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Regional Review

Comprehensive Energy Review
Steering Committee

Tuesday and Wednesday, July 30-31, 1996

Sheraton Airport, Portland, Oregon

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THE COMPREHENSIVE ENERGY REVIEW STEERING COMMITTEE considered a "strawman" proposal from Al Wright and Northwest Power Planning Council staff and deliberated on issues and upcoming decisions. All committee members were present. The audience was about 60.

Next Meeting: August 14-15 in Portland.

In This Issue:

OPENING REMARKS: THE LATEST FROM WASHINGTON, D.C.

Steering committee chair Chuck Collins and the governors' representatives briefed the group on their recent trip to Washington, D.C. "We heard more than we said," Collins stated. We were given the clear message that Congress is going to act on restructuring the utility industry, Todd Maddock said. The point was made repeatedly that if the Northwest has a unique situation, it's incumbent on us to "write our chapter," and if we don't, we'll have it written for us, he said.

We were told major national legislation is in play, and that the region should have a consensus proposal compatible with national trends, John Etchart said. It was an admonition that we "better have something wired together." If we let the opportunity go by, we'll have less control over our future, he said.

We have a unique situation in the Northwest with BPA and public power, and we need to get our act together to fit into the national legislation, commented Mike Kreidler. Hearings will start before the year is out, and we better have our role defined, or it will be dictated to us, he warned.

We laid out choices, Collins explained, and everyone, with the exception of the American Public Power Association, thought we should take an aggressive legislative posture. When we suggested no legislation, or only minor legislation, they were really skeptical, and in one or two cases, hostile, he said. Someone told us that the perfect time to have done this was last year, Collins noted. Rep. DeFazio told us the problem is money, and "it's getting tougher and uglier" every year. A public power lobbyist said, you've got to show public power this has a chance of being passed intact. We were shown that the chance of getting a favorable vote gets worse every year, Collins said.

I heard the same message, stated Roy Hemmingway. National legislation is coming. Committee staff from outside the Northwest told us, you better have your ducks in a row because we're going to deal with your issues, he said.

We need to write the Northwest chapter, and that involves the river, BPA, and fish, said Collins. "That's the piece we've got to get right," he emphasized. While the next Congress will take up national electricity issues, it may take more than one Congress to get it done, observed Hemmingway.

ORDER OF BUSINESS

Enter The Strawman

Hemmingway said when the governors' representatives reviewed the draft strawman proposal, we wanted to make sure it was "ready for prime time," and that it had "sharp edges." We didn't try to influence the substance or staff who put it together, he said.

The dictionary defines "straw man" as "an argument set up so it can be easily refuted," noted staffer Dick Watson. It may also refer to "straw men," who in the past loitered near English courts with a straw in one of their shoes. This indicated they would be willing to swear to anything in court for enough money, he explained. In preparing the strawman, we tried to reflect definitive choices on key issues, keep the benefits of the power system in the Northwest, and be consistent with the committee's consensus points, Watson said.

Transmission: Separate G&T Through An IGO

The strawman proposes achieving separation of generation and transmission through an Independent Grid Operator (IGO), which has BPA as a member. We assume FERC will insist on open, non-discriminatory access and the separation of generation and transmission decisions, Watson explained. Membership in a FERC-regulated IGO would provide separation and greater operational efficiency, he added. Due to concerns about the WPPSS debt, we think that legal separation of BPA's power marketing and transmission would be very difficult, and we favor maintaining a single Bonneville fund, said Watson.

We recommend that BPA be a full participant in the IGO, he said. This requires legislation permitting BPA to turn over operation of federal transmission assets to an IGO, and legislation subjecting BPA's transmission revenue requirement to FERC regulation on the same basis as the IOUs, Watson stated.

The IGO governing board would include owners and users, and state and regional regulatory and policy entities would be ex officio members. IGO membership would be voluntary, except for BPA. Local load centers could be maintained, Watson added.

We aren't making specific pricing recommendations, said Watson. IGO pricing would be subject to FERC regulation, he said. Transmission would not be used to collect non-transmission costs unless: states cannot implement a meters charge for conservation, renewables, and low-income services; or if the proposed federal power marketing system cannot be implemented and the federal system finds itself with costs above the market, Watson noted.

Does this preclude using transmission revenues for fish and wildlife? asked Rick Applegate. It precludes anything FERC says is inappropriate for the revenue requirement for transmission, replied Wright. We don't know what that will be, but it would be the same for the IOUs and this proposal, he added.

Are you proposing BPA not be the IGO? asked Walt Pollock. We made no particular proposal about governance, Watson responded. We were following FERC's principles on an IGO -- FERC says governance should not reflect a single user or type of user, explained staffer Wally Gibson. That doesn't mean Dittmer couldn't be the nucleus, he said.

Are you recommending legislation to tell BPA to be a member? asked Ken Canon. I think so, Watson replied. What does that mean? What IGO? We would be directed to join IndeGO? asked Pollock. If IndeGO is up and running, yes, said Wright. "Your involvement is voluntary, it's just that we demand it," he quipped.

How can you have an IGO and independent control centers? asked Pollock. We've talked about it and think it can be done, answered Watson. Would BPA maintain a load control area? Pollock queried. Yes, Wright replied. "I don't understand what you've proposed here," Pollock stated. Over time, you would move to a single control center, we think, Watson said.

Do your recommendations prescribe what IOUs should do with respect to forming IndeGO? asked John Saven. We assume a viable IGO will be formed by somebody, and we think BPA should be part of it, Watson replied. Many IOUs think the IndeGO will need an independent board -- the process is moving to more separation rather than less, said Wright. We conceptualize totally independent governance, as Al said, Gannon commented.

Does consistency with FERC rules take priority over a sense of regional control? asked Sharon Nelson. Living with the FERC regulations allows consistency within the region, Watson replied. One of our overriding decisions is that meters charges are the first choice and should be subject to local control -- wires charges are always the last resort, said Wright.

I see nothing about the role of the IGO and system reliability -- is that intent or oversight? asked Gary Zarker. The basic background on the IGO is FERC's principles, and one of those says that an IGO has responsibility for reliability, Gibson responded.

Competition and Consumer Access: "Be Prepared"

The strawman does not propose legislation to require anyone to do anything, Watson said. We recognized that retail access is coming, so we recommended principles or guidelines aimed at retail utilities being prepared to accommodate open access for all customers by 2001. Decisions are clearly up to state regulators and locally elected boards and commissions, he stated. To be prepared, they should at least functionally unbundle distribution, but divestiture is not required, Watson said.

Preparing for open access requires: providing non-discriminatory access to aggregators and other energy service providers; the obligation to serve "migrating into" the obligation to connect for distribution entities; and limiting cost transfers through policies for the recovery of legitimate, non-mitigable stranded investment, if any, Watson said.

To speed the transition to a competitive market, large consumers should be allowed access when cost transfers are "acceptably minimized"; pilot programs to provide access to small customers should be carried out; and "green marketing" of power should be permitted, Watson stated. During the transition, distribution utilities should have the obligation to ensure reliability and the ability to charge for the service. Distribution utilities should be the "provider of last resort" for those who don't or can't choose alternative suppliers and for potentially "red-lined" customers, at least transitionally, he said.

