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Regional Review

Comprehensive Energy Review
Steering Committee

Wednesday and Thursday, August 14-15, 1996

Sheraton Airport, Portland, Oregon

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THE COMPREHENSIVE ENERGY REVIEW steering committee considered changes to the strawman and proposals from committee members. Walt Pollock and Bill Drummond were absent; the audience was about 70.


Next Meeting: August 19-22 in Portland.


In This Issue:


OPENING REMARKS: LESSONS FROM THE WEST COAST OUTAGE

Vickie VanZandt, BPA's vice president of engineering, briefed the committee on the massive west coast power outage August 10. It was over 100 degrees in Portland on Saturday when two 500 kV power lines (Big Eddy-Ostrander and John Day-Marion) went out of service, causing a third 500 kV line (Marion-Lane) to fail, she explained.

The Keeler-Allston 500 kV line tripped about 3:45 p.m., when it sagged into a tree. This was the event considered most significant in triggering the disturbance, VanZandt said. About five minutes later, the Ross-Lexington 230 kV line short-circuited when it contacted a tree. Voltages in the system dropped and voltage oscillations began, she continued.

Simultaneously, generating units at McNary Dam began to trip off line, and within 70 seconds, 600 to 700 MW of generation went out of service. Loads on the lines were within capacity limits, but voltage was oscillating severely on the 500 kV system, VanZandt said. Within minutes after that, virtually all of the 500 kV lines south of John Day and Dixonville had tripped.

BPA Administrator Randy Hardy said the agency was still trying to find out "what had contributed to what" in the disturbance. He explained that the generating units at McNary provide voltage support as well as generation. Once they were lost, the AC transmission system began to collapse, Hardy said. This was "a textbook case" of undamped oscillation, VanZandt said. Since the outage, BPA has taken aggressive vegetation management steps and launched a comprehensive voltage study systemwide, she stated.

John Saven asked how the Northwest events related to what subsequently transpired in California. At the time of the collapse, the California-Oregon Interties were loaded to 4,330 MW, and the Pacific DC Intertie was loaded at 2,680, Hardy responded. The outages in the Northwest suddenly brought those exports to zero. Generating units in California tried to meet the load, and they became overstressed and tripped off line. Among other resources, PG&E lost nuclear generation from Diablo Canyon, he explained.

The NW Extends a Helping Hand Southward

BPA restricted transfer capability on the Intertie to 3,200 MW following Saturday's disturbance, Hardy continued. Because of the time it takes to restart nuclear plants, PG&E indicated it would be strapped for power Monday and asked the Northwest for help, he said. BPA huddled with the Corps and NMFS and declared a state of emergency with regard to fish spill. Spill was cut at The Dalles Dam and generation went from 460 to 1,200 MW. This allowed a 3,600 MW transfer on the Intertie to help PG&E meet load, Hardy stated.

Hardy said there are messages in the experience for the review. First, if we have problems now, they aren't going to get better -- they'll get worse, he said. "The geometric increase in the number of players in the market," will have an effect; let's understand what we are doing, Hardy cautioned, so we don't blunder into something that will jeopardize reliability.

An example of how the market can affect reliability involves VAr or voltage support, Hardy said. Not all transactions being delivered on the transmission system have the voltage support that was previously assumed to be part of the deal. This affects reliability, he explained. In addition, companies like PG&E used to buy on six-month contracts, but now they're making daily purchases, assuming capacity will be there and that there is a massive surplus in the transmission system, he said. This has been "conclusively disproven" in the last two days, Hardy observed. This could be "the tip of the iceberg" in what we may be dealing with," he said.

The region needs to get to an Independent Grid Operator (IGO) as soon as possible, Hardy urged. We have to have an entity with authority to build and improve the system and clear accountability for operation, he said. Until we get there, "we are in a dangerous situation," Hardy stated, adding that voltage stability is a problem the Electric Power Research Institute has recognized nationwide. In responding to "enormous competitive pressure," BPA has been careful to protect voltage stability, he noted.

Al Alexanderson observed that the technical explanation sounds like this was "something we thought we had covered," but things went wrong. It doesn't sound as though BPA took risks in cost-cutting that could have caused this, he said. You've gone from the first explanation around to the second, Alexanderson told Hardy.

Hardy said Alexanderson's first conclusion was correct. But we can begin to see influences of the market which were not anticipated, such as voltage support, he explained. Since 1965, we have had a voluntary system for reliability, and the question is how do we adjust to the new situation, in which new players do not necessarily have the traditional responsibilities, Hardy stated.

What timeline do you suggest for the IGO? Jim Davis asked. The sooner the better, Hardy said. There are huge questions in forming an IGO; this is a call to plan for it and not punt, he added. Rick Applegate asked whether DSI interruptibility could come into play in such a situation. VanZandt responded that since the region was exporting at the time of the disturbance, there was no need to drop load. Hardy said BPA does not have contractual rights to interrupt the DSIs in lieu of curbing fish spill at The Dalles.

