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Regional Review

Comprehensive Energy Review
Steering Committee

Thursday, December 12, 1996

Ridpath Hotel, Spokane, Washington

THE FOUR NORTHWEST GOVERNORS accepted the final report of the Comprehensive Energy Review steering committee for restructuring the Northwest energy system. All committee members were present. There were approximately 50 audience members.

THE FINAL TEXT of the Steering Committee Report to the governors is available at Document Access for reading and download.

Next Meeting: None.

OPENING REMARKS:

Washington Governor Mike Lowry welcomed the audience and thanked everyone who worked on the Comprehensive Energy Review. He expressed appreciation for the "amount of time and seriousness" applied by all involved, especially the steering committee.

The Review in Context

Steering committee chair Chuck Collins began his presentation by noting a critical issue that Bill Drummond had raised during the committee's deliberations. That is, if people don't understand that the future will be different from the past, and if they don't understand that the status quo is changing rapidly, a lot of the review's report won't make sense, Collins observed.

He showed a slide on "BPA's Position in the Market" from 1980-2025. In the 1980s, Collins said, BPA's costs rose and then fell, when the WPPSS plants were shut down. With combustion turbines powered by inexpensive natural gas, the market today is cheaper than BPA, explained Collins, and from 1995 to 2005, market prices are likely to be lower than BPA can charge. He noted this will be true even though utilities have insisted that BPA's costs be kept as low as possible.

After the "difficult middle period" from 1995 to 2005, Collins suggested the cost of BPA power will level off as the WPPSS debt is paid off. The part of the equation that is rarely talked about, he continued, is after 2005. If there are low gas prices, market costs are likely to go above the cost of BPA power, and if there are high gas prices, the market could be quite a bit above BPA costs, Collins explained. Then we would have something that is very attractive, he pointed out.

The concern, he continued, is that in the year 2000, "the first of the baby boomers will get their AARP (American Association of Retired Persons) cards," and the federal government will have to deal with what to do about Medicare. The problem is, according to Collins, that "we are the renters of the system, and our landlord is coming into a financial crisis."

It will be a difficult period, Collins predicted, and we'll have to minimize costs and find a way to protect the system out into the future. Otherwise, we could lose this economic engine we have in the Northwest, he said.

The review's report is a set of strategies to get through that difficult period, Collins explained. It's about unifying our position to present a united front against this threat, he added. Collins noted that recently Senator Mark Hatfield had told the committee that other interests are looking at the Northwest system -- what we have is no national secret, he said.

Collins introduced four steering committee members to present the report's recommendations in the four main subject areas.

Canon on Competition and Consumer Choice

Ken Canon paid tribute to the hard work of the Northwest Power Planning Council staff during the review and noted the "great contributions" from the public in the hearings and work groups. In establishing the review, the governors recognized the changes occurring in the electricity industry, he said. Three states have already enacted customer choice legislation, federal legislation has been proposed, and the topic will be an active issue in the state capitals and Congress, Cannon pointed out.

The committee established these goals for competition and consumer choice:

? Provide consumers more choices.

? Reduce power costs.

? Protect small, residential, and rural customers.

? Maintain public purposes in an increasingly competitive electricity marketplace.

The committee recommended these "means":

? Consumers may choose electricity supplier by mid-1999. To do that, Canon said, there needs to be resolution of stranded cost issues and any outstanding contractual issues, unbundling and cost-based pricing of electricity services, exploration of pricing options, and pilot programs to demonstrate aggregation for small commercial and residential consumers.

? Consumer protection programs to ensure reliability, accountability, and fair treatment for all customers.

? State regulators and local utility boards to implement customer choice.

? Market access directly linked to implementation of public purposes.

There is much to be accomplished to get the benefits of competition to the ultimate consumers, and that is the task ahead, concluded Canon.

Shimshak on Public Purposes

It has been an honor and a privilege to serve on the steering committee, said Rachel Shimshak. The people of the Northwest value an efficient system, affordable energy prices, clean air, and maintaining the quality of life, she said. Competitive pressures present the risk of sacrificing long-term benefits to short-term market decisions, Shimshak stated.

Goals for public purposes include:

? Maintain a commitment to conservation, renewable resources, and low-income energy services in a way that is compatible with a competitive market. We want to overcome market barriers to these activities, she said.

? Maximize local control of investments for public purposes. Our proposal provides for regional goals, but flexibility for state and local regulators, Shimshak said.

? Secure low-income energy programs.

The committee recommended these "means":

? A regional investment of $210 million annually for public purposes (about 3 percent of electricity services revenues, based on 1995 revenues). That's one mill per kilowatt-hour, or one-tenth of a cent, Shimshak noted.

