A strawman proposal for stranded cost recovery took a number of hits at the Northwest Energy Review Transition Board meeting. Various interests also commented on the board’s progress report on developing a "Northwest chapter" of national restructuring legislation. All members were present, except Mike Kreidler, who participated by phone. The audience was about 40.

Next Meeting: May 14 in Portland.

HEADLINES____________________________________________________________

Is the Northwest Chapter Making Progress?.................................................................p. 1

Staff Introduces A Stranded Cost "Orphan".................................................................p. 6

No One Rushes to Adopt It...............................................................................................p. 9

ORDER OF BUSINESS___________________________________________________

Is the Northwest Chapter Making Progress?

Transition Board chair John Etchart opened the floor for comments on the board’s "Progress Report on Development of the ‘Northwest Chapter’ of National Utility Restructuring Legislation."

Paul Murphy representing the Pacific Northwest Aluminum Group said the progress report is generally "fine," and that the discussion of the issues surrounding subscription and FERC-equivalency is "fairly accurate." I’m disappointed with the part of the report that deals with stranded costs and how that issue affects other issues the Transition Board is looking at, he stated. The staff work appears to conclude that given BPA’s cost structure and where the market will go, there won’t be stranded costs, yet in the report, there’s a desire to have a stranded cost structure, Murphy said.

The report has "teed up" a new set of fundamental policy issues that go to the core of the role of BPA in the region’s energy market, according to Murphy. If you conclude there are no stranded costs, yet give BPA the ability to charge transmission rates above transmission costs, you’re dealing with the question of: "Is it appropriate for a federal agency to be manipulating power markets," because that would be the effect, he said. There needs to be "a venting" of those policy issues if you are going to go in that direction, and the progress report doesn’t do that now, Murphy stated.

Which policy issues are you referring to? asked Etchart. The strawman proposal alludes to subscribers not being "worse than the market" by virtue of subscribing, and the staff’s cost data makes it appear they will be better off than the market, responded Murphy. So does it make sense to shift costs to transmission users, who are not subscribers, and make them pay a penalty if BPA goes above market? he asked. It goes to the issue of BPA exploiting its transmission monopoly to advantage its power marketing, Murphy said. Shifting the incidence of risks and benefits is not addressed in the report, he stated. In addition, use of the term "stranded costs" implies there is a problem, and it brings up the notion of historical costs being stranded by something, and the question of "who did the stranding," Murphy continued. There are policy issues being lost here due to the use of that term, he added.

Maureen Carr of the Public Power Council (PPC) said the PPC thinks is it important for the Congressional delegation to understand that the region has been working diligently since the Regional Review concluded and that "we believe we are making significant progress." The level of effort is commensurate with the importance and difficulty of the implementation issues raised by the Review, but the progress report doesn’t make this point, she stated. Carrying out the Regional Review’s recommendations is particularly difficult because an underlying premise of the Review -- "an uncompetitive BPA" -- is dated, Carr said. Today, there is lots of interest in and outside of the region in purchasing from BPA, she pointed out.

We agree with the report’s analysis that BPA’s status is different from that of investor-owned utilities (IOUs) and other utilities, Carr said. With respect to enhanced FERC jurisdiction over BPA’s transmission, regardless of whether you start from the Federal Power Act (FPA) or BPA’s organic statutes, you need to go through each of the "BPA-specific statutes," as well as the FPA, to determine which statutory authorities must be changed and which maintained, she said. We think a broad-brush approach could eliminate authorities of the BPA Administrator that we want to preserve, Carr stated.

As for the transmission section, which discusses the "risks" of BPA legal separation, Carr noted that BPA has complex financial arrangements with respect to all net-billed and other third-party obligations. It’s more than just the Supply System bonds that makes it complicated to separate BPA, she stated.

PPC has proposed a transition cost recovery mechanism that provides a means to ensure that BPA’s costs are recovered, and a Treasury deferral trigger that is "sufficiently distasteful" to cause BPA to work with customers to control costs, according to Carr. We agree with the discussion of "economic efficiency" in the report, which states that the most efficient pricing system for transmission will consist mainly of fixed charges, she stated. If everyone pays the same charge to use the system, we think that no economic advantage will be obtained, she concluded.

