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Regional Review

Comprehensive Energy Review
Steering Committee

Thursday, October 31, 1996

Red Lion Lloyd Center, Portland, Oregon

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THE COMPREHENSIVE ENERGY REVIEW steering committee heard a presentation on the Bonneville Power Administration's revised energy services program and the reactions of an industry panel. Council staff presented an analysis of the proposed federal power marketing option fee. Eighteen committee members were present; Bill Drummond joined the committee by phone; Chuck Hedemark was absent. There were approximately 65 members in the audience.


Next Meeting: November 14-15 in Portland (Red Lion Downtown).


In This Issue:


OPENING REMARKS:

Steering committee chair Chuck Collins said that at the end of the day, he wanted "to go around the table" and have each committee member state the one or two changes that would be important to make in the draft report. I want to develop an inventory of agenda items for November 14, Collins said.

BPA Outlines Revised Program for Energy Services

Terry Esvelt, BPA's vice president of energy services, began his presentation by stating that he realized the original proposal was controversial. BPA apologizes for starting off in a controversial direction, he said. We've listened carefully, and you'll see an accommodation of the concerns we've heard in this revised energy services proposal, Esvelt said.

BPA is fighting the "ghosts of proposals past" and images that people have left over from earlier versions, Esvelt continued. BPA has significantly modified its energy services proposal and the philosophy behind it, he explained. When we first talked about this, we didn't have a good philosophical basis, Esvelt said, noting that BPA was looking largely at increasing revenues. He said the controversy was engendered over the appropriate role for BPA. If the question is whether government should be competing in the private sector, "that's a short debate." Our proposal needed careful examination and modification, Esvelt stated. We can't just be out there competing in the private sector, he added.

Esvelt explained that there are three parts to BPA's energy services, two of which provide the foundation. The first are the Conservation Legacy Programs, which accounts for about two-thirds of the total energy services' budget. BPA has hundreds of conservation contracts signed prior to 1995, which still have useful lives; many expire in 1999, he said. Esvelt noted that BPA's conservation program is in its 16th year. We have spent $1.6 billion and acquired 580 average megawatts (MWa), he said. We will spend another $172 million over the next five years, Esvelt added.

The second part of energy services is the Market Transformation Program, Esvelt said. The Northwest Energy Efficiency Alliance was launched yesterday, he noted, describing it as a collaborative effort with a long-term commitment to conservation.

Market Development is the third part of BPA's energy services efforts. Market transformation moves the marketplace, Esvelt said, and development takes what's there and makes it bigger. This is not an energy services business, it's not a company, and we're not here to compete, he stated. "We will not do that," Esvelt said. We are not out building business opportunities, he said, adding that BPA has outlined a completely different role.

We've reexamined what is appropriate for a government agency, Esvelt said. We feel we have a Congressional mandate to promote conservation, he added, and we're now focused on energy efficiency.

Esvelt presented the following six principles that underlie BPA's market development proposal, principles he said were negotiated with the Northwest Energy Efficiency Council (NEEC). They are: grow the pie; act as a market catalyst; leverage private sector services; facilitate/aggregate transactions; exit viable markets after cost recovery; and track and report results.

With regard to "grow the pie," Esvelt said, we will not engage in the marketplace, but we think opportunities do exist to grow the marketplace. The opportunities are not large, but narrow, he explained, and they are where the natural marketplace is not breaking through barriers. Because of who we are, we may be able to reach those consumers, Esvelt said. We are not taking business, but creating opportunities, he stated, explaining that most of the business created would not go to BPA, but to others.

As a "market catalyst," BPA's energy services would be limited to markets or individual situations that are not currently accessible, viable, or profitable for the private sector, Esvelt said. It's a philosophical delineation, he explained, with projects that wouldn't otherwise have happened. Our business is to break the barrier, not deliver a product, and to facilitate activities to be passed on to our partners, he said. Financing would come from private-sector partners, Esvelt added. We may come in at the tail-end to evaluate, monitor, and verify savings, he said.

Where The Pie Will Grow

Esvelt explained that BPA would assist federal agencies and public utilities. Federal agencies face problems getting energy efficiency projects moving forward, he said, noting that financing and procurement can pose obstacles. We believe we made a difference in moving the General Services Administration (GSA) forward in the Jackson office building in Seattle, Esvelt stated. With regard to public utilities, our ability to aggregate could be useful, he said.

Esvelt said BPA will work with other parties to amend the energy services proposal and to address any changes needed in the Record of Decision (ROD) released in October 1995. The question is should we move forward with the market development role, Esvelt stated. We have a long and proud tradition of promoting conservation, and we have a talented work force, he added. We want to make a difference, he concluded.

