Comprehensive Energy Review
Steering Committee Meeting

OPENING REMARKS

Steering committee chair Chuck Collins said he received lots of thoughtful suggestions and encouragement over the past two weeks. There were no protests about the meeting schedule, he said; the committee will meet every other Thursday through April. Most meetings will be at the Portland Airport Sheraton, although February 1 and 29 are set for the Lloyd Center Red Lion.

Collins also acknowledged that he received many suggestions on consultants for the process, and he noted there was "surprising unanimity." Steve Crow will act as chief of staff to the process; he will be the access channel, Collins said. I do not want to discourage people from calling me or Bob Kahn directly, he added.

We are about to retain Al Wright and Jim Litchfield, Collins announced. I've received comments that both represent a utility perspective, he added, and I think that's fair. We are also going to retain Bill Marcus from California, a consultant with a public interest background, Collins stated. Tom Foley will also join the consultant team, he said, noting Foley is knowledgeable about the restructurings in the United Kingdom and Australia.

A Template and A Straw Man

In presentations on February 15, Litchfield and Marcus will offer two products, Collins explained. The first is a "template," a series of blanks that represents the electricity system. Each will then present a "straw man" by filling in the blanks on the template. Litchfield will describe a system he thinks would work and that he could defend; Marcus will do the same from his set of values and priorities, Collins said.

Your homework assignment for February 29, Collins told the committee, will be to fill out a template with your own system. Most of you have said that locking you in a room and having an interest-based arbitration won't work; it's not what we're doing. With this exercise, we'll learn to advance issues in the context of the entire system, Collins said.

At the end of the day on the 29th, we'll have settled on three important points, Collins continued. First, we'll understand what we agree on, and we'll understand which blanks we have enough information about. Second, we'll have a set of items on which we don't agree and have enough information, and third, a set on which we don't agree, but need more information. Out of that third item will come the assignments for work groups, he concluded.

What Litchfield and Marcus will do is not a point of departure, Collins explained. They will offer illustrations of a system; the point of departure will be your templates, he told the committee.

Clearing Up Noë's Role

Collins said the governors' representatives plan to retain Cyrus Noë in a public information role. While Collins said he supported the idea, he acknowledged that it has been the subject of some criticism and controversy. He explained that if part of the review process is to discover information, there must be a way of circulating it. Clearing Up has proven to be effective in circulating information, and it communicates broadly, Collins said.

We don't have another vehicle, he concluded.

K.C. Golden asked what the governors' representatives had in mind. John Etchart said Noë's involvement would be limited to making documents available and "advising the four of us on how best to have a two-way discussion within our states." The role is circumscribed to that little bit of help, he stated.

Cyrus will be communicating technical issues to a broad audience, Collins explained. And he will also be reporting on these deliberations and pros and cons of the deliberations as they unfold, he went on. The concern is that the reporting is not always neutral--it is laced with Cyrus Noë's opinions. If you like those opinions, it's fine; if you don't, it isn't. Where I come down is I don't see another vehicle, Collins said.

Mike Kreidler said Clearing Up is a publication marketed to utilities. If it doesn't appeal to them, they won't buy it, he said. He suggested it would take extraordinary steps to keep the two functions "at arm's length." Kreidler cautioned that people may see this "as another insiders' game." We could step into a trap, he said. Kreidler suggested the group may need to exercise some editorial control.

Walt Pollock said he understood Cyrus' role involved a Web page and is separate from Clearing Up. I don't know if we have an issue if it's a separate enterprise for information distribution, he said.

Golden raised the issues of slant and audience. Your assumption is you have a person with access to the audience; I don't agree, he stated. Cyrus has a strong audience within the utility industry, but not with sectors outside of it, whom, he added, need to be included here.

Jim Davis said he was concerned about how the review could get on newspaper front pages. We had all four governors at the kickoff, and "we didn't even displace a gardening story in the local paper," he said. I am not comfortable with the prospect that this is not on the public radar; this should be making news, Davis said.

Rick Applegate suggested that Council staff should be considered for getting materials boiled down. He noted the quality of writers and power planners on the Council staff. Might we be able to use them? It's an alternative to look at before you decide, he said.