Jason Eisdorfer of the Oregon Citizens’ Utility Board said the progress report is "a good summary of the issues" facing BPA and the region. Whether it adequately informs the Congressional delegation of the need for specific legislative activity "is an open question," he stated. There are a number of issues that remain open and may or may not need legislative activity at the federal level, Eisdorfer said.

Eisdorfer said the first set of "unanswered questions" includes: Is access to the Federal Columbia River Power System (FCRPS) for residential exchange customers of the IOUs really secure under subscription? Will there be a higher rate for IOU residential customers than for residential customers of publicly owned utilities? Will contracts for exchange customers be saddled with callback provisions? What rights of resale are attached to the contracts?

There has been little discussion of how to service BPA’s contracts if the system "becomes smaller," for example, if WNP-2 is closed or if dams are breached, stated Eisdorfer. How will ongoing rights to future power be treated if the system is oversubscribed? he asked.

A work group is discussing how the residential exchange load will be served, Eisdorfer noted. One concept being considered is to expand the BPA resource pool with market-based purchases and sell to IOU exchange customers through "a friendly in lieu," he explained. But this may be subject to the 7(b)(2) rate test, and IOU residential customers could end up paying a higher rate than any other BPA constituent, Eisdorfer stated. Another scenario would have the IOU exchange customer served through surplus power, which would establish a set rate, but it would be susceptible to a five-year callback and thus not fit with the idea of long-term rights to the system, he pointed out.

The Resale Issue

The resale of power issue is crucial, he continued. Will resale apply to loss of qualified load, and if qualified load is lost and power is resold, does this erode rights to BPA power at the next subscription period? Eisdorfer asked. If resale rights allow an IOU to monetize the power and distribute the cash benefits upfront, I don’t think the public utility commissions have the capability of "following the money," he said. These are complicated issues, and it’s not clear to us that federal legislation will not be necessary to firm up the rights "imagined for IOU exchange customers" in the Regional Review, Eisdorfer stated.

"Where is the link between secure access to the BPA system and the stranded cost mechanism?" Eisdorfer continued. There should be a link between certainty of access to BPA and the use of any stranded cost charge, whether applied "in a peanut-butter approach" on the wires, or on a historical basis, he stated. Eisdorfer noted that in traditional state restructuring proceedings, stranded costs or benefits are identified by netting the long-term value of below-market resources against the long-term value of over-market resources. If some generating assets have future value, this offsets over-market costs and either reduces stranded costs or creates stranded benefits, he said. In contrast, if some customers are not given secure rights to long-term BPA access and its future value, then a stranded cost charge on the wires only applies the over-market costs to these customers without first capturing and netting out the future below-market costs, Eisdorfer said.

The Transition Board’s stranded cost recovery strawman proposal says the first stage of stranded cost recovery should apply to customers who secured contracts with BPA through subscription, and that these customers will pay first during the period necessary to recover stranded costs, and that makes sense, he stated. The second stage of recovery relies on a peanut-butter transmission charge and a charge directed to customers based on historic benefits, Eisdorfer said. This ignores the link between future value of the asset and stranded cost recovery, he stated.

Another question, according to Eisdorfer, is: Does subscription work with full retail access? Our answer to this is "no or not very well," he said. Many customers will not choose BPA because they won’t know the option exists, and many will be lured by short-term savings "or a toaster," unaware of the long-term implications, Eisdorfer stated. As an energy provider loses qualified load to other providers and rights to BPA erode, the individual customer who switches away from BPA is unknowingly making resource decisions for future customers, he said. This version of delivering BPA power to exchange loads through certain energy providers, but not others, fails in the goal of delivering the benefits of BPA to the region, Eisdorfer stated. For subscription to work, we need to send a message to Congress that "one size does not fit all," and that the retail access model won’t fit every state, he said.