Collins asked about the proposal's statement that BPA does not anticipate working directly with consumers and would do so only with explicit endorsement of the local utility. Esvelt said there are already very successful programs in utility service territories. We won't get involved without asking, he said. Our interest is not to operate at retail, Esvelt said, and he concurred with Collins that this needs clarification in the ROD.

Sharon Nelson observed that the BPA division's name is still Energy Services, but now the proposal is emphasizing energy efficiency. Does the title imply future market expansion? she queried. That has been our name for three years, Esvelt replied. The three elements are what we're proposing, he added. Nelson said she is concerned about accountability and asked whether BPA would be receptive to having an advisory committee. Esvelt said yes.

Al Alexanderson explained that Portland General Electric has a contract with 44 post offices in its service area. We did a lot of what you're talking about in pioneering work with procurement changes. I'm comforted by the limit on retail, but troubled about the federal agencies, he said. Would you accept that same limit with federal agencies? Alexanderson asked.

Post offices are unique in that they must work with local utilities, Esvelt replied. If a federal agency puts out a Request For Proposals, we won't be a bidder, he said, adding that BPA would always point agencies to the local utility as a first choice.

Brett Wilcox asked about the cost to customers of the energy services proposal. We lose BPA some money in the first years, Esvelt replied; by 1999 or 2000, we aim to be self-supporting. I can't start from scratch; I already have an organization with staff, he explained, and we anticipate losses in the first two years. Wilcox asked about BPA's role in financing and incurring obligations for projects. We will look at the commitment from the customer, Esvelt replied. We'll see that there is a compensating revenue stream; any deal will cover its costs, he said.

If the revenue is not forthcoming in year three, would you cut staff to come into balance? John Saven asked. We are planning to reduce full-time equivalents (FTEs) by 10 to 20 percent per year, Esvelt said. We would bring down the staff anyway, he added.

What can you do to minimize the first year's operating loss? Ken Canon queried. Esvelt noted Randy Hardy has stated the agency would not use reductions in force (RIFs) to downsize. The costs are salaries, he acknowledged, and we need to get rid of FTEs. If Randy had said we would use RIFs, federal civil service requirements would still take over a year to implement them, Esvelt explained. We've examined the question, and the reality is the salaries are there, and there's not much we can do, he added.

There is concern about the term "energy services," Bob Gannon said. Would there be a problem with putting energy efficiency in its place? he asked. If the name is a problem and it would be helpful to change it, that's fine, Esvelt replied. Alexanderson stressed the need to revise the ROD, and said it should be done soon.

K.C. Golden said the name isn't the problem, it's getting clear on the specifics. Early on, the proposal included load building, and he asked if that was gone. Esvelt said if it is a barrier to a utility offering conservation, we want to help to get past it. Our purpose is to enlarge opportunities for energy efficiency. If a utility wanted to develop energy services, our motivation is to have a large energy efficiency component, he explained.

Load building starts to look like a commercial enterprise, Golden observed. We're here to help them develop the efficiency component, Esvelt said. I know what your concerns are, he added, but it would be up to the utility.

Yeas and Nays From the Energy Efficiency Industry

Stan Price of NEEC, an industry trade association, said his group thought that BPA's original proposal would be unreasonable competition to our companies. In the late summer, we conducted a forum and had Terry Esvelt give more information about BPA's plans, Price explained. Our board developed principles that we felt were appropriate for BPA, he said, and NEEC has engaged in a number of discussions with BPA about the principles.

We think the principles, if properly applied, hold the possibility of increasing the size of the market, Price stated. We would feel better if we had some immediate access to BPA's program to affect how this occurs, he added. Price noted that Esvelt had worked with NEEC and listened to its concerns.

Greg Page of Abacus Engineered Systems said his company, one of the largest performance contractors in the Northwest, had been trying to get into the federal market for energy efficiency. There are barriers for federal agencies, he said, and he listed several ways BPA could add value and increase the size of the marketplace. Contracts could be simpler, projects could be implemented more quickly, and projects would have a lower cost of financing and lower administrative costs, Page said.

We see this as a great opportunity for businesses such as ours, Page continued. BPA is moving in an area in which private firms have been unsuccessful, he said. We couldn't get into the school district, but we understand that BPA is working with the schools through Seattle City Light, and a project may come to fruition, Page stated.

Washington State Senator Dan MacDonald said he is both a legislator and a design engineer but came to the meeting on a vacation day on "my own nickel." I have always had profound respect for BPA so I don't begrudge them having a bad idea once in a while, MacDonald said.

He presented statistics on the size and annual revenues of design engineering firms to give perspective on the scope of BPA's proposal. MacDonald said engineering firms have a profit margin of about 5 percent, pointing out that it takes a firm of about 1,300 people to generate $10 million in profits. Fourteen of the largest 500 firms in the nation are in Northwest states, MacDonald said. Holding aside the largest, Morrison-Knudsen, BPA's proposed enterprise would be half the size of the remaining 13 combined, he said. This is not a niche market, he contended. "This will be a big kahuna -- a 900-pound gorilla," MacDonald declared.