? Decentralized implementation. For example, the committee made provision for customers that use large amounts of electricity to be able to credit their cost-effective conservation investments toward their share of local conservation and weatherization investments, she said.

? State and local regulators create a collection mechanism for public purposes funds. How the charge is collected should be competitively neutral and as equitable as possible, Shimshak said. The minimum investment standard should take effect in mid-1999, at the same time retail access occurs, she said. Utilities should be moving on plans to meet the standard as soon as possible, Shimshak indicated. If utilities take action by mid-1999, good, and if they don't, a distribution access charge would be imposed as a backup, she said. Utilities can aggregate with other utilities to meet the standard, Shimshak noted.

? Creation of a Universal Electrical Service Fund in each state. She suggested adopting energy charges at the distribution level to ensure stability of the fund.

As I prepared these comments, I asked other committee members their views, Shimshak reported, and one said, "Who would have thought we'd come together around public purposes?" We're not done, we're at the beginning, and the hardest work is yet to be done, she stated. I hope the governors use the momentum created by the energy part of this document to solve outstanding fish issues so we can have a truly comprehensive program, Shimshak concluded.

Saven on Federal Power Marketing

John Saven noted as goals for this topic:

? Retain the benefits of the Northwest energy system. We recognize in the long term, the hydro system looks very attractive, he said.

? Improve the ability to repay BPA debt. BPA has not defaulted on Treasury payments for 13 years, Saven noted. Customer contracts expire in 2001, he pointed out, and between 2001 and 2006, BPA owes Treasury over $2 billion. We have a plan that can deal with that issue, he added.

? Meet fish and wildlife obligations. We didn't deal in depth with fish and wildlife funding, or with governance on fish issues, Saven reported. But, he stated, all the steering committee members recognize that fish and wildlife restoration and mitigation constitute a strong obligation that exists. None of the report's recommendations do anything to diminish that, Saven added.

? Define BPA's role in the competitive marketplace. In a competitive environment, the role of BPA and of the federal government need to be agreed to by the players, and we think we've achieved that, said Saven.

The committee recommended these "means":

? Creation of a subscription-based marketing system. Customers would sign up to pay at cost, and in the short term, costs may be above market, but in the long term, they will fall below, he said. We assumed the size of the Federal Base System is fixed, and that growth would be done by bilateral acquisition decisions between BPA and customers, Saven explained. We wanted to establish incentives for long-term subscriptions, but also provide an opportunity for those utilities that want to go short by allowing five-year contracts with an option fee. We also allowed resale rights for lost load and set up a customer advisory board, he reported.

? Honoring BPA's historic link to public power. Public power goes first in the subscription process, followed by residential and small farm customers of IOUS, the DSIs, other in-region, and then out-of-region, Saven explained. Small full-requirements utilities representing up to 1,000 average megawatts of BPA load can have their load growth served by BPA at cost, he noted. That covers 90 smaller systems, Saven pointed out. If utilities leave the system and return, they return at market-based rates, he added.

? Sharing market benefits with federal taxpayers. We established a mechanism to share benefits with the Treasury if BPA costs are below market, Saven said, adding that the document emphasizes keeping BPA costs down. The report recognizes there may need to be a mechanism for stranded cost recovery, he added.

? Continuing the Northwest contribution to salmon recovery. We recognize that additional fish costs may be incurred in the future, and we need a flexible but detailed five-year budget, Saven stated. We need to tell customers what their obligations will be, he added.

? Returning BPA to its historic market role. We recognize BPA should not be an aggressive marketer and recommend that BPA prepare a plan consistent with that limited role and present it to the oversight body, if the governors decide to create one, he said.

There is a lot of interest and enthusiasm in the topic of federal power marketing, and I encourage you to keep the momentum going, Saven concluded.

Drummond on Transmission

Of all the areas in the review, transmission generated the least controversy, Bill Drummond stated. That was due to the fact that a lot of the transmission debate started before the review did, he said. Drummond noted that in the Energy Policy Act of 1992 Congress established open access and declared that transmission would be treated as a common carrier. Congress left the matter of offering retail access to customers up to the states, he added.

We've had regional discussions about transmission, said Drummond, noting that the Pacific Northwest Utilities Conference Committee (PNUCC) had a process that the review was able to join. "That was very, very useful, and we owe a debt of gratitude to them," he said.

Transmission goals identified by the review were:

? Ensure competition via equal access.

? Improve reliability and accountability. There's a concern that in a competitive environment utilities might not spend the money to maintain reliability, and also the question of what will happen when a lot of new players begin to use the transmission lines, he noted.

The committee recommended these "means":

? Separation of generation and transmission. This is to prevent owners from putting generation costs on transmission and thus making their generation more attractive, Drummond said.