Alfred Canada of Grants Pass, Oregon, commented that there is an alternative recommendation that must be made to Congress. If solar voltaic generation were developed and integrated by BPA into the FCRPS, it would provide half again more clean energy than the FCRPS now produces, transmits, and markets, and "a lot of this exercise to revise the statutes would be unnecessary," he stated, handing out an outline of his proposal for applied strategic solar voltaic generation.

Consultant Jim Litchfield said the progress report states that the Transmission Work Group abandoned legislative separation of BPA, and "that’s not accurate." The group decided to put its resources into FERC-equivalent regulation, but if we can’t do that, the group could go back to the issue of separation, he noted. You need to clarify that statement, Litchfield advised.

The report also contains the statement that the linkage between subscription and stranded costs "has been severed," he indicated. There hasn’t been any such break -- there is a very direct link, one that we recently heard from the Administration about, stated Litchfield.

I agree with Jason’s comments, Litchfield continued. In the Regional Review, we were aligning risks and rewards, and the deal was that we would pay cost for long-term benefits, he said. Now the stranded-cost talks are moving into other areas, Litchfield stated. The strawman proposal apparently will spend time trying to get others to pay for what should be the long-term benefits of subscription, he commented.

Litchfield noted the statement in the progress report that says since BPA has no shareholders, it is "not organized to bear risk." The issue is not that BPA can’t accept risk, it’s how do we manage the risks BPA has, he stated. The Regional Review anticipated "a new class of BPA shareholders" being formed, Litchfield said. They are the ones likely to benefit, and they have to address how to manage risk in the future, he stated.

Looking back for who benefited from the system as a way to determine who should pay stranded costs "won’t be a fruitful action," Litchfield continued. The way the region has operated for the past 60 years has involved a deal in which the federal government said it would build a hydropower system if we would agree to pay the cost, he said. Power users agreed to pay the cost, and in exchange, the federal government got the benefit of a stable Northwest economy, Litchfield stated. The Regional Review "rightly looked forward," and there are lots of benefits in the future, he said. The progress report should acknowledge we need to look ahead to a system where subscribers pay cost and understand that there may be times when the costs are above the market, Litchfield stated. If there are "bumps in the financial road," we may need to find ways to manage them, but ultimately it is the responsibility of the long-term beneficiaries, he said.

If you want cost, you have to agree to pay cost, Litchfield stated. When BPA’s costs are above the market, utilities will face risks because their customers "can walk" in a competitive market, he noted. The question is, how do we manage the financial future to secure the long-term benefits of the system, and the way to do it is to pay the cost, Litchfield concluded.

"I think you’ve got a business model in an un-business environment," commented Roy Hemmingway. The owner of the system won’t forgo payment today -- Treasury deferral is not an option, he stated. Many of the customers are publicly owned entities, and they can’t operate and raise money like businesses, Hemmingway said. That’s why we’re in this business of looking at stranded costs, he added.

I think the progress report doesn’t investigate ways to manage the cash flow problem, responded Litchfield. I’ve seen, for example, the idea of entering into futures contracts, he stated. The concept is, if the subscription process is designed to secure the benefits of the system for the region, the price of subscribing is paying the system’s costs, Litchfield said. If we turn to using the transmission system, "it’s a blunt instrument," he stated. The Treasury is not a bank, said Hemmingway. It’s not entrepreneurial -- it doesn’t assess risk and try to take more risk in order to get greater rewards down the road, he continued. If we ask Treasury to take that role, we are asking the federal government "to look at its power systems as moneymakers," and "that’s the death knell of the benefits," Hemmingway stated.

The Treasury is not divorced from a financial interest in the power marketing administrations (PMAs) everywhere, replied Litchfield. We "can’t hang ourselves out with a model that says Treasury will accept nothing but 100 percent" -- we need to look at all the options, he stated.

Steve Weiss of the Northwest Energy Coalition (NWEC) concurred that the statement in the report indicating that the linkage between subscription and stranded costs has been severed "is quite wrong." We do have a link -- it’s the idea of options, he explained. If a subscriber wants a long-term right to buy at cost, it may have to pay an option fee, stated Weiss. It’s an important mechanism, it was a major part of the Regional Review, it’s been agreed to, and it isn’t mentioned in the progress report, he said.