MP Seeks To Unbundle Kerr Dam From Its Resource Portfolio

Bob Gannon announced that Montana Power, faced with a $47 million price tag for FERC-mandated mitigation, has begun discussing an early transfer of Kerr Dam to the Confederated Salish and Kootenai Tribes. The company had planned to transfer the project in 2015, but is moving early because of the economics, Gannon said. Todd Maddock asked about the tax implications for local governments. Gannon said Montana Power pays over $700,000 annually in property taxes to Lake County, where the dam is located. The commissioners are very concerned about the potential loss of revenue, he replied.

ORDER OF BUSINESS

How The Conservation Bales Stack Up

Staffer Tom Eckman walked the committee through the strawman proposal on Conservation, Renewables, and Low-Income Energy Services. The near-term proposal for conservation is to have BPA and utilities support conservation market transformation with a $30 million/year program. Conservation acquisitions should be consistent with utility submissions to the 1996 PNUCC Northwest Regional Forecast. With regard to renewables, the strawman proposes that BPA encourage completion of wind projects and the exploration and environmental assessment for geothermal. The proposal also calls for continuing current levels of support for renewables research and beginning "green power" marketing. Current low-income energy services should not be diminished in the interim.

A meters charge of $1/month/household is proposed to provide long-term funding; commercial and industrial meters would be charged proportionately. This would raise about $100 million a year. A funding safety net in the form of a FERC-ordered transmission access charge is indicated if state legislatures do not impose the meters charge. The safety net calls for utilities to maintain low-income energy assistance at current levels until they are funded by general government programs.

The strawman would have a regional entity administer revenues from the meters charge. The funds would go for market transformation, regional conservation, renewables and distributed generation research, backup of green marketing efforts for current wind projects, and low-income weatherization.

Eckman said the major questions with regard to conservation are: can we safely assume conservation will be acquired during the transition? Is there a need for regional conservation acquisition beyond market transformation activities? And is there a need for a mechanism to ensure that local conservation opportunities are developed? The major issues related to renewables are whether green power marketing should take place in advance of full retail access and whether to provide additional regional support for development of renewables.

Issues for low-income assistance include sustaining such services as bill-paying assistance during the transition, and regional funding for low-income weatherization. The size and structure of a meters charge are issues that cut across all categories, Eckman explained. He presented a scenario of how the meters charge could be collected from different customer classes, as well as a proposal for allocating the dollars among purposes.

Are the Contributions Balanced?

Jason Eisdorfer asked why Eckman's chart shows residential customers contributing over half the total, and Eckman said collections were roughly comparable to the revenue percentage each class contributes. What percent would go to administrative costs? Ken Canon asked. Eckman estimated not over 5 percent of the total.

Roy Hemmingway asked about low-income programs utilities currently offer. Eckman said about $34 million in combined federal, state, and utility funds is provided annually for bill-paying assistance. John Etchart asked how the $1/month/meter compares to programs elsewhere, and Eckman said it was low. Did anyone talk about the regressive nature of a $1 charge? Etchart queried. Eckman said the idea was to design something competitively neutral. "It's not a new cost, just a new way of collecting," Rachel Shimshak said.

Davis said the public purposes work group discussed keeping the money within local utilities. I keep hearing "regional," he said, and that doesn't sound like what we discussed. There were open questions, and we closed them, Eckman responded. You can change this, he added.

K.C. Golden asked Eckman how he arrived at the conservation allocations, and Eckman explained they were based on a portion of the cost-effective conservation identified in the Council's power plan. Shimshak said the goal ought to be to get all 1,780 MW of cost-effective conservation the Council identified. You decide what you think the market will do on its own, and then make some judgments about what the rest will cost and how much customers should contribute, she suggested.

Canon observed there was "a significant question" about what goes into the cost-effectiveness calculation. We made it very clear to the Council that we had trouble with that number; it's still a number that is hotly debated, he added.

Shimshak offered modifications to the strawman proposal, saying she didn't think "it adequately reflects Northwest values." She also questioned whether the governors would sign on to a package that calls for breaking contracts with renewable resource developers.

Shimshak proposed aiming for 90 average megawatts (aMW) of conservation acquisition a year at a cost of $2.4 million per MW and weatherization of 11,000 low-income homes yearly at an annual cost of $30.5 million. Low-income energy assistance would be at $107 million per year, under Shimshak's proposal. She called for developing one 30 MW renewable project in each of the next 10 years, at an average cost of $60 million to $80 million per year.

Revenues would be collected through a meters charge, part of which would go to a regional entity and part of which would be kept and spent locally, Shimshak explained. Chuck Hedemark said it looked like $397 million would be needed to cover the costs Shimshak outlined. I don't think it's any worse than that, she responded.

Saven asked for a formal proposal, and Shimshak said she would provide one. Hemmingway indicated the committee needed several pieces of information: historic and current spending levels in each of the proposed project categories and what would be needed to complete acquisition of cost-effective conservation.

Hedemark queried whether the committee should take a national perspective on renewables. A $5 million solar R&D effort in the Northwest might not make the grade, but $50 million nationally might, he observed. Eckman said that issue was considered, and Shimshak added the focus was on opportunities in the region. Gary Zarker suggested that it is more than numbers; the committee needs to be clear about what we're attempting to accomplish. To the extent you give this some definition, it would be useful, he said.

