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Regional Review

Comprehensive Energy Review
Steering Committee

Monday-Thursday, August 19-22, 1996

Airport Sheraton, Portland, Oregon

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THE COMPREHENSIVE ENERGY REVIEW Steering Committee wound up deliberations and decisions for its draft restructuring proposal. All members were present and there were approximately 70 people in the audience.


Next Meeting: Sept. 19 in Portland; Sept. 5 meeting was canceled.

In This Issue:


ORDER OF BUSINESS

Davis/Shimshak Compromise Finds Consensus

Rachel Shimshak reported that she and Jim Davis had developed a compromise proposal on conservation, renewables, and low-income services. She presented a matrix that compared the strawman, public interest, and Davis proposals.

Davis said he and Shimshak compromised at a 3 percent charge on regional revenues to fund the proposals. The annual expenses would be: $30 million for conservation market transformation; $140 million for regional/local conservation, including $30 million for low-income weatherization; $1 million for renewables research; $5 million for renewables development and demonstration; no new revenues for existing renewables projects, but $34 million for new efforts, such as identifying renewables potential. The total is a $210 million-per-year package.

One percent would be spent by a regional entity and 2 percent locally. One non-profit, such as a market transformation trust, is created in the proposal. We hope renewables developers will follow through on their commitments to projects, even though no new funds are designated to assist them, he added. Walt Pollock cautioned that the $50 million being assumed to be available for ongoing renewables projects was not in BPA's budget.

Both Rachel and I agreed on a sunset in 10 years, Davis said. If we can agree on 3 percent and a meaningful way to implement this, we would be open to a 10-year sunset, she clarified. The 3 percent would be collected locally in any fashion a utility chooses, he said. We recognized the limitations on trying to mandate this to the legislatures, and we're counting on utilities to take this as a moral responsibility, Davis explained.

There are two approaches to implement this, Shimshak said. We could go to the legislatures, which the publics oppose; or utilities could implement it with a meters charge or some other way, she explained. The publics aren't necessarily opposed to legislation, but we recognize the difficulty of getting it passed, Davis said. We also recommend low-income customers be exempt if there is a meters charge, Shimshak added.

I share your cynicism about passing legislation, Mike Kreidler said. In Washington, you can pass a referendum, he continued; if you go that route, it's important to have allies. Steering committee chair Chuck Collins outlined the choices: 1) legislation; 2) a referendum, which he called "incredibly adversarial"; 3) a charge on the transmission system; and 4) a high-quality commitment from the utilities. Let's explore number four as far as we can, he recommended. If guys like Don Clayhold show up during the comment period and say they'll do it, I'd bank that, Collins added.

We've compromised an incredible amount to get here, Shimshak pointed out. It's very important to me and to the people of the Northwest, she said. The incentive is to have a backup if it doesn't happen voluntarily, Shimshak stated.

Jason Eisdorfer said he hoped the benefits charge would have a chance of passing the legislatures if it were tied to a package of restructuring measures. If it isn't linked, I feel uncomfortable that it be "an article of faith" with the publics, he said. My PUC would have trouble signing on to a 3 percent charge not knowing what others in the region will do, he observed.

We don't need a judgment now, Collins said. "It would be unconscionable to hang Rachel out to dry after all of this," he said. But let's see what we hear -- I wouldn't bet a penny on getting this through the legislatures, Collins added. Let's give it a try, Gary Zarker said. The initiative process in Washington is a strong backup, he stated.

Industrials Can Do 1.5, But Not Three

We support the strawman, but can't support this proposal, Ken Canon said. The strawman calls for one and one-half percent, and we can't support three, he stated.

This whole effort came from an attempt to find a way to make this investment competitively neutral, K.C. Golden offered. This is what we understood to be the hurdle, he said. We're trying to get the bias part out and leave it in local hands, he continued. I don't think other measures should be enshrined in federal legislative proposals and this be given "a lick and a promise," Golden said. If we go with the voluntary commitments, there should be a timeline. If there is a high-quality commitment, then having backup in the strawman should be acceptable, he added.

Shimshak noted there is much support for a per-kilowatt-hour charge to collect revenues. But to raise support "in this room," we've gone with this, she said. I prefer the volumetric approach, Golden said, but the real issue is equity in cost allocation to customer classes.

I'm bothered by the discussion about how much money versus what is appropriate, and who pays versus what needs to be done, Bill Drummond said. In the service territories of my members, customers are visited daily by people offering to sell energy service programs. The companies are well-equipped with good programs, he explained. If a customer elects to go with the energy service company (ESCO), why then place an additional tax on them to fund other programs? Does the money the customer spends with another provider count in some way? Drummond queried.

We assumed the market would come in to do some things, but there will be a remaining need, Shimshak said. Large customers could get credit for their efforts, she added, noting that the conservation still available is largely in the commercial and industrial sector. The question here is whether there is still cost-effective conservation in your service territory, Collins said. If there is, this is for you to go out and get it, he added. Is it appropriate then that in addition to paying an ESCO, customers would pay an additional tax for other conservation? Drummond asked. You may want to exempt them, Collins said.

I'm wondering how this works on a practical basis, Drummond said. We've acquiesced here to local flexibility, Collins responded, and you are asking local jurisdiction questions. We've struggled to keep the costs and benefits connected, Shimshak said.

Canon said his experience comes from 15 years of working through the numbers. We've heard consistently that conservation is a resource, yet it's not acquired like that, he stated. I'd like a guideline that says "buy the cheapest first," Canon said. With BPA programs, the dollars have been spent 11 to one for residential versus industrial conservation, he explained. This is a competitive issue, Canon continued. For a large load, 3 percent is a million dollars, and there may be better ways to spend the money, he observed. We could forge a relationship between the revenues collected in a customer class and the expenditures, he suggested.

In the work group, I was under the impression that large customers have the most to benefit from restructuring, Shimshak said. Rates for them will fall. The economic benefits are large, and this is a very small contribution to balance the scale, she stated.

Would you tie this to when the restructuring is accomplished? Canon asked. Everything is geared toward 200l, but this goes into place in 1997; can we link these together? he queried. Does that get you to 3 percent? she asked. It helps, Canon responded.

