The Northwest Energy Review Transition Board presented a revised contingent cost recovery proposal and indicated the next step is to see how it meshes with BPA’s soon-to-be-announced subscription proposal. All members were present. The audience was about 35.

HEADLINES______________________________________________________________ 

Federal Power Act Consultations Are Moving Right Along..........................................p. 1
Comment Review of Last Month’s Contingent Cost Recovery Proposal.....................p. 2
Board Proposes Revised Contingent Cost Recovery Proposal.......................................p. 2
A Flurry of Questions and Comments..............................................................................p. 4
Next Step: Waiting for the Subscription Shoe to Drop..................................................p. 8

ORDER OF BUSINESS___________________________________________________

Federal Power Act Consultations Are Moving Right Along

Staffer Bill Hannaford said the Transition Board had asked staff to look at what the effects of applying the Federal Power Act to BPA’s transmission would be on BPA’s organic statutes. He reported that the staff has been meeting with groups around the region, including BPA, the IOUs, DSIs, public utilities, and a public interest group, and that additional meetings are being arranged. The parties have identified sections of the statutes that require modification, Hannaford said. He noted that it is the staff’s understanding that this exercise is limited to those changes in the statutes necessary to provide Federal Energy Regulatory Commission (FERC) oversight of BPA’s transmission equivalent to FERC’s regulation of jurisdictional utilities, and that it is not concerned with revisions aimed at achieving other objectives.

We’ve met with considerable success and agreement about which parts of the statutes require modification in the meetings thus far, Hannaford stated. No one has said this is an impossible task, he pointed out. We expect to complete this series of meetings by mid-October, and then we’ll sit down and "carve out the parts" of the statutes needed for equivalent oversight and circulate them for review, Hannaford explained. We hope to get responses back by the third week of October, and then we’ll start drafting the legislation, he said.

Comment Review of Last Month’s Contingent Cost Recovery Proposal

Transition Board Chairman John Etchart said the board received a lot of comment on the contingent cost recovery proposal it released in August. Staffer Ken Corum noted that the board received 11 sets of comments, which staff will send out to anyone who requests them. We received the most comment on the proposal to use projected levels of BPA reserves as the trigger for the cost recovery mechanism, he indicated. Some people said using reserve levels was appropriate as an alternative to using Treasury deferral as a trigger, and others preferred using deferral because it wasn’t a "gameable outcome" and would give BPA more incentive to control its costs, according to Corum.

Corum indicated that the board also received a lot of comments about the Stage 4 section of the proposal, which said that the recovery of any remaining costs necessary to restore reserves to the level required to assure the desired Treasury repayment probability would be accomplished through a mechanism and allocation methodology adopted by FERC. The content of the comments depended on what the commenter believed FERC would decide, Corum stated. Some commenters said that turning the matter over to FERC could jeopardize third-party debt, he noted. The board’s proposal called for FERC to carry out a proceeding to design and adopt a mechanism and allocation methodology promptly so it could be implemented without delay, Corum said. Some commenters called that approach impractical, he stated. They said FERC would have a hard time going through the process without having specifics about what the money would be used for, and as a result, it would be unlikely FERC could do much in advance that would save the region from delay, Corum explained.

We also got comments on the proposal that a target reserve level be established at the end of the first rate period that would take into account anticipated costs during the 2007-2012 period, Corum continued. Some people said collecting the money ahead of when it is actually needed is a problem, and others thought it is fully appropriate to set a target level of reserves at the end of the first rate period, he stated.

Comments were also received on the proposal’s caps of $100 million and $600 million, Corum reported. Some people said the caps were inadequate, and others said they were too high, he noted. There were also comments on the first two stages of the proposal -- Stage 1, "Use of Credits and Reserves," and Stage 2, "Cost Control," Corum stated. Some people said both of these should be part of BPA’s everyday operations and that they didn’t need to be called out as separate stages, he indicated. We also had comment endorsing the Regional Review’s suggestion that there be a customer advisory committee, Corum pointed out.