Saven said he had been kicking these ideas around with his constituency. They don't ask me how much, they ask, why spend the money centrally? he reported. I don't have a good answer, Saven stated. Zarker suggested that the committee indicate energy costs are going down in some cases because sellers are offering a lower quality product environmentally.

Etchart asked what contracts would be broken under the strawman proposal. Shimshak said contracts for the output of the geothermal projects would be in jeopardy if, as the strawman proposes, work ends with drilling wells.

The Straw Thickens On Transmission

Staffer Dick Watson presented changes the committee requested to the strawman proposal on transmission. The major change involved fully separating BPA's power marketing and transmission functions, and creating two separate funds. An item was added to indicate FERC would regulate an IGO.

Litchfield Offers A View Of The IGO

Consultant Jim Litchfield gave an overview of issues involved in forming an IGO. He listed several ways in which an IGO would enhance operations, including improved O&M, coordinated expansion planning, increased utilization of transfer capability, and reduction of pancaking. Litchfield described the various elements involved with reliability and who would be responsible for each under an IGO. Long-term and seasonal energy supply would be market functions; real-time reliability would be shared between the IGO and a control area operator. Power quality would be the responsibility of distribution companies, the IGO, and the market, Litchfield explained, with transmission O&M and capacity a responsibility of the IGO and transmission owner.

Litchfield sketched out how the current utility control areas operate and how that would change under an IGO. The IGO could operate the system as one control area, and provide a single transmission arrangement for a transaction, he explained. The option for a control area to be embedded within the IGO is left open, Litchfield said.

Incentives differ among monopoly, competitive, and IGO structures, Litchfield said. For example, maintenance reliability is part of utility rate base under a monopoly. With competition, there is an incentive to reduce maintenance costs, and with an IGO there is a push to cost-effectiveness, with an overlay of FERC regulation. Monopoly pricing offers postage-stamp rates; with competition or an IGO, FERC determines pricing structures.

Zarker asked what would assure reliability with competition. Litchfield said reliability is not "a black-and-white concept" -- there are gradations. Judgment comes into play, he acknowledged, along with cost-effectiveness. Competition pushes toward low-cost solutions, Litchfield added.

I think regulation really matters, Sharon Nelson asserted. The implications of cost-cutting for service and reliability are important; we have all seen the effects with US WEST, she added. Alexanderson said he thought the missing piece was how you price reliability, and he suggested there is the issue of people "getting comfortable" with decisions about "goldplating" versus reliability.

Brett Wilcox suggested regulation could come from a customer board. Customers have a great interest in reliability, he said. Saven said he was concerned about the issue of VAr support that Randy Hardy raised. The idea that resources are coming in but not paying their fair share didn't sit well at all, he stated. Litchfield said he was troubled by that, too. The IGO would provide a backstop, he added. When contracts come in, the IGO would see that the ancillary services are there. The IGO could have the right to supply them and make the beneficiaries pay, he suggested.

You're saying we need legislation, and BPA said we don't have time, Davis noted. Your IGO doesn't comport with FERC's Order 888, he added. Litchfield said he thought the IGO he described was consistent with the FERC model. For this to work, we'll need legislation, he acknowledged, adding that he thought it would be a real push for the IndeGO to be operating by July 1997.

Litchfield offered recommendations for the committee to pass on to the governors: a regional IGO would increase reliability and efficiency; a legally separate, federally chartered, FERC-regulated Bonneville Transmission Corporation (BTC) should be formed; an IGO should be voluntary; no mandatory pooling is necessary; and taxes on transmission would negatively impact power markets.

Some IGO Nuts and Bolts

Watson said BPA provided an explanation of how its two funds might be separated if a BTC were formed. A crucial question is whether the BTC is an IGO, he added; all users would have to be satisfied the BTC is fully separate.

Davis said he was concerned the committee had not heard an opinion from bond counsel. They're not going to do something that weakens the bonds, Chuck Collins responded. In the end, the question is whether other people in the market are satisfied with BPA's behavior, but we have no way to predict that, he said.

If BPA becomes an IGO, where does the money go? Saven asked. Jim Curtis of BPA said there would have to be a provision in legislation to cover that. Saven raised the issue of an IGO's "winners and losers." I would venture to say those with high-voltage transmission systems would be winners, he added. But how would customers of BPA with low-voltage systems fare with an IGO? he queried. What about 230-345 kV systems? What happens to utilities served under a general transfer agreement with the IOUs? This could have a material effect on rural customers, Saven added.

Zarker suggested there may need to be a transitional approach in the near term which bolsters BPA's role, "a role they've played well." Collins asked whether it was important to insulate BPA's transmission system from competition. Zarker said the voltage disturbance indicates that equipment is not being maintained. We aren't going to have 100 percent reliability, Alexanderson asserted. He suggested that the growth rate of trees and the extent of power line sag were "knowable" and could be addressed. Three times in 40 days means something is going on, Zarker said. I'm in Zarker's camp on this one, Collins stated.