Weiss indicated there are other reasons besides the Supply System bonds that make it important to be careful about separation of BPA. There are F&W obligations that are part of the single Bonneville fund, he pointed out.

The description of stranded costs in the report contains a variety of overlapping categories and "gets very complicated," Weiss observed. The stranded cost mechanism should deal with the money that BPA needs -- there shouldn’t be an indication that "this mechanism will deal with this cause" and "that mechanism will deal with that one," he stated.

Weiss said he saw two things in the stranded cost strawman proposal that were not referred to in the progress report. One is the "sharing the benefits" mechanism, and the other is that subscriptions would "get bumped close to market price" under certain conditions, he stated.

"I want to highlight Jason’s issues," Weiss said, adding that the residential exchange issue is "not close to being solved." You should talk about this more, and we may need legislation, he suggested. "This could be the monkey wrench that stops subscription," Weiss warned.

Finally, he noted that the Regional Review contained "a backstop," which called for a system benefits charge if the states didn’t enact legislation by July 1, 1999, ensuring that utilities are meeting the 3 percent standard for investment in conservation and renewables. There’s a good chance there won’t be state action by that date, and we think the Transition Board should talk about the need for backstop legislation in the report, he stated. The board should say, according to Weiss, if you want BPA subscription rights, "you have to eat your vegetables and do your 3 percent."

Ken Canon of the Industrial Customers of Northwest Utilities (ICNU) said the board should keep in mind that the report’s purpose is to inform Congress there are "nuances for the Northwest system" that have to be kept in mind when others in the country are talking about electricity restructuring. You should spell out the principles embedded in this report, he recommended. You did it for transmission, and you should also lay out the goals of the Regional Review with respect to subscription and stranded costs that this endeavor is trying to accomplish, stated Canon. You should recap the principles of: aligning benefits and risks, improving Treasury repayment, and retaining the benefits in the region, and then state how the contents of the progress report match up with them, he suggested.

You should also give some idea of what the Transition Board thinks about these matters, Canon recommended. You represent the governors, and if you see something going down the wrong path, you should flag it, and say, this needs more work, he stated.

As long as stranded costs are talked about "in IOU terms," we’ll have difficulty in this region and in Congress, Canon said. He stated that the section about "costs of historic investments stranded by persistent low market prices" is "out of place in the report." Canon noted the report says that since BPA has no stockholders who have volunteered to bear potential losses, it’s not clear that the remedy for stranded costs being applied to IOUs is appropriate for BPA, and given that the scenario [of historic investments stranded by persistent low market prices] is not one that is anticipated to face BPA in the near future, "little effort has been directed toward this problem." Don’t raise the issue and say "we haven’t looked at it," stated Canon. By doing that, you separate BPA revenue underecovery and its costs -- they’re related and should be back-to-back, he said.

Canon said he agrees that the linkage between subscription and stranded costs has not been severed, as the report states. Canon also criticized a sentence in the subscription section of the report that seems to offer a "value judgment" about the approach to stranded costs. "It’s way too early to do that," he stated.

What, No Comments? Etchart asked if anyone wanted to comment on the strawman proposal for FERC- equivalent regulation of BPA transmission. No one did.

Staff Introduces A Stranded Cost "Orphan"

Staffer Dick Watson said the staff’s strawman proposal for BPA stranded cost recovery will "tee up a bunch of issues" and "tee off a bunch of people." We thought it was important to be clear what problems the proposal is trying to solve, he stated. It is not short-term revenue fluctuations, such as those related to water conditions, and it is not long-term markets below BPA’s historic costs, Watson said. We did not try to use the IOU traditional definition of stranded costs, which is "embedded costs that can’t be recovered at market prices," he stated. It is not (or only to a limited extent), Watson continued, the costs associated with major system configuration changes. We think those costs should be spread beyond the power system and maybe beyond the Northwest, he explained, adding that such actions will require Congressional authorization, and Congress will have to determine the allocation of costs. We thought we needed a mechanism to accommodate some additional costs beyond current levels, for example, incremental F&W costs and other uncertainties, such as "a huge Tenaska settlement," Watson said.