Is there a reason why this area is not as sharp as some of the others? asked Brett Wilcox. Competition is coming, and turning it into a legislative fight with public power is a waste of time, replied Wright. Trying to take on local control is a "big war," he added. Just to say "be prepared" is not internally consistent, observed Canon. In Montana, you don't need legislation to open up a utility, Bob Gannon pointed out.

What's the difference in what you propose for small and large customers? asked K.C. Golden. There are large customers capable and eager to get to the market, and we're saying, if it doesn't unduly disadvantage other customers, then you should let them do it, replied Watson. Smaller customers may need market development and the kinds of steps we are recommending to move into the competitive market, he added.

Conservation, Renewables, Low-Income: A Meters Charge

The strawman proposes a regional meters charge equivalent to $1/month/residential meter to support: conservation market transformation; some additional regional conservation; renewables RD&D and completion of some existing pilot projects, and low-income weatherization. The meters charge would apply to all customer classes proportionately, according to Watson.

While we need to rely on market mechanisms to make conservation happen, we recognize market outcomes are not likely to match socially desired outcomes, and thus some intervention will be necessary, Watson said. We want to preserve renewables as a long-term option and allow them an opportunity to compete for customers in the marketplace, he stated. We want to keep the door open for low-income weatherization and energy assistance, Watson explained. The strawman considers low-income energy assistance to be more appropriate as a general purpose government function, he noted.

Between now and 2001, the proposal contemplates that BPA and utilities would support conservation market transformation activities at $30 million per year, administered by a non-profit corporation. Utility conservation acquisitions should be consistent with submissions to the 1996 PNUCC Northwest Regional Forecast to ensure a smooth transition, he said.

BPA and utilities should complete wind projects under way, and finish environmental assessment of geothermal projects, but not complete them unless there is a market for the power. Current levels of support for renewables research should continue, and green power marketing should begin. Federal, state, local, and utility low-income energy services should be maintained at current levels until stable funding mechanisms are put in place, he said.

After 2001, the meters charge should be implemented by the states. The charge would be a statutory cap, with a target amount of approximately $100 million per year, Watson said. If there is no meters charge, we recommend federal legislation directing FERC to authorize a transmission access charge collected by the IGO, he stated. It would be equivalent to the meters charge and would be a flat charge, not a kilowatt-hour charge. Distribution companies or direct access consumers in the region would be charged for access to the transmission system, Watson said.

After 2001, utilities would maintain low-income energy assistance at current levels until picked up by general purpose government funding, Watson said. There is no regional requirement or funding for additional local conservation. It would be undertaken by consumers in response to the market and by local utilities or retail service providers for competitive and customer service reasons, he noted.

Why recommend a statutory cap for the meters charge? asked Gannon. To give assurance there will be an end -- that it's not "a money pit," said Watson. Under the transmission charge proposal, the IGO would determine for each transaction if the power would be used in the region and apply the charge? asked Bill Drummond. It's a hookup fee, an annual charge, replied Watson.

I'm confused about the basis for the recommendation on low-income assistance, said Zarker. Is it inappropriate for the distribution charge to include low-income services or competitively disadvantageous? he asked. We assume we will move bill-paying assistance off utility bills, replied Watson.

Federal Power Marketing: 30-Year Subscriptions

The strawman would secure long-term benefits for the region through voluntary, long-term (30-year) subscriptions to the firm output of the federal system. Subscriptions would be at cost, take-or-pay, and consistent with public and regional preference, Wright explained. Resale would be permitted. We proposed a subscriber board with budget authority over the Bonneville Power Corporation, as well as the Corps and the Bureau of Reclamation, he said. There would be a means to share benefits to enhance fish and wildlife, and a fish risk mitigation mechanism, Wright said.

If the voluntary system doesn't work because there aren't enough subscriptions, there would be a "backup system," Wright explained. Federal system output would be sold at market, and the responsibility and rights to net costs and net benefits would be assigned to preference customers. The budget oversight board would be retained, as would be the sharing of benefits with fish and the fish risk mitigation mechanism, he said.

BPA would not sell directly to retail customers, nor could it acquire new resources for growth except through bilateral contracts with customers, Wright noted. He said the strawman also includes an alternative subscription proposal, which would give subscribers shares of the net revenues from the sale of power at market prices.

I thought there was no consensus on marketing federal power at cost, said Golden. You didn't have one, but we did, explained Wright. That's why we have two alternatives, he added.

Wright explained the strawman's "megawatt subscription" proposal was driven by the idea there would be an early period of high risks when federal energy would be above market, and a future where it could be substantially below market. To address both circumstances, we thought 30 years was the right subscription length, he said. While the implications for the status of third-party bonds needs further study, we are taking such a risk off Treasury, I can't believe Congress wouldn't go along, said Wright.

Subscribers Would Get on Board

The idea for the subscriber board is that in the early stages, the board would be advisory, and Congress would have appropriations authority, Wright explained. In the future, Congress probably would not extend your borrowing authority, so you would go to the private marketplace to borrow, he said. The more you do that, the more powerful the board would become, and over time it would evolve, probably to a co-op, Wright said.

Have you thought about the details of the evolution? asked Hemmingway. We should build enough into the original legislation so we do not have to go back and say "Congress may I?" answered Wright. At the end of the 30 years, are the assets still federally owned? asked Hemmingway. Our idea is that the federal assets are not divested, Wright replied.

Is there provision for anyone but subscribers on the board? asked Golden. Not under this proposal, Wright said. How could you find the private marketplace dollars to invest in government projects? asked Chuck Hedemark. You do what the mid-Columbias did with 30-year, take-or-pay contracts -- you underwrite your borrowing authority, replied Wright.

Does the board set rates? asked Pollock. The federal power marketing entity won't have rates, it will charge you at cost. You are obligating yourself to pay an annual cost per kilowatt-hour, Wright answered.

Will the board have authority over power products? asked Pollock. Yes, they would price them at market, Wright replied. Besides the "steely-eyed business people" on the subscriber board, there would be a regional public policy board and a river governance entity, Wright explained. How does the public policy board fit with the regional entity proposed to administer market transformation? asked Applegate. It could be the same or not, "depending on how much bureaucracy you like," said Wright.

Suppose the subscriber board wants a capital improvement at a project that the river governance board wants drawn down? asked Applegate. The subscriber board doesn't have a prayer -- it would be overridden by law, Wright replied.

Wright called the strawman's approach to river governance "a punt." "It's a pivotal question. Why did you punt?" asked Zarker. That's a valid criticism, Wright acknowledged. I was inclined to propose a compact commission, but we decided instead to say, let's give it to the governors and get them to face up to it, he said. Could the NMFS-driven executive committee of sovereigns evolve into this board? asked Kreidler. It could, Wright said.

The Allocation Pecking Order

Wright said the initial subscription for firm power would be offered in this order: existing public agency customers; DSIs IF they participate with preference customers in the backup system; representatives of IOU domestic and small farm load and IOUs or aggregators with that "certified load"; IOUs and DSIs; and out-of-region (bid at cost plus adder). You would go back through the subscription process if it is not fully subscribed the first time around. Anyone in the region who wants the power, gets it; then you go out of the region, Wright explained. As you move into the competitive market, preference becomes more problematical, he said, noting, we're about to have Enron as a regional entity.

