June 3, 1997

This letter sent to the Northwest House of Representatives Congressional delegation

Dear Member of Congress:

This letter is intended to give you and the other members of the Northwest House delegation our early view of the legislative issues posed by the recommendations of the Steering Committee of the 1996 Comprehensive Review of the Northwest Energy System. The need for legislation is clearer for some issues than it is for others. In almost all cases, it is too soon to propose specific legislation, but the general areas of concern and some more specific issues can be pointed out at this time.

Transmission

The Comprehensive Review called for the Bonneville Power Administration to participate in a regional independent grid operator (IGO). The Review also called for legal separation of Bonneville’s transmission functions from its power functions. The goals in calling for Bonneville’s participation in a regional IGO and separation of its functions are to promote competitive practices, improve reliability and reduce or, in the case of separation, eliminate the potential for self-dealing between the generation system and the transmission system. At the same time, the Review established a goal that such separation not jeopardize or diminish the legal obligation and ability of Bonneville to meet fish and wildlife and other obligations. Finally, the Review called for legislation to subject Bonneville’s transmission to regulation by the Federal Energy Regulatory Commission (FERC) that is equivalent to FERC’s regulation of investor-owned utilities.

The issues regarding legal separation and FERC jurisdiction are complex. This is particularly so because separation has implications for the security of Bonneville’s third-party debt that need to be addressed carefully to ensure that the security is not impaired. Our Energy Review Transition Board is currently sponsoring a regional working group that is examining the legal and other issues related to transmission separation. This working group has a target of this fall for draft legislation.

A somewhat less complex, but important, problem is the removal of barriers to Bonneville’s participation in a regional IGO. Participation in an IGO could go a long way toward meeting the Review’s goals for transmission. A Northwest IGO is currently in a relatively advanced stage of formation, and Bonneville is an active participant in the organizing discussions. Bonneville’s actual participation in the IGO, however, is problematic. A primary reason is that Bonneville is believed to be constrained from turning over operational control of its transmission system to a regional IGO primarily by Bonneville’s transmission responsibilities under its organic authorities and by the provisions of Section 208 of the Urgent Supplemental Appropriations Act of 1986 (Pub. L. No. 99-349, 100 Stat. 749, July 2, 1986). Section 208 had a broader purpose, but one of its consequences is believed to be to preclude Bonneville’s participation in the regional IGO. These constraints would need to be changed.

The change should not mandate Bonneville’s participation in an IGO. There are additional issues that must be resolved before Bonneville can be a full participant, but it is possible those issues can be resolved contractually. Bonneville and the other participants in the IGO process should be encouraged to work expeditiously to reach resolution. If the issues cannot be resolved contractually, additional legislation may be required.

Strategically, it may be prudent to wait until the legislative requirements for separation of Bonneville’s generation and transmission are known so that legislation can be pursued in a complete package. However, if by early fall it appears that the steps necessary to achieve separation may be delayed, and it appears the other issues associated with Bonneville’s participation in the IGO can be satisfactorily resolved without legislation, legislation addressing Section 208 and Bonneville’s transmission responsibilities should be pursued in order to allow Bonneville to turn over operational control of its transmission facilities to the IGO.

Subscription

The Steering Committee of the Comprehensive Review intended that its recommendations for a subscription process for federal power be accomplished, to the greatest extent possible, without legislative changes. Bonneville has made a preliminary examination of the recommendations and believes that it has sufficient flexibility under existing legislation to carry out the recommendations, given some latitude for their interpretation. There is, however, some uncertainty whether Bonneville would be able to enforce certain aspects of the recommendations. For example, the Review recommended that preference customers that choose not to continue to purchase from Bonneville at cost would, if they subsequently wish to return to Bonneville service, have to take service at market prices. Bonneville believes it can implement this provision. However, it is not absolutely certain what would happen if a customer chose to challenge Bonneville’s implementation of that recommendation in the courts.

At this point in the process, it is too soon to know with complete certainty whether the existing law places such possible impediments in front of implementation of the recommendations. A federal power subscription work group has been formed to implement the Review’s recommendations. The work group has as one of its tasks clarification of the legal issues involved in implementation, with a preliminary report scheduled in its work plan for the end of 1997. The participants in this work group are trying to accelerate their process. If they are successful, we will endeavor to have recommendations regarding any legislative barriers to the subscription process in the fall.

Bonneville Cost Control

Effective control of Bonneville’s costs is essential if the subscription process is to be successful. We believe that any regulatory barriers to achieving better cost control should be removed if it can be done without diminishing Bonneville’s public accountability. However, we are not yet at the point of being able to identify specific measures.

We also believe there is a need for more effective regional oversight of Bonneville’s costs. The Comprehensive Review called for the establishment of a customer advisory committee that would also include representatives of other interests. The intent was that the advisory committee would review Bonneville’s budget requests, overall capital and operating costs, rate setting, and key marketing issues. The committee also would provide input on the power-related capital and operating cost decisions of the U. S. Army Corps of Engineers and the Bureau of Reclamation.

Bonneville’s own objective of selling power for 20 mills per kilowatt-hour by the year 2000 likely will require substantial cost-cutting efforts. In addition, there is widespread interest by Bonneville’s customers to review thoroughly Bonneville’s operating and capital costs prior to serious discussions regarding potential transition cost recovery mechanisms. Consequently, we are asking the Northwest Power Planning Council to work with Bonneville to establish a cost-control forum to assist Bonneville in controlling costs in preparation for a post-2001 subscription process.