Will it be successful? MacDonald queried. Yes, because it has advantages, he said. It will have no corporate income or state business taxes, no property or sales taxes, no motor vehicle excise tax, and limited liability, MacDonald said. Liability is 5 percent of the cost of doing business for engineering firms, he stated. The federal government is exempt from antitrust concerns and pays employment taxes in a different way, MacDonald added.

As a public official, MacDonald said, I see the BPA proposal heading in the opposite direction of what is going on elsewhere in government. That will generate great interest, he said. Every time government does something unfair to people, it's not just that enterprise that is looked at, MacDonald stated. "It gives the rest of government a black eye," he said, and people begin to question all the functions of government.

It's a big jump to say that the ratepayers should be in a high-risk venture, and consulting is high risk, MacDonald added. He also suggested there are revenue implications for government if business is taken from the private sector. If you do this, someone is going to look at it and "jump in with glee," MacDonald predicted. "Talk radio will draw a very graphic picture," he added.

I've heard that this is a small issue, but if you fall into that, you lose the symbolism in government, MacDonald said. He cited as an example, the $40,000 fish tanks in the Department of Natural Resources building in Olympia, which became "a symbol of government excess."

MacDonald said he viewed the committee's decision as "in for a dime, in for a dollar." When you're done considering it, give it all, or if you agree with me, give it none. We recommend you not give the $7 million now and no money in the future, he concluded.

Michelle McKenna of the Consulting Engineers Council of Oregon said she represents an organization of 120 firms, with more than 3,000 employees throughout Oregon and southwest Washington. She said the entrepreneurship that nurtures our vitality and innovation is threatened by BPA's use of taxpayer and ratepayer dollars to compete with private firms.

The Office of Management and Budget anticipated this problem, McKenna said, and outlined a policy that prohibits government from competing with private businesses and engaging in work the private sector can do more affordably and efficiently. Engineers work in a highly competitive industry and firms compete aggressively with each other, she continued. When BPA enters that marketplace, the level playing field disappears. Free or below-market services destroy opportunities for the private sector, McKenna stated.

BPA is a giant with privileges, including name recognition. It pays no taxes, its bank is the U.S. Treasury, and it is immune from many regulations private firms must follow, McKenna said. She urged the committee to consider the impact BPA's energy services proposal would have on businesses. "BPA is a wolf in sheep's clothing, and you are the shepherd," McKenna said.

Bill Garrity of the Consulting Engineers Council of Washington said he had been alarmed by BPA's October 1995 ROD. Although BPA has changed its position, I still think it is important to look for areas of potential competition, he added. Garrity said that 75 percent of his members' revenues derive from government agencies. Cutbacks in government contracting have led to layoffs in large and small consulting firms, he said. At the same time, government is trying to compete, Garrity observed. If private firms have to compete with government's subsidized services, there will be more layoffs and firms will fold, he added.

Garrity reiterated it is federal government policy not to provide services for its own use that can be procured from the private sector. While we applaud BPA's attempt to confine its activity to energy efficiency, it must be clear BPA will not offer services and products in competition with the private sector, he concluded.

Jason Eisdorfer noted the BPA goal is to capture what the market will ignore. Is it possible to monitor what would be provided by the market and what would be ignored? he queried. Price said it would be difficult to determine what would happen absent BPA's intervention. We provided a suggestion for oversight and a means for business to immediately affect the situation, he added. We believe an opportunity exists, but we don't want BPA doing what the private sector is able to do. To the extent BPA can bring customers to the marketplace, we support them, Price said.

Nelson said Esvelt had stated that BPA has an obligation to promote conservation. "He's talking about a pump primer," she noted. MacDonald responded that it was hard for him to see this as "a niche." There isn't a niche that big, he added. You either satisfy yourself that you'll never get the ratepayers' money back or you conclude it will be a large organization and can't do anything but compete, MacDonald said. Growing the market isn't the role of government, McKenna added.

It was hard for federal energy managers to procure our services, Page observed. BPA's role as the "pump primer" helps us focus on our core competencies, he said. Changing times require changing solutions. This is an opportunity for partnership, Page said.

Collins asked McKenna if her testimony had changed from a year ago, when BPA's ROD came out. No, she replied; I don't think BPA has a role to play. MacDonald said he didn't believe BPA could restrict itself. If they feel strongly about paying the money back, they'll have to go beyond this proposal, he stated.

To the extent they grow the pie, that's hard to argue with, Garrity said. He added it is very difficult to determine what markets and situations would not be viable or possible without BPA. Are we going to close potential markets to firms, and are we precluding development in the private sector? he queried.

BPA is making two inconsistent commitments, Wilcox observed. They won't compete, and they will be self-supporting. One of these will fall by the wayside; it's a matter of which you think it will be, he said.