Board Proposes Revised Contingent Cost Recovery Proposal

Staffer Dick Watson explained the changes the Transition Board has decided to make in its contingent cost recovery proposal in response to comments. He stated that the comments had indicated that having four stages was too cumbersome and complicated. The Transition Board took that to heart and decided to do away with the first two stages "as stages per se," Watson said. The board thinks that Stage 1 in the earlier proposal, "Use of Credits and Reserves," is standard operating practice for BPA, and Stage 2, "Cost Control," is what BPA should be doing continuously, he pointed out. We will continue to refer to the use of reserves and credits and cost control, but we will not call them stages, Watson said.

He noted that the Regional Review called for a customer advisory committee and stated that the board has decided to recommend establishment of a standing cost management advisory committee. It would be made up of customer representatives and others to "advise BPA on management efficiencies and policy choices," Watson explained.

In the revised proposal, Stage 1 would involve implementation of a capped rate adjustment mechanism for BPA power rates, he said. That was Stage 3 ("Capped Rate Adjustment Clause") in the previous proposal, Watson stated. Prior to implementing such a mechanism, BPA would be required to show, in a public hearing, that it is doing everything feasible to manage its costs, he added.

Stage 4 Revamped into Stage 2

The revised proposal’s Stage 2 is the previous proposal’s Stage 4, "Recovery of Remaining Unrecovered Costs," Watson stated. The new proposal indicates that if, after implementation of Stage 1, projected reserve levels are at or below a second, lower trigger level that implies a high probability of Treasury deferral, Stage 2 would be implemented, he explained. According to the new proposal, before reaching this stage, BPA would evaluate all its options in both the Power Business Line and the Transmission Business Line for closing the remaining gap between costs and revenues and develop a plan. Upon reaching Stage 2, BPA would implement the plan to the extent of its authorities. The proposal goes on to say that if the plan includes a charge on transmission, that charge would be subject to review by FERC, and the standards for review would be the "just and reasonable" standard of the Federal Power Act and the requirement of the Northwest Power Act that "rates be set to assure payment of the Federal investment in the Federal Columbia River Power System (FCRPS) over a reasonable number of years after first meeting the administrator’s other costs." FERC could approve the charge or order changes, Watson said.

The revised proposal also states that "any power costs recovered through transmission charges would be treated as a loan from BPA’s Transmission Business Line to its Power Business Line, to be repaid with interest as soon as conditions permit" and that interest would accrue at the cost of capital of investor-owned utilities. The caps of $100 million in any year, up to a cumulative total of $600 million, which were in the previous proposal, are maintained in this version, Watson said.

In redesigning this part of the proposal, the board was swayed by the argument that it would be difficult for FERC to deal with the stranded cost mechanism in the abstract -- in advance of a real need -- and that doing so would provoke a lot of controversy, Watson explained. Consequently, the revised proposal is to use independent FERC review of any charges on transmission and to do this in a way that is feasible for BPA to implement, he said.

The written discussion of the revised proposal indicates that the question of recovering power system costs from transmission, as part of a contingent cost recovery mechanism, "has been a difficult issue for the region" and that such cost recovery should occur only if all other potential remedies are being exercised and should be subject to review by FERC on the same basis as it reviews other BPA transmission rates under the Transition Board’s recommendations for Federal Power Act conformance. In addition, it says that to the extent power costs are recovered through transmission, they are to be treated as a loan to ensure that those costs are ultimately allocated to power customers.

The handout on the revised proposal points out that the annual and cumulative limits on recovery through Stage 2 are intended to "bring about a broader national discussion on the proper allocation of BPA’s unrecoverable costs," and that if unrecoverable costs exceed these limits, it is likely that a major contributor to the costs would be "the effects of significant changes to the power system for the purposes of fish recovery mandated by federal law." The limits reflect the recognition that, in this case, there is a broader national interest in and responsibility for the costs of recovery of threatened and endangered species, and the 15-year period allowed for this mechanism is a period long enough to take BPA to the point that the Supply System debt will have been largely paid, according to the handout.

