Challenges Faced by Northwest Electricity Industry (1970-1985)

1. Part 5: Challenges(1970-1985) 5-1

2. Part 5 Overview • Introduction to Northwest Electricity Industry in 1970 • Washington Public Power Supply System (WPPSS) and Bonneville Power Administration (BPA) Move Forward With the Hydro-Thermal Plan • The Energy Crisis of 1973 • A Nascent Wind Technology • The Energy Crisis of 1979 • Reduced Load Growth and Problems with WPPSS Development of the Electricity Industry in the Northwest - Part 1 The Early Years (Prior to 1900) 1-5

3. Part 5: Challenges (1970 – 1985)Section 1: Introduction to the Northwest Electricity Industry in 1970 5-3

4. Part 5 (1970 – 1985): IntroductionNorthwest Electricity Industry in 1970 Energy shortages were predicted because of continued load growth and the Columbia River system was close to fully subscribed. Load was projected to steadily increase despite the lack of sufficient generation. Washington Public Power Supply System (WPPSS) and the Bonneville Power Administration were moving forward with the Hydro-Thermal Plan, financed by net power, to meet the growing load. A strong interconnected power system made the new generation, spread across the region, technically feasible. 5-4

5. Part 5: Challenges (1970 – 1985)Section 2: The WPPSS and BPA Move Forward With the Hydro-Thermal Plan 5-5

6. Part 5 (1970 – 1985): WPPSS and BPA move forward with the hydro-thermal planConstruction and Operation of the New Thermal Power Plants 5-6

7. Part 5: Challenges (1970 – 1985)Section 3: The Energy Crisis of 1973 5-7

8. Part 5 (1970 – 1985): The Energy Crisis of 1973Energy Crisis of 1973 In 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an oil embargo on the United States. This was partially in response to the United States’ support of Israel in the Yom Kippur War. In addition to the direct impact the disruption in oil imports had on the economy, there were a number of impacts on the electricity industry: • A desire to find “domestic energy” sources. • A culture of conservation was reinforced. • The emergence of energy efficiency programs With the removal of the oil embargo in 1974, people tended to go back to their normal routine, but the public had been introduced to the impacts of energy shortages. Many oil-fired plants were shut down, or converted to natural gas or coal. 5-8

9. Part 5: Challenges (1970 – 1985)Section 4: A Nascent Wind Technology 5-9

10. Part 5 (1970 – 1985): A Nascent Wind Technology Wind as a Potential New Generation Source In response to the oil crisis of 1973, the United States Department Of Energy and NASA teamed to examine the feasibility of utility-scale wind turbines. One of the driving reasons for this work was that utility-scale wind was seen as a domestic energy source, and as such, it would be secure from disruption. In 1982, three 2.5 MW MOD-2 wind turbines were installed near Goodnoe Hills WA. These three units showed that it was technically feasible to generate utility scale wind. But, like many demonstration projects, the three units on their own were not cost effective. With the end of the oil crisis, energy prices decreased and so did interest in utility scale wind generation. The three MOD-2 units were removed by Pacific Gas & Electric (PG&E) in 1988 and replaced with the 47 unit, 94 MW Goodnoe Hills Wind Farm in 2008. 5-10

11. Part 5: Challenges (1970 – 1985)Section 5: The Energy Crisis of 1979 5-11

12. Part 5 (1970 – 1985): The Energy Crisis of 1979The Energy Crisis of 1979 The Iranian Revolution of 1979 once again severely disrupted international oil markets when the American -backed Shah of Iran was replaced with the Ayatollah Khomeini. Even after the revolution, oil prices remained high because of the outbreak, and continuation, of the Iran-Iraq war. While not as severe as the 1973 crisis, a second crisis just 6 years after the first had an impact on the American psyche. The idea of domestic energy security had been formally introduced with the Carter Doctrine. The combination of the 1973 and 1979 energy crises changed the way the nation viewed energy. 5-12

