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Northwest Energy Review Transition Board John Etchart,
Montana
851 S.W. Sixth Avenue, Suite 1100
Portland, Oregon 97204-1348		 John Savage,
Oregon
Phone 503-222-5161 or 1-800-452-5161 
FAX 503-820-2370		 Tom Karier,
Washington
Todd Maddock,
Idaho
Tuesday, April 27, 1999
NORTHWEST ENERGY REVIEW TRANSITION BOARD
NWPPC Conference Room, Portland, Oregon

The Transition Board took comment on its report to Congress on recommendations “to effect FERC oversight of BPA transmission” and got conflicting advice on whether the board should fold up and go home or settle in and roll up its sleeves.  Syd Berwager explained what’s new with BPA’s subscription proposal, and Brett Wilcox expressed the aluminum industry’s frustration with that process.  All members were present.  The audience was about 35.

HEADLINES____________________________________________________________

Report on the Status Report on FERC Oversight of BPA Transmission
Public Comment Highlights Lack of Consensus
The Latest on Subscription
Wilcox:  “The Comprehensive Review Is Dead”
Where Does the T-Board Go From Here?

ORDER OF BUSINESS_________________________________________________

Chairman John Etchart said the Transition Board received a letter on March 8 from some members of the Northwest Congressional delegation indicating “an uneasiness” with the board’s efforts to work with the region to develop a Northwest chapter to a national electric utility industry restructuring bill.  They thought the Transition Board “was taking license,” he said, adding that the letter was signed by all the members of the House from the Northwest states, except Montana.

While the board may think the House letter doesn’t accurately reflect the efforts the Transition Board has made to communicate with the delegation, nevertheless, we take the letter seriously and recognize the delegation is working in “a hostile, anti-Northwest environment,” Etchart stated.  We want to be helpful to them, he said.  The delegation has a legitimate concern that a legislative draft they don’t control will be harder for them to assemble and maintain a united front on, according to Etchart.  He said the Transition Board wrote back to the delegation April 12.  The board’s response “was an olive branch, and we want it understood as such,” stated Etchart.

On May 10, members of the board will go to Washington, D.C. to update the delegation on Transition Board activities, especially work on transmission, Etchart noted.  We will try to get agreement on how the board can be the most helpful to the delegation as we go forward, he said.

Report on the Status Report on FERC Oversight of BPA Transmission

Staffer Wally Gibson explained that the report originated as a result of the Comprehensive Energy Review’s recommendation to investigate separation of BPA into power and transmission entities.  A work group examined the idea and found it so fraught with problems that the focus shifted to looking at the issues of “FERC regulation equivalent to that over IOUs,” BPA’s authority to join a regional transmission organization, and a mechanism to address unrecoverable costs, he said.  The work group started with a set of principles from the Transition Board and held several meetings with attorneys for various interests, but then was stopped by the delegation’s letter, Gibson stated.  This report indicates where we got to, but we haven’t had “a big tent discussion” of all the latest changes that were made to it, he noted.

Gibson recounted the principles the Transition Board put out in a paper last August.  They are:


Gibson said the Transition Board set forth the following contingent cost recovery principles last September:
 


Gibson outlined several FPA issues, such as the phasing in of rate changes and cost impacts, and how limited environmentally driven access to federal transmission would work, including a concern by some parties that BPA might exploit it for commercial gain.

Gibson explained concerns associated with Congressional versus FERC pre-approval of BPA’s budgets and how to recover transmission costs not yet incurred but which BPA says will occur later in the rate period.  Staff believes that the Congressional-approval process is a sufficient mechanism for oversight of BPA’s transmission expenditures, that costs incurred as of the date of a rate filing should be deemed recoverable, and that if costs are not incurred at that point, they would be subject to FERC’s judgment, he said.  Gibson noted that the report proposes that if power costs threaten Treasury payments, FERC would review a transmission surcharge proposed by BPA that would recover no more than $100 million in any year, up to a cumulative total of $600 million.  FERC would establish an equitable allocation of those costs, he said.  While the staff proposal contains no caps for recovery of power costs that threaten the security of third-party debt, Gibson pointed out that such debt is highest in the priority of payments.

Gibson said the proposal does not take a position on how parallel FERC regulation of BPA’s transmission should be to FERC regulation of IOUs.  We were not able to work far enough through the issue, he noted.  The staff proposal includes a recommendation authorizing BPA to propose uniform rates, but it is not intended to limit FERC’s ability to prescribe rates or rate forms, according to Gibson.

