Reports & papers Bonneville Cost Review (CR98-2)

Bonneville Cost Review Public Comment Meeting February 9, 1998 Council Conference Room, Portland, Oregon

Todd Maddock chaired a public comment meeting on the BPA Cost Review Management Committee's draft recommendations. Committee members Jim Curtis, Steve Hickok, and Mike Kreidler were also present. Twenty people presented comments; the audience was about 40.

Maddock welcomed those present to the first public meeting on the BPA Cost Review recommendations, and he offered the following background: The cost review effort was begun by the four Northwest governors, who asked the Northwest Power Planning Council to establish a cost-control forum to help BPA prepare for subscription. After meeting for about six months, the management committee released a set of draft recommendations. Public hearings will also be held Wednesday morning in Spokane and Wednesday evening in Richland; the close of comment is February 20. The management committee will hold its last meeting February 23, and the final cost review recommendations will be delivered in March to the governors, the BPA Administrator, and Congressional committees.

Jerry Leone of the Public Power Council (PPC) commended the management committee, saying the $159 million in proposed reductions "would go a long distance toward ensuring that BPA power is fully subscribed." She expressed concern about the feasibility of implementing the recommendations, which she said PPC views as a package, because some depend on actions by other state and federal organizations. Leone pointed out that none of the recommendations address fish and wildlife (F&W) spending, adding that the F&W program could benefit from the same management discipline, such as benchmarking, that is recommended in other areas. The recent Moss Adams report contains constructive recommendations about procurement for F&W, she stated. "We see a continuing upward trend," Leone said of F&W spending, and she said actions that would give the region "more biological bang for the buck" would be good for fish and for BPA's stakeholders and customers.

John Saven of Northwest Requirements Utilities (NRU) told the committee as BPA moves along its journey toward a competitive future, there are two questions: Where are we going? and How will we get there? He noted that the committee's objective is to ensure that BPA's costs are as low as possible, consistent with sound business practices, while enabling BPA to recover costs and offer power at rates that are below market. The question now is how much cost cutting is needed for BPA power to fully subscribe, Saven said, adding that any cuts must be based on "sound business decisions, not on desperation." He suggested that BPA adopt a first set of reductions, and if those are insufficient, "impose a second wave of more draconian measures."

"A glaring omission" is BPA's failure to address the General Transfer Agreements, which pay for transmitting power to customers over lines owned by other utilities, Saven said. BPA could lose "the confidence and likely the subscription" of its traditional customers, if it fails to address the issue, he stated. Saven said the proposals that deal with duplication between the Corps, the Bureau, and BPA, as well as opportunities to refinance debt, should be implemented as soon as possible. With regard to reducing corporate overhead and marketing, Saven suggested the savings might be overstated. He noted that there is no calculation of costs for Enterprise software that would be needed to effect the reductions. Small customers rely on BPA for quality service, and "turning off the lights on customer support" might not be the best strategy for retaining customers, Saven said.

The committee recommended eliminating the cost impacts of all subsidies, discounts, and cost transfers, and Saven said these need to be considered case by case. With regard to the low-density discount, some NRU members serve rural areas with as few as three customers per mile of line, and he pointed out that the benefits of "robust competition" will be mainly in urban areas. It doesn't appear that closing WNP-2 will reduce costs in the 2002 to 2006 period, and closure would reduce the amount of subscription power by 800 megawatts (MW), Saven said. There isn't enough Federal Base System (FBS) power now to cover existing regional preference loads, DSIs, and the residential exchange, he stated, and "shrinking the pot" of FBS resources further is "an invitation to litigation." In addition, Saven suggested that if a private buyer is found for WNP-2 power, the project's debt would no longer be tax exempt and could carry a higher interest rate. The WNP-2 recommendation should only be considered "as a last resort," he said.

I do not support eliminating conservation and market transformation funding, Saven concluded. If the states implement public purpose funding, it is fair to reconsider BPA's responsibility, he acknowledged, but BPA should not withdraw support unless other funding is in place.