13. Part 5 (1970 – 1985): The Energy Crisis of 1979The Public Utility Regulatory Policies Act (PURPA) By the latter half of the 20th century it was clear that power systems were a natural monopoly. Redundant infrastructure for the delivery of electric power was inefficient. The generation of electric power is not a natural monopoly, but a company that operates the wires is going to give preference to their own generation. As a result, existing operating companies could effectively keep out any new generators. The Public Utility Regulatory Policy ACT (PURPA) was passed to promote the greater use of domestic renewable energy. PURPA required utilities to purchase power from any qualified producer. The specific implementation was left to the various states. • Enabled significant cogeneration from large commercial and industrial customers. • Enabled interconnections for renewable (non-fossil) sources, including at the distribution level. One of the significant results was the expanded adoption of cogeneration. While cogeneration is not always renewable, it is significantly more efficient than previous generation. PURPA has been partially superseded by some legislation, such as the added requirement for utilities to provide net metering under Section 1251 of the Energy Policy Act of 2005. 5-13

14. Part 5: Challenges (1970 – 1985)Section 6: Reduced Load Growth and Problems with WPPSS 5-14

15. Part 5 (1970 – 1985): reduced Load Growth and Problems with WPPSSLower than Expected Load Growth Between 1946 and 1970 load in the Northwest grew at an average rate of 7% per year. Estimates for future load growth were generally based on a linear continuation of this rate. These estimates were overly optimistic and failed to take into account a number of factors: • Slowing economy • Price elasticity of electricity due to the increasing rates Environmental concerns and energy conservation programs, were reducing the rate of load increase. As a result, the anticipated customer base, which would justify the cost of new generation, was not materializing. 5-15

16. Part 5 (1970 – 1985): reduced Load Growth and Problems with WPPSS WPPSS Turns to “WHOOPS” In 1972 the Internal Revenue Service determined that the tax exempt status of net billing was illegal. Without the tax exempt status, the cost of issuing bonds increased significantly. One of the major problems with the Phase 1 projects was that none of the participating members had any experience with capital projects of this size. As a result, cost quickly began to skyrocket. In January 1982, the WPPSS board stopped construction on Plants 4 and 5 when total cost for all the plants was projected to exceed $24 billion. Since plants 4 and 5 generated no power, and generated no revenue, the system was forced to default on $2.25 billion in bonds. This meant that the member utilities, and ultimately the rate payers, were obligated to pay back the borrowed money. Numerous lawsuits began. Plants 1 and 3 were never finished either, but their costs were backed by the Bonneville Power Administration and the power it generated from the Columbia River Dams, cost that were eventual passes on to the customers as well. 5-16

17. Part 5 (1970 – 1985): reduced Load Growth and Problems with WPPSS WHOOPS… It was not until December 24, 1988, the parties in the various lawsuits reached a settlement of $753 million. Some of the system's approximately 75,000 bondholders would receive 40 cents on every dollar invested; others got as little as 10 cents. Because a court found that some of the bond monies for plants 4 and 5 were spent on plants 1 and 3, participants in those projects were held liable for the default. Seattle's share was $50 million, of which $43.2 million came from insurance companies. The last settlement was reached in 1995. Plant 2 at Hanford was completed in 1984 and is called the Columbia Generating Station. It produced 12 percent of the power supplied by the Bonneville Power in 1984. The WPPSS was at the center of the largest municipal bond default in the history of the country. 5-17

18. Part 5 (1970 – 1985): Challenges Challenges in 1985 Public Perception Because of the public bond default of the WPPSS, the public had a low opinion of the electricity industry. End-use Loads Load growth began to slow because of economic problems. The lower than expected load growth contributed to the WPPSS bond default. Infrastructure The countries dependence on foreign energy sources, and their interruptions in 73 and 79, had started the first attempts at utility scale wind energy. Utility Companies The WPPSS was at the center of the largest municipal bond default in the history of the country. This affected many of the utilities in the Northwest. Current Events/Regulation An increasing awareness of environmental concerns led people to re-examine conservation methods. It was shown that conservation could be more cost effective than nuclear or coal. 5-18