The power of power purchase agreements4 June 2002
A short and very loud international battle for the heart and soul of the Columbia river's largest FERC licensed hydro project was fought and 'settled' during the end of 2001. Fred Ayer reviews the brief history of this conflict and explores the reality of competing for hydro projects during the FERC relicensing process.
If I had set out to write a fictional account of the largest competitive Federal Energy Regulatory Commission (FERC) relicensing in the US, I wouldn't have been allowed the liberty to make up either the circumstances or characters that actually were involved in this 'hydro war to end all hydro wars'. For starters, once the competition by PacifiCorp and its new partner the Yakama Indian Tribe was announced, the licensee, Grant County Public Utility District (PUD), fired off a press release with a headline guaranteed to attract attention: European corporation continues its invasion of the Pacific Northwest. The release went on to quote the President of the PUD, Bill Judge, who described American farmers as the 'spiritual descendants of the 1776 Minutemen,' and with much bravado, boldly bragged, 'We've overcome long odds against European tyrants before.'
I grew up in Massachusetts, a short distance from the 'rude bridge that arched the flood. Their flag to April's breeze unfurled. Here once the embattled farmers stood, And fired the shot heard round the world.'* While I was very familiar with the events of the American Revolutionary War, I was intrigued to learn more about this modern day equivalent. To understand more about this conflict, I found it was helpful to understand some background about the project, the combatants, and the existing and future power contracts.
At the centre of this competition is the largest FERC licensed project consisting of two facilities: Wanapum and Priest Rapids. They were built on the Columbia river in the 1950s with financial help from Tacoma City Light, Puget Sound Energy and other regional utilities (both public and investor-owned). Together, the two facilities have an installed capacity of about 190MW, enough power for a city the size of Seattle. Back in the 1950s, the sparsely populated Grant County was only able to use about 1% of the power. The PUD, with the help of clever legal guidance, figured out how to pay the projects' US$380M cost by selling off much of the electricity through long term sales contracts with utilities serving the urban northwest. The FERC licences expire in 2005, which means the licensee, or a competitor, must file an application for a new licence by 2003.
The Grant County Public Utility District, located in central Washington, is a municipal corporation of the state of Washington authorised by a majority vote of the citizens of Grant County in 1938. The electric system that Grant has owned since 1942 operates with 6098km of transmission and distribution lines and 44 substations. The PUD is a major generating utility with the two large hydroelectric developments on the Columbia river and two small generating plants on local irrigation canals. Electricity is sold on a non profit retail basis to Grant County residents and wholesale to utilities serving customers in seven Western and Northwestern states. As a consumer-owned public utility, the PUD has a five-member board of Commissioners comprised of local citizens elected on a nonpartisan basis by the people of Grant County. The Commissioners meet weekly to set policy, review operations, and approve budget expenditures. Reports published at the end of 2001, show that the Grant County PUD enjoyed record revenues of US$88.8M for the year, more than doubling its best ever year.
Yakama Hydroelectric Project LLC (YHP) was the entity created by PacifiCorp and the Yakama Nation to compete and hold the new licence for the project.
PacifiCorp, based in Portland, Oregon, is the northwest's largest utility serving more than 1.5M customers in six Western states stretching from northern California into Washington, and across Utah, Idaho and Wyoming. PacifiCorp is made up of utilities it has acquired over the years, with at least one of its predecessor companies having been formed in the late 1800s.
In 1999, PacifiCorp merged with UK-based Scottish Power, a US$12.6B company traded on the New York Stock Exchange and thus the reason in the aforementioned press release referencing an invasion by a European corporation.
The Confederated Tribes and Bands of the Yakama Nation live on one of the largest reservations in the US (0.5M ha). The reservation covers 2530km2 in the south-central Washington counties of Klickitat and Yakima. The members of the Yakama Nation have historically depended on the Columbia river and the salmon for their sustenance. Traditional routes for subsistence were, and continue to be on the Columbia river, starting above Priest Rapids to the traditional fishing site on Celilo Falls, and extending west on the lower Columbia river beyond the Klickitat river tributary.
The Power contracts
Grant PUD currently uses only 36.5% of the output of the project and sells the other 63.5% under long term contracts to a 12-member organisation called the Grant Purchasers Group (purchasers). Included in this group are the region's four investor-owned utilities; Portland General Electric, Puget Energy, PacifiCorp, and Avista Corporation, as well as the cities of Seattle and Tacoma, Eugene Water and Electric Board, Cowlitz and Kittitas PUDs and three small Oregon municipal utilities. What seems to have driven at least the PacifiCorp half of the competition was concern about how the project's 1900MW would be distributed and at what cost during the term of the new licence.
The Purchasers' long term contracts expire when the FERC licence expires, and under an October 1999 Washington, DC Appeals Court ruling, the PUD will have title to 70% of the power for the term of the new licence. The other 30% of the power has been allocated to a group of regional utilities that also included four Idaho electric co-operatives. In addition, FERC ruled that Grant could sell that power under market-based principles once the project is relicensed.
The shot that was heard, if not around the world, at least around the Pacific Northwest
In August 2001, PacifiCorp and the Yakama Nation announced their plans to file a competing application for the dams. On 29 October 2001, YHP made the competition for Grant County PUD's Priest Rapids project official when they submitted their initial consultation document (ICD) for a competing licence application to FERC. The document outlines YHP's plans to develop its licence application for the Priest Rapids and Wanapum facilities.
