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Regional Review

COMPREHENSIVE ENERGY
REVIEW FORUM
"Putting It All Together"

Friday, July 12, 1996
Seattle Center, Seattle, Washington

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Nearly 550 people packed into the Rainier Room at Seattle Center to hear a full day's update on the Comprehensive Review of the Northwest Energy System. Among the highlights, Jan Packwood, vice president of Idaho Power, announced that seven investor-owned utilities (IOUs) are pushing ahead with plans to create an independent grid operator (IndeGO) by mid-1997. Deputy Secretary of Energy Charles Curtis cautioned against solutions that rely on transferring debt to the federal government, and BPA Administrator Randy Hardy said the big question is, who gets the system benefits when WPPSS bonds begin to be retired in 2012.

HEADLINES:

WELCOME

Seattle Mayor Norm Rice welcomed Forum participants and thanked steering committee chair Chuck Collins for giving his time and leadership to the effort. Rice said the work of the review "puts us closer to deciding the region's energy future." It is vital to find a way "to equitably share" the resources of the Columbia River system, he said.

"The Columbia River is the foundation of the region's economy, identity, and environmental health," Rice said. No one would be better off if we forfeit control of this resource, he cautioned. The four Northwest governors came to the review representing different types of communities, but all four challenged the audience at the kickoff to decide how to meet the region's shared goals and preserve the value of the system, Rice stated.

Today marks a new course for the review -- "the work begins in earnest," he said. During the first part of the review you defined the issues and suggested possible solutions, Rice stated. Now comes the search for compromise and shared solutions, he added.

The Mayor cautioned the audience to keep in mind "how the rest of the nation views our situation." The Pacific Northwest's hydro system is still the envy of the rest of the United States, and powerful members of Congress have their eyes on it, he said. We no longer have the clout we once took for granted in Congress, Rice continued, and we should heed the advice in Senator Slade Gorton's letter. Gorton said we must not give the Administration or other regions of the country a legitimate basis for objecting to our proposals, particularly with regard to paying the U.S. Treasury or the WPPSS bondholders, he explained.

We will control our resources only if we assume the costs and liabilities of the system, Rice said. If we do otherwise, we invite a loss of control to interests outside the region, he added. Rice said the recommendations of the review stand the best chance if they offer an interim solution to the fish issues. We must be willing to compromise and step up to new obligations, he stated.

Rice said the City of Seattle will spare no effort in working on the review. Seattle is seen "as allied with environmental interests," which he acknowledged has been "a source of concern." Yes, we have strong environmental values, but we have an interest in low-cost energy as well, he declared.

The entire Northwest has shared goals, Rice said. This is a premier region in the global economy, and for economic opportunity and environmental stewardship, he stated. I wish you luck and am following your progress with great interest, Rice concluded.

AGENDA

Electric System Components: Pieces of the Puzzle

Collins introduced the steering committee and noted that the committee had divided itself into four work groups to focus on specific issues. The work groups held over 100 meetings and over 400 people participated, he said.

Competition and Customer Choice

The first report was from Al Alexanderson, who along with Ken Canon, co-chaired the Competition Work Group. Alexanderson said the group's primary concern was to look at bringing the benefits of a competitive system to the end user. The group came to various levels of agreement on a number of issues, he said.

There was strong agreement on several items, Alexanderson said, including providing all customers with choice of electric supplier by 2000, and the separation of transmission and distribution from supply. The work group would give PUCs jurisdiction over stranded cost recovery for IOUs and likewise, the governing boards of customer-owned utilities (COUs) would deal with stranded costs for those utilities. Alexanderson said the group agreed public purposes should be funded through "market neutral" mechanisms.

There was less agreement on formulas for stranded cost recovery, the special advantages that existing retail providers have in a competitive market, and the degree of separation required between generation and transmission functions, Alexanderson reported. He added the group had examined the current situation and determined that, among other things, wholesale competition is here now, and large customers are demanding access to the market.