Libby Henry of the Eugene Water & Electric Board (EWEB) said the cost review report contains recommendations that would affect programs that "are near and dear" to EWEB. She called on the committee not to eliminate market transformation funding. It is an effective investment, and market transformation needs regional cooperation, Henry said. The Northwest Energy Efficiency Alliance (NEEA) "has filled a void," and EWEB contributes to the organization, "even though we have taken load off of BPA," she said. If you must reduce BPA's contribution, don't do it until the states have acted to provide funding, Henry urged. She also asked the committee to hold off on its recommendations to cut legacy conservation and funds for renewable resources. Henry said "the portfolio approach" to renewables would allow customers to purchase green power, which she said is of interest in the community EWEB serves. The recommendations get at the fundamental purpose of BPA, she concluded. "Eliminating these programs does not make BPA a more attractive business partner; quite the contrary," Henry stated.

Jeff Shields of Emerald People's Utility District said he applauds the governors for the cost review, but is critical of both the committee and its recommendations. Shields said he chairs the Northwest Energy Coalition (NWEC) and is a member of the PPC executive committee. Both groups embrace a healthy and accountable BPA, and they want the benefits of the federal system to remain in the Northwest, he said. The cost review committee stated that its recommendations are consistent with the Regional Review, Shields said, but he pointed out that statement conflicts with the proposal to end funding for conservation and market transformation. The recommendations fail to look at subsidies for navigation, irrigation, and "other sacred cows," Shields added. Despite the committee's closed-door sessions, the Supply System had "fairly open access," he noted.

Shields called Recommendation 6, the integrated capital/asset management strategy, "smoke and mirrors." We can't borrow ourselves into prosperity, he stated, adding that the strategy could not be looked at as a short-term means of cutting costs. Shields questioned whether the committee adequately considered the cost and time frame for implementing Enterprise software, a part of Recommendation 8, and he expressed concern about "the high volatility" of variable rate debt proposed in Recommendation 12. Shields said he hopes the committee "is sincere" about putting WNP-2 to "a market test" since the recommendation "didn't exactly say that." As for finding new funding sources for renewables, he suggested that "we play the game fairly." We need to put all resources to a market test, including their capital costs, Shields stated.

The committee failed to recognize BPA's statutory obligation to acquire conservation, Shields said, adding that BPA's competitors, such as Enron, do invest in research and development and renewables. "If BPA is only a government power broker, if they're just there to be a better Avista or Southern Company," it raises the question of whether to privatize the agency, he suggested.

Is there a point at which if BPA can't provide public responsibilities, it should go private? Kreidler asked. BPA was created to serve the Northwest when other companies would not, Shields responded. BPA needs to go beyond what the private sector will do; it needs to add value to the customer "beyond the cheapest electron," he stated. Our task is to make BPA as competitive as possible, Kreidler said. Do you provide public purposes at any cost? he asked. Shields said he is concerned about removing funds for conservation and market transformation while ignoring subsidies for irrigation and retaining WNP-2.

K.C. Golden of the Washington Department of Community, Trade and Economic Development said the vast majority of the savings the committee identified would strengthen BPA's bottom line without compromising its mission. "But BPA can't survive on the strength of the bottom line alone," he said. Golden pointed to a time in the 1980s when BPA tried to identify its "competitive handicaps." It turned out that these were the things some people in the region thought justified the agency's existence, he observed. The more BPA acted like its competitors, the more people questioned "what does the federal government brings to the party," Golden said. What place is there for laws like regional public preference and what justifies them in a competitive era? he asked. "In a word, stewardship," Golden stated.

Golden said that energy efficiency is BPA's only successful resource acquisition. The budget for conservation and market transformation was "explicitly and painstakingly" agreed to in the Regional Review, he said. Golden questioned whether dropping this funding would actually help BPA's competitive position. It would be a shame to lose this investment and gain nothing in competitiveness, he commented. Golden also denounced a recommendation to cut the Council's budget. "If you want to see what could have happened to the region in the absence of the Council, look to TVA," he said. The Council will become more valuable in the future, Golden stated, adding that "the goals of the Northwest Power Act are as important today as the day they were written."

