The Northwest Energy Review Transition Board called on BPA customers and interest groups to discuss their efforts to develop a stranded cost proposal. The staff made presentations on how transition activities fit together and on the status of the BPA cost review. Consultant Al Wright reported that the Subscription and Transmission Separation Work Groups are making good progress. All board members were present; the audience was about 25.

Next Meeting: September 9 in Portland.

Headlines___________________________________________________

Interests Link Up To Talk Transition Costs

The Transition Puzzle: Do the Pieces Fit Together?

Work Groups Progressing

Cost Review Kickoff Set For August 25

ORDER OF BUSINESS___________________________________________

Chairman John Etchart opened the meeting by saying the Transition Board would attempt to make its meetings less formal. There has been criticism that the process is "stilted" and not conducive to collaboration, he said. We’ll try to make things more informal and discussion-oriented, Etchart stated.

Interests Link Up To Talk Transition Costs

Council staffer Dick Watson reported that the Transition Board had received letters in the past couple of days from representatives of BPA customer groups, including the Direct Service Industries, Inc. (DSIs); investor-owned utilities (IOUs); and the Northwest Requirements Utilities. DSI executive director Steve Waddington said his letter resulted from a couple of joint meetings the DSIs, Public Power Council (PPC), and IOUs held to decide how to develop a stranded cost proposal.

We wanted to let you know we are willing to work on the issue and how we plan to go forward, Waddington stated. We’ll report regularly to the Transition Board, he added.

Todd Maddock said he was pleased about the willingness of the customers to step up and participate in the process. He asked Waddington to clarify the group’s intent to include BPA, Council staff, and other interested parties in its discussions. How do you see that playing out? he asked. That question is on the agenda for our next customer meeting, Waddington replied.

The transition cost issue is something the Transition Board is to follow through with, and I’d like to develop a process or forum in which we can all participate, Maddock continued. Your efforts are very critical, he said, but this could be viewed as "you are the only ones participating." We have to broaden this process and be more inclusive, Maddock stated.

Waddington indicated that the customers’ letter does not address how the Transition Board should conduct its process. "I’m impressed with the level of candor we’re seeing," he continued. The point is to limit the group at the moment to keep the candor coming, Waddington said.

Maureen Carr of PPC said one reason the customers thought it was appropriate to pull in t Transition Board staff is that "they will be able to help you understand the serious issues." You’ll note that there is no letter from PPC, she said. As we worked on defining principles, we were soon into "a laundry list of issues," and we decided to let the issues drive the principles, Carr explained.

Timing is the tough issue, and that’s not talked about here, Mike Kreidler observed. Waddington said there is agreement that the customers "have to pedal fast enough" to make progress in a timeframe that meets the expectation of the Congressional delegation.

Steve Weiss of the Northwest Conservation Act Coalition said his group is getting close to a consensus on stranded costs. We think this is a good course for coming up with a proposal, he said of the efforts outlined in the letters to the board. A lot of proposals are converging, Weiss commented.

Our group found it difficult to have a discussion that addresses solely the principles for a stranded cost mechanism, Weiss continued. "When you only talk about principles, they turn into platitudes that don’t mean anything," he stated. We found we quickly got into a discussion of issues, Weiss explained.

"The key to a proposal is certainty to customers of their total cost exposure," he asserted. There has got to be a limit, he said, adding that this is "something the fish interests don’t like to hear." But "it’s a critical piece," Weiss said. The limit has to be high enough that the Northwest delegation can show Congress "we are doing our part," he continued. We hope we won’t need to put a stranded cost mechanism into effect, but once you cap the exposure, people will be willing to sign on, Weiss stated.

The IOUs Check In With Principles

Consultant Jim Litchfield outlined the stranded cost recovery principles the IOUs put together. Stranded costs are "near and dear" to the private companies, and they are addressing the issue in other forums as well, he said. Litchfield indicated the IOUs hope that the subscription process works to avert stranded costs, "but it’s clear that the Administration isn’t willing to wait." We’re willing to work to find a mechanism that we hope won’t be used, but if it is, will be used fairly, he said.

The IOUs presented four principles for stranded cost recovery. First, the mechanism should not diminish BPA’s incentive to reduce costs and become more efficient. You could have a mechanism that "cocoons" BPA, and that would not be desirable, he said. Second, the mechanism should not be a way to shift avoidable future power costs to a taxing mechanism. All generating resources have some environmental costs, Litchfield explained, and these costs should not be shifted to others through a stranded cost mechanism. For example, a mechanism should not allow BPA to impose a charge on transmission to cover a carbon emission tax.

The third IOU principle relates to targeting a stranded cost recovery mechanism to those for whom BPA incurred generation-related costs. Stranded costs are created by customers who leave the system, Litchfield said. The problem will be if subscribers who choose to stay and those who leave are treated the same. The mechanisms should not create disincentives for those who decide to remain with BPA, he said.