Alexanderson said a "breakthrough in thinking" occurred when the work group focused on the "end-state" to be achieved with competition. We agreed that all customers should have choice, there should be open and non-discriminatory access to power supplies, and funding for public purposes should be consistent with the competitive market, he said. Alexanderson listed a number of market power concerns, including the separation of the regulated and unregulated (or competitive) segments of a business, and the role of BPA as a competitor. The group identified several transition issues, including cost shifts to captive customers, stranded costs, and public purposes, he said.

Conservation, Renewables, and Public Purposes

Jim Davis, co-chair of the Public Purposes Work Group, said the participants in the group "were very diverse" and that is one reason "we didn't reach lots of consensus." The list of consensus recommendations on conservation is very short, he said. The group favored a voluntary regional effort to sustain market transformation, funded by contributions from BPA and other utilities. Market transformation would have a life span of 10 years, Davis explained.

The "non-consensus" list is more extensive, he reported, and includes identifying a mechanism to ensure ongoing support for conservation and the level of funding needed. Some people believe the market should define and support conservation, and others believe the effort requires public funding, Davis said. The work group report includes a chart of the system's cost obligations and transfers, he pointed out.

Co-chair Rachel Shimshak said the problem we addressed with renewables is that they have unique benefits that are not reflected in their pricing. If a competitive market focuses on least cost, she said, renewables may not be adopted. There was consensus on five activities related to renewables, Shimshak said, as long as there is no new money required. The group supported continuing existing research and development for renewables, along with completing six ongoing renewable pilot projects. There was no agreement on whether the region should pay for continued development of renewables, she said.

With regard to low-income energy assistance, Shimshak said the group agreed the need is greater than the available funds and that an additional $50 million to $100 million is needed annually. There was no agreement on who is responsible for these programs: the government or the electricity system, she said.

I hope none of you are scandalized by the lack of consensus among the public purposes group, Collins interjected. In an evolving market, non-market interventions are by their nature the most controversial, he said. Rachel and Jim did "heavy lifting of the first order," and the steering committee will have to deal with the lack of consensus, Collins concluded.

Transmission

K.C. Golden, co-chair of the Transmission Work Group, noted that his group had the advantage of building on the work PNUCC had already done. He said there were three basic issues before the group, and he likened the transmission system to an interstate highway to explain them. First, the highway has multiple owners, and each owner must be contracted with. Second, each owner also owns a lot of trucks, and there is a powerful incentive to prefer one's own trucks over those of others. Third, if you tackle the first two issues, what do you do about the costs and obligations born by an integrated system? he said.

Golden noted there was strong support for formation of an independent grid operator (IGO). There was agreement that BPA's transmission system should be separated from its power marketing function and regulated by FERC. And the group agreed that any transition should include honoring existing contracts, he added.

Bill Drummond, co-chair of the group, described the opportunities an IGO would present. "Everyone agrees we have a fantastic transmission system," he said; it's reliable and has few bottlenecks. The group started with the principle of "do no harm," Drummond said. He went on to explain the "pancaking" problem caused by having multiple owners in the system, and he said, when you have utilities that own both transmission and generation, it requires constant oversight to guard against "self-dealing."

There are also questions of coordinated planning if bottlenecks occur, Drummond continued. It may not be to an owner's advantage to remove the bottleneck, he explained. By and large, the group agreed there are opportunities to improve the system, he said. A majority thought an IGO would resolve a number of problems, Drummond reported.

He described the group's recommendations on several issues and pointed out that there are two points of view on control areas: some favor a single control area, and others want to continue with 12 or 15 control areas. There is a big question about what facilities would be under the control of an IGO, Drummond said, and there is a lot of work left to be done on pricing.

Golden presented four options for IGO governance, from complete federal control to a for-profit corporation. A minority of the group felt that moving to an IGO may not be worth it, Golden said. They favored small increments of change, and a proposal for an independent grid scheduler (IGS) was submitted; it came in later and needs further study, Golden noted. The group also discussed public purposes, he said, and came up with several principles to guide the discussion, including preventing conflicts of interest for the IGO. The group concluded that "wires charges" could interfere with the most economic operation of the system, Golden stated; if they are used, there would need to be study about the most fair way to apply them, he added.