First, A New Forecast

We looked at BPA’s potential future cost exposures, BPA’s ability to manage its base costs, and at whether BPA costs would be below-market or above-market, in which case it could have a stranded cost problem, Watson stated. We tried to develop a range of forecasts of potential market prices, he continued.

Watson showed a graph of "forecast market prices," and said the base case is the staff’s view, in light of natural gas price predictions, continued growth in the West Coast economy, and some improvements in technology. There is also a low case, reflecting lower gas prices, and "for symmetry," a high-market case, he said, noting that all the high case does is "make things look better for BPA, and things look pretty good in the base case."

Watson showed a graph of "net non-operational F&W costs," pointing out these are direct, reimbursable, and capital costs and do not include purchased power costs. We took numbers directly from the Columbia Basin Fish and Wildlife Authority (CBFWA), the Three Sovereigns, and others, and plugged them in, he noted. Watson explained the scenarios, which range from reduced flows to drawdowns to "Transport Plus - Clean Water Act." This latter reflects the Biological Opinion, with additional investments in temperature control and gas abatement, he said, noting that its price tag would be about $350 million-$450 million at the time of initial subscription, but would "ramp up stiffly" after that. That scenario would change hydro generation by about 3,500 average megawatts (MWa), assuming the use of Treaty storage, Watson indicated, adding that the costs of using Treaty storage are not included. Consultant Al Wright pointed out that what is shown here is "the worst-case fish scenario," without a major system configuration.

"How much dispute is there about these numbers?" Watson was asked. That issue hasn’t been addressed yet, he replied. The debate about whether you should do these things hasn’t occurred, and from BPA’s viewpoint, this represents a worst-case analysis, Watson stated. The costs do not reflect mitigation measures, such as extending irrigation intakes, which might be associated with drawdowns, he added. Does it show savings that the federal government would realize by not having to do things like dredge? asked Weiss. No, not at this time, replied Watson. Does it include a large amount of renewable energy? asked Canada. No, said Watson. You’ve assigned risks to things in the fish business you think might come about, stated Canada. You must assign some probability of success to 2,000-4,000 MWa of renewable energy that would be distributed in the system, he said. We’re building photovoltaics, and you should assign a probability of success to that, stated Canada.

Watson displayed a graphic, which shows that with the base-case market price, all but one of the F&W scenarios would result in substantial present-value benefits for the system. This shows that while BPA has diminished cash flow, it’s looking quite good in relation to the market, he said. Watson also displayed a "low market price" chart, which he said "shows a more tenuous situation." This says, given the lower assumptions about market prices and BPA’s costs, BPA would have to pass through some periods where its costs are greater than the market, he stated. What is the probability of this low scenario? he was asked. We didn’t assign probabilities -- others will have to make their own judgments, Watson replied. The staff feels "this is pretty doggone low," but others would argue it should be lower, he commented.

Watson said the preliminary conclusions are that under "good" markets, there is substantial long-term value, and BPA would be in a good competitive position in all but the highest cost F&W scenario. Under low-market conditions, BPA would continue to see positive, but reduced, long-term value, except for the two most costly F&W scenarios, he said. Periods of revenue shortfalls would be likely in all but the lowest-cost F&W scenario and would be most likely in the initial five-year period, according to Watson. But if we come into that period with enough reserves or get better than average water, there may not be a problem, he added.

Canon asked to see a medium-price, medium-fish scenario, and staff ginned one up in minutes. This is without the Clean Water Act scenario and with medium market prices -- "it’s fat city," commented Watson. Staffer Pete Swartz noted that all the numbers are preliminary. Don’t just lock onto these because this is not necessarily where the numbers will end up, he cautioned. There are still a lot of questions about how the market will develop, Swartz added.

I appreciate your developing scenarios around various fish proposals, but the degree of "regional vetting" of these proposals is extremely low right now, said Hemmingway. "We could work harder at disclaiming some of these scenarios," commented Etchart.