The key decision is that Hardy decided not to RIF 140 employees, Collins said. What we're talking about here is 140 people on the payroll for another three years, and he's trying to get some residual benefit, he explained. In the private sector, we wouldn't worry about 140 jobs if there was a profound worry about whether the company would continue to exist, McKenna said.

Nelson asked if a seat on a board of directors that had a veto over BPA's business plans would alleviate the panelists' concerns? There was no assent. I get the point you think it's a real slippery slope, she said.

Esvelt Responds

We are shrinking, Esvelt said. This piece of the energy services group will be 20 to 25 people -- it's not about growth, he explained. It's difficult to talk about the principles, but the examples are clear. The GSA wasn't going to do energy efficiency at the Jackson Federal Building. They invited us in, and we brought a private partner. They used BPA as an extension of their own staff, Esvelt said. It led to a $2.4 million project, of which $30,000 went to BPA. All of those other dollars went to private-sector firms, he pointed out.

One reason for the losses is the management decision not to RIF, Canon observed. You're allocating the excess personnel to this? he queried. That's the reality, Esvelt said.

I'm troubled with Brett's statement, Golden said, indicating that the concern about losing money was still a vestige of thinking about this as a business. That concern in my mind is resolved by the fact that most of the money is going for the legacy programs, he added. The idea is not troubling as long as it's not subsidized competition, Golden stated. So the focus is on recovering costs, but not a penny more? he asked. The concern is that customers not pay for this in their power bills, Esvelt replied.

BPA has struggled mightily to respond to competitors, Canon said. Customers see this $10 million as real money. Two weeks ago BPA said it needs continued stranded cost recovery, and when I see this $10 million, I'm concerned, he continued. It doesn't make me feel any better that we'll lose the money anyway, Canon added.

The part of the market you propose to stay within is not the money-making side, Collins observed. It stretches credibility that you can stay there and make any money -- developing markets and never providing services, he said. It depends on the implementation of our principle five, defining exit strategies, Esvelt responded.

Nelson asked about BPA's relationship with the Federal Energy Management Program (FEMP). Esvelt said BPA has a memorandum of agreement with FEMP and is an advocate for the program. We are providing another opportunity to complement the FEMP tool kit, he added. "You bring a brand name," Nelson observed. There is some comfort for federal agencies in working with another federal agency, Esvelt said. Wearing the federal hat, they know we're on their side, he stated.

Rachel Shimshak summarized four principles she had heard. You're open to an advisory committee; you won't enter into consultation with companies in serving customers outside the "green area," which you outlined on the slide; you'll change the ROD to reflect this; and you'll change your name, she restated.

There is wide agreement about what BPA should not be doing, Alexanderson said. The rest is how to manage BPA, dealing with RIFs and assigning people, he observed. He suggested the committee vote on the first question: should 20 to 25 people have the opportunity to find work that doesn't interfere with the private sector? We're starting the year with more than 25 people, Esvelt cautioned. The Congressional debate was about the use of capital to finance projects, not pay salaries, he said.

The $10 million is "a mystery and a handicap" for you, Gary Zarker observed. There are 117 FTEs in the energy services group, Esvelt explained; their salaries are $8 million. We get compensation for those through power rates. It's the remainder of the costs that are uncovered. Zarker repeated that the numbers are troubling.

David Mills of BPA explained that in fiscal year 1997, there are 32 employees in conservation legacy programs, 15 in market transformation, and the remaining 70 are in market development. That area is targeted for reduction, he said. There are costs other than staffing, Mills added, including such things as BPA's $400,000 in EPRI dues and overhead.

Nelson inquired what precisely Congress had asked the Regional Review to do. Council staffer Steve Crow read the following language from the Congressional report:

"The conferees have agreed to limit Bonneville's borrowing authority to $10 million for their energy services business line, a decrease of $10 million from Bonneville's request. Including this amount should not be viewed as an endorsement by the conferees of Bonneville's ESB activities. Bonneville should limit its activities to the continuation of historic services to existing customers, including new contracts with existing customers, not to cumulatively exceed $3 million until the Regional Review has determined the appropriateness of the activities and developed clear parameters. If the Regional Review or ultimately Congressional action does not support Bonneville's proposed new venture, Bonneville should not expand its activities into this area. When entering into these contracts with existing customers, such contracts shall provide full cost recovery. The parameters developed by the Regional Review should address the appropriate level of capitalization, competitive implications and maintenance of a competitive energy services market, and minimize the risk of cross-subsidies from BPA's core power marketing and transmission customers. The conferees expect Bonneville to act consistent with the recommendations made by the Regional Review.

