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Regional Review

Comprehensive Energy Review
Steering Committee

Monday and Tuesday, August 19-20, 1996

Sheraton Airport, Portland, Oregon

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THE COMPREHENSIVE ENERGY REVIEW steering committee continued to develop proposals to restructure the Northwest energy system. All committee members were present. The audience averaged about 40. This is the first of two reports on the week-long session.

Meeting to Continue: August 21-22 in Portland.

In This Issue:

ORDER OF BUSINESS

Applegate Offers River Governance Principles

Rick Applegate offered five draft river governance principles:

• Management of the Columbia River power system should be bound by legal obligations to restore fish populations, including the Northwest Power Act, the Endangered Species Act (ESA), the U.S. Canada Pacific Salmon Treaty, and treaties with tribes. Management priorities should be: public safety first, restoration of the health of the river to protect and enhance fish and wildlife (F&W) resources second; and other uses, third.

• A board of federal, state, and tribal sovereigns should manage the power system.

• There should be a formal dispute resolution mechanism to resolve differences among sovereigns on the board.

• The board should develop, budget for, and enforce a unified river governance F&W implementation plan.

• Board deliberations should be open, and independent parties should periodically conduct scientific, economic, and technical reviews of the board's work.

What's your model for dispute resolution? asked Ken Canon. I'd like it to be "threatening" enough that the parties try to resolve disputes in advance so they don't have to go to it, Applegate said. He cited U.S. v. Oregon and the mid-Columbias' settlement process as models.

Would the board's decisions be final and binding with respect to implementing the ESA? asked Walt Pollock. The board wouldn't be dispositive on the ESA, but it would be as close as you can get without amending the ESA, Applegate responded.

Would the mid-Columbias be included on the board? asked Jim Davis. Since the board is made up of sovereigns, there wouldn't be a formal seat at the table for non-federal parties, Applegate said. If we added non-federal dam operators, the tribes would think it was not a government-to-government working relationship, he continued. Navigation, recreation, and sports fisheries interests might also want to be on the board, Applegate added, and "if you're not careful, you've got another Salmon Summit."

We've negotiated with the tribes on a government-to-government basis, said Davis. I don't understand why the mid-Columbias, which represent local governments, would not be characterized as a government, he added.

If you accept the premise of "balance," how do you provide it in this type of scheme? asked John Etchart. The federal government would appoint a couple of people, one bringing fish obligations to the table, another representing a river operations entity, Applegate suggested. I anticipate four-state representation, he said, but I'm not sure you need two people from each state. The tribes could be upriver and downriver, or there could be as many as 13 tribes, Applegate said. The states will continue to have a strong role, and that's how you get balance, he stated.

What decisions does this board make -- when power is marketed, when generators are taken out for maintenance? asked Bill Drummond. I assumed there would be a river governance plan that deals with things like spill and bypass systems, and we may need an advisory board of power interests, replied Applegate.

Would the board make decisions by consensus or unanimity? inquired Brett Wilcox. Any tribe could invoke the dispute resolution mechanism if it felt its treaty rights were being affected, Applegate answered. Beyond that, my thinking was that some number of members, maybe three of an eight-member board voting together, could invoke dispute resolution, he said.

River Governance: Bite the Bullet or Creak Along?

The governors did not intend us to be specific about river governance, and I'm uncomfortable moving ahead with the specifics in the list of principles, Todd Maddock said. I'd like to see us be respectful of what the governors asked us to do and "not attempt to bite this one off," he stated.

Noting that the Council couldn't come to consensus after the 180-Day Review, Applegate said, we have room to make a proposal in this area. I've suggested general principles to take out for consultation, and if we run into a stone wall, then we'll deal with it, he stated. This is very important to those who believe the governance structure we have now is not working very well, he continued. Simply creating the ability to make more investments isn't enough for fish -- governance is the key point for getting things done on the ground, Applegate said.

When I was hired by the governor of Oregon, my charge was to straighten out "that mess on the Columbia with respect to fish governance," said Roy Hemmingway. I've looked at it, and my conclusion is that it is working as well as anything would with that many interests, parties, and conflicting jurisdictions. We're better off with something "creaking along," than inventing something new "out of whole cloth," he stated.

I'm willing to leave it open through the hearing process, but if anything will bring our efforts to a grinding halt in Congress, it will be our trying to weigh in on this, said Hemmingway. This forum is not the one to come up with a conclusion on this, said Maddock. We don't have the right people around the table, and this group wasn't formed for that purpose, he added.

We represent some, but not all the interests on the river, said Chuck Collins. And how could we do it in 90 days? he asked. I'd hate to see us come out with new power and fish arrangements but do nothing on governance, stated Applegate. "Creaking along" doesn't get the work done for salmon restoration, he said. To leave the issue to be fixed by someone else is a mistake -- "we ought to take a run at it," Applegate recommended.

Collins referred to a letter from the U.S. Department of the Interior indicating all the things, from treaties to municipal water supply, the review would have to take into account in deliberations on river governance. That letter wasn't written to tell us to stay out of the issue, but to suggest the important federal issues at stake, said Applegate. It is fundamentally important to fishery advocates that this issue be dealt with, and I don't accept we can't make progress on this, he added.

The "one ray of hope" in this fractious debate is that people on both sides say it would be better and cheaper if salmon restoration were in the hands of the fish people, commented K.C. Golden. We need to be careful of taking this up in the review, Pollock said. There are major things, such as state, federal, and tribal rights and treaties involved -- "it's a very big item to wrestle to the ground and resolve," he said.