Collins closed the discussion, saying the Review would probably enter into an agreement with Cyrus. We'll look at getting the Council staff involved, he added.

ORDER OF BUSINESS

Kean: There's Gold in Them There Markets

Steve Kean of Enron Capital and Trade, a buyer and seller of energy commodities, said his company has been through the process of deregulation. At one time, we were a regulated interstate gas pipeline, and we have had to open up our system, Kean said.

Enron deals in natural gas, oil, and electric power. In June 1994, we traded our first electricity, Kean said. Now, we serve 3,000 megawatt-hours, and we've done it without owning any transmission. It demonstrates that people outside of the industry can come in and find a place. Competition is here in certain select areas of the marketplace, he declared.

Kean said electricity is the biggest remaining regulated industry, representing 4 percent of GNP. "It's an industry frozen in time," he said, operating under the same basic rules for over a century. The industry has $200 billion in stranded costs, which he called the biggest indictment of the current system. We've spent $200 billion more than can be recovered in the market, Kean observed.

One of the benefits of competition, according to Kean, is that the market would bring rates down 25 to 30 percent, a conservative number, he added. You're looking at $80 billion per year in savings, the equivalent of a large tax cut, he said. That moves the industry to the top of the agenda for policymakers, Kean added.

We've looked at electricity as an island, Kean contended. But it can be marketed in combination with non-energy services, such as cable television and telephone, he added.

Competition could lead to better technology development in conservation and transmission, Kean said. Such development has been held hostage to the regulatory agenda, he said, but it would be wide open with competition. In generation, construction times have fallen, and efficiency levels have increased with competition, he stated.

Unbundling and rebundling of services are another feature of the market, Kean explained. A residential customer may well want a package of services, but industrial customers want choices, he said. In the competitive market, there is also better management of price risk, he said. The risk now is allocated to those in the worst position to bear it--consumers of electricity. There is better control on investment decisions, he said, and better capital deployment. Markets do that job better than regulation, Kean said.

Why turn the process over to the market? Kean asked. Because markets respond more quickly to accommodate customer needs. If we leave it to the market, we get better allocation of capital and better pricing of resources, he contended. We know this not just from looking at other industries, but because of what we're seeing with electricity. We're cutting prices and offering new products--we're seeing benefits, he stated.

Identify the real natural monopoly and restrict regulation to it, Kean advised; the natural monopoly is "smaller than you think." Transmission falls within a natural monopoly, and regulation will be required to provide equal access to the wires, he said.

Kean said there is no inherent conflict between a market system and achieving social policy goals. The question is whether electricity regulation is really the right place for resolving such issues as low-income energy assistance. Is it more appropriate in a welfare system or in electricity regulation? he asked.

As for environmental and demand-side management goals, take a hard look at what could be handled in the marketplace, Kean recommended. Costs that can't be handled by the market can be allocated to all suppliers and collected through an end-use charge, he said.

Kean cautioned the committee to take a minimalist approach to re-organizing the electricity system. It shouldn't be the role of policymakers to organize markets. Knock down the barriers such as unbundling transmission, he advised, and let the market take over the functions it does best.

Pollock Responds

Pollock, the steering committee-appointed provocateur, cited several issues as "the hard part" of restructuring. The governors gave public policy imperatives high priority when they kicked off this process, he said. Research and development, renewables, and market transformation, are "public goods" that we must deal with in earnest, he added.

Some costs are part of the regulatory compact in the old structure, and those costs, as well as stranded investment costs, must be dealt with, Pollock said. Kean was "right on the money" with open access, he added. It may not be the most difficult to achieve --trying to separate the merchant function from transmission will be more so, he said.

Rachel Shimshak asked for Kean's opinion on how to deal with pollution created by the electricity system. That may be one of the policy issues to be dealt with in another forum, he replied. For example, the Clean Air Act may be the most appropriate place to address emissions. So you'd have Congress decide and the industry deliver? she asked. Yes, Kean said.

Kreidler queried Kean about the transparency of product pricing. He noted that a recent large monetary settlement in the pharmaceutical industry was the result of companies offering their biggest customers too good a deal. Kean said there was great price transparency in the natural gas industry. The transparency in a commodity market will be better than anything you can engineer; it will be hard for people to play games, he responded.