If we don't make a finding, the level stays at $3 million, Collins said. What is the implication of the $3 million? Zarker asked. We'd downsize as quickly as possible, Esvelt replied. Why would you want to borrow $10 million? Collins asked. As a line of credit to get projects going, Esvelt said. Will the $10 million be recovered in the five-year rates? Golden asked. No, I can't say we'll recover it in that time period, Mills responded.

What borrowing level do you anticipate? Bill Drummond asked. We have $10 million now, but anticipate $3 million to $4 million a year, Esvelt replied. We'll try to bring in third-party financing, he said; this is a last resort. Are BPA or ratepayers ever involved in these third-party arrangements? Drummond queried. It's a principle we'll try to adhere to, Esvelt said. Can you make that any stronger? Drummond asked. I don't know, Esvelt replied. As a ratepayer, I don't have any interest in picking up that risk, Drummond stated.

If I were to support this, I'd do it with limits on exposure, Saven said. If this body can do anything prescriptive, I'd say that the loss should not exceed $11 million over three years, he said. I don't want to agree to a loss that is greater than what would already occur, Saven stated.

The time has arrived for a subcommittee, Collins declared. He appointed Golden to chair a group, with Alexanderson and Zarker as members. The Congressional language is more demanding than I realized, Collins said. He asked the subcommittee to have a recommendation November 14, at which time the committee will vote.

Two-Mill Option Fee May Be In The Ballpark

Council staffer Pete Swartz walked the committee through an economic analysis of the proposed option fee that would be part of short-term federal power contracts. Swartz said in doing the analysis, he had help and input from BPA, the IOUs, DSIs, and PPC.

Swartz explained that the analytical approach considered the Treasury's perspective: what option price provides adequate compensation for absorbing the risk that option customers could leave the system? Customers are buying "an off-ramp" if the market price of power stays lower than BPA's price, and this leaves the Treasury at risk, he said.

Staff used a classic decision-tree approach, which analyzes the possible outcomes at various decision points. Market uncertainty was treated probabilistically, and other parameters were factored in through a sensitivity analysis, Swartz explained.

The decision tree shows two paths for the original subscriber to follow: 1) long-term energy, or 2) short-term, with an option. Short-term subscribers pay an option fee, and at the end of the contract period, there is a decision point at which the choices are to stay or leave.

The outcome is determined by the marketplace, Swartz said, and depends upon whether prices in the market are high, medium, or low. Market assumptions are therefore critical, he stated. What Treasury cares about is the part of the tree that represents customers leaving to purchase from the market. This is where the risk is, Swartz continued.

Swartz presented various market-price scenarios over the period 1996 to 2014. Two possibilities were given for the amount of escalation in price: one from a consultant's study done for BPA, and a second simple representation of a growth rate ranging from a low of minus 1.5 to a high of plus 1.5 percent. In 1996, the starting price for energy is 16 mills, which Swartz explained represents just the cost of generation, without transmission costs.

Swartz compared the market price of power with the Federal Base System (FBS). FBS prices were calculated in two ways: one with no increase in fish and wildlife (F&W) costs ($435 million cap), and a second with an increase up to the additional $500 million limit in the committee's draft proposal for federal power marketing.

This chart summarizes the problem, Swartz explained. In the high and medium cases, FBS is generally below the market, consistent with the consultant's study. BPA's risk is only in the near term, when the low-market case is below FBS prices, he said. Wherever the BPA line is above the market, there is risk, Swartz stated. In the outyears, BPA is generally below the market, he added.

Several assumptions are built into the model, Swartz explained. Sales to subscribers are assumed to be at cost, with the surplus sold at market, he said. Revenue from the surplus reduces the cost to the subscribers -- if you buy into the system, you share this revenue benefit, Swartz noted. Seasonality of load, market prices, and hydro constraints are accounted for in the model, he added.

Treasury takes the losses due to unrenewed subscriptions, and there is no cost-shifting to customers who stay. Long-term purchasers are insulated from the activities of the short-term buyers, Swartz said. In the analysis, any Treasury losses are recovered, if possible, from sales at market, before power is again sold at cost. In this way, it's possible short-term stranded costs could be recovered later, he explained. The level of resubscription is treated in the model as a function of future market prices versus FBS costs, Swartz said.

What Happens to Treasury?

The analysis shows that in the high and medium-market cases, Treasury has no stranded costs, Swartz stated. In the low market, there is a potential for Treasury to absorb $992 million in losses. That's a big risk -- almost a billion dollars, he observed.

Treasury is most concerned about the margin between BPA and the market, Swartz explained. In the medium-market case, the FBS subscription pattern is different than when the market is low, he continued. The risk to Treasury is about $20 million per year in the medium case, but there is a chance for recovering that loss, Swartz said. I'm comfortable that in the high and medium cases, there are no stranded costs for Treasury, he allowed. But in the low-market case, Treasury starts to get stranded costs that are not recoverable, Swartz said.