A Flurry of Questions and Comments

Paul Majkut of BPA asked why the proposal uses the cost of capital of investor-owned utilities as the interest rate for loans between BPA’s business lines since the business lines use Treasury rates. The folks you are borrowing from are likely to have higher costs of capital than Treasury costs, responded Watson.

Benton County PUD consultant Don Clayhold noted that what Watson said about borrowing costs is "true for some folks, but not for all." You have created a windfall for the Transmission Business Line here, and I suggest you take a second look at that, he stated. What’s wrong with having the normal cost of capital? Clayhold asked.

Is BPA in trouble? Have they asked for this aid? Why are you doing this? asked Alfred Canada of Grants Pass, Oregon. Watson pointed out that BPA faces some extraordinary risks in the future.

Steve Weiss of the Northwest Energy Coalition stated that there is an advantage in having FERC go through the process to adopt a mechanism and allocation methodology in advance. This region has never solved whether it should be a directed or "peanut-butter" charge, and FERC would have been someone outside who could consider what it should be, he said. You are giving this back to BPA and not FERC, and BPA will probably do a peanut-butter charge, Weiss continued. Maybe BPA needs to have its authorities extended to prevent bypass, he suggested. Most of the liabilities in the region are old liabilities for dams and WPPSS plants, which past and current BPA customers share, and BPA needs to spread those costs out, according to Weiss. If we say use BPA’s existing authorities, we are pushing BPA down a road with a lot of problems, he stated. We should give BPA the authority in this one circumstance to spread the burden more widely, Weiss said. BPA’s existing authorities are pretty narrow -- maybe the board should urge BPA to get the legislative authority to spread the burden out so it would be fairer, he stated. If you are going to do some "rifleshot" legislation, this might be an area where it could be useful, Weiss said.

The intent is that FERC would have the authority to approve what BPA proposes or that FERC can order changes, noted Watson. Those changes could be in the form or in the amount -- it could be peanut-butter or directed, he added. So you think there’s enough flexibility with this proposal? asked Weiss. That’s the intent, Watson replied.

You are suggesting that BPA’s authority is co-extensive with FERC’s authority to approve the charge, said Marilyn Showalter. I’d characterize this as, BPA proposes, and FERC disposes, stated John Savage.

It might make sense to reference the board’s proposal for FERC regulation of BPA’s transmission here, said IOU consultant Jim Litchfield. Maybe you should point out that BPA would develop a transmission proposal, which would go through the regular FERC review process like any other BPA transmission rate, he stated. People have told the board that the process outlined in the previous proposal gave FERC "the authority to stick its nose into BPA’s Power Business Line," and that the process in the revised proposal "better walls off the Power Business Line," noted consultant Al Wright.

In this proposal, would FERC assure itself that the allocation of the charge is just and reasonable, or does the standard mean that FERC would look at costs shifted from power to transmission and judge whether those were reasonable costs for BPA to incur? What would be FERC’s remedy? asked Angus Duncan of the Columbia/Pacific Institute. It depends on how you write the legislation, but this says that FERC could not decide if those costs are just and reasonable, replied Wright.

Maybe we should tell Congress that if BPA "checks off certain boxes," for example, for making use of credits and reserves, or instituting a rate adjustment clause, it would constitute a sufficient exercise of prudence, Duncan said. We should specify what it is that BPA has to do to show it has done its best to meet an impending deficit and not give FERC "a hunting license to go past those boxes," he stated.

There’s concern about using reserve levels and the probability of repayment as trigger points, Duncan continued. In my comments, I suggested there should be prior agreement on methodologies for calculating the probability of repayment, so the methodologies are clear and there has been public participation in their development, he said. This would lessen the concern that BPA would "cook the numbers," Duncan stated. It would be good if BPA could agree on a methodology for that calculation ahead of time, and it would allay concerns about "gaming," he said. What was the disposition of my comments on this? Duncan asked. Your idea wasn’t picked up in this proposal, so it remains a rate case issue, replied Watson. All we said was that we won’t pick the numbers -- it’s not a prohibition against doing it the way you recommend, stated Wright. But it’s also not a recommendation, and I suggest you consider making it one, responded Duncan.