Rick, what is it about this process that you think would bring a better result than a process that just considers river governance? asked Etchart. We're suggesting there are matters to be resolved here on the "power-fish interface," but we would be leaving in place a system that doesn't work well at all, Applegate replied.

I didn't hear the governors say we should stay away from this, said Gary Zarker. There's no certainty for the power industry if we don't address fish uncertainties, he stated. I don't think this is the right forum, but we should tell the governors that they need to launch something, said Zarker.

We should say the issue needs serious regional attention, and that's enough, stated Maddock. Some of Rick's principles make a lot of sense, said Zarker. Maybe this group needs to make suggestions on how to address these issues, he commented. We aren't the forum, said Wilcox, but we could say in our report that one member submitted these principles and seek comments on them. At least we'll move it along, he suggested.

We were challenged with the responsibility to be visionary in our approach to the problems of energy, fish, and keeping the benefits of the system in the Northwest, said Mike Kreidler. "I'm not in the boat Roy's in," he said, adding, it's not the best we can do. We can do better, and there's a lot at stake, said Kreidler. If we do a report that is silent on this issue, we'll have done a disservice. Failure to do anything would be a travesty and undermine what we want to accomplish, he said.

I read the letters from the Port of Portland, Columbia River Inter-Tribal Fish Commission (CRITFC), and the Interior Department as a "warning," stated Bob Gannon. That if we get into this, we should tread lightly, and that since not all the interests are here, there are concerns that "we'll gum up the works," he said.

I'd like to know why the 180-Day Review was not a success -- that could help us to make recommendations, Canon said. I agree with Gary, said Jason Eisdorfer. We are in as good a position as anyone to offer the governors recommendations, and I hope we don't turn it into a "nothing commentary," he said. There's nothing more useless to a governor than a half-baked recommendation, observed Collins.

If we "wade into this," there's a host of people who will want to talk to us, he pointed out.

Let's ask Gary to draft a statement of his position, and we'll look at it, suggested Collins. It should include a timetable to address the issue consistent with the timetable we are on, recommended Applegate. I'm very disappointed that every time this issue has come up, we've managed to put it off. We're abandoning the field in an area where we should take action, he added.

Public Interest Power Marketing Proposal Premieres

Golden presented a fourth federal power marketing proposal (in addition to the strawman, John Saven's FPM2, and Brett Wilcox's proposal). It stems from the report of the federal power marketing work group, as well as consultations with Angus Duncan and the Northwest Conservation Act Coalition, among others, he explained.

Duncan, of the Columbia/Pacific Policy Institute for Energy and the Environment, said under this proposal, initial take-or-pay contracts for firm power would be offered at cost for terms of five to 30 years. Customers could subscribe up to their historical loads, with an option to renew, and preference would apply. The renewal option charge would be determined by inviting bids for the products in the expiring contract; the charge would be the difference between cost and the bid price. Prior holders of contracts have right of first refusal to renew, he said.

Power not subscribed would be auctioned by BPA at market prices, Duncan said. There would be a full right of resale to the extent allowed by current law.

Customers would buy power as part of a package, with attendant system cost liabilities, including fish, as well as potential dividend benefits when BPA revenues exceed costs. There are a number of measures to manage fish costs, Duncan noted, including a five-year fish budget in place before contracts are signed, and a contract limit on fish cost-escalation recoverable from customers.

The proposal assumes a board of sovereigns would govern the river and the Federal Columbia River Power System (FCRPS), Duncan explained. "It's akin to what Rick described," he noted.

When revenues exceed costs, they would first be used to redress any arrears in Treasury payments. Remaining net revenues would be divided in quarter-shares to: 1) accelerate Treasury repayment; 2) accelerate funding for public purposes; 3) accelerate fish recovery measures; and 4) provide dividends to contract customers.

If costs exceed revenues, subscribers would absorb cost increases and hydro capacity degradation up to 15 percent, similar to the strawman proposal. There would be exit fees for customers of historic record who reduce or vacate their load on BPA. Such fees would only be assessed when needed to meet costs that exceed revenues and only on the amount by which the customer's load is reduced. Exit fees would expire with retirement of WPPSS debt.

Does your proposal have anything special on the exchange? asked Al Alexanderson. Residential and small farm customers would get the same benefits as preference customers, Duncan replied.

Would it be a sale of kilowatt-hours or a dividend approach? asked Pollock. It's a package that combines the two, Duncan responded, adding, you buy a package that includes power, risks, and a potential dividend with the right of resale.

Davis' Approach to Conservation and Renewables

Davis described a proposal for conservation, renewables, and low-income assistance which he called "very different from the proposal that surfaced last week." The bottom line with this proposal, he said, is that it is "closer to the center of gravity" of the work group and respects the authority of utility commissions, local jurisdictions, and state laws. This approach does not "needlessly create new bureaucracies," Davis added.

The issues to address in the post-2001 time period, according to Davis' proposal, are: for conservation -- what are regional versus local responsibilities? For renewables -- what are appropriate regional activities and appropriate local responsibilities, and do standards such as need for power and cost-effectiveness play a role? For low income -- what are the responsibilities of the power system versus responsibilities of general purpose governments?

Market transformation makes sense to do regionally, Davis said, noting BPA has $15 million in its rates for this purpose annually for the next five years. We hope the IOUs will "match-fund that," he said.

