The Northwest Energy Review Transition Board declined to intervene in a Subscription Work Group controversy over the "slice of the system" proposal. The board heard from staff on progress toward developing a Northwest chapter for national restructuring legislation and on the "strawman" proposal for FERC-equivalent regulation of BPA transmission. Two members were present; Mike Kreidler and Roy Hemmingway were absent. The audience was about 40.

Next Meeting: April 23 in Portland.

Headlines______________________________________________________________

Board Declines Slice Controversy . . . . . . . . . . . . . . . . . . . . . . . . p. 1

Progress on the Northwest Chapter. . . . . . . . . . . . . . . . . . . . . . . .p. 1

IOU Yardstick Measures Little Progress. . . . . . . . . . . . . . . . . . . . . p. 3

Stranded Cost Strawman in a Hair Shirt. . . . . . . . . . . . . . . . . . . . p. 6

Transmission Strawman Points Way to FERC Equivalency . . . . . . . . . . p. 6

ORDER OF BUSINESS_________________________________________________

Board Declines Slice Controversy

Transition Board chair John Etchart said the board was asked to adjudicate the controversy over the "slice of the system" proposal, a power product that is under discussion in the Subscription Work Group. There is a great amount of interest and controversy around the "slice," he said. We’ve talked it through as a board, and we do not intend to go into the proposal here -- we will not take it up at this level, Etchart stated. All parties have agreed to continue working, and we encourage them to do so and to resolve the issue, he added.

Progress on the Northwest Chapter

Council staffer Ken Corum gave an overview of a draft progress report on developing the Northwest chapter for national utility restructuring legislation. The report, prepared by Council staff, will go to members of the region’s Congressional delegation to give them an update on efforts to implement the recommendations of the Regional Review, he explained. We have addressed six major areas, Corum said: the role of BPA’s transmission system; treatment of BPA’s potential stranded costs; definition of subscription for BPA power after 2001; control of BPA’s operating costs; governance of the Columbia and Snake River hydro system; and future fish and wildlife (F&W) budgets.

Corum outlined what is included in each of the six issue areas of the draft report. The following descriptions are based on Corum’s remarks and the draft report.

Transmission. The Regional Review recommended that BPA be legally separated into two organizations: power marketing and transmission. The Transmission Work Group decided the most practical option is functional separation of Bonneville’s business lines, with regulation by FERC that is "equivalent " to FERC’s regulation of investor-owned utilities (IOUs). The work group considered a number of differences between BPA and an IOU that might make it appropriate for FERC regulation of BPA to vary in some ways from its regulation of IOUs.

The work group identified the following issues related to FERC equivalency: the starting point for legislation -- BPA’s organic statutes or the Federal Power Act (FPA); the nature of separation of BPA’s business lines; how to separate the cost accounting between BPA’s business lines; setting BPA’s transmission rates; the conditions for access to BPA’s transmission; whether BPA should be permitted to join an independent system operator (ISO); and whether BPA should be able to make retail sales.

Stranded Costs. The group came to think of the stranded cost issue not as a single problem, but as one or more of five relatively distinct problems. The problems, which may have different causes and may require different remedies, are identified as: BPA revenue shortfalls due to variations in precipitation and short-term markets; costs of historic investments stranded by persistent low market prices; operating costs; incremental new investments in programs, such as F&W; and reconfiguration of the power system.

The other issues include: costs to be included in stranded costs; the incentives to control costs; who decides when there is a need for greater revenue recovery; what triggers the mechanism; the limits of the mechanism in terms of time and money; and the recovery mechanism itself. The mechanisms discussed include a uniform transmission surcharge and a directed charge. The debate on recovery mechanisms focused on two issues: fairness and impact of the mechanism.

A staff note on the recovery mechanisms and economic efficiency states that each mechanism affects individual parties differently, and "the question of which recovery mechanism is fairest is almost certainly impossible to answer to everyone’s satisfaction."

Subscription. The Subscription Work Group has made progress in developing federal power products and services, and dealing with contractual issues. "If BPA and the region are successful, subscription offerings will be commercially viable products at competitive rates that recover BPA costs over time. Progress toward this outcome has been significant, and the prospects for this successful outcome appear likely," the report states.

Cost Control. The Cost Review panel recommended $147 million in cuts from the power business line budget. The panel also recommended BPA be exempted from certain federal laws related to procurement and other administrative functions to provide greater flexibility. Specific legislative changes necessary to effect the administrative flexibility are included in an appendix to the report.

River Governance. The Three Sovereigns, which include federal, state, and tribal representatives, have been discussing ways to coordinate governmental actions affecting Columbia River F&W. A draft agreement was released for public review on March 30, 1998. Comments will be taken through May.