? Creation of an Independent Grid Operator (IGO) to maximize use of the transmission system. It would be a non-profit entity, he explained, with the goal of getting as many transactions on the lines as possible. The IGO wouldn't own any transmission, at least in the beginning; it would manage transmission, Drummond said. There are many issues unresolved about the IGO, including management, pricing, and technical issues, he added.

? Encouraging BPA participation in the IGO. Drummond noted that a group of IOUs formed an IGO, known as the IndeGO, while the review was taking place, and that some publics and BPA have joined.

Some people think that separation of BPA's generation and transmission requires legislation, so that "is problematic," Drummond reported. There is also the question of the extent to which the IGO will be able to regulate what goes onto federally owned lines, he noted. In addition, there is the question of, if the Bonneville fund is split into generation and transmission, how we make sure we don't jeopardize the security of the WPPSS debt or make it impossible for BPA to pay its obligations, Drummond added.

These are a number of unresolved issues with respect to the IGO, and we are moving to resolve them, Drummond stated. Transmission was one of the most successful elements in the review, he added. Thanks for the opportunity to participate, Drummond concluded.

The General Makes the Handoff

Collins, dubbed "the General" by many during the process, told the governors, "we've achieved a consensus." It's not a comprehensive consensus because it doesn't include fish and wildlife, he added. Those issues need to be dealt with, Collins stated.

He thanked the staff of the Northwest Power Planning Council and the governors' representatives. Your representatives have been supportive and candid, and they've represented you well, Collins observed.

This is a world-class economic asset we have in the Northwest -- the work of "political visionaries from FDR to Hatfield," Collins stated. It's unique in the world, and we need to preserve it, he said. That system is worth all the difficulty we've gone through during this process, and all the pressures you'll face in the future, Collins told the governors.

In the comprehensive review, these 14 people "did something remarkable," he added. They debated the problem, had 29 full days of committee meetings, and held hundreds of meetings with the public, Collins said. The steering committee recognized that it had to find common ground, and the common ground was an uphill climb, he said.

Because we sought consensus, we only took one vote, and that was when we adopted this report, Collins explained. These 14 people made this possible, and as a result of their efforts, you have "as good an amount of consensus as possible," he stated.

You will be lobbied intensively by the members of some constituencies, Collins predicted. The support for these recommendations is broad, but you'll have to hang onto this, he continued. What you have is as good a deal as will be possible, Collins said. The result you wanted has been achieved, he stated.

I urge you to stay in the game -- to stay around and carry through the transition, Collins said. We need your political leadership, he added.

It's the end for me, but for you, it's the beginning, Collins told the governors. Keep the momentum going, he urged. Most of the "giants" are absent. Now the giants are the governors -- "you need to be there," Collins stated.

It's been an honor and privilege for me. I think we've got something very good here, Collins concluded.

The Governors Respond

Mike Lowry of Washington

Everyone has said what a great job you've done -- there's true consensus there, Lowry told Collins. The report "clearly moved in response to the charge we presented to the committee," he added.

I was delighted to hear the many remarks acknowledging that while your work concentrated on energy, you also recognized the importance of the biological health of the river, fish and wildlife, and the need to develop a regional governance structure to carry that forward, Lowry stated. Committee members were correct that it was not their charge, but your recognition of how critical fish and wildlife is to the success of the review is important, he added.

I spent 10 years "in the other Washington" as a member of Congress, and there is a danger of what could happen to the Northwest if there is no unified front, Lowry noted. The danger, if anything, is understated, he said. People in other parts of the country don't understand why our power rates are so low, Lowry continued. The unanimity we've had with BPA in the past is more necessary now than ever, he stated.

Your work on power and BPA's financial stability is very important, said Lowry. We must move ahead on more effective river governance, he urged. The four states, the federal government, and the tribal governments are so important in finding a structure that will work, Lowry added. We must find a better solution on governance, and we need to move on that, he stated. We must review the costs to fish of the other uses of the river and lay those out, Lowry recommended.

The state of Washington is committed to the transition process, Lowry said. He noted that while he is leaving office, some of incoming governor Gary Locke's transition leadership was present. Washington will stay committed to carry forward this work, Lowry stated. I accept the report and say thank you, he concluded.

Phil Batt of Idaho

Governor Phil Batt of Idaho called the review's report "interesting and well presented." Congratulations to those who put it together, he said.

"You picked through a land mine of controversial things," and we need to proceed with your outline, said Batt. We governors won't be able to isolate this from fish and wildlife and river governance, as you could, he stated.

We'll take your work and discuss it in the states, Batt said. The federal government and the tribes need involvement to a degree, but the role of the states is the key one, he stated.