I think Ken is on to something, Brett Wilcox said. The suggestion is worth considering, Pollock concurred. At the same time, you could solve stranded investment, open access, and the meters charge, he observed. There will be open access bills in the Oregon legislature, Roy Hemmingway said. I can't imagine the bill will be resolved without settling the issue of a meters charge, he added.

Do we make the proposal saying these should be linked? Collins asked. I read the group as supporting this, he concluded.

I still don't know what's linked with what, Zarker said. Is the message if the Washington legislature doesn't impose a tax and the local program doesn't work, the whole thing is off? he asked. If open access isn't available until 2001, then there would be no meters charge until 2001, Canon replied. Markets develop unevenly, Sharon Nelson asserted, and big trucks will have access sooner -- it's a fact. Some people have open access now, she said.

Renewed Discussion on Renewables

What would we be acquiring? Drummond asked about the $34 million for renewables. The funds would continue efforts to identify new areas for renewables potential, Shimshak said. Is there a cost-effectiveness measure? he queried. "R&D doesn't always pencil out," she replied. If you included the environmental costs of other resources, they would pencil, she added.

Would it be comparable to my ability to buy for 15 mills? Drummond asked. Shimshak said cost-effectiveness was based on a comparison with new resources. The focus is on building capability in the region, she continued. It's great that you can buy at 15 mills, but you're probably not buying clean power from California, Shimshak said, and this is a move toward balance. It's a move away from fossil fuels and to more sustainable resources, she stated. BPA and others have made efforts; let's continue those at some level, Shimshak urged.

Given where prices are today, it makes sense "to back-end load" the expenditures, Drummond observed. Some of the economic gain in competition is at environmental expense, Golden pointed out. If the exercise is about net benefit and not about cost-shifting, "some of that should be in environmental currency," he said.

"As a farmer, I know when you plow the same ground too much, it blows away on you. I think that's where we are," Davis observed. I'm willing to submit what we've worked out -- let's make a decision and move on, he urged. This is one of those compromises where no one leaves happy, Collins observed.

Are we putting this out as a totally voluntary package? Golden asked. I can't go with that, he said. I can't either, Shimshak said. The best test of the local commitment is submitting a backup, Golden observed.

I don't think there is any question that absent convincing testimony, this group will look for a backup to voluntary action, Collins said. This is an important moment to see what utilities will do, he said; if we're "negatively surprised," there are all kinds of remedies. I'd feel better if we'd test this in the comment period, Davis stated. I've said our people will fall into place. Maybe they won't, but let them have a chance to stand up, he urged. There's a security issue here, Shimshak said. A lot of people are getting a lot of things, she observed.

No other parts we've taken forward had a threat, and this is a veiled threat, Chuck Hedemark observed. I agree with Jim, he said. I'm thinking that you step out with a voluntary program, and see what's out there, Kreidler said. Then there is the opportunity to remedy, he added. What does a voluntary commitment look like between now and November? Golden asked.

Pollock offered compromise language: We believe a voluntary system will work. There needs to be a commitment, and we will test the quality of that commitment. If concluded to be necessary, there are mandatory alternatives, but we think such approaches are less desirable.

Bob Gannon noted that Montana is in a unique situation. A voluntary system may not work as well for us, he said. How do you test the quality of the commitment? Zarker queried. Testimony is appreciated, Golden said, but let's not rely on it. Local ordinances and such would be desirable -- "if you say you're going to do it, do it," Golden urged.

Before this package goes to Congress, there is plenty of opportunity for publics to pass resolutions, Zarker suggested, and IOUs could be submitting tariffs to the PUCs. Mandatory alternatives are less desirable, and they'll cost us a lot more, he said. A referendum is likely to require even more from the utilities, Zarker said. "The enthusiasm for this type of environmental resolution is great," he observed.

Is Walt's language acceptable? Collins asked. Golden suggested the first sentence read: "we believe a local adoption system will work," and he suggested the final phrase be dropped. The statement was amended to read: We believe a voluntary local adoption system will work. There needs to be a commitment, and we will test the quality of that commitment. If concluded to be necessary, there are mandatory alternatives.

Ensuring A Provider For Redlined Customers

Eisdorfer proposed that customers who do not or cannot choose an electricity supplier be assigned through a bidding process conducted by state utility regulators or through random assignment to a supplier. He said he wanted to assure that the provision for "a provider of last resort" was not "a penalty box" for customers.

Al Alexanderson questioned whether "we're wise enough today to choose" a solution. He suggested there are alternatives to Eisdorfer's proposal. This is best left to the time "when we know the problem we're trying to fix," Alexanderson said. Gannon noted that the problem was addressed in Montana with a lottery system to assign customers to a provider. If no one is aggregating customers in an area, regulators could compel us to serve, he said.

Eisdorfer explained that his proposal is a response to the strawman's "prescription" that the distribution utility be the provider of last resort. He said he would be happy with a general statement that moves away from the strawman. In the work group, some people wanted to lean on the existing utility, and some people wanted to get rid of it, Alexanderson observed. I think Jason's proposal is too specific, he said.

As a regulator, I will be dealing with this, Nelson said, adding she thought the options should be left open. She proposed deleting language that assigns the distribution utility responsibility to be the provider of last resort, but not adding prescriptive language.

Eisdorfer moved on to low-income energy assistance. Low-income customers are at risk, he said, and the situation will get worse. Eisdorfer suggested that there should be provision for low-income assistance, otherwise restructuring legislation would give benefits to large customers and "forget about the bottom 15 percent."

He proposed language that would provide enough bill-paying assistance to ensure that customers pay no more than 5 percent of their income for electricity service, and that a "universal service" fund be established with revenues collected through a meters charge to assist qualified low-income customers. Total regional need for low-income assistance is estimated to be between $60 million to $107 million annually, he said.

Would this replace a utility's current voluntary program? Davis asked. Yes, this would set a regional standard, Eisdorfer replied.

Alexanderson suggested that competition would not make the situation worse for low-income customers; it would make it better. Competition isn't to give benefits to one customer class, he said. The real cost of energy will be going down, which is a potential solution to what you describe, Alexanderson stated.