A fourth IOU principle states that the entirety of BPA’s generation must be considered in determining if there are stranded power costs. We’re dealing with whole utilities here, not individual resources, Litchfield said. This principle involves the complexity of BPA’s contractual arrangements related to customer resources and avoiding cost shifts, he explained. We want to work with other customers to come up with a package that works, Litchfield concluded.

There are lots of encouraging signs, Etchart observed. We’ll talk about milestones and timelines at a later time, and come together in the next two meetings to discuss principles and options, he said.

Weiss again cautioned against a focus on principles. Let’s not try to do principles, he said; let’s look beyond to issues. Waddington concurred. We quickly rejected principles, he said of the customers’ discussions. We wanted to get into the issues and get specific. Our first question is, how will you define a cost as stranded? The second is, who will pay it?

Waddington said the customers spent a whole day on the definition issue. We are working on three or four different ways of approaching a definition, he said. I’d be willing to come before you and get into detail, but "I’d ask you not to create pigeonholes for us to fit into -- let’s keep a more fluid and organic process," Waddington urged.

Kreidler reminded the group that from the governors’ standpoint, it is important to have some kind of timeline. He cautioned against getting caught at the end without sufficient time.

The issues are controversial, and we are committed to briefing you, Litchfield said in support of leaving the process less structured. "We have a group that is constructively working together," Carr noted. Some said this would never be a consensus process, she observed. I don’t think there’s a conscious attempt to drag it out, but it’s "extremely contentious," Carr continued. We want to be back here saying "this is something we all think will work," she said, urging "a little patience."

Watson said it might promote more productive discussion if the board is able to specify dates for specific topics. There are essentially three issues: How do you define? How do you allocate? How do you collect? he said. It might be helpful if "we all aim at the same place" when we get together, Watson suggested.

We have a meeting on September 9, and we’ll get an update then, Etchart said. He suggested the board would consider at that time what milestones are needed. Weiss requested that a long period of time be allotted to the briefings at the next meeting so the groups can get feedback from one another and from the board.

Al Canada suggested the groups consult an Energy Information Administration analysis, which he made available, as guidance for defining stranded costs.

The Transition Puzzle: Do the Pieces Fit Together?

Waddington elaborated on an August 8 letter that Mark Crisson, chair of the Pacific Northwest Utilities Conference Committee’s (PNUCC) board of directors, sent to the Transition Board. The PNUCC board discussed the fact that the region has been working on the recommendations of the Comprehensive Review for six months, Waddington said. It’s time for you to take a fresh look at the work plan to see how the pieces fit together, he stated. In doing so, there are two important points, Waddington observed. First, be clear on what goals you are trying to accomplish, and second, the key is controlling BPA’s costs. In any revision of the work plan, the cornerstone should be on cutting BPA costs, he said.

Watson walked the board through a table and timeline depicting how the "pieces of the puzzle" fit together. The table is the first step in re-examining the work plan, he said. The table lists several "pieces," the goals for each, the necessary components for achieving the goals, and how each interrelates or depends on other pieces.

Cost Control. The goal is for BPA to meet or beat market prices and eliminate transition costs. The components are specific cost recommendations and accountabilities.

Fish and Wildlife Memorandum of Agreement (F&W MOA). The goal is to establish BPA’s F&W obligations for the 2001-2006 time period. There are several components, including capital costs, river operations, annual revenue requirement, and accountability. Watson noted that this is not a Transition Board activity, but it bears heavily on subscription.

Transition Cost Recovery. The goal is a mechanism for allocating costs that BPA cannot otherwise recover. The components are coming up with principles, options, and a proposal. This piece relates to the question of cost control, the F&W MOA, and river governance.

Subscription. The goal is to have BPA’s power products fully subscribed for at least 2001-2006. There are several components, including definition and prices for the products and services, definition of the business relationship, and contracts. Subscription is interrelated with cost control, the F&W MOA, transition cost recovery, and river governance.

Transmission Separation. The goal is an efficient transmission system that facilitates a competitive electricity market and assures BPA’s ability to meet its financial obligations. The components include legislation or administrative changes to separate transmission from power marketing; regulation of the transmission system by the Federal Energy Regulatory Commission (FERC), under standards equivalent to those used to regulate IOU transmission; and legislation to permit BPA to participate in an independent grid operator (IGO). This piece is dependent on transition cost recovery to provide assurance to third-party creditors that separation won’t adversely affect their security.

River Governance. The goal is to establish how and by whom decisions about river operations are to be made. The components are: who will govern and under what authority?

Watson presented a timeline that shows how the dates and deadlines correspond. The MOA process will go through April 1998. The cost review recommendations will be completed in January 1998, with follow-on activities likely. The subscription process aims to have BPA products with prices available in July 1998 to kick off bilateral negotiations. The transition cost discussions will identify legislative needs by March 1998 as part of a Northwest restructuring package for Congress. The transmission separation process will also aim to mesh with the March 1998 restructuring package. The river governance piece will extend into 1998 and link with the restructuring package in mid-1998. Watson noted that the timetable does not show river governance concluding next spring. It’s ongoing, he said.