How does your proposal differ from working this out in a rate case? Showalter asked Duncan. If it were worked out in a rate case "prior to the trigger being pulled," it would be okay, Duncan replied. The concern involves the difference between doing it when you have to versus doing it in a prior rate case with full public participation, he said.

The Eyes of Pennsylvania Are Upon Us

Jim Baker of the Sierra Club told the board he sees two problems with the caps of $100 million and $600 million in the proposal. First, he said, the caps will bring attention to the region’s advantage in low-priced electricity. Members of Congress from the Northeast and the Midwest will consider how appropriate the caps are, Baker stated. If I were a Congressman from Pennsylvania, with high market forecasts, I’d require the Northwest "to pay market rates from the get-go," and with low market forecasts, I’d consider selling BPA, he said. Do we want to invite this kind of oversight? Baker inquired. Second, Baker said that the caps would stimulate conversation with a national audience over fish recovery. The fish advocates won’t support these caps without an express salmon recovery plan or a process for reaching one, he stated.

I want to address the question of why you are doing this, Canada told the board. Your staff said before that it is a question of BPA facing risks, he said. But has BPA called for help? Has BPA had input into this process? Canada asked. No way can you be so cavalier that you brush this off with the statement "BPA faces extraordinary risks" and say, "only we are smart enough to fix the problem" -- that’s not an answer, he commented.

Jerry Leone of the Public Power Council told the board public power stands behind a uniform wires charge and using deferral as a trigger for the stranded cost mechanism. It’s good you’ve gone to two stages from four, and it’s good you have given back to the region, instead of FERC, determination of what stranded costs ought to be, she said. I suggest you put the whole proposal down "on a new piece of paper" so we can react to it, Leone stated.

We hear that deferral as a trigger "is a non-starter" for legislation, said Etchart. What do you think about that? he asked Leone. We haven’t heard that, Leone replied. Deferral "is a scary thing" -- BPA wouldn’t dare miss a payment -- that’s why we think it is an excellent trigger, she said. I’ve heard if you propose deferral as the trigger it wouldn’t "pass the laugh test," Etchart responded. I’ve heard that we can’t go to Washington, D.C. with deferral as the trigger, said Litchfield. I hear that people in Pennsylvania are going to look at it and say the Northwest wants to support itself on the back of the U.S. Treasury, he continued. I suggest this may be about "how it is packaged and sold," rather than the substance, Litchfield said. We could say to Congress, we have all the protections in place so there will never be a deferral, as opposed to saying "we want to use deferrals to advantage the Northwest," he stated. We shouldn’t accept that the concept of using Treasury deferrals is "dead and gone," and that we can’t refer to it, said Litchfield. It’s in the statute, he added.

BPA has huge amounts of revenue variability, and it’s in the statute now that at the end of the year, if BPA doesn’t have the money, it defers, Litchfield stated. But if we are putting together a legislative package, we could say we set our repayment probability to make sure we can repay Treasury and that we have additional insurance measures, he said.

Are you saying nothing short of deferral as a trigger will satisfy customers? Etchart asked Litchfield. Referring to Duncan’s suggestion, Litchfield said, we don’t think you can "lock it down in advance." We’ve tried to lock things down with BPA for years, but "the beans change color," he stated. This is more about packaging than substance, Litchfield added.

Aside from the packaging, there’s the reality, said Showalter. We wouldn’t do this if we didn’t think that somewhere down the road, there could be a deferral, and if so, the region would want to have some tools ready in advance, she suggested. I agree, but we’re better off if we don’t talk about it, said Litchfield. This discussion has been about the "stages of pain and suffering," not about using Treasury deferral as a trigger, he stated.

The Transition Board "hotly debated" this issue, said Todd Maddock. Clearly, deferral is readily understood, and it made a lot of sense as a trigger, but I became convinced, as John [Etchart] said, "it was a non-starter," Maddock stated. I thought that, as is the case with a private business, BPA needed the threat of bankruptcy hanging over it, but I was told that even Chapter 11 triggers before a complete collapse, he said.