John Saven observed that the 25 to 30 percent in potential savings must pertain to the national picture. Do you have any gut reaction for what might happen in the Northwest? he asked. If you look at where natural gas prices were cheap before the market opened, they got even cheaper, Kean replied.

Sharon Nelson asked Kean about his "glib statement" on the market taking risks and not captive customers. For natural gas customers, there are substitutable products, she said. What is substitutable for electricity? she asked. The suppliers, Kean replied. If you don't like one supplier, there are others. You may have five people reaching through the same set of wires clamoring for your business, he said.

I believe you may have understated the volatility of prices, Davis observed. I suspect the person who turns on the light switch will pay for that volatility, he added. We maintain a hedged position in the market, Kean responded. Price volatility is a huge risk, he acknowledged, but we're in a better position to manage that risk than individual consumers.

White: Social Programs Must Be Integral to a New Order

John White, director of the Center for Energy Efficiency and Renewable Technologies (CEERT), said a friend from Texas likened California's regulatory scene to "world federation wrestling in full opera dress." And, he observed, the state's legislature is as colorful as its regulatory commission.

White said there is great potential for public interest in the issues of restructuring. The experience with telephone deregulation hasn't been that happy for customers, he observed. The CEERT decided early on that the place to be in the electric industry transition is with the customers, both small and large.

It is important to pay attention to where the money goes as the market opens up, White said; watch for who is benefiting and who is paying. There is a tendency for costs to be shifted from the regulated side of the business to the unregulated side, and back again to the regulated side, he said. Equitable access to the market for all customers is important, White pointed out, if this is to be anything other than a cost-shifting exercise.

White referred to the New England Electric System's (NEES) response to the Massachusetts Department of Public Utilities' request for proposals on restructuring. He said the New England model allowed for recovery of sunk costs and involved the utility making standard offers to its customers. White encouraged committee members to invite an NEES representative to one of their meetings.

Do We Want Kilowatt-hours Hawked Over the Phone?

There is no clamor for electricity choices at the residential level, White said. I think it's because people are tired of calls from long-distance phone companies during dinner, White quipped. Residential customers are interested in where the power comes from and who they send their money to, he said.

White said he sees no inherent conflict between a market system and social policy. But social programs must be looked at as an integral part of the system, not as optional. Electricity is connected with the public interest, he stated.

I would disagree with Steve (Kean) on whether the Clean Air Act is the repository for environmental responsibility, he said. In the Act, we've allowed for a differential standard of emissions, depending upon the age of a plant, White explained. It has led to a perverse situation in which old plants are allowed to pollute at 10 to 40 times the level of their newer competitors, he said.

We need to eliminate the subsidy for dirty generation, White contended. He pointed to the Ohio Valley where "dirty plants" are being fired up because of low generating costs. The electricity markets of the Eastern Seaboard will be flooded with low-cost power and ironically, also with pollution, he said.

There will be a need for more regional regulation as the market era dawns, White said. The Northwest may not be comfortable with California, but it is probably more comfortable with California than with the Federal Energy Regulatory Commission (FERC), he noted, urging regional agreements on such issues as the environment and pollution.

White suggested a system of environmental dispatch of resources in which the cleanest plants are dispatched first. He showed the committee examples of energy bills in which customers can choose to be billed at a higher rate for "green" or environmentally friendly generating options.

Drummond Responds

Bill Drummond said Western Montana G&T did a telephone survey in preparing its integrated resource plan. We found that social values and price were evenly split, in terms of which should get priority. We find ourselves competing with natural gas, propane, and the energy services industry, Drummond continued. These competitors can wipe out or reduce loads, he explained. How are we to invest in conservation and renewables when the competition comes in to undercut our rates? Drummond asked.

You need to have the ground rules set up properly from "the get-go," White responded. A non-bypassable system charge, for which any user of the distribution system is liable, is one answer, but we don't know all the options, he said.

Al Alexanderson said utilities want to run the plants they already own. There's a disincentive to close them because they'll fall out of rate base as no longer used and useful, he pointed out.