He said the DSIs have asked the Transition Board to support their continued eligibility to purchase transmission service from BPA.  Since it is probable open access will be the rule before the end of the DSIs’ current 20-year contracts, staff thought such a provision would be unnecessary, Gibson noted.  He said the proposal recommends that any FERC hearings on BPA rates be held in the Northwest and that a “Northwest chapter” should make it clear that even if not ordered by FERC, BPA has the authority to participate in a regional transmission organization.

Gibson went through a list of provisions in BPA’s organic statutes that would need revision if BPA’s transmission is subjected to FERC regulation.  There was “a big issue” with respect to the responsibility for determining costs for rate setting, he said.  The staff proposal’s leaning is that BPA should determine power costs and FERC should determine transmission costs, according to the requirements of the FPA, with FERC making the determination that no costs are left out or inappropriately transferred from one category to the other, Gibson explained.

Comparison with CECA

Gibson went over how the board’s proposal compares with the Administration’s recently released “Comprehensive Electricity Competition Act” (CECA).  CECA generally follows the principles and recommendations of the T-Board, with a couple of significant differences, he said.  They are:
 


Other “less important” differences Gibson noted are:
 


John Savage asked about the “equitable” standard versus the “just and reasonable” standard.  The “equitable” standard is assumed to be broader than the “just and reasonable” standard, Gibson said.  FERC Order 888 uses the just and reasonable standard of the FPA, he noted.  People were concerned using that standard would constrain FERC to only doing what it did in Order 888, and that since BPA is different from the IOUs, it might be constrained in some way, Gibson said.  There was a lot of controversy about allocation of costs and the surcharge so the Transition Board said, let’s let FERC decide, said T-Board consultant Al Wright.  The board’s proposal recommends that FERC establish an equitable allocation regime for costs associated with the surcharge – that’s how we closed that piece, he noted.

The Transition Board thinks its work on transmission is pretty much done, and this proposal is what we will discuss with Congressional staff on May 10, said Etchart.  But he noted that the board welcomes written comments on the report until May 4.

Public Comment Highlights Lack of Consensus

Alfred Canada of Grants Pass, Oregon said the Northwest’s integrated system is unique in the nation.  We have an integrated system of hydropower with lots of users and a transmission system that ties all the pieces together in rapid dispatch, he stated.  Canada said that last year the Dept. of Energy recommended all utilities should be generating 5.5 percent of their electricity from renewable resources other than hydropower by 2010.  BPA would need about 3,400 MW of plant to meet that criterion using solar energy, he said.  The amount of energy needed would be 660 average MW per year, according to Canada.  If we had distributed power plants in the system, BPA and the region could meet that requirement better than anywhere in the country, he said.  Don’t throw away the integration of the system by splitting it into pieces, Canada urged.

Steve Weiss of the Northwest Energy Coalition said there is a mismatch between the board’s recommendations and what BPA is doing with respect to the contingent cost recovery mechanism.  We need to know how things will be brought back together, he stated.  Weiss said his questions involve Stage 3 of contingent cost recovery.  How do you expect FERC to deal with Stage 3, how will rates be raised in mid-rate period, and would this be written in the legislation? he asked.

Weiss laid out several differences between BPA’s current rate case proposal and the board’s proposal.  First, BPA is not looking at a rate adjustment clause that goes up to market – it is limited to a certain number of dollars per year, he said.  Second, the BPA proposal looks back and says the rate adjustment would happen after reserves have gone down, while the board’s proposal is forward-looking and calls for taking action based on projected reserve levels, Weiss indicated.  BPA’s rate adjustment clause doesn’t ensure extra Treasury payment probability -- there’s still an 88 percent probability of making Treasury payments and so 12 percent of the time BPA would miss Treasury payments even with the rate adjustment, he said.

Third, BPA has come up with a set of costs associated with different fish scenarios, Weiss stated.  When the system configuration decision is made “in 2001 or whenever,” FERC may be called on fairly often and may look at BPA’s rate adjustment clause and say it doesn’t provide what the Transition Board intended, he said.

Savage asked if there is a problem with the principles in the board’s proposal.  The proposal says FERC can’t approve a surcharge until it determines whether BPA has done its job, Weiss replied.  You need to clarify how the administrative and legislative pieces of the proposal will work, he said.

It’s important to note that CECA does not include a provision for a cost recovery adjustment clause, said Gibson.

IOU consultant Jim Litchfield said the governors undertook an important exercise in the Comprehensive Review, and the governors’ leadership has helped the region get organized for deregulation.  The Transition Board is an important body for getting the Comprehensive Review implemented because the alternative is “all of us running to Washington, D.C. and trying to work with representatives from states like Ohio,” he said.