Would there be nothing more than the BPA and IOU contributions over the next five years? asked Rachel Shimshak. From the region's standpoint, replied Davis, adding that it wouldn't cut off the "flywheel effect." I have a real problem with last week's proposal, he inicated, stating that "shoehorning" a mandated approach to these issues into a complex web of state and local responsibilities and regulatory relationships does not make sense politically.

Davis' proposal calls for sponsors to continue ongoing renewables projects and for utilities to offer "green" rates or resources to customers. It says utilities would continue low-income weatherization programs, and that utilities should work with states and other general purpose governments to decide the best approach to low-income assistance.

Davis suggested that ultimate accountability resides with locally elected governing boards and public utility commissions, but that since "some believe that more is needed," activities should be reported annually to a Regional Technical Forum (RTF). The RTF would compile a status report on public purposes accomplishments. This could be "no more complicated than a website," he said. The RTF could recommend strategies that might be pursued during the following year. For public utilities, this mechanism should be sufficient to meet the reporting requirements in BPA power sales contracts, Davis said.

How do you generate the dollars for the regional entity? asked Shimshak. There's no regional entity in this -- local control is not compatible with a regional approach, Davis replied. I'm willing to promote the "green" rates notion, he said. But is hydro a green resource or not? he asked. To me, it is, and we need to have that discussion, Davis stated.

Who's supporting this? asked Wilcox. Public power, replied Davis.

Action on Consumer Protection Amendments

Eisdorfer introduced amendments to the competition and consumer access proposals that deal with consumer protection, cost shifting, local government aggregation, and BPA and retail service. There's a need for some government oversight of the transition to a more competitive market, he stated.

We recommend that regulators and local agencies be able to review and revoke licenses or assess financial penalties on entities that "do grievous acts," Eisdorfer said. What's an example? asked Collins. Canon suggested misrepresentations, such as selling green power that is not green power. We want to establish this "hammer" so market participants "play fair," Eisdorfer said.

He also proposed: placing market participants under state consumer protection laws; identifying on energy bills a place where consumers can lodge complaints about service; and establishing a "neutral" resolution mechanism for disputes between consumers and market participants.

Canon noted that the industries he represents often buy on a national basis where there is no "local nexus." They don't want a level of regulation that would increase costs when it is not needed, he said. Canon suggested changing language in Section 5.4.2.1.1 to indicate it applies to "residential and small commercial customers," and Eisdorfer agreed.

Eisdorfer's amendments call for monthly bills to contain information on a provider's resource portfolio, including environmental characteristics, and a consumer satisfaction index. If itemized costs appear on bills, the amendments state that disclosure should be "complete," and include charges for stranded cost recovery, transmission, distribution, low-income assistance, generation type, and renewables.

This begins to look "excessively regulatory," commented Sharon Nelson. But consumer advocates will suggest such language, she predicted. This will be debated roundly at utility commissions and elsewhere, Nelson added. Let's amend it to indicate that customers should get information of this type, but not prescribe it be on a monthly bill, suggested Alexanderson. We don't know if monthly bills will even exist in the new competitive world, he added.

How would this work? asked Drummond. Say we buy power from Enron; we don't know, and they may not know where the power will come from. They could be buying from all over the west, he said. We're not sure how to do this, said Golden, but we want to say "we care," and that people should compete on these grounds. It's a good idea, but the time frame is of grave concern to me, said Zarker.

"We're not writing code here," observed Nelson. We could say "standardized information made available to consumers that should include...," she suggested. I'm reluctant to stray far from this language, responded Eisdorfer. I've been told that one of the benefits of retail competition would be that consumers can buy "environmentally good" products, he continued, so if we are to make informed choices, we need to be informed.

"This is overly prescriptive," commented Chuck Hedemark. If we are going to do this, I think we should list the taxes paid unknowingly by customers through utility bills, said Gannon. I'm not offended this body would take this up, stated Hemmingway. We are to lay out conditions for the move to competition, and one condition is, how much consumer information ought to be out there, he said.

The committee changed the amendment to read "provide information on monthly bills or through other appropriate readily available media." Is there anyone who doesn't think we should provide this information? asked Collins. It's not an issue, he concluded.

Eisdorfer said the amendments call for a "provider of last resort" to accommodate those who cannot or will not choose a supplier. The provider of last resort should be decided by a bid process, and the energy should be at affordable rates, he said.

Access to the distribution system should be available to new energy service providers on a non-discriminatory basis, and states are encouraged to establish an orderly transition to direct access that insures all customer classes benefit and that cost shifting is prevented, Eisdorfer continued. The amendments call for pilot programs to encourage development of aggregators who can provide competitively priced power for small consumers, and for states to authorize local governments to aggregate consumers within their jurisdictions. Local governments that aggregate consumers must allow individuals to opt out, Eisdorfer noted.

At Canon's suggestion, the word "unwarranted" was added before "cost shifting" throughout the amendments. Nelson noted that there is no intent in the amendments to take any authority away from the local boards of utilities.

Debating Local Government's Role in Aggregating Customers

Referring to the recommendation that local governments aggregate consumers, Gannon stated, I don't think local governments should be in this business. In Montana, we're providing that the local distribution entity be the provider of last resort, he noted.

The committee accepted Zarker's suggestion to change the provision to say local governments that aggregate consumers "should allow" individuals to opt out, rather than "must allow." Did you mean this to apply to Seattle, or only to newly empowered local jurisdictions in formerly IOU territory? asked Alexanderson. Seattle has a local aggregator, responded Golden. But it doesn't allow individuals to opt out, Alexanderson said.