The Proposal’s Two Stages

Watson said the staff’s proposal uses an actual deferral of Treasury payments as a trigger, which builds in an incentive for BPA to manage its costs aggressively to avoid a deferral. We were concerned about going directly to putting costs on transmission, so the proposal has a first stage, wherein if BPA subscriber rates are below market and costs are going up, subscriber rates would be adjusted to the lower of: the rate necessary to recover the amount of the deferral in the succeeding year; or market prices, as measured by an index established as part of the stranded cost process, he said. An alternative would be for BPA to build in more net revenues at the start, but we opted for this approach, Watson stated.

In the second stage, costs not recovered in Stage 1 would be recovered through a transmission charge, he continued. The charges would be limited to $100 million in any year, up to a total of $500 million over 15 years, Watson said. "We split the baby," and decided that half of the total charges would be recovered through a uniform surcharge -- the "peanut butter approach" -- levied in the form of a charge for access to the transmission system, he explained. The other half would be recovered through a directed transmission charge, determined by FERC to be proportional to the historic benefits customers received from the purchase of power from BPA, and levied as an access fee, Watson said. Any recovery from the transmission system would be treated as an obligation of the Power Business Line to the Transmission Business Line that would be repaid with interest when conditions permit, he added.

We built in safeguards, according to Watson, including the fact that an actual Treasury deferral is the trigger; and a requirement that reserves and Section 4(h)(10)(c) authority be used to the fullest extent to avoid deferral. In addition, to implement stranded costs, BPA would have to carry out a rate proceeding, and FERC would review the Administrator’s decision to ensure BPA is "adequately mitigating the stranded costs through opportunities to reduce costs and increase revenues," he explained. FERC review would be constrained by the need to: assure security of the Supply System debt; assure repayment of Treasury debt over a reasonable period; and satisfy the requirements of the Endangered Species Act and other legal and Treaty obligations, Watson said. We are not inviting FERC to do a prudency review, he noted.

Watson explained the "sharing the benefits" aspect of the proposal. If BPA rates are below market prices, 40 percent of the difference would be collected from subscribers and used for accelerated repayment of federal debt, he said. The intent of this mechanism is to demonstrate an additional benefit for Treasury, Watson commented, adding it will deflect the "East Coast crowd’s" attention, or maybe "it will call attention to our low rates." It would also reduce BPA’s interest payments and reduce interest expense for subscribers, he said. If, however, Congress authorizes major system configuration changes and these are undertaken, the 40 percent accelerated repayment amount would be treated as "a 4(h)(10)(c)-like credit" against power system responsibility for the costs of system configuration changes, Watson said.

Many clarifying questions ensued. "We haven’t worked through every tittle and jot," Watson noted as he responded to them. We recognize as a board that we have put our staff at risk in trying to do this, commented Todd Maddock. The staff is courageous "to offer up this orphan to stimulate discussion," he added. We need to bring closure to this issue by July 1, so we compliment the staff on putting together this proposal, Maddock stated. No one on the Transition Board has endorsed this -- it’s a mechanism for engaging discussion, he said. "It’s a little something to offend everyone," quipped Hemmingway.

How will you get comments and revise this? asked Weiss. The board will hold consultations about it, and we’d like to have written comments within two weeks, replied Watson. After that, the board will decide what it wants to put out for public comment, he said. Do we have all the strawman proposals now? asked Jim Baker of the Sierra Club. As far as we know, replied Watson.

No One Rushes to Adopt the Orphan

I’d like to offer an observation about how to think about stranded cost proposals, said John Saven of Northwest Requirements Utilities. You should think about solving one problem, not two or three problems -- to the extent we divide the issues, it works against solving the problem, he stated. The PPC did a good job of advancing an overall stranded cost proposal, Saven said.