The DSIs can choose whether to put in a bid? asked Jason Eisdorfer. They can move two tiers up, but must then subject themselves to the backup system, Wright said. Could third or fourth tier customers choose to expose themselves to the backup system in order to move up? asked Canon. I don't know why not, Wright replied.

What happens if a new preference agency forms? asked Drummond. It has to wait 30 years, said Wright. What about resale? asked Canon. If you are eligible to subscribe, you are eligible to resell, Wright responded. Are there any limits on who you can resell to? asked Kreidler. We didn't put any on, said Wright.

Wright said firm power would be subscribed to by month. Remaining firm power and other products would be sold at market whenever possible, and the revenue used to reduce costs to the subscribers, he said. How will you determine costs? Hemmingway inquired. You'll have to decide on an accounting system, determined by the federal power marketing entity under supervision of the subscriber board, Wright answered. You'll have a chicken-and-egg problem -- people won't subscribe until they know their costs, suggested Hemmingway. Are all costs assigned to subscribers? asked Pollock. Yes, there is no backstop, no Treasury, said Wright.

If you can't get enough subscriptions, the subscription process becomes void, said Wright. Under the backup system, BPA would become a federal corporation with a preference agency board, and all power products would be sold at market to maximize net revenues. Did you talk about the difficulty of predicting customer loads? asked Zarker. The backup system keeps benefits and risks on a small group of customers, in contrast to the subscription process in which you spread them across many more entities, Wright said. There's an inherent conflict between these kinds of systems and customer choice, he admitted, but he added, we were trying to get the responsibility off Treasury.

There are two "safety nets" associated with the proposal, Wright said. When you subscribe, you know the base fish cost is built into your system every year, similar to the fish cap now. Anytime costs fall below market, the fish system gets 30 percent of the benefit as a dividend, he said. The safety net for subscribers would release them from their take-or-pay obligations if hydro system capability is degraded by more than 15 percent from pre-established limits by fish measures. This indemnifies subscribers if the commodity they sign up for is devalued, Wright said.

What's the basis for the 15 percent? asked Applegate. We did not intend it to be a limit on fish measures; it's an "out" for subscribers, said Wright. If take-or-pay obligations are gone, what follows from that point? asked Canon. If subscribers stay, the system stays viable. If enough bail out, Treasury picks up the risk. It's the only time we put any risk on Treasury, Wright said.

The strawman proposes a one-time buyout of the low-density discount, and no changes to any other subsidies, Wright noted. Why didn't you deal with subsidies? asked Applegate. We thought massive legislative changes would be required. We just said "aaah" and threw up our hands -- I don't think you can deal with it in a decade, but go for it if you want, replied Wright.

Wright described the alternative subscription process: the "dividend subscription," in which subscribers sign up like stockholders for benefits and costs, and the benefits are dollars, not megawatts. You would get a bill or a dividend at the end of the year, and you meet your power needs however you want, he said. Why didn't you propose a percentage "slice of cake" allocation system? asked Golden. It was too complicated, but we're not saying it can't work, answered Wright.

In summary, Wright urged the committee to no longer think in terms of four components, but to think of a comprehensive package. I like some of the strawman and I hate some of it, but it's an amazing thing you did in such a short time, and it will help us, said Rachel Shimshak.

Five-Minute "Gut Checks" Around the Table

Canon proposed each committee member take five minutes to say what they like and don't like about the strawman; "let's get some things out on the table," he suggested. Collins called it "five-minute gut checks." The governors' reps did not participate.

Bill Drummond: I agree that the strawman helped sharpen the focus. You attempted to do a package that hung together, and "it may hang us all individually as well," he quipped. I believe the IGO is a good idea to examine, he said, even though there are "an incredible number of unanswered questions." "I'm thankful the IOUs are going to take this half-baked idea forward," he said. I believe BPA should split its generation and transmission, but I'm not willing today to endorse BPA being part of the IndeGO, Drummond noted.

I have a serious concern that people are falling through the cracks -- the people that Jason represents -- and there's no comfort in the strawman proposal about that, said Drummond. I have questions about the obligation to serve versus the obligation to connect, and the role of individual utilities. It may be that utilities like those I represent should be in the "wires only" business, not the wholesale business, he said. The review should ask questions about the people power marketers won't rush to serve. Distribution utilities will be left with them, Drummond stated.

For public purposes, the meters charge is the best way to go, said Drummond. But the idea of sending money to a regional entity is not encouraging -- "been there, done that," he said. My vision is to collect it locally and spend it locally, Drummond stated. We're still trying to determine the local utility role in conservation, he said, noting that PGE folks were in Missoula recently to talk about energy services. What role does this leave for local utilities? What's my obligation? Where do I fit in as a local utility? he asked.

I had real problems with the proposals on federal power marketing, said Drummond. Between the work group's report and the strawman, something was lost. There are elements of the subscription mechanism I could support, but a customer board overseeing BPA poses real questions. I'm skeptical a customer board can exercise real cost control. We should get back to the work group report and examine the range of possibilities, he suggested.

John Saven: The strawman moved us along, he said. For public purposes, I'm interested in local control and in how much we're spending. The centralized approach is questionable, Saven said. I'm less than satisfied with the strawman on competition and think the review will need to take more definite positions, he stated.

I support the IGO, Saven said. If the IOUs want IndeGO, great, but I never signed onto the notion that BPA would be part of that effort, he commented. As for the strawman's federal power marketing proposals, I felt like I had gone to the store to buy work boots. The salesman came out with finely crafted moccasins. They were beautiful, but what I need is work boots, Saven said.

Let's go back to the work group report, he recommended. The strawman doesn't reflect public power positions. It solves the Treasury debt problem, but it does so by dumping the risk on public power, Saven said. Thirty-year subscriptions will work for some customers, but not for others. The strawman punts on river governance, and I'm not comfortable with that. We can't punt this to the governors, he said. I'm not sure the strawman takes the WPPSS debt into account, he added. The 30-year commitment raises questions about the status and security of the bonds, Saven said.

Major points of consensus in our report, such as freedom of action for customers and a preference to put in administrative changes as soon as possible, were not in the strawman, Saven noted. There should be flexibility to do shorter packages than 30 years, he said. As for a "Northwest chapter" in legislation, I'm not sure if we need it. I'd rather defend turf against others than go in with a proposal the people I represent can't support, Saven concluded.

K.C. Golden: We have to spend a lot of time on governance -- the problem of who's accountable for which decisions. It can't be solved by "creating more boxes," he said. I have a philosophical and practical objection to customer-only governance for any part of the federal system, he continued. We're staring at the river governance question. Many of us want to believe we won't have to take that bull by the horns, and I'm not sure it's right for this group. But our work can't come to fruition until somebody takes it on, and the strawman forced us to that inevitability, Golden said.

For federal power marketing, the strawman shook us out of our complacency that we could muddle along and eat our cake and have it too indefinitely, he said. That's not an endorsement of any of its options, Golden added. As for transmission, he said, there are important policy questions buried in planning and pricing that need to be addressed. We haven't heard the full range of opinion on these issues, and we need to, he said.