Brett Wilcox asked about the role of central planning as the industry moves toward competition. While observing that there may be a "stranded regulator problem" with competition, White said some issues--regional environmental regulation, siting plants, transmission planning--will still require central planning.

Nelson noted that with telephone deregulation, customers were forced to elect a long-distance carrier. Should we put generating plants on the ballot and have customers make choices? she asked. Rather than affecting the operating system, White advocated changing the money flow and giving customers the choice of where to send their money.

Jordan: The Devil is in the ISO Details

Jerry Jordan, director of the California Municipal Utilities Association, suggested the transition to a competitive market must be a consensus process. If any major segment of the industry doesn't believe it's in the public interest, there could be veto power, he said. Munis serve 25 to 30 percent of the state's population and are not subject to California PUC (CPUC) regulation.

Stranded investment recovery is a major issue for munis, he said. We don't have a choice. We recover investments, or we go broke, Jordan stated. He noted that the munis do not have "the luxury" of stockholders to take the hit; but, he added, investor-owned utilities (IOUs) should be allowed to recover investments as well.

The pressure on municipal utility boards is to try to balance the needs of large industrial customers, who provide jobs, with the needs of residential customers, who vote. There will be great pressure to put stranded assets into residential rates if they are not recovered from those who leave the system, he stated.

Early on in California, everyone agreed that an Independent System Operator (ISO) for transmission was a good idea, Jordan said. It's quite another thing to agree on what "independent" means, he observed. When all of the devils are through arranging the details, we'll see, Jordan said.

We'd lean toward a government agency running the transmission system--it must be a nonprofit organization, Jordan continued. The ISO must have the power of eminent domain and the ability to own transmission upgrades. He suggested utilities might not be inclined to upgrade their transmission systems, if they have to condemn property or step into politically sensitive projects.

The most important thing is stranded investment recovery, Jordan emphasized. We support a non-bypassable fee for public purposes, he said, but it's questionable whether such a fee can survive. It may be classified as a tax, and it would be very hard to get such a thing through the legislature, he observed.

It's Wait and See As the Market Evolves

Bob Gannon asked how residential customers will be given a choice of suppliers. The CPUC order requires that residential customers be phased into the competitive market over the next five years, Jordan replied. They will have to have their own time-and-use meters, he explained. There is a lot of talk about aggregating customers and about forming new municipalities as aggregators, Jordan said. I wouldn't advise anyone to jump into that business right away, he added; we need to wait and see what happens.

Jordan said proposals for a system benefits charge vary from 3 to 5 percent of the electricity bill; that would be $3 on a $100 bill, he added. Todd Maddock asked if the munis, like the IOUs that fall under the CPUC order, would allow customers direct access to other markets. There will be pressure on cities to offer whatever private utilities offer, Jordan responded.

Alexanderson observed that stranded costs will be very hard to quantify. Let's say you have a three-cent-per-kilowatt-hour plant and lose the customer. If you get a new customer at two cents, only one cent is stranded. The $200 billion number is as likely to be right as wrong, he said, referring to Kean's statement about the level of stranded costs nationally. Jordan said a simple formula for stranded investment is to have utilities recover in the traditional way for existing investments and to handle new plants in a different way.

In response to a question about the ISO, Jordan said the munis' support depends on how the ISO is organized. The fear is the ISO will devise a transmission system that is too expensive and that transmission owners will still exercise market power, he said. It's possible these issues will be resolved as the ISO takes shape, or it's possible the result will be something totally unfair, Jordan observed.

Collins asked about concerns over the voting and governance of the ISO. What if there was one rule: the cheapest resource is dispatched first. Is it doable? he queried. Jordan said it is, depending upon the governance. He noted that the situation is complex since the pool will serve bilateral contracts as well as spot purchases.

Gannon asked about the ownership of California's transmission system. SoCal Edison, Pacific Gas & Electric, Western Area Power Administration, and Los Angeles own the majority of it, Jordan said. In the Northwest, you would just rename BPA, he quipped.