I also concur with PPC’s comments about transmission, Saven noted. I represent 45 utilities that have transmission arrangements with BPA that are "well-rooted in history," he continued. There’s a genuine fear that removing the BPA Administrator from the decisionmaking process "guts any sense of history and lets the entities that have lots of resources go to FERC and prevail," Saven stated. The bottom line is that "whether it’s A, B, C, or D who takes over as BPA Administrator," the utilities I represent want to have that administrator, after a FERC-appointed ALJ makes a recommendation based on a hearing in the Northwest, have the opportunity to review the record and make a decision, he said. To remove that authority from the administrator is a real problem -- "it’s a bread and butter issue to the folks I represent," he said.

The strawman stranded cost proposal is built on premises that are not well founded, Saven continued. The premise, for example, that there is long-term value in the federal system and that people are willing to make a long-term commitment is "a nice idea that we talked about" at the Regional Review, he said. But you wouldn’t bet on that as a preordained outcome, because in 2012 through 2018, when the Supply System debt is retired, and there are "lots of bucks around," who doesn’t think the PMAs might be sold? Saven stated.

BPA is trying to sign people up -- they’re on the street right now, he continued. There’s a premise in the stranded cost proposal that people could make a deal and shake hands, and then BPA could change that deal unilaterally if things don’t work out as BPA thought, Saven said. "People don’t want open-ended deals," he stated.

As for the transmission surcharge, the real question, according to Saven, is whether it is "fair" for BPA to exercise the authority to move to Transmission Business Line (TBL) cost recovery due to a Power Business Line shortfall. To the extent BPA is limited to five years for setting rates, it’s fair to do it in the short term, and PPC laid out the parameters for imposition of such a charge, he said. At the end of five years, the TBL should be first in line to be repaid, Saven noted. Those who use the transmission system will be around for a while --you don’t need to jack up rates to market in a five-year period, he said. It’s an issue of using the transmission lines for a limited amount of time, Saven stated.

In the Regional Review, we backed away from the concept of "sharing the benefits," Saven stated. "Don’t hang your hat on resolving this," he advised. If we get to a point where BPA is clearly prosperous, then we can deal with it, Saven suggested. Let’s get through the next five years with BPA revenues, decide what to do with the river, and then deal with it, he recommended. It’s not integral to dealing with the stranded cost issue, Saven stated. My customers are looking at other options, and they are continuing to find BPA attractive, he said. I hope we don’t "put a burr in the saddle" for those people," Saven concluded.

Etchart asked Saven about his comments about the long-term benefits of the system. You could try to design a contract to secure those benefits, but what guarantee is there in the long term about federal legislation or other directives that would affect the PMAs? Saven replied. "Folks don’t think 20 years is in the playbook" - five years is where you’ll see the bulk of customer activity, he stated.

BPA looks like a better bet over the next few years than it was when we discussed it in the Regional Review, commented Etchart. People have questions about the cost of BPA beyond 2006, and they are associated with the configuration of the river, responded Saven. I see five-year deals, and 10-year deals with exit provisions, he stated. I haven’t seen many people interested in "opening up their wallets" and taking their chances for 20 years, Saven said.

PPC: This Makes Subscription Impossible. We believe this approach makes subscription impossible, said Carr. It works hard to transfer all of the benefits of the federal system out of the Northwest, which was not the intent of the Regional Review, she stated. I can think of few who would sign up for "a cost plus 40 percent contract," Carr said. We opted for simplicity, and you made it complex, but we’re willing to continue to work with you on the issue, she stated.

You are telling people that if there’s a time when BPA is below market, they won’t realize that benefit, Carr said in response to a question. People tell me "if I can’t survive for the next five years, it’s not a value to me," she stated. My phone has been "ringing off the wall" from people about this, Carr commented. That’s the outcome we were hoping for, said Etchart. We’ve worked for years to ensure BPA costs are under control, Carr said. BPA’s value is low-cost, green power -- why set up a situation where people would be reluctant to subscribe to it? she stated.

I’m assuming we have to come up with a stranded cost proposal, said Hemmingway. I don’t understand the reluctance to subscribe, he added. The unknown is "cost plus," replied Carr. It’s the cost side of the equation that is the problem, she said. But paying market is a "dead uncertainty," stated Hemmingway. I see the choice as cost-based rates at reasonable costs versus this proposal, responded Carr. Public power has tried to come up with a stranded cost proposal that is simple and that we believe is workable, she said.