The strawman gives the impression the train is out of the station on the IGO, and if BPA hurries, it can hop on, said Golden. We need to take out a clean sheet of paper on this, he suggested. The competition section is also "thin," Golden said, noting that there's a lot of work to do on the end-state. While this section needs to be stronger, the strawman points us toward the thought that this is not our main jurisdiction, he added.

For public purposes, there's an unacceptable gap between now and 2001 in how we move forward; timing needs more discussion, Golden said. The level of support has to be taken on in a more systematic way, and we have to take each public purposes item on its merits -- don't throw them all into one box, he suggested.

Bob Gannon: We are trying to deal with the restructuring of the Northwest electricity industry to be compatible with national restructuring, and we're trying to balance risks and rewards, he said. The strawman was helpful on customer choice, Gannon said. Montana Power's gas utility has filed to open up to full customer choice over the next five years, and we will do the same with our electricity business this fall, he noted. This is the reality of what's happening. Customer choice is compatible with competitive markets, he said.

The transmission system needs to be legally separated and regulated by FERC, and a lot of issues like pricing are left to be dealt with, he said. We also have a lot of work to do on federal power marketing, Gannon noted. If you allow the concept of customer choice in the allocation process, you would be embracing customer realities. The strawman, he said, had a forced choice concept that is "not so palatable."

As for public purposes, Montana Power supports a system benefits charge as long as it is uniformly in place across the system, Gannon stated. The fundamental point in power marketing is that the federal government should not be in competitive businesses, period, he said. I think we'll get resolution of these issues by pulling forward or else by being pushed, Gannon concluded.

Rick Applegate: The strawman "helps break the concrete we've been standing in," he said. There will be big legislation, and we've got a chance to write the Northwest chapter, Applegate continued. Public purposes and system obligations will be central as we write the chapter. Fish and BPA are the central pieces in it, he said. Salmon runs are in decline, and the system has the obligation to protect, enhance, and mitigate resident fish and wildlife. He harked back to former Northwest Power Planning Council member Larry Mills who always said, "read the Act." We need to reaffirm the legislative obligations of the system with respect to fish and wildlife and our obligations under the U.S.-Canada treaty, treaties with tribes, and the like, Applegate said.

The key questions involve the ability of what's left of the system to help in restoration of fish runs, he continued. The Independent Scientific Advisory Board (ISAB) appears to be heading to a "normative river," which may result in a reduction of the capability of the system, Applegate said. If we separate generation and transmission, what is left? he asked. What does the WPPSS debt do to the ability to fund fish and wildlife? What does having ratepayers pay for irrigation do to that capability? We still need to deal with stranded debt, the insulation of transmission revenues, and subsidies, Applegate said.

River governance is key, and we can't punt on it, he stated. We can come up with a package, and it needs to include the tribes and state agencies -- they need to be key in the decisionmaking. We don't need the number of boards proposed in the strawman.

As for the process, we should seek consensus, and we should have what we had for the Northwest Power Act -- that process included fish and tribal interests, he said. Let's hold voting until the last moment. Let's remain open to the public and to comment. It's clear we'll be remembered for a number of things -- not what we did with the WPPSS debt because in time it will be paid off -- but for our ability to carry out fish and wildlife restoration and the public purposes, Applegate concluded.

Rachel Shimshak: The strawman was good in that it took on hard issues, she said. It tried to solve the debt problem. It was bold to say there should be a charge for public purposes with a backup charge on transmission. It was gutsy to say get BPA in the IndeGO. My general reaction to the strawman is that it's not properly balanced, said Shimshak.

I said at the beginning that the goal of this process is to maintain and enhance the competitive price of power and to preserve the public purposes of the Northwest Power Act, she said. The strawman has lots of activity on reducing the price of power, but needs to balance that with benefits on the environmental side. In the strawman, the "environmental stuff" has words like "limits" and "cap," Shimshak observed. The Northwest values the environment, and when the public looks at this, if they don't see a balance, we won't have something we can work with, she added.

I fundamentally object to the assumption in the strawman that low-income energy assistance and conservation and renewables will be taken care of, said Shimshak. It's broken now; we know it, and we have to get after solving it, she stated. It's a fantasy to think these things aren't at risk in a competitive market, Shimshak said.

We need to be "more crisp" on transmission access than the strawman was, she stated. It's not fair to do the big trucks first. It's more important to have slices of all customer classes go forward together, Shimshak said. We have to tackle the local control issue. We need to accommodate that, and the dollars mentioned here are not enough, she concluded.

Ken Canon: Our concern about transmission is reliability; specifically, we don't want restructuring held hostage by current owners blaming outages on restructuring, he said. The strawman is not as sharp on competition and customer choice as it needs to be, Canon stated. How does a utility plan for an allocation when it doesn't know who its customers will be? We want to see customer choice go ahead so that everyone knows what the rules of the road will be, he said.

The legislative packages should direct utilities to provide choice, Canon said. The timetable is much too slow, he added. There are three or four major issues in federal power marketing, said Canon. We need to find an allocation model that can work. We have concerns about the backup system and are troubled by the governance issue, said Canon. Having more oversight and boards is incompatible with going into a more competitive future, he stated. As for federal power marketing, true cost control is the issue that BPA will face in the future, Canon said.

On public purposes, there is still much I need to know about how much and for what? Canon said. If there were a system benefits charge, we need to know what kind of system we are benefiting. For conservation, we need to know if it is a resource or a customer service. It makes a difference, Canon said.

We support local control and would take it a step further, he stated. Large industries are being asked to spend thousands, perhaps even a million dollars a year, and they'd rather keep the money at home. How does industry get credit for the activities they undertake on their own? Canon asked.

Sharon Nelson: At a recent meeting of the four public utility commissions, I was "taken to task," she said, by colleagues who said, the business of business is to be in business, but the business of government is not to be in business. We haven't yet described the central role of BPA and its entry into markets, Nelson observed.

I liked the strawman's emphasis on human consumers and that it emphasized the need for structural changes and new accountability mechanisms, but I was dismayed by the number proposed, she said. We've assumed competition will automatically benefit Northwest human consumers, stated Nelson, but with FERC's failure to approve the Sierra Pacific/Washington Water Power merger, we learned that the low energy prices in the Northwest may conflict with FERC's goal to promote competition in the whole of the west. We need to keep our eye on that ball, she counseled.

We need to recognize that open access doesn't guarantee a sustainable and fair competitive market, Nelson added. I saw an "intellectual disconnect" in the strawman, with one proposal where you divvy up current assets and liabilities on a static basis versus consumer access recommendations which contemplate a dynamic and changing marketplace. Thirty-year contracts are difficult to imagine in a dynamic marketplace, she said.

The strawman affirmed the importance of public purposes, noted Nelson. We have to find a market mechanism to "incentivize" market actors to step up to accomplishing them, or else a meters charge is a recommendation to state legislatures to create a new tax, and that's perfectly fair, she said.

As for the specific consumer access recommendations in the strawman, I have lots more to say and will submit something in writing, Nelson said. I assume the distribution charge would be cost-of-service-based, but there are lots of other ways of ratemaking, she added. There's a duty to mitigate stranded costs, Nelson said. Questions of uniform taxation and siting requirements have to be examined, she stated. There's a lot to like in the strawman's transmission proposal, but resolving disputes in an IGO needs more work, Nelson concluded.