We have a fundamental difference in view about what will happen to residential rates, Eisdorfer replied. This is a flexible standard, in case rates do go up, he said. You're right, they will if we lose the exchange, Alexanderson asserted.

I think we should stay with the strawman, which says utilities should maintain current programs, Hedemark said. The work group agreed low-income customers are in trouble today, and we agreed the problem was in the range of $50 million to $100 million annually, Shimshak said. To the extent the federal government picks this up, good, and if competition brings benefits, good, she observed.

Davis said many solutions suggested in the work group were "one size fits all." Utilities are very different, he observed. Is this a one-size-fits-all solution? he asked. I am open to editing, Eisdorfer said. "The bottom line is meeting need," he added.

Nelson said Washington's three IOUs have a range of programs. This assumes "a czar" will put something into effect, she observed. Let's keep the strawman language about utilities' current programs and suggest that states could consider a menu of items, including, but not limited to, those you've suggested. We've created a universal service requirement for telephones, and it's now under great pressure, Nelson cautioned. A new universal service requirement will be difficult to attain, she said. The fear is that if you move forward with the rest, the principle of linking this disappears, and it may not be addressed, Golden said.

"The social safety net is eroding," Collins said, and the country has to come to consensus about a new net. We're putting our finger in a hole with no side, he stated. Fifty-five billion in welfare funds has just departed, and states will be dealing with that; it's much more fundamental than heating assistance, Collins continued. If general purpose government is about anything, it's about this problem, he stated.

I differ with Al, Zarker said. We owe the legislatures and the governors the observation that what we are about here will make the situation worse, he stated. "No one is talking about poor trucks going first," Zarker observed. There are no incentives to have companies aggregate poor people, he said. Hemmingway expressed concern about taking the issue off the table. I want something so we get some comment, he said.

The standard is important, Shimshak said. If we think the federal government is sidestepping its responsibility, we aren't doing our part if we don't set a standard, she added. Nelson restated her proposal to keep the existing language and urge states to consider a menu of options.

If we come out with a competition proposal that gives significant benefits to the lumber mill, but has nothing for the mill worker who is laid off, we're in trouble, Eisdorfer said. Gary is right; there must be something in the report that says some people are at risk, he added.

I agree there are people at risk, John Saven said, adding that if the implication is the power industry will come up with a solution -- "that's not where I'm at." Collins said the draft would use Nelson's language. Gannon queried whether bad-debt writeoffs paid by other customers for low-income consumers should be considered. Bad debt is not necessarily related to being poor, Zarker responded. There are notorious large building owners in Seattle, he noted.

Nelson suggested that in lieu of the aggregation proposal in section 5.5.1.5.4 of competition and consumer access, the draft include a statement such as: States should recognize that effective competition may not materialize in all market segments. States should take steps to consider alternative ways to address this, including, but not limited to local units of government aggregating customers. In Montana, that would "be an excursion from the law," Gannon pointed out.

I don't see a mandate here for Montana, Davis observed. Alexanderson wondered if the statement could be interpreted as suggesting that states should get on with authorizing local jurisdictions to aggregate.

This is recognizing that some markets are not attractive to serve, Nelson responded. It exhorts states to deal with this problem, she said. Hedemark suggested that aggregation by the local distribution utility "may still be the best thing on the block." The power of the incumbent is enormous, Nelson said. There is a big split in the public interest thinking, she observed: those who want full competition, and those who want to lean on the incumbent. Collins suggested the language was the best compromise offered; anyone want to prolong the agony? he asked.

BPA's Stranded Cost Recovery

Pollock offered language that would give BPA stranded cost recovery equal to that afforded to IOUs, if state regulators mandate retail wheeling. We're going to get a big fix or no fix, Collins said of the proposal. A hundred band-aids won't work, he stated. It's the only contingency we're worried about, Pollock said.

This is the no-legislation alternative, Collins said, but we're no longer considering that, It presumes that what we're proposing doesn't work; if power marketing works, this won't be a problem, he added. Drummond observed that for his utilities, it suggests "we'd be agreeing to submit to state regulation."

I don't think this detracts from the big solution, Golden offered. It involves a "sober understanding" of what's involved in all of this, he said. Pollock noted the provision would apply only if retail wheeling is mandated for publics. Hemmingway said he had a legal question about whether states could give BPA stranded cost protection. Pollock said BPA's lawyers concluded it could be done. If Sharon is convinced the IOUs should get only 70 percent recovery, you'd be satisfied? Canon asked. Yes, Pollock replied.

Pollock again raised the issue of BPA's stranded investment on Thursday, introducing new language that said if retail wheeling is considered, the agency's stranded investment should be addressed. That tries to resolve a contract issue in this forum, Drummond said. Canon suggested the committee move on to other issues.

A Look At The FBS' Nonpower Obligations

Rick Applegate offered three amendments to address the obligation of the federal base system (FBS) to cover nonpower costs. The power system is facing financial difficulty and some customers may leave; if the system is not in good financial shape, it can't pay for the obligations it has, he explained. Why should ratepayers pay for certain costs that have been imposed? he asked.

Congress should provide that the irrigation share of the federal dams be repaid by the irrigation beneficiaries, and that the Bureau of Reclamation raise the rates for pumping water to market rates over the next five years, Applegate recommended. A third amendment would have the beneficiaries of navigation lockages pay the annual cost of lost power revenues that result from the lockages.

These proposals amount to about $40 million annually that is now paid by ratepayers, Applegate said. I'm not suggesting that irrigation and navigation are unimportant -- they provide enormous benefits, he stated. But do you need to continue these subsidies? Applegate asked. We have been careful to keep track of the power losses from water given back to the fish -- "we hear about it every year" -- but that's the only such cost we do that with, he said.

The drafters of the original strawman knew what kind of "slippery slope" this puts us on, Davis commented. There was no consensus in the work group about characterizing these as subsidies, he added, noting that Grand Coulee was originally built as an irrigation project, with power as a subsidiary purpose. We shouldn't be acting on this, Davis concluded.