IOUs: A Dangerous Debate. I agree with Maureen about the Regional Review, said Litchfield. The prepayments to Treasury "might be a good sweetener," but "it’s like the Northwest is negotiating with itself" -- how sweet do we have to make it so Treasury will go along? he stated. Forty percent is "a big hit" -- there was no 40 percent in the Regional Review, Litchfield continued. "You start a debate here again that is dangerous," he stated. You say that 40 percent is a reasonable place to start, but then other people will say, what’s wrong with 80 percent or 90 percent? Litchfield said. It’s not useful for the region to talk about that if we are trying to preserve the benefits, he stated.

With respect to John Saven’s remarks, Litchfield said, "I’m not suggesting lashing customers to BPA’s mast for 20 years." But a series of five-year deals will take us to market, he predicted. In 2006, things will be bumpy, and maybe the region can hold onto cost, Litchfield said. In 2011, when BPA drops to 12 mills, the Northwest won’t have any clout then, he stated. To preserve the benefits, we have to come up with some creative options, not just 20-year deals, Litchfield said.

"Maybe the staff got a bad load of hay when they wrote this," quipped Litchfield. The stranded cost proposal is missing any set of principles, he said. I suggest you go back and think about what goals you are trying to achieve so that you are going in a direction -- "I don’t see the pieces here fitting," Litchfield said.

Wright explained the basis for the proposal’s 40 percent idea, noting it is a line of credit, not "a license to spend," and that subscribers would be retaining 60 percent of the benefits. We also decided we needed to drive subscribers up to market before imposing a charge on anyone else to avoid having subscribers sit there below market while non-subcribers are hit with a surcharge, he said.

You didn’t need to put in numbers -- the Regional Review didn’t, said Litchfield. Getting ahead could be a justification for BPA making payments ahead of time, but if you formalize it in a Northwest chapter, there’ll be a lot of Congressmen there helping you to choose the numbers to put in the chapter, he suggested. In Washington, D.C., we met "uniform and heartfelt hostility to this idea," observed Etchart.

ICNU: Watch Your Language. You should be extraordinarily careful about the language you are using, advised Canon, noting there has been talk of "customers, beneficiaries, and subscribers." We should focus on subscribers to follow through with the Regional Review, he said, adding when I think of beneficiaries I think of "entitlement-type beneficiaries." Be careful about the words you use because it leads you in certain directions, Canon advised.

As you go through the stages, you should try to crank in exactly where each of the safeguards fits, he recommended. I agree with the idea of moving subscribers to market, if necessary, Canon said, adding, "we assume all the other 14,000 MW of load in the region would be paying market."

As for the transmission surcharge, you did it two ways, peanut butter and historic benefits, and both miss the mark, he stated. Everyone else will be paying market, but to ask an IOU industrial customer to "pay for BPA’s problems" -- that would be difficult to sustain nationally, Canon said. And if you go to past beneficiaries, "how do we get the Californians?" he asked. People who sign up and get the value of the system should carry the cost, Canon concluded.

NWEC Questions. Weiss said what bothers him about the 40 percent is "the conditions for getting it back." It’s only for a limited use, and if we have to do things like flip lips, which are not dam modifications, we can’t use it, he stated. It’s important to clarify how that credit will be used, Weiss said. Putting the money away could be a big selling point in getting the Northwest chapter approved, but getting it back is the problem, he stated. Some will say "it’s a down payment" on dam modification, Weiss said. It’s a valuable idea, which I support in general, but the details need to be worked on, he stated.

What Now. There will be more opportunities to discuss this in the future, said Etchart. We hope to end up with a consensus proposal that the Transition Board can adopt, he noted. If the PPC and others have concerns, the Transition Board should do some outreach to hear what people think about this proposal, suggested Kreidler.

I didn’t hear any "acknowledgment of paternity" among the four Transition Board members for this proposal, stated Hemmingway. Try to get your written comments to us by May 8, Watson told the audience.

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).