Budhraja: First, Figure Out Where You Are Going

Vikram Budhraja of Southern California Edison said utilities have traditionally been vertically integrated, with an obligation to serve and a responsibility to stakeholders. That obligation was interpreted in very creative ways and came to include such things as conservation and low-income energy assistance, he said. In time, California utilities found themselves unable to satisfy all wants plus keep rates down. Rates were 50 percent above the national average.

Budhraja also pointed to the effects of a national energy policy in the late 1970s that was predicated on running out of natural gas. The state was drowning in excess capacity, and at the same time, there was debate about whether to contract for $14 billion in renewables, he said.

The challenge is how to get from here, the traditional structure, to there, a vibrant competitive market, Budhraja said. He walked the committee through major landmarks in California's restructuring discussion begun in 1993 and culminated in the CPUC's December 1995 decision. The issues in the debate include wholesale and retail competition, pricing, stranded cost recovery, market structure, public policy programs, and jurisdiction, he said.

Budhraja noted that the $80 billion in savings Kean mentioned is "an illusory number." The policy question is, are we going to honor our past commitments, or are we going to default? If you design a system where customers gain by defaults, it isn't workable, Budhraja said. The challenge is to have benefits built on honoring past commitments, he added.

The focus in California has been on bringing about a system in which all benefit, Budhraja continued. We can't afford a failed experiment in going from a reliable system to a competitive market, he stated. Jurisdiction between FERC and the states is an issue in the restructure, he acknowledged.

The CPUC decision calls for 100 percent cost recovery. A new market structure is to be implemented by 1998, with a phase-in of direct access over five years. The order calls for a 50 percent divestiture of fossil fuel resources, public policy programs funded by a non-bypassable charge, and a non-bypassable transition charge. No cost shifting is allowed in the transition, he explained.

An ISO is to be created along with a Power Exchange Spot Market, according to Budhraja. The ISO will not own transmission, but will provide non-discriminatory access. Each utility "will turn over the keys to its dispatch center" to the ISO, he said. The transition is to be complete by January 1, 1998, Budhraja stated.

The lesson from California, he said, is figure out where you're going first. You can't be all things to all people. You must have either a competitive or a regulated system, he said; the two don't work together very well. Dig down and see where the benefits really are, Budhraja advised.

We at Southern California Edison went through a soul searching, Budhraja acknowledged. It was important to have strong principles; we insisted upon: equity for customers, opportunity for all competitors to compete, full cost recovery, and an orderly transition, he said.

Golden Responds

We need to make a distinction between commitments and continued operation of resources that are high cost economically and environmentally, Golden responded. While stranded cost recovery is appropriate for investments made, it is not for continued operation of such plants, he said.

True economic competition is not just cost shifting, Golden stated. All things that were nominally settled with cost allocation in the past come creeping back in under the guise of competition, and we must be vigilant about these, he cautioned.

As for social policy objectives, Golden said, social goals have an intimate connection to a high-quality electric system. I think we still need to ensure a basic, affordable level of service, he said.

Central planning has an important role that won't be covered by bilateral transactions or competition, Golden said. Let people decide what people decide well. Don't let the market decide the right level of sulfur dioxide emissions; the market doesn't know, Golden urged.

Davis asked if there are economic signals in the new system that will compromise system reliability. There is nothing that compromises operating reliability, Budhraja said, as long as there is a smooth transition. As for adequacy of supply, there is nothing inherent that requires new investment, he acknowledged.

Nelson observed that the California system creates two new institutions, neither of which owns the resources they operate. Some transactions are regulated by the state, others by FERC; there will be transmission owned by one party, but operated by the ISO. How does this add up to efficiency? she queried. Investment will be driven by the markets, Budhraja said, noting that the transition process "gives me headaches."

Coyle: Who's Going to Pay?

Eugene Coyle of Toward Utility Rate Normalization (TURN) complimented the committee "on what you think you're doing." He said that "interest arbitration" was what went on in California, and the result was "a terrible decision."

I'll tell you what customers want, Coyle said. They want a clean environment and just, reasonable, and non-discriminatory rates. He cautioned that in California the prospect for high transmission rates is large. I suggest you stop at wholesale competition and do not go on to retail wheeling, he said.