Walt Pollock: The strawman's federal power marketing proposal was very bold; "I'm glad I had my seat belt fastened," he said. The proposal invites some major problem areas for us, with respect to the security and tax-exempt status of debt, governance, and the separation of power and transmission, Pollock noted. We'll need assistance to tackle these issues -- this is "big stuff," he said.

The strawman, according to Pollock, elevates some items to the national stage, and we have to be sure we want to do that. For example, it moves the question of conferring the future benefits of this low-cost system there, he said. The strawman's backstops are bad outcomes, Pollock continued. Either you lose the resource, or someone is stuck with something they don't want to have. The multiple boards are problematic; we can't have boards with confused accountabilities, he said. We need to decide if our starting point should be the strawman or the report from the federal power marketing work group, Pollock said.

The transmission and retail access sections need to be sharpened -- BPA needs instruction on what to do and when, Pollock stated. We need to focus on what we want, he continued. We want a regional IGO with all transmission in it, and an open system that gets more commerce going in the region. We want accountability for reliability and the tolls to carry it out, he said. I like the concept of evolution, of doing things progressively, Pollock added.

Chuck Hedemark: The strawman is a nice place to begin, and coupled with what we did in the work groups, should get us going, he said. My overriding concern is that getting to and remaining competitive should be our primary goal. We all want public purposes funded in some way, but we can't do it if we aren't competitive. A bankrupt system will not support public purposes, he said. Getting rid of the WPPSS debt as soon as possible is a good idea that arose; if we can buy that down, it will help us, Hedemark stated.

As for federal power marketing, 30 years is a long time, and we don't want a plan where we fall to the backup right away, he stated. An IGO with BPA in it is critical, Hedemark said, adding, it should be seamless and simple and should happen soon. Household charges may be appropriate for conservation, he stated, but I don't want to see 50 percent of every dollar go to administration.

I want to be sure we are all in agreement with the "goals and givens," Hedemark said. We need consensus on those so we can proceed, he concluded.

Brett Wilcox: The strawman is "not something we can carry across the finish line," he said. It doesn't hold together as a piece of public policy or as something for the legislative process -- "there are too many loose feathers on it," Wilcox said.

Customer choice is a central element of the end-state, and the strawman punted on it, he stated. There's a fairly clear consensus on transmission. Until there is legislation, BPA should participate to the maximum possible in whatever IGO develops. In the long term, BPA should separate power and transmission and split the project fund into two funds, Wilcox said.

For public purposes, I'm with K.C., stated Wilcox. I need to see how the dollar figures are derived. Local control versus central bureaucracy is a big issue. We need to discuss local control and how to credit back people for what they do, he said.

The "last and biggest issue" is BPA and what we do about it; it's the central issue of the review, said Wilcox. We need to define BPA's role in the new environment, and the issue of BPA costs in this environment, he noted. The strawman concludes that a subscription allocation model is the only way to deal with these problems. Due to high costs now, the only way people will sign up is to get long-term benefits, Wilcox said. I don't think the strawman's model will work, he said. You have to define what the benefits will be before people will sign up. You need to define quantities and prices, maybe with escalators, and determine which risks you're assuming, Wilcox suggested.

The core issue is fish governance, Wilcox said. It's intimately tied to how to do the allocation. The strawman approach would have the power body and fish body always at each other's throats, he suggested. A second approach is to tie together the benefits and costs of particular decisions, he said, suggesting a model where governance is left to the fish and wildlife people. "Let the agencies and tribes decide how to run the river," Wilcox said.

He described his allocation model in which benefits and burdens would be put on the people making the decisions. If fish and wildlife agencies want to spill, for example, he said, that will reduce revenues for public purposes, Wilcox said. My model aligns the costs and benefits of decisionmaking, which is where proper public policymaking should come out, he concluded.

Gary Zarker: River governance is key, and we'll get no predictability unless we help the governors move in that direction, he said. We need to establish stewardship of the system in the best sense, and I despair that we may be a little late in doing it. At least we can get broad principles on stewardship, Zarker said.

You heard Margaret Pageler talk at the Forum about her level of expectation for this process, he said. I'm concerned we are not getting to the level of detail for political officials, he added.

There's an emerging consensus on an IGO, said Zarker. The Northwest has a tremendous opportunity to be a model the rest of the country will emulate. The strawman is clear about BPA's role, but falls short on details of how we get there, he said.

Accountability is a very big issue, Zarker stated. The official report on the July 2 "disruption" is that "we unknowingly operated the system in an unsafe condition," he added. Nobody is accountable for transmission reliability, Zarker said.

The question with customer choice is, can we get it to the level of detail so we know what it takes to do it? said Zarker. We need to try to analyze the details in short order, he added. I'm disappointed the strawman didn't reflect the good work of the federal power marketing work group, he stated. The BPA Stretch model is a credible base to begin building on, he said.

There's an emerging consensus on public purposes we can work with, said Zarker. The public power community has proposed a useful direction. We need to move the local control concept forward, or the governors will find our proposal dead-on-arrival, he said.

I liked the part of the strawman that talked about progressive steps, said Zarker, adding, I think there won't be national legislation in the next five years. We need to start advising the governors what we in the industry are doing to get to the details that will achieve accountability, he concluded.

Al Alexanderson: The plausible solution set is pretty narrow, while the wishes of this group are very wide, he commented. And the doable portion is even smaller and getting narrower, he added. I liked the strawman, and I didn't go away worrying about many parts of it, said Alexanderson.

The strawman set up some opportunities to lock in the long-term benefits of the system, and it gives people "an admittedly scary choice" of contracting for that, he said. I thought the strawman was a little strong on preserving institutions and weak on customer choice and end-user benefits, Alexanderson observed. As Al Wright noted yesterday, preference is hard to rationalize in a competitive environment, he said. The strawman should do a stronger job of defining the end-state for customer choice and designing institutions around it, Alexanderson stated.

It's naive to say it's all going to happen, he continued. Most of the choices ahead are equity choices and have to be resolved, Alexanderson added. The strawman presented a good approach to the role of BPA, he said. I'm concerned about using transmission charges as a backup to pay for federal sunk costs. Others have sunk costs, he said, and to spread one party's sunk costs over the region, but not others', is inequitable.

I'm concerned about the treatment of Residential Exchange benefits, Alexanderson said. The proposal in the strawman has not acknowledged that the current distribution of exchange benefits is proportionate to sunk costs of the utilities. It's a transitional equity issue that needs solution, he said.

Jim Davis: The strawman is a good starting point, he said. People suggested at the last meeting staff should put sharp edges on the strawman proposal, and the committee would sand them off. "I think we may need a router and lathe," he said. People in my area may think the federal power marketing proposal is an "Abilene" strawman, Davis said.

I'm struck by this group's comments about local control, stated Davis. It's a good starting point for a consensus value, he said. Yesterday Brett said we need to get some basic values right before we fill in the details, Davis noted. The details could be a distraction from getting the overall values correct, he suggested.

He noted Pollock's concern that preference could be blurred in this process. My concern is that it is being recharacterized as a contract value. It's a legal value, said Davis.