The Transition Board needs to get re-engaged and help the region, Litchfield urged.  It’s been six months since the board has been engaged, and while staff has done some good work, the time lag has left the perception that “something is going on in the back room,” and you need to deal with that perception, he said.  The more we see legislative drafts “floating around in D.C.,” the more concern we have, Litchfield stated.

The board’s status report is “reasonably good,” but it would be useful to expand the section in it on the Comprehensive Review to indicate what has been happening with deregulation in states like Montana and Oregon, and with subscription and the system benefits charge, he said.  Beyond transmission, there are a number of issues, and they are far from being resolved, according to Litchfield.

As for the board’s transmission proposal, the specifics dealing with stranded costs do not match my recollection of the board’s decision last September, Litchfield said.  It seemed like the board had resolved the issue, but the report raises some confusion, he stated.  Litchfield said the language in the current proposal, which recommends that FERC “approve a mechanism that would recover no more than $100 million in any year, up to a cumulative total of $600 million,” is not what the board recommended previously.  He stated that the $100 million/$600 million number is taking on a particular significance in BPA’s and the board’s proposal.  “It’s not a number like pi,” Litchfield said.

In your September recommendations, you laid out a mechanism in which BPA would propose to use the transmission system to recover costs and then go to FERC and ask, does it meet the standards, and FERC would say yes or no, Litchfield said.  He read from the September language and said it doesn’t indicate that the board is endorsing the $100 million/$600 million numbers.  I suggest you change the report to reflect the recommendations you made in September, Litchfield said.

This issue is one of the more important we will face, he continued.  The IOUs are likely to be big purchasers from BPA, at least for residential and small farm customers, Litchfield stated.  They will be subscribers and will be responsible for BPA’s costs, he said.  They are willing to take the risks to get the reward of BPA power costs being below market, and the risk might manifest itself as a transmission surcharge, Litchfield said.  But industrial customers won’t get access, and they are not inclined to pay for BPA’s cost problems on the power side because they don’t get the rewards, he stated.

A Long, Ugly Fight

It’s a very difficult issue, and this is going to be “a long, ugly fight,” Litchfield predicted.  A lot of customers are not willing to take the risk of BPA mismanaging its power business line, he added.

The Transition Board should re-engage and get staff to develop a work plan, Litchfield recommended.  We have some very serious problems with what staff has done thus far, and this report has a lot of controversy in it yet, he said.  We have to take up all the issues one at a time and work through them, Litchfield stated.

Are the issues Wally laid out all the issues? asked Savage.  Those are not all of them, Litchfield replied.  His comparison of the staff proposal and the Administration’s bill “is not how I see it,” he said.  The differences between the two “are killer issues,” according to Litchfield.  In the staff report, “FERC regulates, and BPA pays attention,” while in the Administration’s draft, “BPA regulates, and FERC pays attention,” he said.  We need to get into the technical and legal details and argue the issues, Litchfield concluded.

Ken Canon of the Industrial Customers of Northwest Utilities said he seconds Litchfield’s recommendation that the report expand its description of what has happened since the Comprehensive Review.  You need to assume that not all members of Congress know what is happening in the region, he stated.

Canon suggested additions to the list of “key recommendations” from the Comprehensive Review in the “background” section of the report.  He said, for example, that the goal for federal power subscription in the Comprehensive Review’s report – to align the benefits and risks of access to existing federal power – needs to be added.  The Transition Board’s report says a Comprehensive Review recommendation is that “a mechanism should be devised to address unrecoverable costs at BPA, should they arise,” but Canon stated that the stranded cost language in the Comprehensive Review’s report says BPA will take a number of actions to avoid a stranded cost charge and that the Transition Board will be ready to work on a stranded cost solution, if necessary.  Canon noted the Comprehensive Review transmission goal of “a transmission system whose structure and operation help ensure a fully competitive generation market” and said that a transmission surcharge directly contradicts that goal.

Canon said that even though the transmission surcharge drew more comment than the rate adjustment mechanism, opposition to the surcharge was relegated to a footnote in the board’s report.  If this is a report to Congress, you should highlight where you know there will be a considerable amount of controversy, he advised.

We will continue to oppose a transmission surcharge for the reasons that Litchfield laid out, said Canon.  He distributed a letter to Senator Gordon Smith from Smurfit Newsprint Corporation in Oregon City, OR, which explains the company’s opposition to a wires charge.  The letter says the company is worried it might be required to “subsidize our competitors’ rates by helping BPA cover its power costs via an inescapable transmission surcharge."