There is nothing harder in government than to take away something that someone else is paying for, Hemmingway observed. The power system is rife with this, he said. Consumers in north Portland are paying for irrigation costs at Grand Coulee in power rates -- that shouldn't be happening, Hemmingway said. Some of this may have made sense in 1938, but it doesn't in 1996, he observed. If we don't address some of these irrationalities, they'll be there forever, Hemmingway urged. I realize it's very hard to take away subsidies that have been there for 50 years, he said.

We need explicit language that we've identified that this is going on, and that the federal government needs to address it in terms of who is paying, Kreidler suggested. When the issue was first discussed, the public purposes work group was asked "to quantify the quote, subsidies, quote," Saven said. I attended all the discussions on this topic and believe the numbers are fair representations. But I would say we haven't pursued this topic. "Anyone can have a knee-jerk reaction -- am I for it or against it," Saven said. We've heard nothing about the impacts of doing this. I would feel really bad if we came to the conclusion we wanted to change federal law without a process involving the folks who would be affected, he stated.

Wilcox said he opposed taking it on, but suggested the issue should go out for public comment. You may discover the power system is getting disproportionate benefits at Chief Joseph or Grand Coulee, Drummond commented. He asked Applegate how he chose the items proposed. I tried to look at areas with substantial economic activity, Applegate responded. I wish we'd done more on this; someone should raise it and take it seriously, he added.

The most compelling part of your argument is that we can't call these costs fish "subsidies," and other costs something else, Collins said. There is nothing wrong with calling attention to the subsidies that exist, he added. At some point the region will have to really look at this, but I don't think this forum is the moment for that, Collins stated. What's important "is to keep our eye on the major ball," to stabilize the federal agency. To drop this into the process now and make decisions by November is "to inherit things we don't want," he cautioned.

How can it be the moment for these other things and not for this? Golden asked. Hemmingway suggested the group ask Congress to have the GAO study whether the allocations are still appropriate and recommend alternatives to pay for the nonpower purposes.

For the record, I'm a dryland farmer, not an irrigator, Davis said. He noted that the Bureau of Reclamation is looking at O&M costs irrigators pay. Higher charges may be on the way, he said.

Each project is different and unique, Pollock said. If we do this, it deserves a project-by-project approach. At Grand Coulee, there could be a big cost shift in the other direction, Pollock observed.

When you're reforming, it's important to know what you're reforming, Nelson said. The notion of having GAO examine this would be useful; competition has a way of getting under these rocks, she noted.

If the proposal is a list of subsidies, and asking another party to take a look, I'm comfortable, Saven said. Collins asked Hemmingway to write the proposal. Later, Hemmingway presented a draft letter asking Congress to investigate whether cost allocations in the authorizing legislation for FBS projects are still appropriate and whether current payment responsibilities should be altered. With a few editorial tweaks, including a statement that Congress ask GAO to investigate, the committee agreed to include the letter in the draft of its recommendations to the governors. Saven said he wanted to make it clear he did not necessarily support the letter.

Can You Hang F&W On A High-Voltage Line?

Applegate offered an amendment stating that separation of transmission from generation does not insulate the transmission system from responsibility to fund fish and wildlife (F&W) restoration. Pollock noted that what Applegate proposed "is different than what goes on today." He explained that there is some authority to go to the transmission system to meet WPPSS costs and other statutory directives if needed, but "we don't direct these costs to transmission." FERC has required rigorous cost allocation standards, Pollock said; "it's a last resort." Wilcox concurred with the description, adding that any funds shifted have to be shifted back. It's like "a short-term loan," he said.

Alexanderson said he did not want to create a new ability to charge transmission customers for things. Applegate said he was not comfortable with the idea of taking a federal asset and moving it away from the obligation for F&W. We're back to band-aids, Collins observed. Is there a 100-percent certainty generation can pay for the F&W obligation? Applegate asked. If the system is not fully subscribed, this whole thing blows up, Collins replied. There are hundreds of issues that are in abeyance now that will visit you if this doesn't work, he stated.

The next day, Applegate again raised the issue of insulating the transmission system from F&W costs. I want to preserve for F&W whatever they have now, he said. We can raise rates to cover general revenue insufficiency, Pollock said. I want to preserve the status quo, Applegate said. Decisions in power marketing do change these things, Hemmingway observed. We could highlight this in the draft to show different points of view, he said. If power marketing suggests changes, then what are they? Applegate asked. If the power marketing side works, "it's a band-aid deal," Collins said. Can we resolve this by putting it as a question? he asked.

Power Marketing Deliberations: Costs And Priorities

There's a part of us that is paranoid that everyone will leave and a part that is paranoid about who's first in line and how much they get, Saven observed. There are several assumptions in the proposal for quantifying the options risk, he said. From the power perspective, there is a 25 percent derating of the system output, with customers accommodating up to $250 million of the cost.

The proposal assumes BPA could sell in a futures market for 3 mills more than it could have recovered at cost from customers who leave at the end of a short-term contract, Saven continued. And it assumes within 10 years after the end of a five-year contract (2001-2006), nearly all of the WPPSS debt will be retired; by 2016, it should be "a rosy situation" for the system, and it is fully subscribed. In addition, the calculation assumes 60 percent of the customers would take short-term contracts.

Saven presented a chart that laid out the potential financial exposure for the Treasury and how much of that would be offset if a 1-mill premium were collected on short-term power sales to cover the renewal option. In the worst case, which assumes that no one renews a short-term contract, the total potential liability would be $285 million annually. A middle case, in which 50 percent re-subscribe, shows a $129 million liability annually. In the best case, with 90 percent of the power re-subscribed, there would be an $11 million gain.

The assumptions are quite conservative, Saven explained. There's not a great deal of risk associated with this, he said, noting that BPA's annual revenue requirement is $1.65 billion. Staffer Wally Gibson agreed Saven had presented "a worst-case scenario." In order to get the out-year value, the option payment could be thought of as an investment, he said. Saven added that he had done nothing to back WPPSS debt out of the equation.