This amendment anticipates whole subclasses that won't be served, and it equips local jurisdictions to respond if that happens, said Golden. Small customers are profitable to serve if they pay their bills, observed Alexanderson. Are we saying government will aggregate "deadbeats" and get market power out of that? he asked. Lots of people will compete for the residential market. Why do you assume market failure for small customers? Alexanderson asked.

This doesn't solve the issue of incumbent advantage, said Golden. A government aggregator serving these customers against the power of an incumbent is a different issue entirely, said Alexanderson. To go up against a government with special influence and powers, and if customers can't opt out, "this is a self-fulfilling prophecy that competitive markets won't develop," he stated.

I don't see a problem with government playing a role, said Zarker. If voters have a problem, they'll get new elected officials, he added. There are some fundamental questions about the nature of local governments' entry into this, said Nelson. What if the language kicks in "only if competitive markets fail to develop?" asked Collins.

We're split -- let's leave it or pull it, said Hedemark. Would you be comfortable saying market failure could be a significant problem where aggregators fail to form and leave it to states to ascertain the best mechanism? asked Drummond. I feel strongly about these local aggregation proposals, said Golden, because all the other regional suggestions in here "aren't a hill of beans."

We're "skating around" a discussion of the fact that this is a natural way to aggregate load for BPA contracts, said Eisdorfer. How do you direct BPA to residential customers if there are 15 suppliers out there? he asked.

Are you suggesting that municipalities have a "superior right" to aggregate those contracts? asked Alexanderson. No, this allows an aggregated group of residential customers to take risks and get benefits, Eisdorfer replied.

It's a good signal that we think there are people who run the risk of not benefiting -- to alert local governments they may have to play a role, said Zarker. If we took it out, we wouldn't send that signal, he added. I'd like to see us discuss the premises underlying this, like the need for consumer education, Zarker said. The committee agreed a subgroup should look for some "middle ground" on this issue.

With respect to an amendment dealing with BPA and retail service, Pollock asked that all the language except "BPA should not compete directly for retail customers beyond the industrial customers to whom it currently provides direct service," be deleted.

Data on Conservation Achievements

Staffer Tom Eckman, in a presentation on historical conservation investments, said that conservation acquisition ranged from 51 MW in 1991 to 121 MW in 1994. The weighted average utility cost was $2.4 million, he said.

In 1994, according to Eckman, the total spending of $332 million for conservation broke out as: $94 million for IOUs; $218 million for BPA; and $20 million for large public utilities. The estimated 1995 total of $295 million to achieve 121 MW is: $84 million for IOUs; $193 million for BPA; and $18 million for large publics. The estimate for 1996 is $121 million: $54 million IOUs; $39 million BPA; and $28 million large publics.

Eckman indicated weatherization programs for 1995 totaled $18.9 million, with $6.7 million from the federal government, $4.9 million from states, and $7.3 million from utilities. As for bill-paying assistance, the total for 1995 was $39.4 million ($23.7 million feds, 0 states, and $15.7 million utilities).

Utilities are spending between $1.2 million and $1.6 million for renewables, depending on the year, Eckman noted. BPA estimates it will cost $40 million to $55 million to complete current pilot projects, depending on how many are finished and the price of power when they are finished, Shimshak said.

Subsidies Come Up For Another Airing

Applegate offered three amendments on subsidies, which he termed activities funded by utility ratepayers that should be examined to see if beneficiaries should pay for them. If beneficiaries paid, it would reduce the cost of the power system, he said.

Applegate's first amendment states that Congress should provide that the irrigation share of the debt on multipurpose federal dams be repaid by irrigation beneficiaries. This could mean a savings of $827 million, he stated.

The second amendment says Congress should provide that the rate the Bureau of Reclamation charges for pumping irrigation water at federal projects be raised to market value over the next five years. This, according to Applegate, would save ratepayers $15 million to $30 million a year. The third amendment states that Congress should provide that beneficiaries of navigation lockages pay annually the lost power revenues that result from lockages. This exceeds $3 million a year in forgone revenue, Applegate said.

Would you examine each project to determine what irrigators would pay? asked Drummond. This is being suggested as a principle, that irrigators ought to pick up the tab, not ratepayers, Applegate replied.

A Trio of Residential Exchange Proposals

Alexanderson proposed three alternatives to allocate a share of FCRPS benefits to residential and small farm customers to replace the declining residential exchange program.

• Allocate a permanent monetary share of the benefit, calculated as the difference between the rates to preference customers and DSIs, and market alternatives, in proportion to loads. This would provide relief to customers of high-cost rural systems that are losing the low-density discount (LDD), he said.

• A 20-year phaseout, starting with legislative benefit payments for 1997, declining five percent each year, with a right to subscribe to federal power on the same basis as preference entities as the exchange is diminished.

• Credits for the suppliers of the former exchange and LDD beneficiaries against the regional meters charges being proposed. The rationale is, we don't want one class of customers that gets a rate increase out of this, said Alexanderson.

Preliminary Agreements Reached on Transmission

Collins asked how the latest set of transmission recommendations, including a call to separate BPA's transmission and power marketing, with separate funds, and to form an Independent Grid Operator (IGO), differed from what the committee considered last week. Staffer Dick Watson said new language had been added, at Golden's request, to say that transmission planning will follow least-cost planning principles, and that intermittent, as-available, and distributed generation shall be treated fairly in buying and selling ancillary services and in the provision of transmission services.