Canon referred to the part of the board’s report that says “subscribers that receive the benefit of BPA power when it is below market price should bear some of the risk if BPA power is above market price.”  I guess those who get none of the benefits are expected to bear the rest of the risk, and that highlights the problem, he stated.

Canon urged the board to lay out in the report to Congress the last 18 months of discussions in the region.  He also said several sections raise the question of whether this is a report from the Transition Board or from the staff to the Transition Board, and that needs some attention.

Shelly Richardson, representing the Public Power Council, said she wanted to applaud the Transition Board and staff for the work they have done.  We agree with John Etchart when he says the board’s work on this topic is almost over, she stated.  The region has been working on it for well over two years, Richardson noted.  The advice you received in the March 8 letter from the delegation is that they look forward to receiving your recommendations to form a basis for their efforts to draft legislation, she said.  The Transition Board’s work has been hampered by the region’s inability to come to consensus on some of these issues, according to Richardson.

You heard this morning that you ought to be more comprehensive, like the Comprehensive Review, she continued.  I thought this was a report on recommendations on FERC oversight of Bonneville transmission, Richardson said.  If the Transition Board tells the staff to do a status report on the full range of Comprehensive Review activities, I would suggest that “you have miles to go before you sleep,” she stated.

There is a lack of consensus in the region, and the real crux of the issue is the tension or interaction between BPA’s existing statutes and the FPA overlay, Richardson said.  This tension can be illustrated by comparing the proposal's principle that FPA authority supersedes conflicting portions of BPA’s organic statutes with the principle dealing with priority of payments and third-party debt security, she stated.  I’m at a loss as to how this could be implemented, Richardson said.  The public power entities I work for don’t think this approach delivers the priority of payments and third-party debt security they want to see, she added.

Public power is also concerned about the ability of the region to have local control and to work with BPA, Richardson stated.  The FPA overlay takes transmission ratemaking out of the region and lands it in FERC in Washington, D.C., she said.  Your draft report permits hearings in the region, but FERC doesn’t have to order the hearings here, Richardson continued.  The publics see a potential reduction in their ability to influence BPA’s activities, she said.

The publics are also concerned about a provision of law in various statutes, such as the Bonneville Project Act, which states that BPA rates are set to encourage the widest possible use of all electric energy that can be generated and marketed, according to Richardson.  They are concerned about transmission provisions that could reduce BPA’s ability to get energy out to remote areas, and they do not want to see the widespread-use standard be diminished, she said.

We agree that your work is pretty well done, Richardson told the board.  Don’t step up your activity, she said, urging the board to “work with us and the delegation and move on.”

Would A Skull and Crossbones on the Cover Sum Up the Situation?

The report as a whole needs one clarification, Richardson said.  We don’t have a consensus, and the “uninformed reader” wouldn’t understand the lack of consensus that we have, she stated.  I’m not recommending that you put a “skull and crossbones” on the cover, but you should make sure you are not imparting a false sense about the amount of consensus there is on the “meat-and-potatoes issues” in here, said Richardson.

Weiss stated that he concurs with Canon on the point that if the customers with benefits “are going to push costs onto commercial and industrial customers, then Washington, D.C. will get involved in this.”  To save the benefits in the region, the customers with benefits are going to have to pay as much of the cost as possible, he stated.

The Latest on Subscription

Syd Berwager of BPA recapped the goals of the subscription strategy:


Berwager said the current timeline calls for publishing the initial rate case proposal in late May, with the rate case to be finished by December 17, 1999.  During that time, we will be doing contract negotiations, he stated.  Under this schedule, subscription would close on April 17, 2000, according to Berwager.

He described who is eligible to buy requirements power and indicated that the two areas of BPA’s current standards for service that will be most closely scrutinized for possible modification are:  that an entity “own a distribution system and be ready/able to accept BPA power,” and have a “general utility responsibility within the service area.”  Berwager described several issues surrounding eligibility and said in May BPA will propose to broaden the ownership definition to include “ownership-type lease arrangements.”  We would provide limited expansion of eligibility, but as we expand some standards, we want to be sure they aren’t too loose, to prevent “sham utilities” from coming to BPA and requesting service, he said.  Other issues, according to Berwager, are whether access to BPA power could be expanded to such a degree that BPA’s purchase power costs would dilute the price advantage of federal power, and that eligibility “may not be broad enough to support a full range of suppliers in a deregulated environment.”