Fish and Wildlife Costs. BPA is preparing for a rate case for the 2002-2006 period and is aiming to produce rates that will allow customers to subscribe to energy without foreclosing any of the mainstem "system configuration" scenarios now under discussion. A Three Sovereigns work group is surveying potential capital costs of a variety of F&W options, and Council staff is evaluating other costs and risks of major system configuration options, including effects on foregone revenues, energy and capacity effects, reliability, and system stability. In addition, the F&W managers are preparing projections of future costs for operating and maintaining projects directly funded by BPA.

That’s what’s in the paper, Corum said. We will take comments at the next Transition Board meeting, and we will accept written comments until April 24, he concluded.

Staffer Dick Watson said staff is trying to get the progress report wrapped up quickly. The report will include a six-page appendix of legislative proposals, he said, many of which "were vetted during the BPA corporation process and covered briefly in the cost review." Our notion is that this report is more akin to a letter than a formal decision, Watson stated. After the comment period, the board can decide whether it wishes to modify the report, he added.

We will forward the report to Congress in late April, Etchart stated.

IOU Yardstick Measures Little Progress

Consultant Jim Litchfield said he and his IOU clients recently went back to re-read a letter they sent to the Transition Board on January 15, 1997. We came back to the letter to see what progress had been made on the issues that the IOUs raised over a year ago, he explained. It is an interesting check of what we have done, Litchfield added.

"Process" was the first category of issues cited in the letter, according to Litchfield. The effort to develop legislation to separate BPA’s transmission from its power marketing still lacks focus, he stated. The letter said there are several areas where the Regional Review’s recommendations could conflict with existing statutes, Litchfield continued. This issue is particularly important -- Congress needs to know how "to help us move the ball down field and get these recommendations implemented," he said. We still have groups in the region that are not interested in legislation, Litchfield pointed out. But there is going to be national legislation, he said. We think the region should get behind a legislative proposal that would help us secure the benefits of the federal power system, Litchfield stated.

We still lack a clear definition of how to deal with the residential exchange, Litchfield continued. We are far from securing "a swap of the exchange right for a purchase right," as outlined in the Regional Review’s recommendations, he stated. With regard to resale of federal power, some "creative solutions" have come about and can be implemented, Litchfield said. He also indicated there has not been a reconciliation between the Regional Review’s recommendation that BPA not acquire new resources, except through bilateral contracts, and a Northwest Power Act provision that says BPA will offer requirements contracts.

There is no doubt that the 7(i) process and the rate directives in the Northwest Power Act do not provide for what is happening today, Litchfield said. The Regional Review recommended that BPA offer subscription contracts with a right to renew "at cost," and it is still unresolved whether that recommendation should pertain to five-year commitments, Litchfield said. And it is not clear that exchange customers will have renewal rights, he pointed out.

Another section of the IOUs’ letter relates to subscription, Litchfield said. Yesterday, members of the Subscription Work Group looked at a description of their progress that is more optimistic than my clients feel is warranted, he said. On the fundamental issues, we have made no progress, Litchfield stated. We are far from an agreement on a long-term contract arrangement and the amount of power that will be allocated to various customer groups, he said. We have decided only that BPA "will manage the process to accommodate the recommendations" of the Regional Review, Litchfield pointed out. With regard to cost control, there has not been customer involvement, he stated.

Don’t you think the BPA Cost Review accomplished that? Etchart asked. It was a one-time event, Litchfield responded. The Regional Review contemplated something more ongoing and institutionalized, he said.

One section of the Regional Review’s recommendations has been completely ignored, Litchfield asserted. BPA was to prepare a comprehensive marketing plan for addressing the competitive environment, and we have seen no progress on that, he said.

We have done a lot of work on the products in subscription, but only three or four are going to be cost-based, and the rest are market, Litchfield went on. It is not clear how they will be priced, he added. There has been no work on how the costs of purchased power will be flowed through to the subscription process -- and where the costs and risks will go, Litchfield said. With regard to power sales contracts, there has only been conceptual work, he stated. We have not dealt with the issue of how the power contracts will be shaped, Litchfield said. The option fee has been ignored, and it now sounds like it will be negotiated, he added. The idea of "sharing profits in the good times" has not been explored, and we don’t know how that will happen, Litchfield said.

The IOU letter also raises the issue of stranded costs, and Litchfield pointed out that the region lacks agreement on "whether we have any and how we should address them." There are issues outstanding relative to the amount of power BPA would reserve for the load growth of small preference customers, he continued. The law contains recall provisions for BPA power sales that remain a barrier to implementing Phase III of the subscription process outlined by the Regional Review and to resolving the residential exchange, Litchfield said.