Transition Costs

As we recounted to you in our preliminary letter, the final report from the Steering Committee noted that if its recommendations were prudently implemented, the risk that Bonneville would need to seek recovery of its transition costs would be reduced dramatically. Working to ensure effective cost controls and a successful subscription process is our highest priority. Many parties would rather not take up the issue of transition costs at this time. We have received warnings that addressing transition costs could distract from efforts to bring about a successful subscription process. Others have encouraged us not to defer discussion of transition costs until the subscription process is complete. When all is taken into consideration, we believe that if the region’s efforts are to be well-received in Washington D.C., a realistic process for dealing with Bonneville’s possible transition costs will be required.

Bonneville and most of its major customer groups have signed a settlement agreement that provides a procedure that can be implemented under Bonneville’s existing authorities for determining transition cost obligations. This process would determine whether Bonneville has any transition costs and the amount and allocation of those costs. However, the question of Bonneville’s authority to impose a transition cost charge would also be at issue in such a proceeding. That authority is contested by many parties.

The process envisioned in the settlement would be an evidentiary proceeding conducted by Bonneville consistent with the requirements of Section 7(i) of the Northwest Power Act. The scope of that proceeding would include a fresh review of all relevant issues. The decisions of the Bonneville administrator in this proceeding would be subject to limited review by the Federal Energy Regulatory Commission on the adequacy of the resulting rates to meet Bonneville’s obligations and, with respect to transmission rates, the equity of the allocation of costs between federal and non-federal users of transmission. In addition, parties would have the right to challenge the administrator’s decisions in federal court. Although this settlement process is in place, we do not feel it is adequate to cover the needs in a post-2001 subscription process.

The issue of transition costs has come up in the discussions of transmission separation because of the steering committee’s recommendation that any separation of Bonneville’s transmission and generation functions not jeopardize or diminish the legal obligation and ability of Bonneville to meet its financial obligations. The transmission working group has made considerable progress in terms of understanding the legal issues associated with Bonneville’s possible authority to deal with transition costs, but the group has not reached any conclusions.

Developing a realistic process for Bonneville’s possible transition costs will take time and should not be postponed. To respond to this issue, we will ask the Energy Review Transition Board to carry out a process to discuss Bonneville’s potential transition costs. This process should go forward parallel to, but somewhat slower than, the subscription process. We hope that will not detract from the subscription discussions. The objective is to analyze options for a contingent transition-cost recovery mechanism at a pace that will be measured enough so as to not disrupt subscription and timely enough to provide the basis for legislation if required.

River Governance

The question of river governance (how decisions are to be made with respect to the costs of fish and wildlife restoration and the operation and configuration of the Columbia River System affecting fish and wildlife, power and other river uses) is central to the success of the recommendations of the Comprehensive Review. Those whose primary interest is the recovery of salmon need greater certainty regarding the restoration measures that will be undertaken and the availability of funding to carry them out. Utilities and others need greater certainty with regard to their obligations to pay for such measures. No one is entirely satisfied with the process as it currently exists.

The Energy Review Transition Board asked a group of people from the tribes, federal agencies, the states, utilities, fish and environmental interests and other river users to provide us with ideas on how to work toward a more effective process of river governance. That group met on May 15 and 16. We met with the region’s tribal leaders and representatives of the administration on June 3 to discuss those ideas. There was a shared sense at that meeting that the states, tribes and federal government need to work together to address governance and the fish, wildlife, energy and other issues that governance entails. We are committed to pursue this dialogue, recognizing that we have a limited period of time in which to address these very challenging issues. We will report to you on the outcome of those discussions as they progress.

Public Purposes

The Comprehensive Review recommended that each state enact legislation calling for a minimum investment of 3 percent of energy service revenues to fund conservation, renewable resources, and low-income weatherization. The Review also provided that, if by June 30 of this year 90 percent of the load in the Northwest had not committed to meet the minimum standard, the region should seek federal legislation calling for a regional minimum standard. The commitment could take the form of state statutes, utility tariffs, rate or other filings, utility budget resolutions or other evidence. The state legislatures have been working hard to address retail access legislation, including public purposes, and many utilities are continuing their efforts to secure conservation and renewable resources.

The complex and controversial nature of this legislation is such that only one state has been able to enact legislation and it is unlikely that we will know by June 30 whether or not the regional standard is being met. Versions of retail competition legislation that contain provisions for funding public purposes have been introduced in Congress. As Congress considers this and other legislation regarding retail competition, it is possible that the region will be seeking provisions in that legislation establishing a minimum standard for public purposes consistent with the recommendations of the Review.

We appreciate this opportunity to assist you as you prepare to represent the region in the national electricity restructuring debate. Although we know you were seeking specific legislative recommendations from us at this time, the complex nature of the issues we and the region are examining requires that we take more time. We want to ensure that we have conducted a thorough review of the issues, and have included the public to the fullest possible extent in this effort. However, in the event that this response does not meet your immediate needs, or if the House begins moving legislation before our regional process is finished, we are committed to working with you to define a set of preliminary recommendations that you could use to ensure that the Northwest’s interests are addressed during the national debate.

Sincerely,

Philip E. Batt Governor of Idaho

Marc Racicot Governor of Montana

John A. Kitzhaber Governor of Oregon

Gary Locke Governor of Washington