Federal Power Marketing

Federal Power Marketing Work Group co-chair John Saven welcomed the Forum participants to "the Woodstock of the Northwest electricity industry." Dramatic changes in the electricity industry have combined to squeeze BPA between rising costs and falling prices, he explained. BPA's response to these circumstances has raised questions about its role in power marketing, Saven said in describing the group's "problem statement."

He outlined the most significant variables in the discussion, which include BPA's third-party debt, the Appointments Clause in the U.S. Constitution, and contracts. Saven said the group had narrowed the proposals for marketing the output of federal resources to two models: "BPA Stretched" and Joint Ownership. There was no consensus on which of the models is preferable, he said.

BPA Stretched involves no legislation, but "has plenty of room for creativity," Saven reported. Joint Ownership puts ownership in the hands of the customers, he said.

Co-chair Bob Gannon presented a list of guidelines the group developed to evaluate the proposals. These include moving to a fully competitive bulk power market, properly aligning risks and benefits, and preserving the benefits of coordinated system operations. The group reached several consensus recommendations, he said, including a preference that administrative improvements be made as soon as possible and that BPA remain a federal entity, with a modified role. There was disagreement about whether BPA can be competitive, whether long-term take-or-pay contracts were desirable, and whether the power from the federal Columbia River system should be sold at cost-based or market prices.

Gannon said the steering committee faces several key decisions, including whether to pursue federal legislation, whether BPA should compete for wholesale loads outside its current DSI customers, and

to what extent the review should address river governance.

Examining the Issues: How Do We Make the Pieces Fit?

We didn't get consensus in many areas, Collins said, and we're entering a period of putting the pieces together. We asked a panel of experts to react, Collins said, "to tease out the tough issues" and start seeing where the compromises might be.

Saralynn Baker-Sifford, general manager of the Oregon Rural Electric Cooperative Association, said small utilities want to see the review take on "an honest and intellectual discussion about the future and disposition of the Northwest Power Planning Council." That would be very valuable and important, she said.

Baker-Sifford said her constituency ranges from those who feel things should remain as they have been for 60 years, to those who say they're fully ready for competition: "open the door." Most are somewhere in the middle, she said. Public power is all about customer choice, Baker-Sifford noted.

As for the separation of utility functions, "what we call disintegration of vertically integrated utilities," she said her constituents believe that "how it is done" is a local issue. Local control is the key, and we want our customers to be able to tell us how they would like things done, Baker-Sifford stated.

The public purposes present "hard choices," she said. With conservation, there is the question of whether it is a resource or a public purpose -- I believe it's a resource, she said. I've been told that for 15 years, she added. My members believe conservation is here to stay, Baker-Sifford said, and it should be tuned up and down to meet needs and conditions.

If nothing happened in the Oregon legislature next session with regard to conservation, she stated, we'd still have a minimum of seven statutory programs on which we're spending millions and millions of dollars for conservation and renewables. There is not support among the small utilities for a mandatory fee to support conservation; they will meet the conservation statutes and the provisions of their BPA contracts, Baker-Sifford stated.

Our members feel they can and will operate in a competitive market, Baker-Sifford said. There is concern that others want to prevent small utilities from being aggregators, she noted.

With regard to actions that would impose further price disadvantages on rural utilities, such as increased transmission charges, Baker-Sifford pointed out these customers already pay a built-in penalty in the form of line losses, which occur when electricity is transmitted over long distances. A 10 MW purchase may be 9.5 MW delivered, she explained.

My belief and my members' belief is that the lower down the decision tree decisions are made, the better, Baker-Sifford concluded. In some cases, local control may mean at the state level, she added, noting that such issues as low-income assistance may need state-level attention.

Peter Forsyth, power manager for Kaiser Aluminum, described competition in the aluminum industry. Once our customers saw the opportunities, they took advantage of them, he said. Forsythe said there are similarities in the power industry, advising, "don't try to stop it, get out in front." Where there's a will, the markets develop, he added.