A 30-year subscription is too long, he stated. I'm not where you are on the IGO, Davis pointed out. I'm more comfortable with a coordination agreement at least for the transition, and I want you to know that, he said. I'm also not sure about the strawman's regional conservation and renewables entity, Davis said.

We have to discuss governance, he stated. I don't want us to propose a governance structure that exacerbates accountability problems, he added. We may be dropping the ball on the low-income energy assistance issue, Davis said. Utilities have an obligation to step up to the plate, he added.

If there is no meters charge, and we hold distribution utilities accountable, we may be setting up a "cherry-picking opportunity" for aggregators and others, he warned. I give the green light to a meters charge to get where we need to go, said Davis. I can live with a figure of $100 million, but I don't know if it is the right number, he concluded.

Jason Eisdorfer: I look at the strawman as a package, and as a package, it is unbalanced, he said. It pays more attention to the interests of those who will make profits than it does to the public, Eisdorfer said. The baseline for transmission is separating it from generation, he stated. We should recognize that retail wheeling benefits the largest customers primarily, and the strawman "lets them go first."

The review is a public policy exercise, and the strawman doesn't include the public, Eisdorfer said. I have substantial concerns about the conservation mechanism, he added. Fish concerns are the concerns of the public, but the strawman punted on them. River governance is something we can't avoid. The strawman tries to get cost certainty, but not fish certainty, said Eisdorfer.

The strawman's low-income energy assistance section is "truly disappointing," he continued. Low-income assistance is just as at risk in the new environment as any of these other pieces like renewables, and there's no solution proposed, said Eisdorfer. Saying "federal funding at current levels" is not enough, he added.

The strawman "made some movement" on federal power marketing, he stated. After 2001, if there is no solution to BPA's above-market problem, we're in a lot of trouble as a region, Eisdorfer suggested. I don't know if 30-year contracts are the way to go; it's an open question, he said.

Chuck Collins: I agree we need more detail in the competition and transmission areas, he said. We have to get clear on things like a meters charges -- we can't just say "a mechanism like" -- we have to be specific. As for conservation and renewables, we have some good ground to engage a debate on, Collins said.

Federal power marketing is the linchpin, he observed. When the Northwest chapter is written, that will be it, and it is the part we have to get right, Collins stated. I'm increasingly convinced we need to deal with river governance, maybe not the structure, but the nature of the authority and its relationship to power marketing, he said. As for the backup system proposed in the strawman, I don't know if I understand it, stated Collins. But if I do, I think it is "a creative, imaginative, bad idea," he said.

I haven't heard anything that makes a federal power marketing solution work except the allocation model, he said, but it has to be priced so the power sells. The strawman is not clear about how the benefits stay in the region, he added.

An overriding concern that remains, said Collins, is that we are not properly analyzing the risk. I believe Randy [Hardy] when he says there is a $2 billion profit in the system when the WPPSS bonds are paid off. "If we think we can keep $2 billion under a rock, we're just crazy," he said.

We need to look at the risk and ask, will the federal government always be a benign landlord? Collins stated. I think the landlord is looking for money and is going to need this $2 billion, he said.

Federal Power Marketing: A More Flexible Allocation System

Collins explained Wright had developed four threshold questions for the committee:

Hemmingway suggested a fifth: How do we preserve the benefits when the system has value?

Our work group struggled with the long-term allocation issue, Saven said. There was a question as to whether, even if you accept the premise of long-term value, there is a willingness to step up to the plate. Speaking for the people I represent, to the extent there are unknowns, such as river governance and prices, there is a tendency to want to go short and be conservative, he said. We constructed a model where BPA is robust and making Treasury payments, and customers could get short-term or long-term contracts, of five, seven, or 20 years, Saven continued. It is a scenario of flexibility to allow BPA to respond to customer needs. Did you dismiss flexibility in what BPA would offer as products due to Treasury considerations, the market, or what? he asked Wright.

What drove us to 30 years is that if you ask subscribers to sign up for a level of risk, you also have to let them capture the out-year benefits, answered Wright. Your concept is valid; there's no prohibition on offering a host of options to customers, he said. The federal power marketing report gave flexibility to customers at the expense of the Treasury, noted Gibson.

Let's assume Brett signs a 30-year deal, Bill signs a five-year deal, and I sign no deal, said Saven. If Bill signs for five years, he should be able to buy power in the future at the level he signed up for in the past. At the same level of megawatts, it's one question; but every year, should he get to evaluate whether he wants to pay at cost or market? asked Gibson.

What are Bill's rights? asked Collins. Say he doesn't renew because the market is lower than his costs. It's a problem for Robert Rubin if Bill can renew only when it's a benefit to him, he said. I'd like the opportunity to purchase again from BPA at least as much power as I bought before, said Drummond. The question would be, at the end of five years, what do I perceive the risk to be of remaining with BPA versus going elsewhere? he said.

Suppose Bill and I come back on the same day five years later, what's the difference in price for each of us? How much is preference? asked Alexanderson. Well, "the religious answer is..." quipped Drummond.

Maybe the price, terms, and conditions have changed, suggested Zarker, and if I like them, I get to say yes before Alexanderson. We need some definition, he added, is the risk to that Treasury that it won't make as much revenue, or that we will not be paying off debt? There was no probability of repayment in the strawman, Wright said.

We don't want to resolve Treasury from the risk, said Drummond. They are part of the risk we have now due to fish, navigation, and other things. I don't want zero risk for Treasury, he said. Zero risk is not realistic, said Zarker. We have a better track record of paying off debt than any of the Power Marketing Administrations; the system works, he said.

If the market is high, and the $2 billion is not locked up, it could evaporate before Bill gets to buy another piece of it, said Pollock. That will happen, responded Wright. The baby boomers will materialize. We tried to trade off assigning benefits to the region long term in exchange for Treasury having no risk, said Wright. There may be other ways to solve it, like options -- you pay more for contracts with options, Pollock suggested. The problem is waiting for 15 years before you see the benefits -- the people I represent are unlikely to be in anything but the wires business in 10, or even five, years, said Drummond.

The strawman proposes that we regionalize all the risk and reward, stated Golden. If you depart from that, you can't do it part way. If the federal government has some risk, then you can't say it can't reap some reward, he said.

The Heart of the Preference Issue

The ability to leave periodically is of great value, said Saven. If the notion is being able to negotiate fair shares of profit with the federal government, I'm not hopeful how we'd come out, said Zarker. It's the heart of the preference issue, he added. We bought this system, and once we pay the bank, it's ours. The profit is ours. Those who stay the course own the house, he said. The public power community has been pretty undisciplined on this question, Zarker added. If you're there in 2015, you've paid the bank. If you don't stay that long, you can choose to give it up, he said. It seems like public power is looking for ways to have their cake and eat it too, Zarker observed.

The problem is not Treasury's concern about taking risk, the problem is what BPA becomes in the short-term market when there is no allocation system, said Hemmingway. There is no support for a federal agency being a competitor. The greatest risk is that 95 percent of the United States won't tolerate a federal agency being a competitor. It's a much greater risk than Treasury rising up and saying it won't tolerate the risk of non-payment, he continued. It hasn't really hit the fan, but it's starting to, he warned.

I urge people to take a larger perspective and look at the world, said Hemmingway. "Government-owned enterprises are going nowhere." They're being divested, in western Europe, in eastern Europe, in Asia -- everywhere except the Pacific Northwest, he said.