The public purpose recommendations are "in play" with the states, Litchfield commented, and we have made progress on BPA transmission separation. We’ve set the idea of legal separation aside, and now are focused on how to get to FERC-equivalent regulation through a functional separation, he said.

There are numerous outstanding issues that point to the need for legislation for a solution, Litchfield stated. There is a desire to preserve the Northwest Power Act, although it no longer fits our needs, he said. The IOUs believe the scope of the Northwest chapter needs to be broad, Litchfield said. There are a lot of issues left unaddressed, and we need a comprehensive solution, he concluded.

We appreciate your comments and will take them to heart, Todd Maddock said.

We have a fundamental dilemma -- we are still being told that there are no issues that cannot be resolved administratively, Watson said. But we have no agreement on that, and we need to have a fairly focused discussion about it, he added.

When we had a discussion about how to implement subscription and the rate case, a BPA attorney basically said, "you waive your statutory rights, and it will work," Litchfield stated. It seems laughable that people would give up their statutory rights if there is no new statute in place, he continued. They will ask, "what do I get?" Litchfield said. Will everyone agree not to change their position again? he asked, adding "I don’t think so."

Are We Kidding Ourselves?

Between now and April 23 you need to discuss this, consultant Al Wright advised the board. We need to know "if we are kidding ourselves," he said. There are two paths the region could consider, according to Wright: a regional settlement on the power contracts "that would get us through" the next three to five years; or go for legislation. He indicated that he favors a regional settlement that gets us past "the 2001 cliff." We can then go back "and take the Act apart surgically" and decide how to change it, Wright stated.

If we buy time to get us to 2006, will it get any easier? Litchfield asked. I don’t think it will, I think it will get harder, he said, adding that by 2006, the region will be in the midst of a competitive market. We have a fundamental choice to make: are we going to take a new course, or are we going to "muddle through?" Litchfield stated. In the meantime, "the benefits of the system are up for grabs," he added.

We have the 7(i) rate case, Wright observed, and "we all know how to do that." But he suggested the rate-case process would not work to solve the problem. We’re heading in the rate-case direction, Litchfield responded. The BPA rate staff has said, "we have statutes to follow -- we can’t wink, wave, and forget them," he added. The further you go afield of the rate directives, the more legal risk you are taking, Litchfield observed.

Jim Litchfield’s characterization of subscription "was eloquent, but a little hyperbolic" and not accurate with regard to our progress, Paul Norman of BPA said. If the question is, will it be hard to do subscription as the Regional Review envisioned and without a change in the law, the answer is yes, he stated. But can we do it administratively? The answer is yes, Norman said. We have made more progress on the issues than Jim has characterized, he concluded, and we think it can be done.

Had the Regional Review document been perfect, "we would have put it in an envelope, sent it to the delegation, and said, here, legislate this," according to Maureen Carr of the Public Power Council. The report left many questions unanswered, and we have found that some of the recommendations are impractical to implement, and we have backed off from them, she stated. To suggest the publics give up preference sounds absurd without a thorough analysis of what that means, Carr said. We have made progress on the issues, she added. Public power’s position is that BPA should go ahead with the 7(i) rate case, so it can continue to do business with its customers, Carr stated.

A Pitch for Solar

Alfred Canada of Grants Pass, Oregon, said solarvoltaic resources are being developed for under $500 a kilowatt. He suggested that the subscription process could hamper the region’s acquisition of solarvoltaics. I will make a major effort to let BPA customers know that solarvoltaics have arrived -- you can’t keep the lid on it forever, Canada stated.

Stranded Cost Strawman in a Hair Shirt

Wright said the strawman was intentionally divided into two compartments: one that deals with FERC regulation of BPA transmission and another that deals with stranded costs. Our assumption was that any stranded cost mechanism would be in the form of a surcharge and would be dealt with separately from transmission, he explained.

While the draft strawman on transmission is available today, the stranded cost proposal "ran into a snag," Wright said. The delegation staff said they wanted to talk about it before it is released, he said. We could not accomplish that discussion in time to get the stranded cost strawman out today, Wright continued.

The delegation staff feels it got "blind-sided" when the Three Sovereigns released their draft agreement, and "they were sensitized about getting adequate lead time on these things," Wright explained. Why can’t you release the stranded cost strawman to us at the same time you release it to the delegation? asked Jim Reddy of Intalco. We need to honor our commitment to discuss it with the legislative staff beforehand, Watson replied. Is it appropriate to let us know who sent the request to delay it? asked Paul Murphy, a DSI attorney. The request was made "off the record," but it came from a sizable number of people, Wright responded.