Saven proposed adding two sentences about smaller utilities who rely on BPA for delivery. The proposed language states that an IGO should assist in facilitating a competitive power market for rural utilities that take delivery of their power at subtransmission voltages over facilities they do not currently own. In the transition to an IGO, BPA should work with its rural customers to assure that fair pricing mechanisms, reasonable transition periods, and opportunities for utilities to gain control over delivery facilities, are available.

Are smaller customers interested in obtaining that kind of transmission? asked Shimshak. Smaller customers have a commitment from the rate case to explore purchases or long-term leases in lieu of charges or fees, Saven answered. I'll spare Walt a description of how that process is developing, he said, adding, there is interest in buying or leasing such facilities.

Pollock said, I don't see a mandate for anyone but BPA. We'll need the help of the IOUs, he stated. At Drummond's suggestion, the committee agreed that the amendment should say "BPA and the transferring utility should work with rural customers." Noting that DSIs can also be affected, Wilcox suggested, and the committee agreed, that "rural customers" be changed to "affected customers."

The committee added four items dealing with the transition period to the proposed points on transmission. These recommend: that BPA move quickly to achieve administrative separation; that efforts to form a transitional IGO proceed while legislation is under consideration; that BPA's membership in the IGO prior to legal separation be "strongly encouraged"; and that BPA wheeling for retail loads be consistent with FERC eligibility rules.

Public Reps on the IGO Board?

Golden suggested that the IGO governing board include public interest representatives, as well as owners and users. What interest would they represent? asked Collins. For no owner or user is the economic efficiency of the system the primary concern, replied Golden. If this is not about the manipulation of transmission decisions to the advantage of any class of providers or one provider, why would there be an objection? he asked. Couldn't we say "governed by a body in accord with FERC regulations?" asked Wilcox. That's the best we can do under the circumstances, agreed Gannon.

Are there objections to a public interest representative on the board? inquired Golden. I have a little problem with it, said Davis. Just because a person represents the public interest doesn't presume they know what's going on, he said.

The whole notion of public members on corporate boards is evolving, observed Collins. Isn't there a place for some public members? he asked. How would the language read? asked Drummond. "Owners, users, and independent public representatives," replied Collins.

Are there strong objections to a public representative on the board? asked Shimshak. I feel strongly about not adding public representation, Davis responded. There will be representation from public power -- "how much redundancy do you want to create?" he asked.

I don't mind the concept of "public representation," but if we're building a bureaucracy with staff and reimbursements, that bothers me, said Saven. If we are building an independent highway, we need to have some folks besides the trucks and the asphalt-layers on the board, said Golden.

There will be liabilities attached to serving on the board, as well as rewards, noted Gannon. "I didn't volunteer," Golden quipped.

Collins suggested the recommendation say the board would follow FERC principles in allowing no one group of users or owners to dominate, and would include at least some representatives of the broader public -- some "independent outside directors." Nelson recommended that the board include regulators.

Does this language require putting the IndeGO and BPA Transmission Corporation (BTC) into a single IGO -- is that the intent? asked Pollock. Could there be a BPA IGO that would satisfy this? he asked. The strawman didn't say that BPA had to join the IndeGO, said consultant Al Wright. The strawman preference was an independent IGO with all parties in it, he said. The committee agreed to cross out the phrase "(other than Bonneville)" in the item that reads: "IGO membership is voluntary."

Gannon said, I'm concerned stranded costs will be laid on transmission system users even though they were not incurred by those users. Ultimately, the WPPSS repayment goes to the transmission system, if all else fails -- it's the last resort before default, Pollock noted. Wouldn't this be taken care of in the initial capitalization of what is split in the federal entity? asked Hedemark. If you have a fully resilient federal power marketing scheme that handles risk, you've dealt with it -- that's how you solve it, stated Collins. But you don't know that today, said Applegate. It's a big if, Collins agreed.

Gannon inquired about the language that says legislation should subject BPA's transmission revenue requirement to FERC regulation that is "equivalent to" FERC regulation of IOUs. Shouldn't it be "the same as?" he asked. The language addresses WPPSS liability -- there are differences necessitated by that, responded Pollock.

My sense is that it is "two football fields wide," commented Gannon. If it's not "the same as," it's potentially unfair, but I guess from the explanations given here that it has to be written this way, he said.

Does anyone object to adopting the transmission recommendations? asked Collins. No one did.

What's the process: are we doing one piece at a time or will we adopt a whole package? asked Canon. Some of us want one thing that could make or break the package, said Shimshak. We're operating on the idea of "no deal until there's a whole deal," said Applegate, adding, "we have to be careful about piece-by-piece finality."

We're trying to come up with a set of points we can write a draft from, Collins pointed out. Hopefully, we will have the great majority supporting those points, he said. We have to agree everything is conditioned on adoption of the package at the end, said Golden.

Comparing the Federal Power Marketing Proposals

Staffer Ken Corum presented a matrix comparing the four federal power marketing proposals: the strawman, FPM2, the Wilcox proposal, and the public interest proposal. In the strawman and public interest proposals, power users pay all the costs of fish, and these costs are determined by others, noted Wilcox. In my proposal and in Saven's, he said, we tried to specifically allocate that risk. That's what you have to deal with -- all the rest are secondary issues, Wilcox stated.

There are a few issues in federal power marketing that really matter, said Collins, listing:

• The structure of the deal, including who goes first and how long the contracts are.

• Managing/acknowledging/accommodating fish risk.

• Treasury risk, which is tied to what happens at the time of contract renewal.