BPA doesn’t go bankrupt if it defers -- it still makes debt payments, stated Litchfield. There’s a big cushion here, he added. In business, the law lays out the steps to correct the problem, such as selling off assets, and you are trying to lay it out for BPA, Litchfield continued. There’s a clear distinction that could be made, and low reserve levels will always be under a lot of debate, he said.

If BPA had 20-year contracts with everyone, deferral might make sense, commented Weiss. If BPA went through all its reserves in 2005 and its cost went up, it might not get any subscribers the next time around, he stated. It won’t be easy, and no one will agree on the numbers for reserves, but it can’t be zero -- that would be suicide, according to Weiss. If people in Pennsylvania look at Northwest customers getting power below market, and there’s a deferral, that doesn’t pass the laugh test, he stated. Having two trigger levels makes sense, Weiss continued. The first would be pushing customers up to market, and the second would be a wires charge, he suggested. BPA has to build adequate reserves, and these stages, especially Stage 1, have to trigger before deferral, Weiss said.

I’m puzzled by the invoking of BPA as a private business and meeting private business tests, commented Duncan. BPA has to operate prudently, but we’ll have a difficult time if BPA "uses deferral as a trip wire," in circumstances in which no private business would find itself because it wouldn’t be selling its products at cost, he said. If BPA wants to sell at market, it can build up its reserves, Duncan continued. I support BPA selling at cost, but the customers have to be called on before BPA goes to deferral, he said. It’s a substantive difference, not just packaging -- OMB officials won’t buy that, and they shouldn’t, Duncan stated.

I’ve worked on solar photovoltaics, said Canada. He referred to a "recent DOE program communication," which says "we estimate the production costs of photovoltaic modules to be around $2.50 per watt," and judging from the progress being made by the industry and research institutions, the goal of $150 per kilowatt "appears to be within our sights... and if market expansion justifies the construction of large more efficient production plants, the next decade looks realistic for achieving the goal." I’m saying that "there will be 1 cent per kilowatt-hour power in copious quantities in the system for BPA to repeddle," stated Canada.

Next Step: Waiting for the Subscription Shoe to Drop

The board will ask the staff to put the revised proposal on paper and send it out for review, but the question is whether we will have another round of comment on it, said Etchart. If we can put this in the same context as the board’s proposal on FERC regulation of BPA’s transmission, we’ve got what we need, said Maddock. We’ve got a package, but the question is how fast we want to move it forward, he added.

We need to put it in writing so we have a full draft, said Showalter. She noted that BPA is about to come out with its proposal on subscription and that the issues involved there overlap with this proposal. We need to see how our thinking will dovetail with theirs, Showalter stated. I wonder if our proposal needs more comment at this juncture, said Etchart. Let’s "kick it out" and see what BPA does, he suggested.

We’ll do a new draft of the proposal and make it available with the understanding that this is as far as the Transition Board has brought it and that the board is now waiting to see what BPA proposes, stated Watson. Let’s not make final recommendations until we’ve done that, suggested Maddock. By October 23, [the date currently set for close of comment on BPA’s subscription proposal], you’ll have a whole body of comment on BPA’s proposal and on yours, noted Wright. Between now and then, you should encourage people to come and talk to you about your revised contingent cost recovery proposal, he recommended.

The package from BPA will be the big picture, and we need to judge our part of the picture in relation to the big picture, the allocation, and "the whole ball of wax," stated Showalter. We’ll have a revised proposal out by mail and on the website tomorrow, said Watson.

Transition Board Members: John Etchart, Montana Governor’s Representative; John Savage, Oregon Governor’s Representative; Marilyn Showalter, Washington Governor’s Representative; Todd Maddock, Idaho Governor’s Representative. This meeting report is a service provided by the Northwest Power Planning Council, with financial assistance contributed by the Pacific Northwest Utilities Conference Committee (PNUCC).