The new entity said it would expand the project's benefits from the geographical areas of Grant County to the other six nearby counties. One of its expressed strategies involved facilities enhancements at the dams themselves, which would mean construction jobs as well as employment opportunities at the hydro facilities. Another part of that strategy involved what was called a 'broader regional allocation' of the power output from the project. The ICD talks about how YHP proposes to reserve some power for Grant PUD customers while also spreading power benefits of the project to consumers throughout the Pacific Northwest. The ICD's executive summary explains 'this will be accomplished by sale of the project's power output on a cost basis under contracts for the length of the new licence with options for renewal to public and investor-owned utilities in the region'.
In summary, the ICD says that the YHP strives to increase public benefit from the dams by:
• Broadening the spread of low cost electricity.
• Optimising operations, including possible increased generation.
• Achieving greater energy and water use efficiency.
• Extending benefits to disadvantaged areas and peoples, including tribal and Hispanic communities.
• Improving fish and wildlife protections and increasing compliance with the Clean Water Act, the Endangered Species Act and the Yakama Nation's treaty rights.
• Enhancing cultural and recreation values.
Things looked like they were going to get interesting and showed signs of a competition that would engage the citizens of the Pacific Northwest in a range of environmental and cultural discussions. However, the competition fizzled and fell off the region's headlines as quickly as it had appeared. The cause of this precipitous fall was Grant's ability to again get the most out of the long term power contract — the ones that back in the 1950s had enabled the rural county to build the projects while only being able to use 1% of the energy produced.
The end of a loud … but short war
Grant recognised the potential power of the contracts and the relationship with the purchasers and inserted a non-compete clause in its power purchase contract with all the purchasers including PacifiCorp. PacifiCorp tried to stop Grant's use of the non-compete clause but lost that battle in King County Superior Court 21 December 2001.
The ruling, which held that the no-compete clause was legal, undermined PacifiCorp's challenge by upholding Grant's right to penalise utilities that did not sign new contracts by 1 January 2002. With just ten days left to sign power purchase contracts with the PUD, PacifiCorp chose to sign instead of appeal. According to PacifiCorp, the deal it cut in the end with the utility district was US$50M sweeter than that offered by Grant County before PacifiCorp and the Yakamas launched their competitive bid. According to published reports, PacifiCorp spent between US$5-6M on preparing to compete for the mid-Columbia projects before they threw in the towel at the end of 2001. Some had suggested that PacifiCorp had launched the partnership merely as a bargaining chip, but PacifiCorp denied this.
In early January 2002, the Yakama Nation announced that it would assume sole ownership of the YHP and continue to compete for the projects. But less than a month later, realising that the odds against succeeding were significant, the Yakama Nation dropped its bid for the two dams - the competition was over.
Is real competition possible?
While neither the FERC nor its predecessor, the Federal Power Commission, has ever allowed one utility to take over a dam built by another utility during a relicensing, it is theoretically possible. FERC regulations give the incumbent licensee preference in the relicensing process, and Section 15 of the Federal Power Act outlines the standards under which competing license applications are to be evaluated to determine which proposal 'is better adapted to the public interest'. These include 'other factors considered relevant by the commission, except that an applicant's plans concerning fish and wildlife shall not be compared'. The section also states that 'insignificant differences with regard to [these factors] shall not result in the transfer of a project' from the incumbent licensee.
Ironically in the 1980s, it was PacifiCorp that successfully defeated a takeover during the relicensing of its Merwin dam on the Lewis river, a project that straddles Cowlitz and Clark counties.
PacifiCorp has denied suggestions that its partnership with the Yakamas and their attempt to compete for Grant's project was a bargaining chip to enhance terms of a new power purchase contract. In fact PacifiCorp was adamant that the competition for the mid-Columbia projects was not 'a calculated thing' and said that its 'intentions were to follow through with this'. I believe them.
While a competitor has never prevailed in a FERC relicensing competition, this case might have been different were it not for the 'power' of the power purchase contracts.
Indulge me for a few minutes while I speculate on what might have been.
PacifiCorp's strategy of broadening the users of the power from the project ('spread the wealth'), coupled with partnering with a native American Tribe with cultural ties to the river and its salmon, may very well have qualified as a proposal which would have been 'better adapted to the public interest'.
In addition, the licensees reputation and relationships with stakeholders may have also helped the competitors. Grant PUD and state and federal agencies, tribes, and non-government organisations they interact with, have developed a less than positive relationship. This relationship became very public in May 2000, when FERC denied Grant's request to use their alternative licensing procedures (ALP) for relicensing the project due to a lack of consensus amongst the parties.
In making its denial, FERC described how they had received several responses to Grant's request to use the ALP '…including key agency and tribal representatives opposed to the use of the alternative procedures for this project.'
The opposition from the parties referenced unsatisfactory attempts to bargain with the PUD over many years and as American Rivers stated in its letter, 'because our previous attempts to work collaboratively with Grant County PUD have failed, we do not support the use of the ALP in this relicensing'.
Ultimately FERC denied Grant's request saying 'that there remains no consensus that the use of the alternative procedures is appropriate in this circumstance'. This denial marked the first ALP applicant to be turned down by FERC and, to the best of my knowledge, the only one to be denied. What does all this mean?
Grant suggests that the parties' unwillingness to support Grant and the letters in opposition to the ALP have to do with an 'attempt to use the ALP request to enhance the objector's position in ongoing salmon negotiations with Grant PUD'.
If that is true, then those parties may have been very interested in negotiating with a new licensee and absent the power purchase contracts would have made the Grant competition very interesting indeed.
Other licensees agencies, tribes, and NGOs (not to mention an erstwhile competitor) may find this case worth reviewing in detail and checking early on to determine the status of the 'power' of power purchase agreements.