"The cost problem" is why we're here today, Coyle said. The average cost of electricity is high, the marginal cost is low. What makes our costs high is the nuclear investments that have been made, he stated.

This is all about who is going to pay--if industrial customers can get out of sunk costs and buy from cheaper plants, they will, Coyle contended. Utilities have been big and bloated, he said, but it's not clear competition will cure that or bring benefits. Coyle pointed to the airline industry, where business customers get gouged. In the power business, residential customers are the most inelastic, he said.

Coyle likened electric industry behavior to that of colleges and universities; they're raising tuition at the same time they're increasing student aid and discounting tuition. For utilities, it's better to keep load if it contributes anything to fixed costs. People with large overhead are driven not by immoral or bad behavior, but they discriminate because of the need to "fill seats," he said. Collins interjected that as the former chairman of Washington's Board of Higher Education, "I find your analysis profoundly inaccurate."

Coyle said the ISO set-up in California implies very high prices for transmission, indefinitely. He urged the committee to pay close attention to how transmission pricing unfolds at FERC.

The California legislature is considering municipalization proposals that would allow cities and counties to purchase electricity without buying wires or facilities, Coyle said. The proposal would require that each entity spend a fixed amount on conservation and renewables, which would bring environmental decisions back to the local level, he said. A lot of cities are looking seriously at this, according to Coyle; there's lots of support.

Canon Responds

Ken Canon suggested that PURPA-type machines have also contributed to the high costs of power, and he noted that new entrants are still fighting to get into that market. You seem surprised, he said to Coyle, about all of the support for community access to the power markets. Do you think when you add up all the individual costs of delivering power to customers, it will pencil out? Why do you think you can beat utilities at the utility game? Canon asked.

Individual customers won't be approached by the commodity sellers, Coyle responded. Enron is in California, and it hasn't approached small customers, he said. The cost of signing them up is prohibitive. The only way for residential customers to play is through aggregation, according to Coyle.

Golden noted that utility consumers used to be "ratepayers," but now are called "customers." The prospect of choice accounts for that change, he said. Without choice, you do become the repository for costs, Golden observed.

Tomasky: FERC's Giga-NOPR Will Hatch This Spring

Susan Tomasky, General Counsel at FERC, described what's going on in Washington, how the policy initiatives came about, and the related issues. She said there were two important points about the changes: they came about quickly, and they were driven by decisions customers were making to participate in the bulk power market.

The Energy Policy Act exempted new power market entrants from certain constraints and gave regulators the authority to order transmission access. From there, things happened very fast, Tomasky said. The cumbersome Section 211 process was a factor, and FERC kept getting hit with questions about open access and how it would be accommodated. Utilities also started to file open access tariffs, she explained.

In addition, utility mergers and utility power marketing activities were raising new issues, Tomasky continued. FERC struggled to deal with all of this on a case-by-case basis, she said. All of this momentum led to FERC's March 1994 Notice of Proposed Rulemaking (NOPR) to establish open access, she added.

Under the FERC proposal, every jurisdictional utility will file an open access tariff within 60 days, Tomasky explained. A critical point for the Northwest is that FERC authority does not extend to public systems, she added. We cannot make BPA file a tariff, she said; we don't have authority over BPA or municipal systems. FERC has proposed utilities not abrogate existing contracts, she said, but there have been many comments "to take another look" at that.

The rule calls for functional unbundling of transmission, Tomasky explained. In other words, a transmission owner takes service from its own system under the same terms it offers that service to others. The ISOs and power pools are a big part of the dialogue right now, she acknowledged, referring to the California order.

FERC is committed to stranded cost recovery, Tomasky said. It's part of the regulatory bargain even at the wholesale level. There will be fighting over the issue, she said, but we've seen some creative settlements on the gas side.

While the NOPR deals with the wholesale market, "we felt obliged to say what we thought" about the retail side, Tomasky acknowledged. FERC's jurisdiction is with interstate transmission and not with local distribution, she said, but transmission needs to work in a way that encourages competition. FERC had a very constructive dialogue with the National Association of Regulatory Commissioners (NARUC) recently on jurisdiction issues, Tomasky said.