The political constellation in Congress has shifted, continued Hemmingway. When we did the Regional Act, we had power players. There is nothing like that today. Our ability to play defense is seriously compromised politically, he said. If someone made a push in an appropriations bill to constrain BPA from being in the marketplace, I'm not sure we could stop it, Hemmingway said.

Where you want to get to, is to "own the house," suggested Collins. Some buyers won't want a 30-year mortgage, some will want a five-year mortgage; some arrangements will look like rent, he continued. If we had a deal where the bank was secure and would pass the title at the end of the period, wouldn't we have it? he asked.

I'd be careful of the metaphor, said Drummond. If public power stays with BPA, what are they buying? Turbines? he asked. It's control, replied Collins. It's a good question, said Zarker. We need the details filled in, he added.

The key, said Wilcox, is short term versus long term. If you take the transmission costs out of BPA's rates, have an IGO, take out exchange benefits, and handle public purposes another way, you get to a core system at 16-18 mills, he continued. At that range, the market works. You would pay a little more now, but you would pay 16-18 mills 40 years down the road, Wilcox said.

Would you want the right to renew your contract five times? asked Collins. Going in, I'd like to renew every year, but I would negotiate, and maybe it would be every five years, and eventually you'd be able to see the end, Zarker said. There's no question that five-year deals with five renewals will cost more than a 30-year deal, said Saven. If you go long term, you ought to be able to get a better deal than going short term, he suggested.

I suggest we put together a small group to write up what we've been talking about with respect to the allocation system, said Saven. I heard a receptivity to considering options of varying lengths, 30 years, five years, with the right to renew, he stated. I'm willing to bring a paper on this to the next meeting, he added.

BPA would offer long-term and short-term (five-year) arrangements with different prices, Saven explained. Those who take the short-term option could renew, subject to new prices and conditions. I assume through the combination of offerings, BPA would attract enough load to be economically viable, be able to meet Treasury obligations, and keep load in the Northwest, Saven said. We haven't come to a conclusion on what happens at the end of 30 years -- the notion there is some residual benefit at the end, he added.

What happens if this isn't attractive? Where does the risk go? asked Canon. We need to discuss how BPA would market and who takes the hit if there is not sufficient load, replied Saven. There are enough bright people that this will allocate. The question is, are there enough bright people in the Northwest? said Collins. We don't need a backstop. We've lost sight of what we have, he added. We should look beyond the 30-year term -- the goal is to get the benefits from the river in perpetuity, said Wilcox.

Governance: Federal-State-Tribal Board To Run the River?

Hedemark suggested pursuing Wilcox's idea of one governing body that controls how the river is run. My idea is that the river will be run for fish, and power will follow, said Wilcox. Fish and wildlife people would have primary control of river governance and bear the consequences of their decisions, he explained.

Wilcox suggested the hydro system firm capability to be allocated after fish decisions are made could be 6,500 MW at 16 mills. The hydro system also produces nonfirm energy and ancillary services with a huge economic value, and this "residual" would not be allocated. Operational decisions for it would be made by a board, made up of 51 percent federal officials and 49 percent states and tribes. For example, said Wilcox, if you decide to spill in the spring, you may earn less money to use for habitat restoration.

This has some appeal, to have federal, state, and tribal entities on the same body, said Applegate. I agree the board should run the river and be accountable instead of the current fragmented system. The other piece I'd like to see added is a dispute resolution mechanism. Tribes won't want to sit at a table where they can be outvoted; they prefer a formal dispute resolution, Applegate said.

The Wilcox Concept

The concept is, there is a fixed expectation that 6,500 MW will come down the river, said Wilcox. You would allocate firm power at a fixed price. You would leave power marketing and river operations up to a single river/public purposes governing board composed of federal, state, and tribal representatives, he said.

I'd like to know the value of the load regulation, shaping, and other power products and services and the level of revenues to be generated, said Drummond. What's it worth? Are we turning over $1 billion a year to this entity? he asked.

How does this avoid the problem of a federal entity with a slightly different board, competing in the marketplace? asked Collins. If this turns stale when we look at it, what are we talking about for river governance? asked Applegate. This is not much different than the strawman, commented Wright. We said 15 percent, you say 6,500 MW. My question is, said Wright, the river governance board would have to have power marketing expertise to earn the revenues and would make decisions based on fish and wildlife needs. Wouldn't the board have conflicting directives? Wright asked.

I wanted a joint federal/non-federal board when I thought about the competing purposes, Wilcox responded. It would stay a federal entity, but it "would be a much smaller box" than it is today, he said. This is more consistent with the IGO, said Wilcox.

What if the entity failed to provide 6,500 MW? asked Drummond. It's a contract obligation, replied Wilcox. "If Rick can persuade them to take out a dam," they still have an obligation, he said.

Why should river governance be involved in power marketing and business decisions? Why should it go beyond broad policy issues? asked Saven. Now the fish people make decisions with no consequences, suggested Wilcox. Under this plan, if you decide to spill, there's an economic consequence. I'm trying to align decisions and cut down on dueling interests, he said.

I've been considering how much money might be in the residual "box," said Pollock. It may be $300 million-$500 million a year. Now it goes to things like making our Treasury payment, he added.

Do you want to pursue this idea? asked Collins. The group indicated it wanted to understand the numbers first. Should staff flesh out the board's membership? Collins inquired. We should go as far as we can, said Applegate. "Tell us what you're thinking, Rick," said Etchart.

Brett came to me with this, Applegate said, and I'm saying we ought to take a look and do some analysis. The strawman proposal should also be perfected. We shouldn't choose one over the other at this time, he suggested. I'm attracted to it, but I have to see if having the river governance entity being in ancillary services is a showstopper, said Golden.

Drummond asked Wright to explain the Columbia River compact idea. Wright said the states, through their legislatures, would establish a compact for joint management authority over the river. The federal government would ratify the delegation of authority to the compact. Discussions on a compact began in 1966, according to Wright, were revived in 1974-75, and again during passage of the Regional Act. If states and tribes are decisionmakers on river management, you have to go to a compact, Wright said.

Having a politically accountable entity could be good, commented Etchart. I'm concerned about effects on the non-federal generators on the river, stated Davis. That can't be forgotten, he said.

The important thing is what standards in law the board has to operate to, not who sits on the board, said Hemmingway. Won't the body operate to a plan? asked Shimshak. Yes, and to current legal obligations, Applegate replied. It would be obligated by the ESA no matter what; this body would have to respect that legislation, he said.

Respect, yes, but if the board couldn't meet ESA dictates, then what? asked Etchart. It would have to fulfill measures under the Council's program, which are similar to the ESA -- the differences aren't as large as some say, Applegate replied. What if the ESA penetrates the 6,500 MW? asked Collins. I hadn't thought about that, said Applegate. "Now's the time," Collins replied.

It could be they could sue us for damages under the contracts even if the ESA causes it, Pollock suggested. The board would have to meet contract obligations and fulfill ESA obligations too, Applegate said. Collins referred to a letter from Washington's fish and wildlife director which says one day Grand Coulee could be as outmoded as a dam on the Elwha. I think he should go visit them, Collins commented.