We have to come up with something that OMB will score positively, Collins said. You have to show an incremental improvement from the status quo, he added.

Watson presented information from a stranded investment study BPA commissioned, which he called "pretty conservative" in its assumptions. The "market range versus BPA costs" results showed, according to Watson, that in the near term, at medium or high prices, you're in good shape. With low market prices, there's a period of years when BPA costs would be above market, he said.

As for "net revenue estimates," the study showed, with low market prices, BPA would run a deficit; with medium prices, there would be a $100 million net benefit, which would grow over time; and with high market prices, the net benefit carries out over time, Watson said. We think the study's costs are a little low, their gas prices a little high, and it doesn't include new uncertainties about fish, Pollock said.

To show a "major perturbation" in fish costs, we put in an arbitrary $500 million "cost hit" to see what happens to net revenues, Watson said. The resulting low, medium, and high graphs of "modified net revenues" all showed a dramatic drop in revenues in 2010. This is a system derating of what percent? asked Collins. About 25 percent, Wright replied.

This doesn't strike me as a realistic scenario, said Golden. In reality, such costs would be phased in, he said. Are we saying the power system cannot absorb a 25 percent derating? asked Applegate.

The question is, what does this tell us for our deliberations -- I'm not prepared to say now that we should preclude certain things, he added.

It tells us if people sign up for 30-year contracts, this is one risk you have to take into account, said Canon. The question is, can we look at a body of risk and come up with an acceptable mechanism to share it or manage it? Collins stated. I'd like more information on costs; otherwise we'll be "flying blind," said Applegate.

Collins asked if the "modified net revenue" chart would subscribe? "No way, period," answered Wilcox. Adding costs and taking away power puts costs 25 percent above market, he said. This is the "key nut" we have to deal with, Wilcox suggested.

The size of the WPPSS debt has a phenomenal impact on where these lines show up, observed Applegate. To focus just on fish mitigation is a mistake. If you say you won't buy it at cost, then let's test this in a free market, he suggested.

If someone can find someone to take on the WPPSS debt, BPA would be thrilled, Collins observed. I'm not sure you wouldn't see a scenario where something would be done outside the region about the WPPSS debt, commented Kreidler. Other regions don't have a federal agency picking up their nuclear power mistakes, he pointed out. As we go through the process, this is something that will come back and bite us if we choose to ignore it, Kreidler warned.

All things are possible in Congress, but all things are not possible in this region, Collins said. WPPSS is a "poisonous issue," he added. That's why I raised the subsidy issue, said Applegate. It's "not a self-righteous populist campaign," he said. "We've got to look under all those rocks or we won't have done our job," Applegate stated.

The Treatment of Risk

Saven sketched out a proposal on fish risk, which he said was his own, not part of FPM2. Its key assumptions involve whether a fish cap could be retained over time, and whether the federal government would consider a sharing of risk, said Saven. I'd be willing to advance this to public power, and if I were negotiating with the federal government, this would be my position, he said.

Under his proposal, Congress and the Treasury would extend long-term funding of around $435 million a year for fish mitigation. This idea could "score" favorably, compared to what may happen to BPA in 2001 and beyond if customers leave because of better alternative short-term markets, Saven said. His analysis indicates a "sideboard" of less than a 10 percent swing in fish costs would be an acceptable risk to customers and should not preclude selection of a long-term BPA product.

How does this score positively with Treasury? asked Zarker. It's an attempt at something that represents customers' interests and is not injurious to the environmental community, Saven replied.

I disagree with your assumption that the Treasury would be willing to shoulder significant increases in fish costs, Hemmingway said. "I'm wearing the customer hat, not the Treasury hat," Saven explained. The public interest proposal takes care of this by moving gradually to market pricing, noted Golden. Our proposal handles risk with a five-year budget and limits the exposure of customers who stay with the system to a 15 percent change in costs, he said. It reduces the liability of customers who leave the system, but it doesn't eliminate it, Golden continued.

If I purchase power for 30 years, what's my exposure? asked Collins. A 15 percent increment over the cost you sign up for, Golden answered. Who picks up the other liabilities? Collins asked. Power would be sold at market upon renewal, Golden explained. If there are dividends, they go first to Treasury to make up for payment deferrals. After that, if there are more dividends, 25 percent goes to accelerate Treasury repayment -- that's the bargain to Treasury, he said.

The Pros and Cons of Exit Fees

What's the difference between your proposal and John's in treatment of short-term contracts? Pollock asked Golden. We are sharing fish risk with former customers through a fee of 7.5 percent of the costs of derating the system. This arrangement would end when the WPPSS debt is retired, he replied.

My decision on a short-term contract would be heavily influenced by the exit fee, observed Drummond. Cost control under this proposal becomes more significant to me than under John's, he added. When system costs exceed revenues, BPA can assess an exit fee if I've left, Drummond said. Couldn't we address Bill's concern by having a strong tie to a management advisory board? asked Kreidler.

If everyone goes long, there is no extra revenue for Treasury, said Collins. Right, but there's very little risk for them too, Golden replied. In the other model, we tried to create a viable short-term option because customers didn't all want to be long. But in this case, you'll get exit fees if you leave, said Collins. The acid question is, will this subscribe? he asked.

This steps up to the fact that in the short term, revenues won't cover costs -- it shares the risk, Golden stated. If there's a $500 million shortfall, it's split among exit fees, liability limits among customers, and above that, Treasury, he said. How far back does "customers of historic record" subject to the exit fee go? asked Davis. Not that far -- the 1990s, Golden responded.