We've had 52 open access tariffs filed since the NOPR was released, she stated. "Some applicants describe it as giving up early, others see it as getting in front of the game," Tomasky said. FERC will issue its final rule this spring, she concluded.

Alexanderson Responds

Alexanderson remarked that he recently came across an internal analysis of how Portland General should prepare for open access--the document was 10 years old, he said. He queried Tomasky on whether FERC was inclined to adopt regional proposals. What is the tolerance for different solutions? he asked.

Tomasky remarked that no other region has so much transmission owned by an entity "we don't control." So of course, we'd welcome a regional solution, she quipped. We realize that the wholesale market is small, and retail is the biggest piece of the puzzle, she added. The goal is to create an active market nationwide and a viable futures market, she said.

FERC is going to be very flexible with regional solutions, Tomasky continued. But we'd like to see power moving on as fungible a basis as possible--the answer has a lot to do with how states choose to go, she said. One issue FERC will consider is whether market power has been mitigated, Tomasky said.

Collins asked how the Sherman Antitrust Act might apply. Tomasky said it does, but the case law is very complicated. It's really unfortunate if we try to solve this through antitrust litigation, she added. There is a lot of latitude in how you do the analysis for antitrust and much debate within the justice community, Tomasky went on. There is no clear answer here, she concluded, and the courts will give us lots of latitude in making those decisions.

Pollock said that all Northwest transmission owners, including BPA, will file open access tariffs. What is your view of using the transmission system for collecting money to cover public purposes? he asked.

FERC has not historically imposed those charges, Tomasky replied. One reason we are anxious to draw the line between transmission versus local distribution is so local operators can impose what they want, she said. We have not proposed a transmission surcharge for stranded cost recovery, she said, but added that she could not say FERC would "never do that."

Nelson asked if Congress was likely to draw the jurisdiction line more clearly. It depends on who you talk to, Tomasky replied. The House is eager, but they haven't focused on this issue. They're in favor of competition and open access, but there's not much detail, she said. The Senate leadership is less interested, and the conventional wisdom in those circumstances is that it will lead to a stalemate, Tomasky concluded.

Drummond asked about FERC's views on ancillary services. The NOPR made it clear ancillary service will be required in comparability, but there will be some arbitrariness with pricing at first, she replied. These services don't have cost-based pricing historically; to make it workable, there will be some arbitrariness. There seems to be a list emerging of services we will require, she added.

Do you see a distinction between services related to generation versus transmission? Drummond asked. If we call an ancillary service generation-related, we don't have jurisdiction, Tomasky remarked, so we call those "near and dear to us," transmission-related. The gas industry figured it out, she said, and we're counting on the market to create a package of ancillary services.

Roy Hemmingway asked about FERC's view of disaggregating a vertically integrated system. Tomasky said market power is the issue. I wouldn't say the Commission lacks authority to order divestiture, she said, but that authority is totally untested. On the gas side, we came up with a code of conduct that was so onerous, companies decided to put themselves into separate operations. Clearly, it makes business easier, she said. Do we want to force it? We're not there yet, she stated in conclusion.

IN CLOSING

Hemmingway explained that each governors' representative was going to conduct a short public involvement process. We'll do it and report back to the larger group, he said. Each of us is in the process of designing a way to get public input for our exercise on the 29th, Hemmingway stated.

Etchart added that the first Montana meeting is next week. We've invited 30 or 35 people to Helena to talk about changes, ideas, and give us questions they want brought back here, he said. Kreidler said there would be seven or eight meetings in Washington.

Applegate asked about gathering information on subsidies in the power system. It's important we take up the issue early, he said, adding that it would be good to have the information before we do the template on the 29th. Pollock said he would work to compile the information; we can look most clearly at the Columbia River power system, he said. Applegate noted that conservation organizations are also working on compiling the information.

Alexanderson said the subsidy list should include ways the federal system is subsidized, such as no taxes and access to prime sites. Saven suggested the committee use the template or other model to organize a way to deal with subsidies. We could go around the table and get different views on what the subsidies are; I'm cautious of getting on that side track, he said.

Golden suggested the committee "pencil in" the meetings likely to happen so members could schedule other commitments. Collins said he would give the calendar some further attention.