Forsyth said he was encouraged by the leanings toward a fully competitive industry, separation of generation and transmission, the desire to treat "our region first," and to offer the benefits of the river equitably. A big issue, he said, is with BPA competing in a market system. Our industry says BPA doesn't belong there, but issues, such as the WPPSS debt, indicate it will be here, he noted. As for choice, Forsyth said while the reason for choice is to improve access to different suppliers, "some wanted to tell us what to choose and why."

Pure competition works, he stated. "Err on the side of markets," Forsyth urged; let the markets develop. I couldn't choose the time frame for competition in my industry, the customers did, Forsyth said. Competition is here throughout the world, and we don't have the choice to wait until the year 2000. There are customer benefits with competition, he observed, and those who survive will be those who meet it head on.

Forsyth said he had hoped to hear more about the framework needed for the marketplace to develop. It will mean technological changes and responsive products, he said. Forsythe also noted that while he would not "argue for zero" with regard to public purposes, he would argue for a market-based system to deal with them.

In conclusion, Forsyth said that there is a consistency in the "risk-reward" aspects of competition. There is no guarantee, he said, but I put confidence in our ability to manage the risk, and we'll accept responsibility. Let those who take the risks get the rewards, Forsyth urged.

While the debate taking place in the review is constructive, Jan Packwood, vice president of Idaho Power said, it is "in danger of being taken over by events." He urged the audience not to lose sight of what's driving the change: "our customers." They are armed with full price disclosure, Packwood said. The new market entrants and the commodities market, "that's what we're adapting to," he said.

Packwood noted that while the review is discussing administrative proposals, legislation to enable retail competition has already been introduced in Congress. The delegation says once that starts, it may not be limited legislation, Packwood said. The political power of the Northwest is not what it was, and we may not control the outcome, he cautioned.

Deregulation of the transmission system began in 1992, Packwood stated. Seven IOUs have reached an agreement in principle to create an IGO (IndeGO), he announced. We expect to have a filing to FERC by the end of the year and the IGO operating in July 1997, Packwood said. It's a step we feel compelled to take, he added, noting the FERC Order 888 implementation deadline.

Packwood referred to "the myth" that BPA owns and operates most of the transmission in the region. The seven IOUs have 11,000 miles of transmission that span the region -- "it's an impressive system," he said. Does the IGO mean BPA is excluded? Packwood queried. We hear from BPA that it cannot enter in, so we must go ahead without them -- we can't wait, he said.

What guidance and support can we give BPA? Packwood asked. Is there "a bright line" between what markets and government should do? he queried. Competition is survival of the fittest -- it isn't about fairness, Packwood stated. There is a role for government, but there are questions, he added. In my view, "federal competition is an oxymoron," Packwood declared; "it's right up there with giant shrimp."

The debate is useful, but it's not moving fast enough, Packwood said. We've still punted on a lot of "the big ones," he concluded.

Lorraine Bodi, co-director of the Northwest office of American Rivers, said the review is about the Columbia River and money -- who gets it and who doesn't. It's the commercial interests who get the money and the Columbia River, and it's the fish, the taxpayers, and the public who pay the price, she said.

The Columbia River is the region's major watershed; we used to have tens of millions of fish, and now we have about a million, Bodi said. The harnessing of the river for power is the reason for the decline, she stated. We have the cheapest power rates and almost no salmon, Bodi said.

We are giving subsidies to the aluminum companies, and we're meeting the WPPSS debt, which eats up over one-third of BPA's annual revenues, Bodi continued, while we argue that we don't have enough money for salmon. "BPA is cutting special deals left and right," including letting the aluminum companies out of the WPPSS debt, she said. The river system is out of balance, and the challenge in any restructure is to restore the balance, Bodi stated.

There are three issues the review has to address, Bodi said: first, we don't have a unified salmon plan; second, we need to have a program to deal with the debt; and third, we need to have a program to phase out the subsidies.