Golden asked if Saven assumed that for the first five years, the system is fully subscribed, and Saven said yes. By offering a variety of products, BPA is in a position to get full subscription, he said. The major issues in the federal power marketing work group, according to Saven, were: the order in which customers get in line for the subscription, having a robust market, and resale of power. It would be useful to talk about a free market in the context of legislation and the end-state for the system, he added.

The Residential Exchange Dilemma

Pollock offered a chart of BPA power sales in 1995 and 1997. If you use 1997 numbers, you've got an oversubscription, he pointed out. We probably need a way to prioritize in Period 2 of the allocation, Pollock said. What would you suggest? Collins asked. Serve preference first, with IOU residential and small farm load and DSIs second, Pollock offered. To the extent there is not enough, then prorate what's available, he suggested.

Giving this new benefit to everyone might be equitable, practically and politically, Alexanderson said, but in 1996, the IOU residential and small farm customers received rate increases. If we adopt a solution that residential customers regionwide ought to be able to buy a piece of the federal system, it doesn't substitute for the rate hike, he said. Saven pointed out that rural customers lost the low-density discount. BPA decided that certain things would change with the exchange, he said, noting that some customers in southern Idaho will experience the loss of both.

How does this forum undo the rate case? Collins asked. The issue is cost sharing, Alexanderson said. Some customers' rates are going down while others go up, he said. And it's all because of competition. This group spoke to finding equitable solutions, Alexanderson said. How do we fix it? With money, special rights, or a program that's been working for 15 years, he stated.

How does a decision on 7(b)(2) relate to competition? Drummond asked. "The same way filbert trees do," Alexanderson said, referring to recent tree-caused power outages. BPA's business plan is associated "in time and rhetoric" with competition, he replied. It's difficult to resolve the question Al raises, Pollock said.

Alexanderson offered a proposal with three options for allocating a share of the FBS benefit to IOU exchange customers: allocate a permanent monetary share of the benefit to the exchangers; phase out the exchange over 20 years, with a right to subscribe to federal power on the same basis as preference customers; or, provide credits for former exchange and low-density discount beneficiaries against a regional meters charge.

With open access, how do you provide the benefits? Shimshak asked. Customers would have to subscribe individually, Alexanderson replied. Eisdorfer suggested distribution companies could sign 30-year contracts to deliver the benefits to end-users. Al has an excellent point, he added; given what we're doing with the publics, there will be a divergence in rates.

Pollock said he had a very different perspective than Al on the exchange. The exchange was the single most contentious issue in the rate case, he said. We have a disagreement about calculating the benefits, Pollock continued. We thought the exchange was about access to low-cost hydropower, he said. The disagreement is whether the cost of IOU resources is to be paid, too, Pollock contended; it's a disagreement over what Congress intended here.

"Here is a small truck hit bad," Collins observed. BPA should have enacted the in-lieu provisions of the exchange years ago, Drummond asserted. Residential customers will get a significant rate increase next year, Collins said, and there are remedies available in this body.

Allocation of a valuable right to buy power could substitute for the exchange, Alexanderson said, but that delivers the benefits to the wrong people. We have a timing problem because of the rate case, he said. Rate increases will go ahead before the "valuable right" can be turned into a benefit, Alexanderson stated. Al wants a long-term allocation and short-term dollars, Wilcox observed. The question is how fast we can pass legislation, he added.

We are striving to maintain our responsiveness to other public purposes, Alexanderson said. It seems to me in this package, the underlying theme is there is a benefit to the region that is worth our time, he continued. It seems inconsistent to say, sorry, the timing isn't right for your problem, Alexanderson contended. Eisdorfer observed that when Portlanders' rates go up every year until 2001, "Portland won't be quiet."

The reason the rate case was so contested was the rider on the appropriations bill to fix the exchange, Nelson pointed out. The Regional Act was an elegant solution, and I'd like to think about ways to fix this. Walt described the philosophical differences over the exchange. But the political fact is certain ratepayers will see substantial rate increases, she added.

Nelson proposed acknowledging the issue and described some possible language: The review acknowledges that an adverse impact may fall on exchanging utilities' customers. This is a transitional problem. A mechanism has not been found to deal with it. The review encourages parties to continue discussions to resolve it and to report back to the review by November.

Drummond questioned resolving a contract issue in the review forum. What can we do? he asked. We can encourage the parties to solve it, Nelson responded. Congress acknowledged in the bill rider that the review was going on and could address it, she added. Alexanderson said the choice is to find a solution or fight about it. One outcome that won't work is to ignore it, or to say it's unresolved and uncontested, he stated.

I'd support trying to find a resolution, Pollock said, cautioning against any "false expectations." It's a very tough issue, he said, but we may get new information about average system costs. Sharon's language will appear in the draft, Collins concluded.

In The Event Of An Oversubscription

The discussion returned to how to handle oversubscriptions in Period 2 of the allocation process. Wilcox said the strawman recognized that historical customers have paid for equity in the system. The industries have paid their historical share, and it's not fair to put them at the bottom of the stack, he said. Most of the plants are in public agency territory, Wilcox noted, and if they contracted for power with the local utility, they'd be governed by preference. Would you give up stranded cost protections in that case? Drummond asked. Wilcox said yes.

Alexanderson noted that some DSIs were buying very little power from BPA in 1996, and asked how their historic load would be determined. Wilcox suggested a five-year average of the contract commitment. If a DSI switched to a public contract, would it be first in line? Collins asked. We're heading for a huge fight here, Eisdorfer warned. Davis asked where future preference customers would be in the queue. They'd be in Period 3, Pollock said.

Collins observed that most publics seem to be thinking in terms of short-term contracts. If publics are going first, they'd have a choice of long or short contracts, Saven explained. If the publics all went short, the other groups would go short, too, he said.

Wilcox said it doesn't make sense to increase the exchange to include those who are not currently in it. Residential customers have been around paying the bills, too, Golden said. On a forward-going basis, they should be entitled, he stated. Gannon concurred that "it would be a political issue" if some residential and small farm customers can't share along with others. There is another point of view; in the Regional Act, the residential and small farm customers were ahead of the DSIs, Golden said. We're allocating the system, and that's as fundamental as it gets for why I'm sitting here, Drummond said.