It's hard to see how there would be any short-term buyers, said Collins. I don't see customers going in to say to Congress, please impose an exit fee on me that I don't have now, said Wilcox. In a cost-based system, cost control is an issue, said Golden. This is a way to transition from a cost-based system without losing benefits, he added.

It would be a mistake to assume there wouldn't be a national momentum to address this, regardless of whether there's a regional consensus, said Kreidler. As for exit fees, I'm not sure you couldn't get consensus for them in the region because the alternative is so much worse, he stated.

If you sign a contract and there's no exit fee, there's no exit fee, said Saven. If a catastrophic situation occurs, and Congress decides to take "a punitive attitude" toward the Northwest, that's different, he said. Perhaps there would be a stronger regional consensus to sign 30-year contracts if no one can slip out of the system, suggested Kreidler.

In my political judgment, you can't get all the subscriptions you need if you offer only 30-year contracts, commented Collins. That's not judgment, that's a fact, responded Saven.

I'm not sure you can get around an exit fee and leave stranded debt behind. Is that the message we want to send Treasury? asked Applegate. We want to convince them to accept something better, said Drummond. You have no exposure to WPPSS debt now? asked Applegate. At the end of 2001, all bets are off, replied Drummond.

The exposure is the likelihood of losing claim to benefits that may reside in the system in the future, suggested Golden. The exit fee is so that we can step up enough to the liabilities to create a plausible claim to future benefits, he said. But to do this, you need legislation, responded Wilcox. "You're not going to get people to step up and say, `hit me,'" he added.

Attaching Numbers to Fish Risk

Collins suggested looking at what goes to fish at current rates, and what would happen if market prices were to go up, under the four proposals. The strawman has a fish cost number in the original 30-year contracts, explained Wright. It can go up to 30 percent of the difference between the market and cost, if costs are below the market; when costs are at or above market, it stays the same, he said. If there is more than a 15 percent degradation of the hydro system, contracts can be re-opened, Wright noted.

The numbers the committee posted on a chart looked like this:

Terming the exercise "simplistic," Applegate said he wanted to think through the numbers. This is an attempt to find a way to get your vote, Collins said. It's an attempt to get all our votes, rejoined Applegate. That's fair, said Collins.

Looking at the numbers won't help, said Wright. It's how you use a hydro system that has changed dramatically -- you just need to pick a number and say that's what it is -- you don't need a lot more analysis, he said.

Let's do this same exercise for customers and for Treasury, suggested Golden. Let's settle fish first, said Collins. There are bookends of $230 million and zero upside; the strawman is real productive on both ends; the Wilcox proposal has the least in the base and the most upside, he recapped. In that ground, there ought to be a deal, Collins said.

After a spirited exchange of views on this topic over lunch, the conclusion we came to is that we want to make sure there are sufficient resources for fish mitigation and that there is some level of responsibility for customers and BPA to participate in that, Saven reported. There was a recognition that the federal government should have some level of responsibility, especially when BPA's costs are above market, he added.

We focused on a methodology where the level of customer commitment to various mechanisms would approach, perhaps, the $250 million level, with an overall figure of half a billion, Saven explained. Some kind of sliding scale had general acceptance, he said. If you had a 1-mill option charge, there would be another $50 million customers might be willing to pay, Saven said. In the short term, it would balance risk between the Treasury and customers, he added. You can't forecast the federal government providing lots of money into an indeterminate future, particularly if BPA costs go below market, Saven said.

I like that this is not a fish cap, and that it recognizes continuing and increasing customer obligations, said Applegate. I suggest we test the federal commitment to F&W. I'm not sure what Treasury or OMB will accept, and if they say no, we'll have to revisit, he stated.

Exit fees are not in our proposal because they are a bottom line, but because they're the only way we could see to get to the bottom line, said Golden. Options fees could also accomplish the bottom line, but exit fees aren't off the table, he noted.

It has to be a "win-win-win" for fish, the feds, and the customers, said Wilcox. A win for the fish is more money up front. A win for the feds at a minimum is to ensure repayment of BPA costs and the federal debt. A win for customers is that what you pay up front has to be offset by long-term benefits, he said.

My proposal, explained Wilcox, said you could get to a bare bones of say, 16.9 mills, and John's base case starts at 18 mills. They give you about $200 million in revenue beyond what you have now, and if you take John's option payment of 1 mill as a credit for fish, you get the $250 million the fish people need, he said.

It's not a check -- it is a sharing of potential liability, said Golden. It's important to recognize this is a limit if there should be a catastrophic situation, commented Collins. It's not a ratcheting up of the current $435 million. We're talking about a potential liability that should be shared, he said.

We shouldn't refer to it as a "liability," said Applegate. F&W is an important investment. It's not an "unfortunate nuisance" -- it's an important obligation for us to meet, he added.

Is anyone opposed to the notion there be variable contract lengths, including five years and 30-40 years? he asked. No one was. Do we agree shorter term contracts pose risks for Treasury that longer ones don't? he asked. All agreed. What will we put in Treasury's column to compensate for that risk? Collins asked.

In Treasury's column, there would be a comparison of its exposure if shorter term contracts were not offered, suggested Saven. Without shorter contracts, customer defections could make BPA's financial position worse than it otherwise would be, he said. Canon stated that some customers may want 10 or 15-year contracts.