We don't have a salmon plan that all players can agree on, Bodi explained, and that's a bad situation for fish. We need to work up a plan that all can agree to, she said. Everyone talks about the Hanford Reach, where the salmon are doing well; that's no accident, Bodi contended, saying the flow agreement negotiated with dam operators made the difference. It's important to recognize we do have models to apply, she said.

Bodi said the WPPSS debt has caused BPA to cut fish, conservation, and low-income programs. We need to get the WPPSS debt off the hydro system; then we will have a hydro system that can provide for fish, conservation, and other needs, she urged. There are special power rates for aluminum companies and irrigators, Bodi said. Costs for such things as navigation and irrigation are born by the hydro system, she said. We need to come up with a plan to phase out these subsidies, Bodi urged.

We need to stop arguing about competitiveness, Bodi stated. Fish and conservation are not extraneous -- they're part of the system, she said. They are like debt service, Bodi contended, "a cost of doing business." We need less self-interest and more public interest, she concluded.

Mark Crisson, director of utilities for the City of Tacoma, said Saven's work group report did a good job of describing the pitfalls of pursuing federal legislation at this time. We are just one region, he said, and there is the prospect of unintended consequences. Crisson noted that the 1980 Regional Power Act has been described as "a self-inflicted wound."

Not seeking legislation "doesn't mean sitting on our hands," Crisson pointed out. This is the opportunity to do a number of things, he said. Crisson said he would encourage BPA to start working on its customer policies. Those relationships and how you're viewed by customers is important, he added.

Customers are setting the pace for retail choice and competition, Crisson confirmed, and it's a good idea to get out ahead of it. I don't think competition is inimical to the public purposes, he added; our customers are interested in conservation and renewables. We've formed a new energy services group, Crisson said, and we're getting a positive return from our customers. He suggested the region should consider giving voluntary conservation programs an opportunity to succeed and leave details to the local level. Crisson noted that he was disappointed there had been little consensus on how to approach conservation. Let's view this as a short to medium-term problem, he counseled, and give the market an opportunity to work in this regard.

The model for a limited grid operator for transmission "makes a lot of sense," Crisson said, adding that there are reasons to keep multiple control areas. One reason is the need for competition in providing ancillary services, he explained.

Seattle City Council member Margaret Pageler said, as a politician, she must consider the question of "what will my competitors be saying" in the future. "Will they say you and I sold out to industry, cut deals, and left customers holding the bag?" I don't want to be a politician "trying to explain a ValuJet" to my constituents. When I see the downside risk, I am concerned, Pageler stated.

Getting the public's attention is really important, Pageler continued. Jan [Packwood] says his customers are clamoring for change, she said. I have about 30 who are, but there are another 300,000 who have some of the lowest rates in the country and a reliable system, Pageler continued. They don't want that put at risk, she stated. It's important to educate the residential ratepayers about what's at stake, Pageler declared.

The downside risks are big, she said, and not just for politicians. We need only to think about WPPSS unraveling and how the public responded. When the public feels they haven't been considered, "they react quickly and viscerally," Pageler said. We risk the unraveling we had with respect to nuclear power, she added.

Pageler referred to Drummond's statement to "do no harm," and she noted that deregulation, given what Congress is considering and what FERC is trying to do, "sounds like regulation" when applied to public power. We're now becoming subject to "one-size-fits-all" federal legislation, Pageler said. "It's not deregulation -- it's reregulation," she stated.

This is an industry "imbued with the public interest," Pageler continued. The electricity industry deals with life and death issues, she said. What's at stake is not just a transition -- there's an ongoing public interest in what's going on, Pageler said. She cautioned against entering into competition "saying deregulation and the market, like a mantra" without taking the public interest into consideration.

The costs of restoring fish in the Columbia River are better known than the future environmental costs of fossil fuel generation, Pageler contended. We don't know the costs of carbon emissions and global warming, and once we start considering those, it's a big unknown, she said. "Lots of people are gambling they won't still be president of the company and will have retired when that time comes," Pageler quipped. There are environmental costs to all resources, she said, adding that those associated with the hydro resource are "knowable."