Wilcox observed that it would be helpful to know the mechanism to ensure that benefits get to customers regardless of who serves the load. Nelson suggested an auditing authority may be needed. There would have to be a demonstrable method to see that the power has gone to the intended recipients, Collins concurred.

The Ethics of Resale

Saven said issues have been "surfacing with intensity" around the question of resale. The primary focus is providing a resource for the region in the future -- it's a pretty salable approach politically, Pollock said. The issue of distinguishing who is a regional party and who isn't gets muddy, he noted. If we say we'll sell the power and you do whatever you want with it, we have a political problem, Pollock acknowledged.

If the benefits leave the region, I've wasted my time, Collins asserted. I can't support that, he said. If you resell to ameliorate a loss of load, I can see that, Collins conceded. If we're just arbitraging power here, we've lost the ethic to provide benefits to the region, he stated.

The benefits should stay in the region, Wilcox said. But there may be reasons other than loss of load to resell, he suggested; for example, you want to go to a green portfolio. It's a given, Davis said of the desire to keep benefits in the region, but he suggested there would be questions about the disposition of federal power if, for instance, utilities wanted to merge. You could offer for sale in the region first, Drummond suggested.

The biggest issue is resale of options, Zarker said. "That opens a can of worms that can rapidly turn the river south," he cautioned. I don't see any case of a preference customer reselling an option; it should be prohibited, Zarker urged. He cited the example of Whatcom County PUD losing its industrial load. Would they have sold their option, too? he asked; you would have had Washington Water Power owning an option to preference power.

A more likely scenario would be publics forming into a joint operating agency (JOA), Davis suggested. Would you restrict the ability to bring an option into the JOA? he queried. What happens at the end of the contract? Wilcox asked. In the short term, if you purchase the option you have a right to renew; if you don't, the power goes back to the pool, Saven explained.

Columbia River Governance Reprise

For the first time, the parties are sitting down together and the process may be working better, Collins observed. NMFS has worked on the governance structures, he said, and the various teams have been working together. There are big problems with river governance, Collins acknowledged, but I'm not sure they are best addressed by assuming the process isn't working. Suggesting a brand new process may not be the best course until this one has a chance to work, he concluded.

Applegate said he would like to discuss the issue with the committee when members had read Hemmingway's draft letter. The letter, which requests that the governors explore changes in river governance with regional interests, was approved on Thursday with little discussion.

Do We Need A Council?

John Etchart said Montana Governor Racicot feels strongly that the region is better off with an entity like the Council; Montana and other states need a role in river governance. Even though the power planning features are not appropriate in a deregulated situation, there are things, such as monitoring progress toward deregulation and reliability, that will need to be done. Somebody in the region should ensure there is full and effective competition, he added. Without the Council, there isn't effective public participation in this business, Etchart concluded.

There is a role for an entity to do monitoring and bring the region together for strategic thinking, Hemmingway said. Before the Council, there was an attempt to cobble something together, but it was never inclusive enough, public enough, or neutral enough, he said. An entity that is public and does the quality of analytical work the Council does would be valuable for the region, Hemmingway said.

I would second what Roy said about monitoring, but I'm dubious about what role there should be beyond that, Kreidler said. For F&W, there is a better way to govern that would bring together parties that are not there now, he said. I see others left outside the tent, and we need to include them rather than facing them in court. The ESA has driven progress in the region, but we need to come up with a solution that works within the laws, Kreidler said.

There is a role during the transition in the power industry for "an honest broker," Todd Maddock said. The staffing of this review is an example of serving those needs, he observed. The Council may have a role in the transition. As for F&W, initially I had reservations about the need for the Council. But it is important to have a regional body to deal with resource issues. These are contentious, and having the balance of the Council is conducive to reaching decisions that are good for the resources, Maddock said.

Davis suggested the committee help with future characterization of the Council by including a list of questions for public comment. Canon asked about the Council's role in monitoring competition. With BPA's role shrinking, more action will be at the state level, Hemmingway responded. A regional entity could look at other states and see what's happening, he said. The conservation issue needs multi-state monitoring, Hemmingway added.

I've heard a lot of criticism of working with the Council, Zarker said. But we've heard the basis for a new mission, he added. Let's think about this carefully, Zarker urged, and get clarity about the mission if we're going to invest in it.

Wilcox suggested the group list what it sees as unmet needs. That will lead to the appropriate structure to fill them, he said. Shimshak noted that other regions look to the Northwest as a model. I hope we can maintain coordination and communication. It's hard to put together, she said, though it may be easy to take apart.

Nelson recommended taking Hemmingway up on his offer to draft a statement and questions to be posed about the future of the Council. What does the region need? "We need to think about the vacuums we're creating," she said.

The following day, Hemmingway offered a draft statement on the role of a regional entity, with a list of questions for public comment, including how the body should be appointed, funded, and what roles it should have. Applegate proposed three questions to add to the list, dealing with how states could be involved in F&W restoration and with a formal dispute resolution process. Saven said he was unsure about adding those questions, and Maddock said he preferred to stay with the broadly worded questions in Hemmingway's draft. We prefer to be expansive, Collins said, adding that there apparently was not support for Applegate's additions.

I'd like to include the question about dispute resolution, Applegate urged. I don't want to be "bootstrapping" our process to other issues, Nelson responded. How far are we expanding our role? she asked. Why is dispute resolution paramount? Drummond asked. There is none now, Applegate stated.

Your proposal is bootstrapping a whole set of other considerations about F&W, Collins observed. There is not consensus to add these, Collins said. I think it's important stuff, Applegate responded. Canon suggested dropping the staff's three-page addendum to Hemmingway's draft, and the committee agreed.

The ESB Letter Stopped In Its Tracks

Collins said BPA had requested a letter asking Congress to defer a decision on the agency's energy services business (ESB) until after the review considers the matter. He noted that Walt and Randy Hardy asked the committee to consider the ESB this week, but there was not time. Pollock explained that Congress was conferencing on legislation that includes the ESB, but has kicked the issue to the regional review. Kreidler said he would support the letter.