The discussion moved on to governance, and Hedemark said those who pledge their assets should govern. Then it's not independent, Golden observed. The first place to go is the FERC guidelines, Watson suggested. An IGO must be independent of market participants and can't be dominated by end-users or suppliers, he pointed out. Wilcox suggested that a board of owners, operators, and end-users could sort out 90 percent of the issues, and 10 percent would go to FERC. Collins asked staff for a proposal.

Nelson noted that her staff was recently briefed on BPA's efforts to enter the telecommunications market. I want to raise this somewhere, she said. I question the idea of leveraging federal assets to get involved in the telecommunications industry. I don't know if Walt and Randy are even aware of this, Nelson added. Until the risk issues are resolved, BPA will be reaching out in all directions, Collins noted.

New Straw For The Competition Issue

Staffer Terry Morlan said feedback on the first draft of the competition and customer choice strawman suggested people weren't too happy with it. Staff revised the proposal, incorporating suggestions from a memo Nelson submitted, he reported.

The proposal starts with a simple goal: a competitive electricity market driven by customer choice, Morlan explained. It outlines "an evolutionary approach" to market development, allowing the market to develop gradually, while addressing cost shifting and consumer protection issues. You can't just have economists design the structure, Morlan observed.

The strawman describes a number of principles for the region to pursue through legislatures, regulators, and locally elected boards, Morlan said. He listed several assumptions that underpin the proposal, including: consumer pressure for increased choice and retail access exists; there is a continued need for regulation; cost shifts should be minimized; and competition requires open, nondiscriminatory market access.

Under the strawman, distribution utilities must be prepared to accommodate open access for all customers by 2001, and distribution service would be separated from retail electric service. Legal divestiture would not be required if regulatory safeguards were in place. The proposal calls for policymakers to establish procedures that ensure consistency among the market participants in such areas as licensing and taxation, and to clarify the relationship between federal, state, and local authorities.

Zarker asked about regulation and consumer protection issues. Nelson said the idea was not to pre-empt local jurisdiction; she said that in telephony, issues such as boundary disputes tended to pull in multiple agencies. And the lines between federal and state regulation "are anything but clear," she added.

Canon asked how competitive markets would be policed. Morlan said the issue is "market power" and whether things are working properly in the competitive market. Nelson suggested FTC rules for disclosure could come into play. At what level is this policing done? Canon queried. In time, market power could be difficult to address locally, he said. I don't have a model -- it's evolving, Nelson said. Eisdorfer observed that federal laws often don't help consumers much. They involve long administrative battles, he said.

Prepping for Retail Access

The strawman lists a number of things that should be done prior to 2001, including separation of utility functions and itemizing components on the utility bill; establishing the obligation to connect and eliminating the obligation to serve; adopting policies on stranded cost recovery; and promoting retail market development through pilot programs for customers who are ready. The question of how to compensate a "provider of last resort" is another major transition issue.

We are "dancing around" the degree of cost shifting that will occur, Zarker observed. It seems we're recognizing that cost shifting is a result, he said. I thought the goal was to have all customers benefit, Shimshak said. The work group recognized that everyone benefiting was impossible, and the goal was to minimize harm, Zarker responded. We can't predict how competition will evolve -- companies will try to recover costs, Nelson said, noting that there will be debates about "fair" versus "unfair" cost transfers.

The policy ought to try to prevent it from happening, Collins remarked. As long as you have captive or semi-captive customers, there will be cost shifting into that class, Eisdorfer stated. Regulators will have to grapple with this, Nelson said. Should our policy be to try to prevent it? Collins queried. Hedemark replied that some classes of customers are subsidized, and the market system will distort these subsidies. If we recognize that these subsidies should be protected, then yes, he said.

Most regulators say they divide costs according to where they are incurred, Eisdorfer responded. Industrial customers say they subsidize residential customers -- it's as though, if they say it long enough, someone will believe them, he said.

Canon Makes a Third-Third-Third Proposal

The whole idea is to get to choice, Canon said; that's how you avoid cost shifting. He suggested a timeline for moving customers incrementally to the competitive marketplace: by June 1998, move one-third of each customer class; by July 1999, have the next third move; by July 2000, the last one-third moves. One-third of each customer class goes in successive years to get to choice as quickly as possible, he explained.

Nelson suggested that would lead to discrimination litigation. "So as long as Michael Johnson and I start at the same point, it's a fair race," Golden quipped. He recommended the group not get into a cost-allocation fight, but "leave it to Sharon." I'd set the bar higher than Gary, he added. I'd say the policy ought to be that everybody benefits, Golden said.

How do you decide on the first third? With a lottery? Davis asked. Yes, Canon answered. I'm trying to address the fact that some customers may be going first, he said. If we wait until 2001, we stretch out the aggravation, Canon added.

What's our policy? Collins asked. In the transition, I don't think it's possible for everyone to benefit, Zarker said. If you want competition, you will see a cost shift, and I think we should be as candid as we can be with elected officials about this, he said. Some people will be hurt, and we should be vigilant about this, he added. You could have the goal of "everyone benefits" as an end-state, Zarker suggested.