In illustrating the break-even option price, Swartz noted that the further you look into the future, the less the risk. With a five-year option, the break-even price is about 2.1 mills per kilowatt-hour. If the contract length were 10 years, the option price would drop to 0.6 mills per killowatt-hour. He said the assumption in the analysis is that customers would pay 2.1 mills above the cost for the five-year option.

We know very little about what the market price will do and where F&W costs will go, Swartz said. The staff did sensitivities on F&W, he said, and found that if salmon recovery requires no more money, there is a one-tenth-of-a-mill sensitivity. The option price is extremely sensitive to BPA costs, Swartz stated.

The staff analyzed the regional benefits under various market conditions, assuming 60 percent of FBS power is sold long term, 40 percent is sold short term, and there is a 2.1 mill option fee. Swartz described the question as, if I go long in 2002 for 30 years, how much less do I pay? Using the original assumptions about price, the benefit would be $652 million for long-term subscribers, $557 million for short-term subscribers who stay, and a $203 million loss for short-term subscribers who leave.

Swartz also compared levelized FBS power costs relative to the market over the long and short term, and a distribution of FBS benefits. In all but the low-market case, there are benefits to both the region and the Treasury.

In summary, Swartz said the analysis is highly sensitive to assumptions. Using plausible assumptions, a 2 mill per kilowatt-hour option fee "may be in the ballpark" to compensate the Treasury for offering a short-term option. The option fee is highly sensitive to future market conditions, and the short-term purchase with an option lowers the risk for subscribers at the expense of lower benefits, he explained. In this analysis, the option fee works well, Swartz said. It's an insurance policy, and it works as it's supposed to, he added.

I went through this analysis in August, Saven observed. Part of me says you were within one mill, and another part of me says you were off by 100 percent. It's all based on assumptions, he said.

Where We Stand

Collins asked each steering committee member to state the one or two changes he or she felt would be important to make to the draft proposal. He said Ken Canon, who had to leave the meeting, indicated his concern was for a date to implement market choice that is firm and accelerated.

Shimshak said her principal concern goes back to testing the commitment to public purposes. If an outpouring of support is not forthcoming, I'm interested in finding a way to secure it, she said. How would you characterize what you've heard at public meetings? Collins asked. There are a variety of things on the table and a fair amount of security in other areas of the proposal. Public purposes should have the same assurances, Shimshak replied. I've also heard the opposite, that local control is important, she acknowledged. I'd also like to put some meat on the bones of how to invest to meet the public purposes, Shimshak said. She suggested there could be an investment fund to buy down the cost of financing renewables and to overcome barriers.

Gannon said he was optimistic the committee would have its proposals nailed down in a final report. A couple of proposals I would make relate to state activities, he said. Montana has legislation on many issues, including a mandatory system benefits charge. Clearly we need an action plan in whatever jurisdiction is appropriate. The option presentation was instructive, he added, for what we will do with the subscription and allocation process.

Golden said he shared the concern about what will emerge in the way of a voluntary commitment to public purposes. We are not there yet with equitable access to competition, and the most glaring deficiency is with low income, he stated. We need a product we can stand behind in January, Golden continued. I am hearing that it isn't a big deal -- I think it is. We need something for public officials to go forward with, knowing the region stands behind them, he urged.

Mike Kreidler said he had real concerns about the federal power marketing scheme, and the implications of marketing at cost versus the market. I'm afraid we'll make a mistake if we don't spend time on this and how we'll sell Congress and the Treasury on the risk. I'm afraid we'll watch the benefits erode away, he said. We need to speak to the years when there is not enough revenue coming to BPA. We need a mechanism to market at market rates, Kreidler said.

I've been to most of the public hearings, John Etchart said. There is concern that the benefits of competition are not getting to the small consumer and into the countryside. We need a product and a follow-on plan to implement it. It would soothe me if we had a better idea about the regional entity and whether it is in the power planning business, he continued. I'd like to have that settled, Etchart added.

Rick Applegate said he had two fish-related concerns. First is the realism of our fish cost-sharing proposal. I'm hearing rumblings in the fish community about whether Treasury would pick up anything that large, he stated. There is an understandable interest in separating generation from transmission, Applegate continued, but he said he was concerned about seeking to insulate transmission from F&W costs. He also noted that the GAO study idea is getting an airing.

Nelson listed several areas where she said the draft proposal needs revision. We need a clearer definition of the residual BPA role and treatment of the stranded cost issue for BPA. BPA is wanting to hold transmission hostage until stranded costs are resolved, she observed. Public purposes needs more work; we found a budget, but no durable mechanism for implementing it, Nelson said. And equitable access to the benefits of the federal system has not been resolved. If rates go up, people will question the wisdom of the restructure, she stated.

Jim Curtis said the residual and transition roles for BPA are his concern. He also suggested the committee resolve the issue of stranded cost protection for BPA.