Etchart suggested that Watson and perhaps board members could attend meetings of the constituency groups to discuss how the pieces are coming together. I’d like to have those discussions "as a cross-check" that we’re approaching this in the right way, he said.

The Legislative Angle

Roy Hemmingway said he would like to hear from other interests about what pieces need to be in a legislative package and what the timing of the package should be. I’ve always thought we needed to have a package, he stated. It seemed that BPA’s piecemeal approach to resolving the related legislative issues was unacceptable, he said.

The region has also been given indications that it should be ready with something for this Congress, according to Hemmingway. I have my ideas based on many conversations in Washington, D.C., he said. I’d like people who also make contact in Washington to give us their feedback on whether we are on the right path, and to tell us what they think Congress and the Administration are going to need to buy off on this, Hemmingway said. At the next meeting, I’d like representatives of various interests to come before us and give us their viewpoint, he concluded.

Etchart said the board would invite a panel to discuss the legislative strategy at the next meeting. Kreidler said he thought it made sense to do so. "I have a nervousness" about Congress getting on a track in which we can’t participate, he said.

Work Groups Progressing

Consultant Al Wright said the Transmission Separation Work Group is focused on defining what would be "true FERC equivalency" for regulating BPA’s transmission system. He said that a recognition is evolving that in many cases, FERC could not "do that" to another federal agency. We’re having a discussion of both procedural and substantive issues, Wright reported. We don’t have complete closure on the definition, but we are making "great progress," he said.

The group is leaving the issues of organizational form and governance aside for now, Wright said. We will soon get into a discussion of what legislative requirements there will be for BPA to participate in an IGO, he added.

With regard to the Subscription Work Group, Wright said there has been good progress in defining BPA products and services, but not as much has been done in the area of defining the business relationship. A "prime candidate" for a contractual arrangement is a five-year, fixed-cost agreement, he said. There are some conversations about products and services BPA doesn’t normally offer, such as "the slice of the system" proposal, Wright reported.

There is "an ongoing undercurrent of concern" about whether customers are giving up regional preference, he said. A big question is whether a preference customer who leaves the BPA system can return at cost, Wright explained. There is concern that there may be a need for legislation on this point, he stated.

Cost Review Kickoff Set For August 25

Watson noted that while the BPA cost review is not a Transition Board activity, it is a key part of making other things happen. To date, the activities include organizing a management committee, drafting a scope of work, and getting feedback from customers, he reported. Council staff are engaged in "pre-meeting meetings" with committee members to go over basic information about BPA’s cost structure, Watson said.

The Council’s Power Committee members, Todd Maddock, Mike Kreidler, John Etchart, and Joyce Cohen, will serve on the cost review management committee, along with Sue Hickey and Jim Curtis of BPA. There are also five outside members, chosen for their experience and expertise in cost review matters: Comprehensive Review chair Chuck Collins, former Washington Natural Gas CEO Bill Vititoe, Weyerhaeuser vice president Rosemary Mattick, former US Bancorp president Robert Lane, and Florida investment manager and co-op board member Curtis Bostick.

Council staff and consultant Carol Opatrny developed a draft scope of work for the review, which will be the focus of the first meeting, Watson reported. The scope includes BPA’s operations, the maintenance and capital costs of the Federal Columbia River Power System, and the costs of BPA and other federal and non-federal agencies that BPA funds, he said. The review will consider both whether the function needs to be done, and whether it can be done at less cost, Watson explained. The committee will also try to identify "tradeoffs," where cutting costs would affect service levels, he added.

The review will focus on BPA’s major business lines: power, transmission, and energy efficiency, as well as corporate overhead, Watson stated. Several things have been deemed to be outside the scope, including changes in BPA’s fundamental responsibilities, contractual requirements, and issues that are being addressed in other processes. The committee will not look at the question of sale or lease of transmission facilities or at BPA’s marketing strategies, Watson said. The committee will be able to call on outside expertise, he continued.

There were a number of comments on the scope, Watson reported. People said be inclusive, test the need for various functions, use independent consultants, and be aware that the timeframe may be too short. We asked all of those who commented for their view on what would make this a success, he said. The primary response was: If BPA can meet both the market and its essential obligations, the review will be a success.

Weiss said he presumed shutdown of WNP-2 would be part of the review, and Watson said information on the plant’s operating costs is being put together for the committee. Canada asked who is paying for the review, and Watson replied that the Council is paying, which means BPA is paying.

We are aiming for recommendations in January, with a report to Congress in March, Watson said. There is a growing expectation there will be a follow-on to this review, he added.

The first committee meeting is set for a full day August 25, and members of the public can attend as observers, Watson said. Maddock indicated that he wanted to hold open the option that some part of the session may be closed, and he indicated there would be an announcement of the schedule.

The cost review is important symbolism, Etchart observed. It is important to the skeptical federal power buyer, he added.

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).