Are we satisfied with "minimizing" cost shifts? Collins asked. In the transition we could say "minimize," and in the end-state, have "everyone benefits," Zarker responded. You could eliminate cost shifts by the end of the transition, Collins observed. It doesn't matter if it happens on the first day or the last, Eisdorfer said. I don't think you can prevent it, Hedemark stated.

The goal is to minimize prices to all customers, Nelson said. Gary stated it well: be vigilant about unfair cost shifting, but I don't know if we can guarantee preventing it, she added. Collins directed staff to draft an appropriate statement for the strawman. The result won't be zero cost shift; that may be the goal, and governments will have the role of preventing it, Collins recapped. How strongly do you dissent, Jason? he asked.

It is important to recognize that large industrials will be the principal beneficiaries, Eisdorfer replied. We can't fool ourselves that we can protect those who are most at risk, he added. Golden said the words about minimize and prevent are less important than the mechanisms in place to protect customers. It's got to be more than "happy talk" for us to endorse it, he said. He suggested the strawman needed specifics on such issues as small customers being aggregated into buying blocks.

I've been in this conversation many times, Alexanderson said, and it often falls into the trap that the only worry is price on the bill. Airline customers can pay more for a certain class of service, he observed. Electricity customers may have the opportunity to pay more for green power -- being able to choose is a benefit, Alexanderson stated. There are benefits beyond the old way of measuring, he said.

Zarker raised the issue of work load. We're racing down the path that this is better, he said, yet, if you look just at itemizing the bill, you can't do that by 2000. We have been trying to solve that problem, and it's huge, he added. The work program associated with these things is intensive; seemingly easy things won't happen that quickly, Zarker stated. And power quality issues are even bigger, he continued. It's going to take a lot of work, and "holding guns to our head" won't help, Zarker said.

Hedemark said his company faces the same problem. You're adding millions of dollars in costs to information systems, for example; but there are things that will offset that, he stated. Nelson noted "rebundling" is the new game in telephony. "One-stop shopping is what everyone thinks customers want," she commented.

Davis observed that low-income customers could be among those from whom additional costs are recovered. I'd be more comfortable if we could recognize that, he said. Canon asked if it is presumed the legislature has said low-income services are a utility responsibility? The strawman says low-income assistance is a general government purpose, Eisdorfer responded.

What you're seeing is that some of us are profoundly skeptical this generates benefits that could not have been gotten with wholesale competition alone, Golden said. If this is about shifting costs, there needs to be genuine safeguards; if this is about shifting costs, we don't want it, he added.

A Formula For Funding Public Purposes

Shimshak said conservation, renewables, and low-income services are at risk in the market environment, and new mechanisms are needed to fund them. She proposed a meters charge of 4 percent levied on all customers, which would collect $284 million annually. Of that, $100 million would be administered by a regional entity. Shimshak offered the following allocation of funds: $30 million for conservation market transformation; $64 million for renewables market transformation; $5 million for demonstration of distributed application renewables; and $1 million for renewables research. The proposal includes a regional non-profit corporation to establish standards and accountability procedures, and to track progress toward regional and local goals.

Golden elaborated on conservation aspects of the proposal, explaining that the original strawman's $30 million for low-income weatherization would be administered locally under this proposal. The proposed $154 million for local conservation efforts was derived from the Council's estimate of cost-effective conservation available in the region. Some would be captured by consumer action and market transformation, he explained, but 64 aMW would need to be acquired annually at the local level. The cost would be $2.4 million per MW, a figure that he acknowledged "is controversial." The proposal "embraces local control," Golden said.

Eisdorfer said calling low-income assistance a general government responsibility, as the strawman does, is "exporting the issue from this table." That means it won't happen, he stated. Retail wheeling will benefit large commercial and industrial customers, and low-income residential customers will be harmed. Studies show that a small percent of the residential class has the right profile to do okay with retail wheeling, Eisdorfer acknowledged. The proposal offers several possible mechanisms to fund low-income assistance. He urged the committee to keep low-income services connected to retail wheeling legislation to keep it on the table.

Etchart raised the issue of renewables contracts that might be broken, and Collins asked Curtis of BPA to clarify the issue in a memo. Saven asked for a concise definition of renewables and renewables market transformation. Shimshak said the definition was non-hydro resources, and transformation referred to such things as market access for green power.

Nelson asked if any thought was given to taxes people already pay and how they are used for assistance programs. Gannon noted that the IOUs pay $1.1 billion annually in federal, state, and local taxes. And those are paid indirectly by customers, Alexanderson added. Zarker observed that legislatures could redirect the use of existing tax revenues. Saven recommended the committee discuss what to do if the tax mechanisms were not forthcoming.

A "Weedy" Proposition For Federal Power Marketing

Saven said he had worked with a group of interested people to add several points on federal power marketing to the strawman. Folks are working hard "to price options," he said, but before we zero in on the numbers, we'd ask, do we have the concepts right? Saven highlighted some differences between the new proposal, which he called FPM2, and the original strawman.