Jim Davis said he had been to one hearing and did not hear anything he had not heard before. He said he had spent some time with PUD managers and had come up with the following list. First, they are skeptical of the benefits of the federal legislative package, he said. They don't believe we can request separating transmission and generation alone; it will lead to devastating things for the power marketing administrations, Davis stated. We believe BPA has the flexibility to meet the needs without legislation. The managers are skeptical of the subscription mechanism, particularly in that it gives them no ability to affect cost control, he added.

The PUDs are also concerned about implementing a centralized renewables package, Davis reported. They believe if the demand for green rates is there, local utilities will implement them. A mandate could create a WPPSS-type "renewables fiasco," he said. Davis reported there is general comfort with the transmission proposal and a recommendation that it be characterized as an independent grid scheduler, as opposed to operator. This could be done without federal legislation, he said. There is a high level of unhappiness with the GAO audit request in any form, he concluded.

Todd Maddock said he had attended all of the public meetings. He said he is still concerned about whether the region has accepted the need for a regional solution. I am picking up denial, both about federal legislation, and about the speed with which competition is occurring, he said. The reality has settled in with us, but not with the region, Maddock stated. There is also the message that benefits are not being equally shared with rural communities and small farms. He also reported a reluctance about the draft's conservation/renewables number, that it is too high. Something more nominal would be acceptable, Maddock concluded.

The problem out there is that many people don't understand that "the Northwest is no longer an island," Roy Hemmingway said. There will be legislation that deals with BPA, and we should know our response. He noted that there are advantages with shorter-term BPA contracts; fish and cost control become lesser issues. We should look carefully at selling everything short term, he said. Customers who decide not to purchase go into the market-price pool if they choose to buy later, Hemmingway explained. The idea that the federal government "will hold the bag for 15 years" is not politically viable. If we buy short term, we need to deal with the power that BPA doesn't allocate, he noted.

In Oregon, conservation will not be a voluntary activity for any utility, Hemmingway stated. We'd like other states to conform to that, he added; the Oregon legislature will say conservation is a mandatory activity.

Saven said he had been to four public hearings and several "private gatherings" on the draft. He noted that the private sessions put the public ones to shame in terms of their spiritedness. Across-the-board measures are seen as discriminatory, Saven said. For example, the 3 percent of revenues that would go to public purposes is regressive for utilities with higher system costs. There was a lot of feedback on the GAO audit. He observed that it is unlikely you would first call the IRS to come in to audit your income taxes if you thought there might be a problem. I've heard universally that inviting the GAO in is not a good idea, Saven said. But that is not to be construed as denial of the issues raised, he added. Let's have the discussion in a controlled environment. There is total rejection of inviting the GAO in, Saven reiterated.

With regard to federal power marketing, I don't think we're done, Saven said. We were closer in the power marketing work group recommendations than we are in the draft report, he suggested. He noted that Randy Hardy had presented a paper to the committee and that those ideas deserve a response. We have work to do before we're done -- we need more refinement, he said.

Alexanderson said the principles on the residential exchange and the details on power marketing are not good enough. I was not persuaded by Randy Hardy's talk, he stated. We need details in the power marketing section and a follow-on process. I don't see us knowing the answer without a lot more in-region work, Alexanderson concluded.

Wilcox raised the issue of comprehensive legislation. I feel we may lose the benefits of the Columbia River without it, but we're a long way away. If you don't have public power on board, you aren't even close, he said. The lack of cost controls for federal power is a concern; I have no confidence the costs won't go up, Wilcox observed. The market has kept the costs under control, not a BPA program-by-program review, he noted. With regard to customer choice, the market forces are moving fast and have to be dealt with state-by-state, Wilcox said. This is inexorably linked with public purposes. We will have state legislation in this area and it would be good to provide some guidance, he added.

"We punted on river governance," Wilcox continued. Ultimately there will be federal legislation, and we owe it to the region to provide procedural suggestions on how "to move the ball down" so we're ready when the legislation comes, he said.

Zarker said river governance is an issue he has "despaired of all along." I'd suggest Chuck lead another group on that issue, he said. I don't want to be in Congress with the state we're in on it, Zarker added. There is denial among public power about the need for change in power marketing, he said. Things are at risk, but I think we're reasonably close to something that would be a good deal for the region and the Treasury, he stated.

There has been a lot of progress implementing transmission access legislation nationally, Zarker observed, but at the expense of reliability. That's something we ought to push the country on, he said. We didn't answer the governors' question about spreading the benefits of competition equitably. There are significant risks for rural areas and the low-income customers, Zarker concluded.

Eisdorfer noted that the committee has not dealt with the residential exchange, and he said he didn't think the draft has the order for federal power purchases right. I think the DSIs will do all right in the market, he said. A lot of us here said we need a product or a legislative solution. What we are doing is an exercise in uncertainty, Eisdorfer observed. If people are thinking of moving from this table without a product, you need to be certain you'll get another chance. Randy Hardy said change will happen and we have a year. That year is almost up, he concluded.