The state of Washington understood that the committee was to look at achieving efficiencies "with a set of ends in place," Golden said. In contrast, the Regional Review was set up to guide policy, he stated. If the state had realized that policy was to be revisited in the cost review, "we would have insisted on a broader policy group," Golden said. We saw this forum as an opportunity to focus on management issues, he commented, adding that by going beyond that charge, the panel has jeopardized the success of its recommendations.

Steve Weiss of NWEC said the committee made recommendations that "redefine BPA's organic purpose." The Northwest Power Act encourages conservation and renewables and the protection of F&W, while providing an adequate and economic power supply, he said. The cost review was "to meet, not redefine" these goals, Weiss stated. It is a mistake for BPA "to forget what it is," he continued. People in the Northwest want BPA to bear a large responsibility for conservation and for F&W, Weiss said. We don't believe that abandoning those goals is politically sustainable, he commented. "If BPA continues down that road, it will lose," Weiss stated.

"Why weren't other sacred cows -- like irrigation and navigation -- put on the table?" Weiss asked. "The panel's biases are not difficult to spot," he added. The committee thinks of conservation as expendable and recommended ending the NEEA contribution, Weiss said. All of the region's utilities are contributing to NEEA, he noted. If BPA drops its part of the funding, it will mean "a spiral to the bottom," Weiss stated. He said the funding should be cut only if another secure source of money is obtained. The committee should have urged BPA to work with utilities to see why they have not spent conservation funding, rather than trying to cut it, Weiss continued. "Reneging on a commitment to public purposes in order to offer below-market rates and subsidize large industries is an insult," he said.

If BPA is selling power below market, the utilities should be required to meet the standards of the Regional Review with regard to conservation and public purposes, Weiss urged. He disagreed with the recommendation to cut the Council's budget, adding that there is nothing to indicate that less analysis will be needed. The Council has the credibility to provide "neutral data," Weiss said.

Rachel Shimshak of the Renewable Northwest Project said she agrees with a lot of the ideas, particularly that BPA focus on "its roots, including its environmental responsibilities." This goes beyond fish, to keeping the system clean and efficient, she said. This is important to preserving the quality of life in the Northwest, "otherwise BPA is just another marketer," Shimshak commented. Recommendations 2 and 5 "go too far," she continued. They are inconsistent with the Regional Review and the Northwest Power Act. "We worked hard to compromise in the Regional Review," Shimshak said, suggesting that the recommendations would breach trust and cut apart the balance achieved in the Regional Review.

Recommendation 5 violates the agreement made in the Regional Review with regard to renewables, and it wipes out the budget for data collection, she said. Renewables provide the region a way to respond to global climate change, and they help meet demand in the region for green products, Shimshak stated. She also said she disagrees with ending funding for market transformation. "These are fundamental components of BPA's mission," Shimshak concluded. She urged the committee to align the recommendations with those from the Regional Review, stating "we worked hard to find consensus."

Craig Satein of the Housing Authority of Lane County called the recommendations to cut funding for conservation and renewables "short-sighted, irresponsible, and mean-spirited." The Regional Review called for a system benefits charge, and Oregon's governor identified conservation as a goal of the Regional Review, he said. Does the cost review expect us to ignore this? Satein asked. He suggested that if the committee supports "marginal funding" for public purposes, it should also look at "fat cats," such as irrigation subsidies and the life-cycle costs of WNP-2.

Satein explained that in Lane County, the housing authority and utilities have been partners in providing weatherization and conservation assistance to low-income households. "BPA has been a key player," he added. The partnership has enabled the housing authority to augment federal grants, Satein said. He added that anything short of a three-year extension for legacy conservation contracts "is a shameful loss." Satein urged the committee to revisit its recommendations. "May we all be remembered for our dutiful discharge of public responsibilities," he concluded.

Kris Balliet of Save Our Wild Salmon questioned recommendations for cutting costs in conservation programs. She said Northwest citizens have clearly said they want to save wild salmon, and "they expect BPA to do its part." Referring to recent reports of inefficiencies in the F&W program, Balliet said the agency should stop spending money in ways that are "at cross purposes."

The idea of cost-cutting is not new, Scott Brattebo of PacifiCorp said, but the committee's draft recommendations represent the first time the region has undertaken "a comprehensive and systematic cost review." The review comes at "a critical juncture," he said, and the recommendations will provide a starting point in what should be a continual process to align costs with the competitive environment. Brattebo recommended that the review be formalized as an annual process, and he said the Council is the logical place to site such a responsibility. "Without followup, many of the recommendations will be forgotten," he predicted.