FPM2 assumes that the risk to the Treasury should be reduced, but not zeroed out. In addition, FPM2 allows for a variety of power products, ranging in length from five to 30 years. It allows a customer to purchase long or short term, but requires a short-term customer to purchase "an option" in order to assure the ability to renew a contract when it expires. The question here is the risk to other customers who make a long-term commitment and to the Treasury, Saven explained. A customer would pay a premium for flexibility, but it would not be prohibitive; much discussion will ensue on the price of the option, he added.

With regard to governance, there is no governing board for power marketing; instead, an advisory board would give input to the federal administrator. If there is a decision to go to a TVA-style board, it's not incompatible, Saven noted. FPM2 relies heavily on contracts, he explained, and the model presumes there is an agreed-upon level of funding, "a negotiated floor," for fish expenditures. There is a hierarchy for customer groups selecting resources in FPM2, and products would be offered in three stages. The proposal assumes that there is no need for "a backstop" mechanism. If it's done correctly, the system would be fully subscribed, Saven explained. FPM2 would offer products at cost.

FPM2 acknowledges implications for the federal system's third-party debt, depending upon who signs up for the short and long-term contracts. Legislation may be required, but FPM2 does not specifically address the issue, Saven said. Broad-based resale rights are not available under existing laws, and BPA's obligation to serve could be dealt with cleanly and with finality with legislation, he suggested.

"If you like weeds, there's a whole lot of weeds here," Saven said. There are fundamental policy questions; I'd ask you to wrestle with them first, he added. Saven noted that the Public Power Council had submitted modifications to Sections 7 and 8 of the strawman.

Does this proposal preclude slicing up all of the federal power system? Alexanderson asked. Saven said there was agreement that 3,500 aMW ought to be set aside for long-term sales. We did not go much further on various other services, he responded. There is a basic question about how you're slicing the system, Collins observed. BPA would retain an obligation to its historical load, Saven said. To the extent there are other products, those are still available to BPA unless they are resold, he added. Could BPA still use those products to market its power? Alexanderson asked. It is still the entity trying to recover costs, Saven replied.

Golden asked why the group rejected the dividend subscription approach in the strawman, in which BPA could offer some products at market rates and subscribers could contract for long-term rights to the dividends. Saven said the group tried to put together a model that made sense and found that in the future a cost-based methodology could still work.

What led you away from the fish decrement, in which customers could walk away from contracts if the federal system is degraded by 15 percent? Applegate asked. That doesn't resolve the issue, Saven replied. If you're walking away, what is there for a replacement? he queried. To the extent it's possible to negotiate the risks and put sideboards on the future, it gives me the tools to put a deal together. I take little comfort in the ability to walk, not knowing what the rest of the world will be like, Saven explained. This scenario is, I'll negotiate a contract to stay, he stated.

That gets to the difficulty of prognosticating about what it takes to restore the runs, Applegate said. How do we get those numbers discussed and set? he asked. Something will happen with river governance, Saven replied. It's not just a bilateral deal between BPA and the customers. These questions about risk are "big time issues"; I'll work with you and others on how those sideboards are established, he said. So it's flexible terms and probably not numbers we resolve here? Applegate queried. Saven agreed.

This model has us "as renters rather than owners," Saven explained. But if we can rent for long enough, I find it attractive, he said. If we can get to 30 years, we'll declare victory and leave it to the next generation, Saven quipped. Would the 30-year people be able to renew? Collins asked. They'd have the right to be first in line, Saven answered. I'm amazed at how comfortable we are with 30 years, Collins observed.

Wilcox Proposal: Let's Be Owners, Not Renters

This is not a DSI proposal, Wilcox said in explaining his paper on power marketing. The proposal is guided by two fundamental principles: assign the costs, benefits, and risks of the Federal Base System so you know what goes where; and align those with who makes the decisions about them, he explained.

The proposal is to separate the existing system into two parts: a transmission entity and a Federal Power Corporation (FPC). The FPC would have two rate pools. Group B would be the customer pool, from which BPA sells power, along with the services that make the power usable, Wilcox said. We've estimated the firm power at 6,000 MW, he said, and this would be subscribed for as long as possible, 30 to 50 years. Purchases would be take-or-pay, with resale rights, and there would be rights to renew. The point of this process is for the benefits to stay in the region, Wilcox observed.

Group B revenues would cover the FPC's financial obligations; price would be based on defined system costs, including hydro O&M and WPPSS. You don't have to fix the rate, just the costs the group would recover, Wilcox explained. Subscriptions would be voluntary, and priority would be first to preference customers, second to regional BPA customers, and third to others. The first allocation would be for long-term contracts; "the guts of the proposal is long term," although shorter terms are possible, he said.

Group A would encompass "everything that is left over," Wilcox continued. The pool would be "seeded" with 900 MW of firm energy and include all services not needed in B. Group A would be sold at market, with revenues going for fish and wildlife (F&W) and other public purposes, such as conservation. The bulk would go to F&W, he added. River operations would be determined by a board of federal, state, and tribal representatives, established consistent with the Appointments Clause of the U. S.Constitution, Wilcox said.