The Options Concept

Saven presented his proposal to allow customers to purchase options on renewal contracts. He said a 1 mill per kilowatt-hour option charge would yield $89.9 million each year, if everyone signed up for short-term contracts. If 60 percent signed up, that would generate $53.9 million. That's $54 million you don't have today, and customers would get five-year contracts with an option to leave or renew at the same or reduced level, Saven said.

The option price needs to be established before a customer can decide between a long or short contract, Saven continued. He noted that the options revenue could be used for fish, as a reserve for bad water years, to finance replacement of assets, for overall rate reduction, or to advance debt repayment.

The option fee of 1 mill is low enough that it wouldn't discourage customers from a continued relationship with BPA, but it also gives them the ability to go short, Saven suggested. Purchasing an option gives a customer the right to renew for another five years and to purchase another option, or convert to the balance of the long-term period at cost, he said.

Could I just buy the option and not the power? asked Drummond. A lot of people are pressing for that, but it's not in this proposal, responded Saven. Do we all agree the option money should go to Treasury? asked Collins. It could be used for fish, said Applegate. Why couldn't it be at Treasury's option -- to have it in reserve or to take it? asked Hedemark.

What are we going to give Treasury? I don't hear a willingness to entertain that the benefits go to the Northwest and the risks go to Treasury, said Collins.

Our present contracts run through 2001, and another five-year contract would take you to 2006, said Saven. By the fourth year, you'll tell BPA whether you're staying or going, and by then, we'll know more about fish costs. And within five years, some WPPSS debt will be starting into retirement. At that time, if someone doesn't want to renew, I think the power will "sell like that," he said, snapping his fingers.

How do you convince Treasury? asked Collins. They know gas prices could go up, and we could have a gold mine. We are trying to keep the "lead mine" in our hands now, he said. I'd be willing to go head-to-head with Treasury on this, offered Saven.

In our proposal, Treasury gets an increase in the probability of repayment, first call on all net dividends up to the amount of any payment deferrals, and a quarter of net dividends after that, said Golden. What would give Treasury comfort, said Pollock, would be: an adequate level of reserves, and to pay down the debt.

Under John's model, there's no market test of options, and Treasury might be concerned about that, said Golden. I have been told repeatedly that you are not going to settle this thing with just repaying the debt, said Collins. You may want to consider sharing some upside with Treasury, he said.

I imagine that at OMB and Treasury, some want to dispose of the PMAs right away and don't even expect that all the costs would be returned -- "those are the zealots," said Hemmingway. If we were to offer much higher probability than today of getting costs returned and maybe negotiate some profits for the future, assuming there are high profits, it may be a salable opportunity, he said.

There's not a uniform belief that we have a gold mine we are trying to hoard for ourselves, Hemmingway pointed out.

When should we advance the offer for sharing? asked Collins. I'm not sure I'd do it now, answered Hemmingway. The discussion should occur when we are out in draft, said Applegate.

DOE's Kyle Simpson said one of his principles is "no increase in cost or risk to the Treasury," noted Pollock. If we can demonstrate that, I think we've got a starting point for discussion, he said.

Picking Apart the Pecking Order

Shimshak inquired if all the federal power marketing proposals had the same "pecking order" for customers. Maddock asked how residential and small farm customers are treated in the proposals, compared to the strawman. The public interest proposal is the same as the strawman, Golden replied.

In FPM2, Saven noted that in the second round, subscriptions would be offered to DSIs and IOUs and other wholesale suppliers based on historical loads on BPA, including the exchange, and there is no specificity as to who goes first. The third round is open to everyone, he said.

In the public interest proposal, if Washington Water Power is not exchanging, could it purchase up to the full amount of its residential and small farm load? asked Drummond. The right goes with the customers, Golden replied, adding, how to decide which customer is qualified when separated from the incumbent utility is a good question.

It is the residential and small farm customer who would have access to the system -- the right is not attached to the existing IOU or supplier, said Eisdorfer. Given residential and small farm customers, the publics, and the DSIs, there may be oversubscription, Drummond said.

We had preference customers go first, then a proportionate share for everyone else because everyone needs to feel they have something to gain, said Canon. I think of it as "rent to buy" -- a lot of us have been paying rent on the system, Wilcox said.

Should we create an order of march, or have everyone go together? asked Collins. Is there a danger of oversubscription with historical load? asked Hedemark. Yes, Canon replied.

It troubles me thinking about the system in the past, commented Canon. It doesn't allow the customer choice system to exist. That's why we proposed as many purchasers as possible of BPA's power, he added. We could go with historic load on January 1, 1997, Canon suggested. "It's not too late to sign up," Pollock quipped.

Wilcox suggested using the allocation developed for BPA's tiered rates proposal. What would be wrong with a proportional reduction in the second round if it is oversubscribed? asked Collins. If there's a proportionate way to do it that's acceptable to the DSIs and IOUs, that would be okay, said Saven. I'd like to say residential and small farm customers should have some equal preference, but it's a question of how to administer it, Nelson said. Some of my colleagues are thinking of using IOUs to administer it, but it is very complex, she added.

We're imagining it would be oversubscribed because of a general perception that power contracts are better than the market, observed Alexanderson. I don't think that giving residential customers a right they didn't have, while taking away a benefit from other customers they had is equitable, he said. We could look at the total purchases by customer groups, including the purchase of other power products, Alexanderson suggested. If there's an oversubscription, let's use a "pro-rata crankback," based on dollars, not megawatts, he recommended.

I'd like to see the numbers, said Wilcox. My initial reaction is that it sounds like you're double-counting the exchange, he stated.

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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