Some of the recommendations would require legislation, Brattebo noted, and he suggested the report include legislative recommendations. These could address such issues as replacing residential exchange provisions in the Northwest Power Act with a right to purchase federal subscription power, repeal of BPA's responsibility to acquire resources, and new rules for BPA personnel and administrative functions, he said.

Brattebo cautioned that if BPA's costs are above market, it cannot retain its traditional customers. As utilities begin to buy from other sources, there could be "a death spiral" for BPA, he stated. BPA must return to its core function of marketing power from federal projects and scale back in the other areas the agency has been asked to take on, Brattebo said. The IOUs are "no strangers" to cost-cutting, he concluded, adding that PacifiCorp is planning a 7 percent reduction in its work force.

Kreidler asked Brattebo's opinion on taking WNP-2 out of the federal subscription process, which would reduce the amount of power available. Do you see this as diminishing your opportunity to subscribe, given the priority set out in the Regional Review? he asked. I would congratulate the committee for recommending that WNP-2 be subjected to a market test, Brattebo responded. As for the availability of residential exchange power, "if there is not enough to go around, some allocation will need to be in place so all of those who paid for the system will get the benefit," he said.

Angus Duncan of the Columbia/Pacific Institute congratulated the committee on addressing "unmentionables," such as WNP-2 and BPA's relationship with the Corps and the Bureau. He said he has "a quarrel" with the draft report where it "crosses the frontier" from agency accountability and management into policy choices. Where the panel crossed over the border, "it was politically hazardous," Duncan stated. In particular, he said the committee's recommendations on the Council's role and on conservation and renewables "are not policy neutral." Once you crossed into the policy area, the report was selective -- if conservation and WNP-2 are up on the table, the other choices should also be there, Duncan stated.

A regional debate on "what BPA should do" is in order, he said. Your report raises questions that should be finished, but "let's debate this openly," Duncan added. He suggested that an inventory of public purposes ought to be compiled and debated, with regard to which to take up and which to discard. Duncan asked that action on Recommendations 2 through 5 and 7 be reserved, but that the others move forward. He also said that F&W expenditures should be subjected to an independent cost review.

Kreidler asked what form the debate on public purposes should take. Duncan said the Council is in the position to conduct such a debate, and he added that BPA needs to be a party. BPA's participation should not be "in a passive role," Duncan said. "There needs to be a more pronounced exercise in leadership out of BPA," he stated.

Some commenters have asked us to follow the recommendations of the Regional Review, Curtis said. How does that square with what you are suggesting? he asked. The Regional Review is "the default position," Duncan responded. We are far from having a clear mandate, he said. Neither the Regional Review nor the cost review put the whole list -- low-density discount, irrigation subsidies, conservation -- side by side, Duncan observed.

We were impressed with the report, according to Noel Shelton, representing Alumax, Columbia Falls, and Vanalco Aluminum. BPA needs to reduce its costs to be a viable power supplier, he said, adding that this review should be the start of a broader look at BPA, including its role, the transmission business line, and F&W costs. Shelton said BPA's original purpose has been "blurred," and the agency should once again focus on the efficient sale of low-cost federal power. He said he agrees with the committee's recommendation on capital/asset management, calling it "an excellent blueprint" for moving the agency toward efficiency, and with the recommendations on cutting the costs of marketing, overheads, and the Council.

The Regional Review said the states should impose "a public purposes tax" to fund conservation and renewables, Shelton said. The Northwest has purchased many noncost- effective resources because the costs could be spread across the region, he observed. Funding for public purposes should be moved to the local level, Shelton said. He also stated that WNP-2 should meet a market test "or be closed," and that making investments in Corps and Bureau facilities should be expected to increase their productivity and reduce maintenance costs. Shelton recommended that the "refunctionalizing" of costs from the power business line to the transmission business line remain a decision to made in BPA's rate case.