Wilcox explained several additional pages illustrating how revenue requirements could be divided between the rate pools. He noted that $100 million in sunk fish costs would be allocated to Group B, and costs for lost generation would be allocated to Group A. Davis asked if the proposal was based on average water, and Wilcox said it was. Group A takes the hit for critical water, he noted.

Group A has over $100 million more than under the current system, Wilcox asserted. One reason I'm advocating this, is that "it's not a zero sum game." The current F&W situation is worse than a zero sum game, he said. Because the costs and risks are not aligned with decisionmaking, "if A gets something, B may pay 10 times the cost," Wilcox explained.

What about WPPSS' decommissioning costs? Applegate asked. That's a Group B cost, Wilcox said. The point of the exercise is not to argue about one particular cost, but to show whether it is potentially doable or not, he said. A new set of benefiters are cut in, Collins observed.

We've moved from renters to owners, Wilcox said of the proposal. You've achieved the "in perpetuity" benefit, he explained, and you've realigned the risks and benefits. It's potentially commercially workable, he said, noting that for people to sign long-term contracts, you need to tell them what they're buying.

Is the Uncertainty Split Equally?

There's a lot of certainty with Group B, Applegate observed. Group A is "where the fish live or die," and that's where the uncertainty is, he said. I believe there's certainty, Wilcox responded; I've aligned the risks with the decisions. But what about the viability of the piece of the system to fund fish? Applegate asked.

The reality is that certainty comes with a price, Wilcox said. You can get certainty by capping F&W costs, he said, but you can't have both. You're looking at a system that has not restored fish, Applegate said, and yet we have an obligation to restore the runs. Are we really serving up a full plate here? he asked. The strawman acknowledged an additional 15 percent derating of the system, Applegate continued, and we could be talking about further decrements. I don't want to foreclose that possibility, he added.

There is a benefit in allocating the uncertainty, Wilcox said; it's got to be done. The strawman is not commercially viable, he asserted; "it's a nonstarter" for potential buyers, Wilcox stated.

Saven asked whether each group would have an administrator. Group B would be a federally chartered corporation, governed by people paying the bills; Group A would have a public governance body of federal, state, and tribal officials, Wilcox replied.

Does Group A make the seasonal decisions? Saven asked. Group B is a contract; actions are in Group A, Wilcox replied. Canon asked if there was actual system ownership. No, Wilcox said, it's an entitlement. Group A is where the uncertainty is, Applegate said. You've taken a strenuous legal obligation and put it in the most uncertain part, he observed. At the end of the day, someone has to sign up for the power, Collins said. The alternative is the status quo and a deteriorating commodity, he added.

The status quo isn't working, Applegate countered. The fish interests are at the end of their rope with further degradation of the situation, he said. What if we set up something that doesn't work? Then do we turn to the Treasury? Applegate asked.

Where's the pot of money now? Collins responded. Brett has made a useful proposal, Applegate said, but can you tell the treaty tribes there is certainty? You've got to show on the fish side, that we've got the prospect of something that works, he contended. To the degree the risk is unspecified, you can't get there, Collins said. I liked the strawman proposal, Applegate said. Can we design something that accommodates that decrement? he asked.

There are three parts to the uncertainty, Alexanderson said. There is the annual volatility of the water; there is the market risk or the value of the power; and there is uncertainty about the power products--they might not be there because we derate the system. The consequences are where they belong, they're not exported, Alexanderson said of the proposal.

We're constraining internalization of the costs, Applegate said. What if we set up a system that fails to meet the obligations? "It could come back to haunt us," he said. Curtis said BPA was trying to quantify the risk elements in the system and the potential impacts on revenues. Applegate said the committee needs a rough idea of the amount of decrement involved with "the more common elements" in the fish plan, such as the John Day drawdown.

Wilcox observed that Group B is not risk-free. There is the WPPSS debt, Corps and Bureau capital replacements, the Tenaska settlement, and WNP-2 expenses, he said. The biggest risk to both groups is identical: the value of the market, Collins said.

What are the fish going to do with a bunch of money? Golden asked. That's not what fish need, he said. Money and kilowatts are fungible, Collins responded. How doable is the Group A governance? Nelson asked. I had considered 51 percent federal and 49 percent states and tribes, Wilcox said. The feds are there and part of the decisionmaking process, he said; they have the ESA obligations.

Collins said by next week, the three options should be fleshed out. Applegate noted that the public interest groups would have a fourth option, which would address stranded costs, exit fees, WNP-2 debt, river governance, and a limit on the percent of system degradation.

Is River Governance On Or Off The Table?

Collins said it was time for a "gut check" about how far we'll "go down the river governance road." I've heard a wide variety of opinions, and we need to sort that out, he stated.

The ESA will run the river for the foreseeable future, Hemmingway began, and whatever entity runs the ESA -- likely the U. S. Court in Portland -- will also run the river for some time. There is a national interest in preserving salmon on the Columbia River, he continued; "it's the price of admission." Given where the public is environmentally, there won't be the push against the ESA we would have thought two years ago, Hemmingway added.

