basin coincides with high spring-time winds, producing a simultaneous surge in power production from the region's hydroelectric dams and wind generators. While Bonneville can generally manage these events through, for example, backing down the region's thermal generators and providing them with free or nearly-free replacement power from federal dams, this solution does not work for wind generation. Even when output is replaced with free or low-cost power, forced curtailments of wind generation can impose substantial costs on wind generators from lost tax credits based on production, as well as lost RECs and, in some cases, violations of contractual minimum production requirements. 

Bonneville has some capacity to limit production from the region's hydroelectric dams by spilling water rather than running water through hydroelectric turbines. But this solution can run up against water quality limitations because releasing water over dam spillways adds dissolved gases to the water and can, if concentrations are high enough, cause "gas bubble trauma" -- the equivalent of "the bends" in human divers -- in aquatic organisms, including the Columbia Basin's threatened and endangered anadromous fish runs. Washington and Oregon therefore have both instituted limits on dissolved gas concentrations in the Columbia River, and Bonneville operates federal dams to comply with these limits.

FERC rejected Bonneville's initial attempt to address the oversupply problem -- the "Environmental Redispatch" policy. FERC held that Environmental Redispatch, which would require wind generators to curtail production without compensation once BPA has exhausted its other options, improperly discriminates against wind producers. In the process, FERC for the first time asserted authority over Bonneville under Section 211A of the Federal Power Act, often referred to as the "FERC Lite" provision. 

In response, Bonneville went back to the drawing board, developing the Oversupply Management Protocol, which compensates wind generators to reduce production during oversupply events. In December 2012, FERC generally upheld this policy, but rejected Bonneville's proposal to split the costs of Oversupply Management 50-50 between Bonneville's power customers and wind generators. FERC found this allocation placed a disproportionate burden on wind generators.

Bonneville addressed FERC's rejection of the cost allocation proposal by instituting a new mechanism that will allocate Oversupply costs to those generators who schedule on Bonneville's transmission system during Oversupply events, with costs allocated in proportion to the amount of transmission scheduled. In the first of yesterday's orders, FERC found that this allocation mechanism meets BPA's non-discrimination obligations under the Federal Power Act and FERC's previous orders. In the second order, FERC found that the rates Bonneville adopted to carry out Oversupply Management pass muster under the limited scope of review assigned to FERC in the Northwest Power Act.

While litigation concerning Bonneville's responses to the oversupply management problem continues, including, for example, challenges to FERC's initial decision to impose requirements on Bonneville using its FPA Section 211A authority, last week's decisions move this controversy one step closer to final resolution. Interestingly, as FERC noted in its orders, managing oversupply problems has, despite early fears of huge costs, been a modest expense in the context of Bonneville's overall budget, only about $2.7 million, all incurred in 2012, a year of extraordinarily high water in the Columbia Basin. Despite the relatively modest monetary stakes, litigation over the underlying principles, such as the extent of FERC's authority under Section 211A, is likely to continue well into the future.