Pageler warned against major involuntary cost shifts in industry restructuring. A recent survey showed 40 percent of Seattle's residents were not here when "the WPPSS debacle" occurred, she said. If these people are left paying for WPPSS while industries that were very much a part of the need for new generation "go scot-free, there's going to be hell to pay," she predicted.

Seattle has made a major commitment to the review, she said, because we recognize the need for structural change and public involvement, and we're aware of the downside risks of failing to provide for conservation, low-income assistance, and protecting natural resources. We've got to get it right, Pageler said. We can't afford not to -- there's too much at stake, she concluded.

Keynote: Charles B. Curtis, Deputy Secretary of Energy

Deputy Secretary of Energy, Charles Curtis, began his address with a quote he attributed to former Congressman Mo Udall: "We've come to the point in the proceedings that everything has been said, but not everyone has said it."

The transition to a competitive industry will require civic debate, Curtis stated, and he said the Northwest is fortunate to have a history of cooperation in energy issues. "You're ahead of the nation," he said. Curtis noted that while the electricity industry is of economic importance nationwide, it is especially true in the Northwest because of the bounty and influence of the Columbia River system. "BPA has been the economic engine of the region," he said, funding important public benefits.

The pace and scope of changes in the industry are remarkable, Curtis said, and competitive developments have fostered pressures that threaten BPA and invite change. It may be that BPA in its current state has more burdens than it can bear, he stated. I share the view that the status quo is inherently unworkable, Curtis added.

The Administration has agreed to limit salmon recovery costs and BPA has cut costs, Curtis continued; this has provided some "financial breathing room" for the region to rethink BPA's role.

This period of calm is not likely to continue into the future, he cautioned, and he urged the region to maximize the opportunity. Not to do so could force BPA to take action to protect its revenues, Curtis said. If the review does not act decisively, the region may lose this opportunity, he added.

Curtis acknowledged there was "trepidation in the region of going to Congress," but he added that it is "close to inevitable" Congress will consider changes in BPA's structure to adapt the '30s-era energy law that created and governs it. Depression-era laws have evolved over 60 years, Curtis said, "but the basic underpinnings have not" -- they are based on a monopoly industry. It is unlikely Congress will leave the BPA Project Act untouched, while realigning policy in other parts of the country, he explained. Congress will be drawn into consideration of issues at the heart of the review, Curtis continued, such as the Treasury obligation, public purposes, and the role of the federal government, through BPA, in a competitive market.

The review gives the region a unique opportunity to offer vision and guidance rather than react to legislative actions, Curtis said. The real question is whether you can develop a solution, he added. Can you afford the risk that the feds, left unassisted, might stumble on the best solution for the region? he queried. The review is a chance for the Northwest itself to come up with answers, Curtis said. We will respond to your recommendations -- "we are happy to wait," he added.

Our interest is strong, Curtis reminded the audience. The federal government has $9 billion in BPA debt. There is an additional $7 billion in WPPSS debt, and the review must deal with how to satisfy that without transferring any to the federal government and the other 46 states, Curtis said.

We've resisted the temptation "to pepper the review with questions," Curtis said, but he indicated there are issues on DOE's mind. One is BPA providing service to retail loads other than the DSIs. BPA's authority is broad, he remarked, and in the near term BPA will face these questions. He noted that if BPA were to expand its retail service, this would influence wheeling policy. We would like your consensus, Curtis said of the issue.

Last week's outage highlighted the importance of reliability and "keeping the lights on," Curtis continued. This can't be overlooked in the debate, he said. The industry has cooperated and voluntarily ensured reliability, Curtis pointed out, but with competition, "cost cutting and leaning on your neighbor may be irresistible." What actions will be necessary to assure continued reliability? he asked. Can the government rely on the voluntary and cooperative efforts of the past, or will it need to be more involved? Curtis queried.

As we move from the historic structures, much is at risk, Curtis said, but there is much to be gained if market forces are used to make a more efficient system. He urged the region to act as "an architect" rather than be a tenant on a foundation laid elsewhere. It is important to the future of the Northwest economy and environment that you come together to forge a structure. I'm wishing you success, Curtis concluded.