All of the schemes I've heard reduce the inputs and control of the upstream states, Etchart said. The feeling in Montana is pretty universal -- our resource management role should not be diminished. When the review began, we left out F&W, deferring it to the 180-Day Review, he stated. There is not strong sentiment for a new scheme; I don't think it makes sense for us to do it, Etchart concluded.

I support what John says, Davis asserted. I'm a river user for grain exporting, and we aren't represented here, he said. It's an international river, Davis added, and the Canadians have an interest, too.

Mike Kreidler said he had a different view. There are a number of ways to achieve the tradeoffs. One of the tradeoffs for limits is giving other interests a say in operations, he stated. If you set limits, you have to give up something else, Kreidler counseled.

I agree that the ESA will be with us in the future, Applegate said, and we don't want the system run totally by the ESA. The governance we're talking about gets "the relevant sovereigns at the table," and we'd have a dispute resolution process, he stated. If you're going to mitigate the risk of fish costs without any governance changes, "the stool won't stand," Applegate declared. I thought this was up on the table, he said. I'd like the draft we put out to have a set of river governance guidelines. In the hearings, we'd consult with others and see how far we can take the issues, Applegate urged. If we drop governance, you are dropping the fish mitigation cap, he cautioned.

The issue of river governance has always crept in, Shimshak said. If we say nothing, we run the risk of not having political support for our package, she stated. I'm here at the invitation of the governors, Canon said. I'd like to know what they expect, he said.

I find a lot to agree with in what people are saying, Hemmingway responded. It can't be taken off the table, but a lot of interests aren't here, he said. We want a comprehensive package. I agree with Rick that we leave it on the table, Hemmingway concluded.

Collins referred to a letter from the Pacific Waterways Association, which said that group was excluded because the review was dealing with energy issues. Is this a proper forum given other uses of the river? Collins asked. That looks like a serious structural problem, he observed. The governors told us it wasn't part of our charge, but they thought we'd get a definitive answer from the 180-Day Review. We're in by default, Collins said.

I think we could call to the governors' attention that some of the conclusions we reach could require changes, Zarker suggested. Applegate recommended the group put principles together, including a formal mechanism to resolve disputes. At "the principle level," we should lay it out, he explained. If we're the right entity to propose constraints and caps on fish, why aren't we appropriate to do that? Applegate asked. I don't think we can set it aside and then constrain fish costs, he stated.

I don't think our product can come to fruition without river governance, Golden said, but I agree many interests aren't here. I think we're obligated to stay with our original charge, Maddock said. We don't have the right group to deal with river governance. I was not happy with the 180-Day Review, he added, and urged the committee "to focus on our mission and not walk into the quicksand of another 180-Day Review." It's a huge error if we as a group think we can do that job given our timetable, Maddock said.

Are we the right forum? Clearly not, Nelson said. Let's flag it, she said, but don't kid ourselves that we can resolve it. And I don't think we should try, Nelson concluded.

We had the right parties in the room for the 180-Day Review, Etchart said, and we selected them carefully. We got to a set of recommendations, but I don't think a consensus is available any time soon, he stated. The real problem for us is balance, Etchart continued. Idaho and Montana have the resources that will be expended. It's hard for us to agree to a scheme that diminishes our control over those resources, he stated.

We have a lot of work to do, Saven said. It's been nice and polite, but next week, we're going to really get into it. There are significant issues in federal power marketing, he observed. I have strong reactions to some of these things and you'll hear from me. I don't feel that talking about these issues is injurious to fish, he said. If we have thoughts, views, or themes to give the governors in a package, that's as far as we can go, Saven stated.

If we adopt Brett's proposal versus the strawman, we will need governance, Collins observed. There is probably nothing wrong with considering principles, he said, but if we think we can describe the structure, "it's a fool's mission."

The worse thing is to let the issue languish, Applegate said. The current fit between the ESA, the feds, and tribes is awful, he said; let's make a start.

Davis asked what the findings were in the 180-Day Review. There was a lot of equivocation, Etchart replied. We were "so timid," the Council was not able to come up with something to advocate to Congress, and we made a request to the Administration to prepare an Executive Order, he explained.

Of the four states, two are suing NMFS and one other may join the other side of the lawsuit, Kreidler said. It's unreasonable to walk into a process as political as the Council and expect more than what we got, he asserted. There are discussions in the state of Washington about whether to participate in the Council any longer, Kreidler said. It may not be in the state's interest to participate -- there are serious problems, he added.

Collins asked Applegate to draft principles for next week.

IN CLOSING: COLLINS OFFERS HOPE

Collins noted that he and the governors' representatives would meet with CRITFC later in the afternoon, and indicated other committee members could attend if they wished. He recapped assignments for staff and committee members, and noted that BPA would be called upon "to price" various power marketing proposals. Shimshak asked that next week's format include significant breaks for caucusing, and Collins agreed that would be appropriate. I think we're in pretty good shape for next week, he observed. "It is the duty of the leader to provide hope," Nelson quipped.

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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