Will this be part of the draft that we are to comment on April 23? asked Ken Canon of the Industrial Customers of Northwest Utilities. No, Wright said. He indicated that the package would be shaped over the next two months, and there will be consultations before the Transition Board adopts it to send to the governors. My assumption is we will release the stranded cost strawman after the Congressional staff briefing, and before April 23, Etchart said. We will have a staff presentation on it April 23, he added. We have until July to finalize it, Etchart stated.

Why are the Three Sovereigns not responsible for their own discussions with the delegation? asked John Jones of the Northwest Gas Association. They need to take care of their own business and not bring the responsibility to this board, he stated.

There is a lot of confusion about the Three Sovereigns, Etchart responded. The Transition Board is a nominal sponsor of the process, he added. It is unfortunate that the delegation holds the Transition Board responsible for something they did not like in the Three Sovereigns process, Etchart stated, adding "we need to straighten this out about the etiology of the Three Sovereigns."

Transmission Strawman Points Way to FERC Equivalency

Wright explained that the idea of a legal separation between BPA’s power marketing and transmission business lines posed a host of problems. The Transmission Work Group decided to focus on administrative separation to see if that could solve the competitive problems, he continued.

In drafting the strawman, we needed a policy call on the legislative starting point, Wright explained. The group was unanimous that there had to be legislation and that it could not be done with an agreement, he said. There will be national legislation on the federal power marketing agencies, and the default is that BPA would go under FERC regulation with no direction from the region, Wright stated. The legislative question is, do you start with BPA’s organic statutes and modify them, or do you write BPA into the FPA? he asked. There are good arguments for both positions, Wright said.

We made the call for going the FPA route, he continued. The simplicity of modifying the FPA compared to modifying the organic statutes that were developed over a period of time was the deciding factor, Wright said. "We chose FERC to be the final decisionmaker," so it seemed reasonable to use FERC’s statute to cover BPA, Wright explained.

We decided that you would not "put BPA into the preamble to the FPA" and say that everything that follows applies -- that is too simplistic, Wright said. We outlined the sections that BPA should be included in, and we recommended that a small task force of attorneys from the Transmission Work Group review the FPA to see if other sections are applicable, he stated.

Exceptions to the FPA

There are things that are applicable to IOUs that we don’t think are applicable to BPA, Wright said, and the strawman suggests several modifications to the FPA. For example, BPA does not have stockholders who can take risks, so FERC would have to allow total cost recovery -- the embedded costs have to be in the rates, without question, he said. Wright noted some controversy about how much oversight of BPA’s budget FERC should have.

BPA’s third-party debt is another area of exception, Wright explained. The strawman says that nothing in FERC’s regulation can affect the priority or security of BPA’s payments to third-party debt holders, he pointed out. In addition, BPA has environmental obligations on the river and must sometimes have access to its transmission to relieve a situation, such as gas abatement, Wright said. The strawman indicates that "in rare instances," BPA’s power business line may require priority access to transmission, he explained.

Wright went on to outline several other exceptions in the strawman proposal: FERC’s authority over BPA’s power costs should not be expanded; Congress can override a FERC order to build transmission; cost shifts should be phased in over time; FERC should provide for sales based on points of delivery versus points of interconnection; the legislation is effective on or after October 1, 2001 to protect BPA’s existing power sales contracts; and BPA should not be mandated to join an ISO, but there should not be impediments to its doing so.

The strawman proposes that FERC’s review of BPA’s transmission rates be identical to that followed for IOUs, except that the hearings would be in the Pacific Northwest. The first step in the rate-setting process would be for the BPA Administrator to get a rate settlement, Wright explained, with FERC to give "substantial weight" to a settlement. If a settlement fails to emerge, a FERC administrative law judge would conduct a hearing in the Pacific Northwest and come to an initial decision, after which FERC would render a final order. The process would include the normal rehearing and appeal process, Wright explained. The strawman indicates that appeals could be taken to either the Ninth Circuit or the District of Columbia Circuit, he said. BPA would be allowed to provide its own legal representative since in the appeal, there would be two entities of the federal government facing one another, Wright concluded.

Angus Duncan of the Columbia/Pacific Institute noted that the modifications to the FPA outlined by the staff infer there is a single BPA fund. Are you proposing any constraints on BPA’s authority to use funds from either its power or transmission operations to meet its obligations? he asked. This strawman only deals with transmission costs after you functionalize the two operations, Wright responded.

Watson said the board would take comment on the transmission strawman on April 23. It could be awkward to comment on this without the stranded cost proposal, Carr observed. Wright pointed out that there would be a discussion of the stranded cost strawman on the afternoon of April 14.

Meeting Adjourned

Transition Board Members: John Etchart, Montana Governor’s Representative; Roy Hemmingway, Oregon Governor’s Representative; Mike Kreidler, 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).