This implies no judgment about the activities? Golden queried. That's right, Collins said; it will ask them to defer until we've considered the topic. Alexanderson asked, what "status quo" would we be asking Congress to preserve? This letter is not clear about whether BPA will continue its initiative toward energy services while we wait to take action, he said.

We're doing some conservation and energy services, Pollock acknowledged, and there is about $10 million in the budget. He explained that BPA wants to maximize use of some equipment, including laboratories and fiber optics, to produce revenue. Drummond asked Pollock to describe the status quo. We're providing services to our customers and to federal agencies, Pollock responded. We're mindful that there is concern; we will not launch major new initiatives, he stated.

The underlying document for these actions is much broader than you describe, Gannon stated. That's the concern of utilities and other providers, he said. We're far short of what we describe in our business plan, Pollock responded. We're talking about the federal agency role, Nelson said, and the agency has decided to do anything that is not prohibited. This starts us down the slippery slope of that discussion, she said. All the letter says is that we will provide our judgment, Golden said. Alexanderson said the letter appears to call a halt to the debate and bless the intent of BPA.

Pollock said BPA and Congress have asked the review to take up the issue. We want to discuss it in this body, he stated, and we're being cautious pending that review. If we're saying that we don't have a position but will review the issue, it doesn't seem unreasonable, Kreidler said.

I propose we not send the letter, Canon said. Let's just make the decision, he urged. I oppose that, Golden responded. What is the danger of the letter? Collins asked. It's implicit approval of what they're doing, Gannon replied.

Golden suggested adding: this letter implies no judgment about the value of the activities. "Or endorsement," Nelson added. Walt says this is the status quo, yet they're putting more on the ground all the time, Alexanderson said. There is no consensus to send this, so we won't, Collins concluded.

Son of FPM2: FPM3 Makes Its Debut

Saven noted that this latest power marketing proposal has a lot of loose ends. He called the committee's attention to section 1.6.2, which describes the fish risk. There are a couple of forces at work here, he said: a limit on cost and the extent to which the requirement should be proportional. He explained that the initial idea of a sliding scale "didn't exactly fit," which led to the idea of a cap of $217 million. Some said that if we were to go to a sliding scale, it would have to be more aggressive on the customer side at the front end, he said. I would recommend the notion of a sliding scale with a $217 million maximum, Saven said.

We need to be realistic about the federal government putting in more money than we are being, Collins observed. Hemmingway suggested there would be a political problem with the proposal if market prices are way above BPA costs. If we ask Treasury to bear some costs under that circumstance without some sharing of the economic rent, it doesn't have a chance, he said.

With the wrong answer, "the whole thing turns to sand," Applegate commented. I'd be willing to look at the sliding scale, but it needs to be more aggressive on the front end, he said. Does the group endorse a sliding scale? Collins asked. The answer was yes.

This is a mechanism to finance fish, Saven said. Are we raising the fish cap or making arrangements for additional obligations? Collins asked. I'd hate to see this characterized as a liability limit, Applegate said. This is meant to be a limit for how the contract might be structured, Saven explained; it's not a declaration of how much money needs to be spent on fish. It is the fish funding capability that is needed, Applegate stated. We need to marry the two notions, he added. The cap is $435 million, and above that, the feds pick up costs, Wilcox explained. Part of the package is that customers will share, and this is "a carrot to the Treasury" that reduces the federal obligation, he said. We have to have John's limitation, Wilcox stated.

Section 1.6.4 deals with what happens if BPA costs are below market, Saven continued. I tried to view this in terms of the expectation that when the WPPSS bonds retire, there will be substantial savings. It's an arrangement between the customers and the federal government, he said; it's win-win. This proposal says that to the extent BPA costs are below market, 30 percent of the difference will be shared with Treasury, Saven said.

Where do you get the money? Canon asked. You charge customers more, Saven said. This way, everybody has an interest in keeping costs down, he added. If BPA prices just go to the market, what are the incentives to keep the costs down? This keeps the costs down, but not at the risk of the environment, Saven said.

Thirty percent is a big premium, Collins noted. "We can look Treasury square in the eye with a smaller number," he suggested. I'm comfortable pitching the smallest number anyone thinks is okay, Saven responded. I think you can get by with accelerating repayment, Wilcox said.

This payment to Treasury doesn't begin until Treasury pays all of its share of fish costs, Hemmingway pointed out. We may have a situation where Treasury is paying 60 percent of the fish costs before it gets another nickel from ratepayers, he continued. Roy's right, Pollock said. If there are additional moneys under 1.6.4, Treasury would first want to fill the hole of sharing fish costs.

The view here is that from 2011 to 2018 as the WPPSS debt goes away, there will be over half a billion dollars to deal with, Saven said. He suggested that long term, there is an opportunity for the government "to do quite nicely."

Shimshak asked about the revenues from sales of remaining firm power and other products sold at market. Saven said they would be a resource to BPA for meeting responsibilities and would figure into determining rates.

Hemmingway pointed out that when the market price is above cost, customers get benefits, but Treasury kicks in $300 million before it sees a return on investment. You still end up with a number that has significant Treasury payments, Zarker said. It's a good place to begin the negotiation, he added.

Golden said that in the worst case, I wouldn't envision Treasury writing a check, but the region deferring a Treasury payment. Those are "fighting words," Collins cautioned.

I like the idea of Treasury "getting an entrepreneurial bonus" by getting the mortgage paid more quickly, Hemmingway said. I'd support the language as written, he stated. I like combining the language we have with a guarantee of payment acceleration, Saven said. This has to be attractive to customers, Wilcox observed. We may need a slightly lower number in 1.6.4, he said. I propose we write 20 percent, Collins said.

On to Filling Holes

As for 1.6.3, if customers leave and there is a hole for Treasury, this suggests repayment on a one-to-one basis, Saven said. So if someone is signed up and agreed to stay through the lean years, if market prices come up, they get socked for the customers who left during the lean years? Hemmingway asked. The alternative is to go back and go after the folks who left, he said. But people who went long took a calculated risk, Collins pointed out. The option fee is prepayment of an exit fee, Wilcox said.