Shelton said that while customers are obliged to fund F&W programs, the agencies and tribes are also obliged to provide full value, and he urged continued examination of F&W spending. BPA pays too much to manage its power supply, Shelton stated. "BPA has a department of people watching other agencies who have their own people watching the people who actually do productive work," he said. The arrangement should be changed, and that could lead to savings beyond the $48 million recommended by the committee, Shelton suggested. In conclusion, he recommended that the cost-control effort consider BPA's basic structure. The authority to incur costs and the obligation to pay them must "reside under the same roof," Shelton said, adding that he hopes the committee's recommendations lead to a complete review of BPA by a professional management firm.

Marcia Anderson of the Oregon Sierra Club said cost cuts at BPA should not come at the expense of the agency's core mission. The committee acknowledges that BPA has a statutory responsibility to encourage conservation, yet the recommendations say to cut it, she indicated. The cuts should be within the law, Anderson stated, adding that the Sierra Club would strongly oppose any legislation aimed at cutting conservation, renewables, or F&W funding. "Why should BPA exist if it does not provide these things?" she asked. These are not "frills" -- they are why BPA exists, Anderson stated.

Anderson noted that the recommendations say the states should fund public purposes. Our representatives worked on state restructuring legislation last session, but it failed to pass, she said. There is no guarantee that the 1999 session will come up with anything either, Anderson pointed out. BPA must not relinquish responsibility for these activities without a clear mechanism for continued funding, she said. These are programs best handled by BPA on a regional basis, Anderson added. She also said her organization would oppose increasing the capacity at federal dams without an analysis of the impacts on F&W. "Dams are not just energy machines; they kill fish," Anderson said.

Anderson suggested that BPA could cut costs by ending irrigation subsidies and charging navigation and irrigation users for revenues lost due to their operations. Water that is taken from the Snake River does not produce power downstream, she pointed out. Anderson called the recommendations to cut conservation and renewables "short-sighted" and an abrogation of BPA's responsibilities under the Northwest Power Act.

Ken Canon of the Industrial Customers of Northwest Utilities (ICNU) said his organization has been a strong supporter of BPA cost control. We have said there is a cap on what BPA can charge customers, he added. He applauded the committee for moving beyond reducing the rate of growth in BPA's budget to recommending cuts. We support the recommendations, Canon stated. BPA does need to get back to its core mission and to redefine its relationship with the Corps and the Bureau, and with its customers, he said. Canon pointed out that the recommendations are somewhat circular: embedded in the recommendations is an assumption that BPA will be fully subscribed, but in order to get full subscription, the cuts need to be made. Customers cannot count on BPA being able to implement the entire $159 million in recommended cuts, he said, suggesting that other efficiencies need to be sought out.

Canon reminded the committee that the Regional Review recommended establishing a customer advisory committee to give customers more ownership in decisionmaking. The challenge in the future is to keep BPA focused on cost control, he said, even when BPA's rates are below market. Canon said acquiring new resources, including conservation, should not be a BPA function in the future, and the system benefits charge recommended in the Regional Review would move the responsibility for funding public purposes to the local level. Failure of the states to enact such a charge is an indication of how much public policy support there is for these activities, Canon said. He also noted that ICNU proposed restructuring legislation in both Washington and Oregon in 1997 that included a 3 percent system benefits charge.

Kreidler asked Canon for his thoughts on how the customer advisory committee should be constituted. Canon said he had no specific suggestions, but that it is time to start thinking about implementing that recommendation from the Regional Review.

The Oregon League of Women Voters has been a strong supporter of conservation, renewables, and F&W funding, according to Adele Newton. She said her organization finds the recommended cuts unacceptable for meeting BPA's public outreach and communications responsibilities. "BPA is not just another utility; it is a public agency with public responsibilities," Newton stated. She also pointed out that increasing the capability of the hydro system could increase problems for F&W. "We do not oppose cost-cutting per se, but we don't see these as long-range solutions," Newton concluded.