The BPA Perspective: Administrator Randall Hardy

Collins introduced BPA Administrator Randy Hardy as one of a series of agency administrators who have served the region well. He is here largely at my request, Collins said, to put forth his thoughts on the choices BPA faces. These are not necessarily DOE's thoughts, Collins added.

The region is truly at a crossroads, Hardy said. The electricity industry is being restructured, and we've decided to try to take control of our destiny, he said. Our challenge is to derive the benefits of moving into a competitive era while preserving the public mission BPA has performed, Hardy stated.

Hardy said the sole goal in BPA's recent financial initiatives has been to try to have some short-term financial stability so the review is not done "with our backs against the wall," under the pressure of missing a Treasury payment, dealing with the "political fallout." He suggested the agency has two or three years to formulate actions. Wednesday we announced a 900-person reduction in force, Hardy said. It's tough times for BPA employees, he noted; but "our folks are good people," and they'll continue to deliver benefits.

Hardy presented a chart illustrating changes in BPA's rates compared to the costs of alternative power sources. In 1980, our rate was 11 mills, and the alternative was 70, he explained. We could raise rates "with impunity" and could do whatever the delegation wanted us to do -- "and we did," Hardy said. Today, the cost of alternatives is below our rate, he pointed out.

I submit that the $64,000 question in this review is who gets the benefits in 2012, when the WPPSS bonds begin to be retired, Hardy said. Our challenge is how to distribute those benefits -- that's what this is about. "By 2012, that envelope is there"; how do we lay the groundwork so the benefit is shared? he asked.

The BPA restructuring proposals are grouped around four goals, four themes, and three objectives, Hardy explained. The goals are:

The themes around which BPA's proposals are built include: complying as much as possible with FERC's open access and comparability rules; increasing regional control; providing public benefits in good times and bad; and continued federal status for BPA. Hardy said federal status is the "most feasible and desirable" because of the WPPSS bonds, as well as other public responsibilities that cannot be delegated. These include treaties with the Canadian government and Northwest tribes. And he said federal status would ensure "public decisions, publicly arrived at." I think that's substantially different than a private corporation, Hardy observed.

A primary objective of BPA's alternatives is that they be "legally doable and politically feasible," Hardy said. Based on what I see, you will face the issue of security behind the WPPSS bonds, continued tax-exempt status for the bonds, and the Appointments Clause of the U.S. Constitution, he said. Hardy added that in formulating the alternatives, "we've tried not to put forward a Bonneville position," but have taken many ideas and put them together.

BPA's alternatives are: No Legislation, Limited Legislation, and Broader Legislation.

No Legislation

Hardy emphasized this alternative "is not the status quo." With no legislation, BPA would continue with the functional separation of its power generation and transmission business. The power supply staff is being relocated from Vancouver to Portland, and transmission staff will be in Vancouver, he said. There will be separate accounting functions, but a continued single BPA fund.

Hardy said under the no-legislation alternative, BPA would greatly streamline its 7(i) ratemaking process. The agency would limit its resource acquisition authority through contract terms. BPA could establish a customer or regional board to review transmission policies and proposals to ensure fair and open access.

Limited Legislation

BPA would be separated into two corporations, the Bonneville Power Corporation and the Bonneville Transmission Corporation, Hardy explained. Each corporation would have its own CEO appointed by the Secretary of Energy. FERC oversight of rates would be expanded. The corporations would conduct abbreviated rate cases, the outcome of which would be subject to an expanded FERC review, analogous to the type of review IOU rates are given by the PUCs, Hardy said.

This alternative would incorporate a "junior preference right" for residential and small farm customers of the IOUs, he explained. "I'm no fan of the residential exchange," Hardy acknowledged, but the idea behind it is good. The preference customers would have the first right, and next in line should be these IOU customers, he said. "This is not code for our going after IOU residential customers," Hardy assured the audience.

In this alternative, BPA would forego resource acquisition. There would continue to be a single BPA fund to preserve the security of the net-billed WPPSS bonds, he said.