We should flesh out the strawman with fewer boards, and Brett's proposal with "some heavy analytics," suggested Applegate. Both proposals suffer from the perception they are the "benevolence of the hydro industry," said Zarker. Some people in the public are clear that you do what you need to do -- if it's tear down Grand Coulee, that's what you do. I wonder if we are representative enough to solve this problem, he said. This may look like, this is as far as the electrical industry is willing to go, but we haven't heard from the tribes and others. The question is, are there opinions out there that can solve this from another perspective? asked Zarker. Any governance solution will be a slog -- this is a hard thing, said Golden.

Collins summed up by saying Brett will help staff and BPA flesh out the economics of his proposal, and staff will flesh out the specifics of the board under each proposal, including members, standards, authorities, and relationships. Staff will also look at a river compact, he said.

Transmission: More to Come on Legal Separation and the IGO

Watson explained the main issues for the committee on transmission:

Transmission Corporation?

I want to clarify that we are not talking about an IOU IGO that BPA would be forced to be a member of, Watson said.

The Transmission Work Group had a tremendous number of unanswered questions, like the legal separation of BPA, said Drummond. Pricing was nowhere near resolution, he said. Wright reminded the group that the strawman offered an alternative to separation, with BPA becoming part of the IGO and losing its operational authority. FERC would have authority over money earned, he said.

In the near term, before legislation, that would be okay, said Wilcox. But if there is legislation, what do we want in it? I think it should be separate BPA corporations with separate funds -- "we should go the whole hog," he said.

If you go for legislation to separate transmission and power, you might as well go at it frontally and create two Bonneville funds, said Pollock. You will have to deal with the debt and many other matters, he said.

Do we think legal separation is the way to go? asked Collins. There was a murmur of assent. I have never bought that separation is required, but we'll probably get there, said Zarker. I'd like to see how the mechanism with two corporations and two funds would work and how hard it would be with the WPPSS debt, he continued. I want to make it clear we are choosing this, but we don't have to, Zarker said.

Are we okay on that? asked Collins. It's okay to work on it, but I want to see the results first before I support it, said Saven. If there is total separation, who bears the backup responsibility for the security of the bonds? asked Kreidler. It should fall back to BPA customers, not the whole region, he said. FERC will make the decision, Collins said. FERC says transmitting utilities can add directed charges to transmission instead of exit fees; FERC has opened the door, said Gibson.

There are three pieces to the question, Pollock explained. Can we use transmission as a backstop for public purposes, with or without an IGO? What is the potential for recovery of stranded costs? What about targeted recovery? That's the most complicated of the three, he said.

Should Transmission Be Insulated?

What do you want in the backstop? asked Collins. There are two issues in transmission, Applegate said. Separation, and what are you insulating transmission from? I think it should be available to help with the fish obligation, said Applegate. Is that in relation to the system today, or the new system we've talked about for the past two hours? asked Wilcox.

I don't know yet -- I'd be reluctant to see transmission insulated from fish costs in the event you can't cover them from generation, responded Applegate. The strawman said, if a meters charge is not adopted, a transmission charge would be available, said Nelson. The trouble is, she said, if the whole package comes together, it could be difficult to deal with an insurance premium for fish or for public purposes.

Part of the motivation for separation is insulation, said Golden. The exposure exists, or we wouldn't have to eliminate it. Sharon got it right, he continued, to the extent we do a good job designing a non-vertically integrated system, the ability to insulate will grow.

Have we decided we want a single IGO? Or could there be multiple? asked Collins. We could, but it defeats the concept of the IGO, Drummond replied. Do you want staff to propose a structure for the IGO? Collins inquired. Governance, reliability responsibility, pricing, and operations are all issues, said Drummond. I hesitate for us to take that all on in the next week, said Gibson.

We report that the IGO has promise, and that some utilities want to go forward, said Drummond. There's a desire to separate BPA's generation and transmission and a lot of questions remaining about the IGO, and you're done, he continued. We can't be done to say, we don't know how it will operate, said Zarker. We need to lay out a work program to address such things as reliability, operations, and planning. I'm not comfortable with, "yes, we ought to be moving to an IGO," without more detail, he stated.

We have to discuss what the IGO is going to be, who will be accountable for reliability, and resolve control area problems, said Pollock. We need to understand what happened July 2 and what it means, he added. Should an IGO be truly regional, or are there other linkages beyond regional which might have benefits? Saven asked. The California IOUs have filed to form an IGO with FERC, and we could discuss joining it, Pollock stated.

Are we unique in the Northwest versus other regions in what FERC is requiring? asked Canon. We're all in the startup phase, said Nelson, and the beauty of the strawman is that it relies on our federal regulators. Not many regions are far ahead of us, she explained. Why would we make recommendations on reliability if FERC is going to come along and regulate? asked Canon. FERC is looking to us for recommendations, replied Zarker.

If we can lay out the principal bones of contention about the IGO, it might help us move forward, suggested Golden. There's reliability, governance, operations, pricing, and planning, and there are policy questions like what kind of shake does the low-density discount get? What about postage stamp rates? he asked. We should bring the policy questions forward and leave the mechanisms to the Northwest Regional Transmission Association, Golden recommended.

Can we do that? Collins asked Jim Litchfield. It's possible -- it's a question of "how far into the mudhole you want to go," he replied. Collins asked Litchfield to make a presentation at the next meeting on policy issues in the NRTA paper on operation of the IGO. And Al Wright and staff will describe legally separated BPA funds, Collins said.

Public Comment

Glen Swift told the committee that starting with governance is a good way to begin. Bill Bradley, wildlife manager for the Yakama Tribes, said while we heard at the outset that the review was "just energy stuff," lately we've heard that the "f" word is in this. It bothers me you have such substantive issues that impact the fisheries resource and that you have no Native American representation, he said.

We have always said we would reach a point where we'd have to make decisions about river governance, Hemmingway responded. It's been known since January, he said. The four governors wrote to tribal leaders asking for any participation they chose, and the invitation remains open. You're implying the rules have changed, and they have not, Hemmingway continued. The governors are acutely sensitive to not trying to structure the tribal role. We are a government. The tribes are governments. It's not our job to establish their role, he said. Jim Middaugh noted that a mid-August consultation with the tribes is being arranged, and that the governors' representatives are meeting with tribes in their states. "We'll take you up on your invitation to participate," said Bradley.

IN CLOSING

Next time, we'll go through public purposes and competition, Collins said. Do we want a "sharp-edged report" on competition? he asked. Al told us they avoided the issue of legislation because you "get into the holy war" on local control, Collins said.

I understand why you avoided it in the strawman, Nelson said. The political cultures and economies of the four states are so different, she stated. "I'll send you a letter on it," Nelson promised. I'd like the question of BPA and retail loads sorted out, said Pollock.

We need to make sure everyone shares in the benefits, that they "go through the chute at the same time," said Kreidler. Being more specific will help, he added. Collins told Wright, we want the same kind of sharpness as you had for federal power marketing in the strawman, and we suggest you use the "transition versus end-state" format.

I'd like you to address load aggregation, small consumers, and the role of local governments in aggregation, said Golden. It would be helpful if it is consistent and specific, stated Zarker. If it means, divest a dam, say it. Don't be vague, he recommended.

Meeting 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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