It depends on how many contracts are long-term, Alexanderson commented. You have to have a mechanism for a long-term, stable system, Collins said. What's wrong with changing "all customers" to "new customers," Zarker said. It would be a disincentive to come on and off the system, he added. Let's be clear on this, Pollock said. Those costs would be allocated to new customers first? he asked. I can support that, Saven said. So we'd allocate to new customers first, Collins concluded.

The Order

The Regional Act places IOU customers above the DSIs, Eisdorfer declared. I can't think of any reasons to have the DSIs in the second tier of allocations at all, he said. The Act didn't put the IOUs above the DSIs, Wilcox countered; it spread the pie further.

I concur with Jason, Nelson said. I heard Walt say the principle here was to keep the benefits for consumers in the Northwest. I think that means "human" consumers, she said. The centerpiece of the 1980 Act was providing benefits for humans, Nelson contended.

Let's get real clear here, Collins cautioned. We have the ability to blow it all up over this. Our point of departure is a system that oversubscribes in Period 2, he said. You can reopen "the order of march" or we can deal with where this process has gotten us, Collins said. The DSIs and IOUs are at the stage of what happens if there is an oversubscription. Let's work that problem and "not take on the whole waterfront," he counseled.

Hemmingway concurred, but added that what we take out for hearing will have a problem. In 15 years, the market price will be high, he said, and "Ken's people" will be paying higher rates than BPA customers. That creates political instability, Hemmingway said, and we'll have 1976 all over again.

The IOUs can be in the system forever if they choose, Collins asserted. Saven said the proposal was an attempt to create a proportional mechanism. The DSIs could be looking at a potential loss in the amount of load they could place on BPA, he said. He suggested the approach of assuring 75 percent of the DSIs' current load be covered. If the publics fully subscribe, that would leave 1,600 MW for the residential exchange -- that's more than the DSIs would have, but it assures a threshold, Saven explained.

Do you distinguish between current exchanging load and the total IOU eligible load? Pollock asked. If you make the whole load eligible, you'd put a 70 percent floor for the DSIs, he said. I'm not enthusiastic, but I could live with that in the proposal, Wilcox said. Gannon added that all residential and small farm customers should have access.

Saven recapped the proposal: first period is the publics; second period, beyond the publics, there would be a minimum established for the DSIs, perhaps 75 percent of existing load, and 1,600 MW for exchanging load, which is about 50 percent of the existing 3,206 MW exchange. The total system is about 8,000 MW, and about 5,000 MW is associated with the publics, he explained. You won't capture all of the public agency load, Saven noted.

You're letting international companies get ahead of humans, Nelson protested. You're creating an entitlement for a class of customers in lieu of the voters of the region, she said.

That lights the fuse, Collins cautioned. If you want to pass this in Congress and keep the benefits, you need a united front. If we can't be pragmatic, we put everything at risk, he said.

I don't think this is pragmatic, and one side is not lighting the fuse, Golden responded. Are we sure we don't want to expand the pie? Zarker queried. For the IOUs and DSIs, if the FBS is insufficient, could BPA contract for the oversupply and meld it with FBS costs? It would be better than the market, he said. That's the residential exchange all over again, Drummond observed.

That could work, Alexanderson quipped. This isn't a power supply problem, it's a money problem. It's about fairness to people of the region and about preserving a benefit, he continued. There is a serious underlying problem with the allocation scheme, he continued. I'm not sure anybody signs up for a resource, they sign up for a purchase. Having too much power isn't good if you can't sell it, Alexanderson stated. If you're distributing the wealth, you have to think of a way to monetize that benefit, he urged. This is an open sore, he said. We've got three-quarters of a deal, but we don't have a way to share with this class of customers. We've got to get there, or it's not done, Alexanderson said.

Is there any willingness to tie the priority to the length of contract? Canon asked. If there is an oversubscription in Period 2, preference goes to longer contracts, Collins restated. Davis offered a proposal that included new public customers in Period 2, with the DSIs and IOU exchange load.

Let's break the tie in 1.5.4.2.2 by giving preference to long-term contracts, Canon said. What that means is in Period 2, if both IOUs and DSIs sign 30-year and 5-year contracts, the 30-year get priority? Wilcox asked. Yes, the allocation gives preference to long-term over shorter term, Canon responded. Zarker asked how DSI "historical loads" would be defined, and Canon suggested going with Wilcox's proposal and taking the average of the 1997-2001 contracts.

"Let's take it on the road," Nelson said.

Alexanderson asked about the resale of options. I heard options weren't for sale, Saven said. I felt we came to closure, he added. I'm not there, Drummond stated. We came to closure about selling out of region, Collins added. I agree, Wilcox said; options and benefits have to remain in the region. Alexanderson said there may be a need to monetize the residential exchange.

The option for the IOU residential customers is owned by the customer, Zarker said. Resale of options will lead to the loss of control of the resource, he contended, and preference would be lost. I think publics have a significant risk of losing preference if options can be resold, Zarker stated.

Let's leave the language as is -- options are not salable to other parties -- and get comment, Eisdorfer recommended. Zarker agreed. Let's go out with this, Collins concurred.

Golden asked that the advisory committee on power marketing not be limited to subscribers. And he noted that it is called an "advisory" group but given oversight of budget requests. Shimshak suggested describing it as "an advisory board, made up of subscribers and others," which met no objections.

Wilcox asked whether it should be clearly stated that "the model for BPA" is to sell the power generated by the FBS. Do we want to tell people the agency is limited to this role? Wilcox queried. Walt has asked us to entertain the ESB, and I don't think we should imply any judgment until we do, Golden said. BPA has said it will get into labs, mapping, and fiber optics, Nelson said. This is a classic hybrid monopoly issue, she observed. We intend this entity to be a marketing agency, but during the hearings, we'll consider comments on proposals for the ESB, Collins said. The reason it's an issue is BPA's ability to maximize its assets for the region, Golden said. We don't want to foreclose that; it's a discussion we need, he added.

IN CLOSING:

Collins said the committee's draft proposal for restructuring would be available September 12. In response to questions, he said nothing would be embargoed during preparation of the draft. It will contain "expanded bullet statements," as well as narrative, he said. Our mission on the 19th will be to determine if the draft conforms to what we discussed, Shimshak clarified.

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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