Alfred Canada of Grants Pass, Oregon, "a long-time advocate of large-scale photovoltaics," said he wanted information on the study used to estimate future market prices. He questioned the cuts in funding for renewables, and he said "natural gas does not have a prayer" of competing with BPA's goal of two cents per kilowatt-hour. Canada asked why the committee said that BPA would not be engaged in acquiring additional renewable resources. Where does that come from? he inquired, adding that the Regional Review had not made such a recommendation. Canada questioned whether BPA could cut O&M and still gain efficiencies in "the aging hydro facilities." He also asked if there is a report that indicates whether BPA is restricted from acquiring renewables in the future.

Margie Gardner of the NEEA explained that the goal of market transformation is to bring energy-efficient products to market. Markets cross utility and state boundaries, she pointed out, and that is one reason NEEA is regional. The recommendation on market transformation does not adhere to the compromise in the Regional Review, Gardner added. She said alternative funding does need to be found for market transformation, but "it may take time." Even if we are successful in the 1999 legislature, it may take time to implement new funding sources for market transformation -- "momentum could be lost," Gardner said. Keep BPA funding in-tact post-2001 as a contingency fund, she urged.

The panel's recommendations on public purposes "shoots beyond the mark," according to Jason Eisdorfer of the Oregon Citizens Utility Board. Don't eliminate BPA's conservation funding until the states enact a 3 percent system benefits charge, he advised. He also questioned the panel "going after" conservation and renewables even though they are set out in statute. Those are policy questions "that are not appropriately addressed behind closed doors," Eisdorfer said. The public interest is part of BPA's core function, he stated. A reduction in spending on conservation and renewables "won't amount to huge savings," and he said that removing that recommendation from the committee's report "would help secure BPA's political position." Eisdorfer suggested that customers support BPA because it does more than "squeeze as many kilowatt-hours out of the river" as possible.

Jay Formick of Oregon Heat said BPA has a statutory obligation to cultivate conservation and renewables. The federal hydro system is "a treasure" in the region, and public purposes are part of the treasure, he stated. "Let's not dump it under the banner of competition," Formick urged. One of BPA's most important functions is to invest in public purposes that other utilities would ignore, he continued, and some arguments for selling off the system "would gain credence" if BPA no longer makes that investment. "Let's not hand them any ammunition," Formick said of political interests that would like to sell or privatize the federal system.

Low-income weatherization providers in Oregon are depending on BPA's investment to keep energy affordable, Formick said. He also said the idea that funds would be left over in BPA's conservation legacy contracts is not true. The extension of the commitments in these contracts is an important part of providing services, he said. "I would hope that BPA will follow through on the commitments it made," Formick stated.

Alan Larsen of wind project developer SeaWest Energy said he wanted to offer a perspective from a company "that does business with BPA." The premise is that BPA does not have a guaranteed customer base and that the way to compete is to cut costs, he said. Carrying out Recommendation 5, which cuts support to renewable projects, would undermine BPA's credibility as a business partner, Larsen stated. In a voluntary, competitive market, is it wise to put BPA in the position of an entity "that can't keep its promises?" he asked. In addition, BPA has a statutory obligation to support conservation and renewables, Larsen said. The recommendation would end up wasting money and time in the defense of litigation over BPA violating its statutory mandates, he added.

Larsen pointed out that if BPA does not participate in the "green market," it would not have the opportunity to offer a product that could be sold "with a mark-up." Utilities are saying that they hear that customers want this product, and the recommendations would keep BPA out of that market, he said. Recommendation 5 "is counterproductive to the goal of cost-cutting," Larsen stated. Renewables are in the law, and it's a product line that can make BPA money, he concluded.

Laura Culberson of the Oregon State Public Interest Research Group said recommendations that would eliminate public purpose spending are detrimental to customers and the environment. "The committee's recommendations undermine the goal of a clean energy future for the region," she said. "It sends the message that even an agency with the statutory charge to do so, will abandon conservation and renewables at the threat of competition," Culberson said. It adds to the fear that competitive markets in electricity will lead to increased consumption of "dirty, fossil fuels," she stated.

Members of the BPA Cost Review Management Committee, created by the Northwest Power Planning Council and the Bonneville Power Administration, are: Todd Maddock, chair; Curtis Bostick, Joyce Cohen, Chuck Collins, Jim Curtis, John Etchart, Steve Hickok, Mike Kreidler, Robert Lane, Rosemary Mattick, and William Vititoe.

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