Drummond said his Halloween costume was bandages all over his head and body, and a splint on his leg. I'm calling it "steering committee member returns from public hearing." We formed in our minds what the base case or do-nothing case was. Then we constructed a report we thought was clearly better than nothing. I think we need to add what "do nothing" looks like, Drummond said. Let's ask the staff to begin thinking about it, he urged. I keep hearing that what we are proposing is worse than what customers have now, but what we'll have in 2001 won't be like today, he said.

With federal power marketing, we have a structure that tries to balance the Treasury's interest with the customer interest, Drummond said. What I've heard consistently is that customers want the long-term contract option, but there's little interest in taking it. We need more work on those options. We had better turn our attention to the short-term option, he said. Collins asked if the federal power marketing proposal for long and short-term agreements is unrealistic, and Drummond responded yes.

Get Unconfused, Quickly

We have allowed legislative strategy to confuse us, Collins observed, indicating the legislative debate is very different. You can't succeed without consensus, he said. You need a tight formation to provide cover whatever your posture with Congress. You are very vulnerable without a tight agreement, Collins counseled. We need something the delegation can defend or attack with. "We'll be attacking or be attacked." We've got to get this confusion out of our heads quickly, he said.

Collins referred to one of Zarker's statements, saying we may lose this thing, but we're closer than you think. The middle ground is there, he said. I sat down with Steve Waddington [DSIs], and when the rhetoric blew away, the specifics looked doable, Collins stated. We are managing to confuse ourselves, and it would be a tragedy if we drop the ball being this close, he said.

We probably won't resolve the river governance and fish issues, Collins acknowledged. But we can try to get the contractual relationship clear. If the Treasury is not endangered, we can get a settlement, he said. I'm far from pessimistic, Collins stated.

We need to be very candid about where we are. Let's not "get drowned by the tidal wave of negativism," he said. There's a deal there, Collins concluded.

Collins asked the committee what the starting point should be on November 14. Wilcox suggested they start with federal power marketing. That leads us down the path of perfecting the details, Zarker observed; we need principles. Let's step back and look at where we're trying to go. We better be able to articulate the principles, he said.

Saven agreed, and said he was willing to reconvene the power marketing interests and resolve such issues as what should be done with the residual nonfirm energy. What are we going to get? Collins asked. Strawman 3, with agreement among the major parties, Saven responded. Applegate said the public interest side should be part of the discussion, and he cautioned that the power marketing discussions would be occurring before the end of the public comment period.

One issue we didn't deal with is stranded costs, Hemmingway said, and he suggested they ask BPA for a proposal. Randy said he wanted the protection the IOUs get, Zarker observed. FERC punted that to the states, he added. I don't know what the stranded cost recovery has been for the IOUs. My response is to punt that to the national debate, Zarker recommended. We don't know what that is either, Nelson said of IOU recovery, noting that she will be meeting with Hardy to discuss it. There is a lot of activity nationally and a lot of examples, Gannon observed.

BPA and the IOUs are in fundamentally different positions, Hemmingway said. There are shareholders versus the Treasury and the customer relationship is different. We can't finish without a stranded cost statement from BPA, he argued.

I don't think we have to deal with it, Wilcox said. Charles Curtis [DOE] said the costs would go onto transmission, Hemmingway responded. That's the status quo -- that's what we leave in place if we say nothing, he stated.

Jim Curtis said there was no DOE policy in place. Charles Curtis said the region needs to deal with it, he added, but BPA doesn't believe we have a problem with dealing with it. I would guess all of the PMAs have this problem, Zarker said. This is not a big issue -- whether stranded costs get put on wires. We should have a position, but it isn't the biggest unresolved issue, he added.

What about the equitable distribution of benefits? What do we do? Collins asked. Drummond suggested the committee provide principles for public purposes, competition, and customer choice. Drummond suggested a "no net loss" approach to sharing benefits. If one class gets an advantage, but another doesn't, it isn't necessarily a bad outcome as long as no one is worse off, he said. Eisdorfer said he is not a fan of "the no-harm standard." Nelson said the merger hearings in Washington had shown the public is waking up and asking about disparities in rates. Saven said the outcome should be fairness for everyone.

IN CLOSING:

The location of the November 14-15 meeting has changed. It will be at the Red Lion in downtown Portland, 310 S.W Lincoln Street, beginning at 10 a.m. On the 15th, Collins said the meeting would start at 8 a.m. and end about 3 p.m. The committee moves back to the Red Lion Lloyd Center on November 21-22. There is a meeting still scheduled for December 5, which Collins acknowledged would likely be the day for adopting a final report. A December 12 meeting in Spokane will be the grand finale.

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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