We need to keep this forum going, continuing to emphasize state participation, Batt said. We must continue with this forum or a similar one, he urged, thanking the committee for its work.

Marc Racicot of Montana

I've followed this odyssey with great interest from Helena, reported Governor Marc Racicot of Montana. "The future is now" in Montana, he added, pointing out that the state's largest industrial customer, Columbia Falls Aluminum, an historic BPA customer, is now buying its power from Enron and PacifiCorp. Our universities are being approached by independent power brokers, and the state government buys natural gas from an independent supplier and saves a lot of money, he said.

"Thanks for your superlative service to the Northwest," Racicot told the steering committee. Your recommendations will be the guiding influence for the region as we transition to a market-reliant electricity business, he said.

We need to emphasize the many things we have in common, not the few things that divide us, Racicot counseled. Your recommendations are a carefully drawn set of compromises, and I take seriously your admonition that your work should be viewed as a whole, he stated. I want to especially thank "General Collins" for his superb leadership skills, said Racicot.

The steering committee recommended that the governors reconsider river governance, he noted. I am a strong believer in the region's ability to solve its own problems, so "count me in among the home rule advocates," Racicot said. I am unsatisfied with the fish and wildlife results, he continued, and I intend to redouble my efforts to ensure there is accountability for fish and wildlife spending. Accountability has been the missing ingredient in the past, Racicot stated.

Some customers in Montana are already benefiting from the competitive market, but we need to ensure that rural customers also benefit, said Racicot. We must have an orderly transition to competition and protect against market abuses, he added. The states must approach the date to allow retail access together, Racicot urged.

As for public purposes, you were wise to allow flexibility and to let local providers make most of the decisions, he suggested. Funding mechanisms must be market-neutral, Racicot added.

Your federal power marketing recommendations recognized the need to stabilize BPA through the subscription process, he said. Customers must be willing not just to buy when power is a bargain, and they must be willing to assume more of the risks of the system, Racicot stated. We want to keep the assets of the Columbia and Snake rivers in our hands, and that may happen only if the subscription process succeeds, he suggested.

The Transition Board is an essential next step, Racicot stated. The role of BPA in a competitive market mustn't distort developing markets, he said. This will need a close look, and BPA must continue to work to cut costs, Racicot added.

Your transmission recommendations make very good sense, Racicot told the committee. We have a world-class transmission system. We need to manage it to ensure reliability and efficiency, and it must be available on an equitable basis, he said.

You've done a good job to move the ball forward -- there is much, much more work to be done, stated Racicot. We will accomplish for this region what we believe we can accomplish, he stated. I'll expend the energy to make sure your work will benefit the Northwest, Racicot concluded.

John Kitzhaber of Oregon

The comprehensive review shows that those with conflicting points of view can get together around a table and work together for a good result, said Governor John Kitzhaber of Oregon. He noted he had two goals a year ago. The first was to ensure that the federal assets of the power system continued to be devoted to the people of the Northwest. That means BPA needs to have sufficient revenues to be able to cover its costs and carry out its responsibilities, Kitzhaber said. And we have to ensure BPA is not so high-profile in the market that it attracts attention outside the region, he added. The steering committee recommendations accomplish those objectives, and I pledge my efforts to implement them, he said.

If we can put BPA on a sound financial footing, that will help fish and wildlife efforts, Kitzhaber said, adding, if BPA is in financial difficulty, it's a great threat to fish and wildlife funding. There are some who think that the review's report did not do enough for fish, he acknowledged. My administration will deliver on river governance and fish and wildlife issues within all the other forums available to me, Kitzhaber promised. You can't do it in a vacuum, he suggested. You have to do both together, Kitzhaber said.

My second goal was to ensure that public benefits are funded, stated Kitzhaber. Your recommendations provide a broad outline for this, and are consistent with the principles I've issued on restructuring, he said.

Parts of what the review has accomplished are based on a fragile compromise, Kitzhaber observed. If we want to hold onto the system we have, we need to act as one in dealing with the federal government, he suggested. Presenting a unified front is essential, Kitzhaber stated, adding, "you've provided an excellent basis for doing that."

A year ago, there was skepticism about whether we could build a consensus on these issues, said Kitzhaber. You've done that, he stated. I pledge my efforts to see this become a reality, Kitzhaber concluded.

IN CLOSING:

Governor Lowry thanked the other governors for their leadership.

After the meeting, the governors appointed their representatives (John Etchart-Montana, Roy Hemmingway-Oregon, Mike Kreidler-Washington, and Todd Maddock-Idaho) as the Northwest Energy Review Transition Board and asked them to submit a draft strategic work plan for implementing the steering committee's recommendations by mid-February.

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.