Broader Legislation

A board fashioned after the Tennessee Valley Authority (TVA) model would govern BPA under this alternative, Hardy said. It would be a federal board; Northwest governors would nominate and the President would select its members. If an overriding objective is to increase regional control, this is the alternative, Hardy said, noting that there would be less accountability than with a single administrator. A limited FERC review of rates is proposed.

Up to 30 percent of the federal system could be sold on 30 to 40-year contracts, Hardy said. This would mean that a company like PacifiCorp could, for example, purchase 10 percent of the system on a take-or-pay basis, Hardy explained. He pointed out that while a "take-or-pay" arrangement would be acceptable, "hell-or-high water" would cross the line beyond which the WPPSS bonds could become taxable. "Changing the tax-exempt status of the bonds is a non-starter," he said. This alternative "doesn't mess with the preference clause," Hardy noted.

This alternative would create two BPA funds, with an interfund loan arrangement. A TVA-like board would be created to govern transmission. Hardy said BPA is ready to participate in an IGO or to be the IGO, once its power and transmission functions are separated.

Stranded Cost Recovery

We recognize that retail access is inevitable, and we support it, if we can safeguard our obligation to repay Treasury, Hardy stated. If the market is at 2 cents [per kWh] or more, we're fine. But if it is less than 2 cents, we need some kind of stranded cost recovery assistance, he acknowledged. BPA is not interested in pursuing retail business, which he said presents "an inherent instability." But we need stranded cost recovery or the ability to compete at retail, Hardy said; we can't say no to both.

"I don't think we're helped by labeling stranded costs as WPPSS or fish," Hardy observed. We're better off treating them in a generic sense and not using labels "that are incendiary," he said.

Public Purposes

The market will accomplish a lot with conservation, Hardy predicted. Under BPA's no-legislation alternative, we would continue to rely on the market and guarantee a minimum level of funding for 10 years, he said, adding that would probably be about $25 million a year for conservation and renewables. BPA would encourage voluntary contributions to public purposes, which could take many forms, Hardy said. A voluntary system avoids "big legislative fights," he noted.

The limited-legislation alternative calls for a minimal transmission charge for public purposes, although Hardy said, "we would prefer an end-use or meter charge." He noted such a suggestion is "punting to state regulators."

All of the scenarios BPA offers involve significant change, and all scenarios meet our four goals, Hardy concluded. BPA can support any of the three alternatives, he said, and/or the mixing and matching of any of the elements. "We're not recommending any one," Hardy affirmed. I hope these are a basis for the steering committee in reaching a conclusion, he said.

Comprehensive Proposals: Putting the Pieces Together

Analyzing the Alternatives: Questions and Answers

The audience submitted written questions, and Collins moderated.

CLOSING REMARKS

Collins congratulated the day's "survivors" and adjourned the Forum with a word of caution. "We've got to turn the volume down for awhile." This is an industry that's gotten very shrill, he said. We need to compromise, now. We won't have an impact if we can't find that middle ground, he concluded.

Forum Adjourned

Steering Committee Members: Chair Chuck Collins, Colsper West Corporation; Al Alexanderson, Portland General Electric; Rick Applegate, Trout Unlimited; Ken Canon, Industrial Customers of Northwest Utilities; Jim Davis, Douglas County (WA) PUD; Bill Drummond, Western Montana Electric Generation and Transmission Cooperative; Jason Eisdorfer, Citizen's Utility Board of Oregon; John Etchart, Montana Governor's Representative; Bob Gannon, Montana Power; K.C. Golden, energy consultant; Charles Hedemark, Intermountain Gas; Roy Hemmingway, Oregon Governor's Representative; Mike Kreidler, Washington Governor's Representative; Todd Maddock, Idaho Governor's Representative; Sharon Nelson, Washington Utilities & Transportation Commission; Walt Pollock, Bonneville Power Administration; John Saven, Northwest Requirements Utilities; Rachel Shimshak, Renewable Northwest Project; Brett Wilcox, Northwest Aluminum Company; Gary Zarker, Seattle City Light.

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