Berwager described the provisions of the Northwest Power Act [Sections 5(b) and 9(c)] that deal with determining net requirements and said the associated issues are “very tough and complicated.”  They include:


The current schedule calls for a 5(b)/9(c) public process to begin in May, with tribal consultation tentatively set for May 25, and public meetings in Spokane on May 27 and Portland on June 2, Berwager said.  Public comment would open May 10 and close July 10 on this schedule, he noted.

Berwager said in response to Litchfield’s earlier comments that the subscription strategy calls for the IOUs to get a minimum of 1,000 MW in power and 800 MW in benefits in the 2002-2006 period.  We anticipated that the public utility commissions would give us recommendations on how to allocate the 800 MW, but so far they have not, he stated.

Berwager also pointed out that there have been discussions between BPA and the DSIs about the subscription strategy.  The DSIs have expressed concern about the survivability of DSI plants in the Northwest and the jobs they support, he noted.  BPA is concerned about the jobs and the DSIs, Berwager said, adding that they have been “loyal customers for over 60 years.”  We have held some meetings with the DSIs to see what can be done, and we anticipate more meetings with them, he indicated.

Q&A

Can you address how a potential balance might be achieved between the 5(b)/9(c) limitations and the minimum 1,000 MW for the IOUs -- how will those relate? asked Todd Maddock.  To the extent that we are selling power to an IOU under Section 5(b) of the Regional Act, the amount can be no greater than the net requirements load the IOU can place on BPA, Berwager replied.  Therefore, under whatever allocation scheme BPA uses, an IOU’s allocation would be limited by its net requirements, he said.  There are two elements of net requirements – what they are when a customer signs up, and what happens over time when a customer’s loads and resource picture can change, Berwager explained.

What’s the probability the 5(b)/9(c) public process will begin May 10? asked Etchart.  Optimistically, I’d say there’s a 50-50 shot, replied Berwager.  How will others be able to participate in your discussions with the DSIs? asked Richardson.  There will be participation and whatever comes out of the discussions will have to be reflected in the rate case, Berwager answered.  How will we find out what proposals BPA and the DSIs have laid out? asked Pam Jacklin of PacifiCorp.  We will provide information before the rate case starts, responded Berwager.

If you reach an agreement with the DSIs, would you modify the subscription ROD? asked Howard Schwartz of the Washington Dept. of Community, Trade and Economic Development.  It could mean that, Berwager replied.   Will there be a public process? asked Schwartz.  It’s fair to assume we will have some public process, Berwager said.

Wilcox:  “The Comprehensive Review Is Dead”

Brett Wilcox, president of Northwest Aluminum, said with respect to turning the recommendations of the Comprehensive Review into new legislation, I have to say “the emperor has no clothes.”  Our proposal in the Comprehensive Review was a package, designed to be internally consistent, integrated, and comprehensive, and we opposed picking and choosing particular parts of our recommendations since that would destroy both the substance and balance of the new system, he stated.  The measures that are being considered today in the name of the Comprehensive Review bear little or no resemblance to our larger vision, according to Wilcox.  We are implementing bits and pieces that do not fit together and lack balance, he said.  I ask you to “take a time out” and consider where you are going, he told the board.

Wilcox said he sent a letter to the board on March 30, which laid out the “fundamental ways” the transition has diverged from the Comprehensive Review’s original vision.  I realize, he stated, that the Comprehensive Review took place in “a different time” when we thought that BPA’s costs would be above market and a stranded cost mechanism would be needed.  Now it looks like BPA’s costs will be below market for the 2001-2006 period, but you are still considering “a transmission tax” on those who do not get an allocation of the benefits, Wilcox said.

You can raise power rates more frequently as long as costs are below market -- there is no need for stranded costs, he continued.  BPA can insist on take-or-pay contracts that include all fish and wildlife costs, Wilcox stated.  I’m willing to sign up for that, but some customers want to impose the risk of stranded costs on us, he said.

As for subscription, Wilcox said the Comprehensive Review report said subscription would “maintain the principles of public and regional preference to the output of the Bonneville system at cost,” “facilitate a fully competitive bulk power market,” and that the subscription system is “central to aligning the risks and benefits of the federal power system.”  According to the report, subscribers would contract to purchase power from the system at cost, take or pay, for the period of their subscriptions and be able to purchase at cost when costs are below market levels, he said.  In the second phase of subscription, BPA’s industrial customers and the residential customers of the region’s IOUs were supposed to be co-equal, and any oversubscription was to be decided by the length of the contractual commitment to bear BPA’s costs, Wilcox stated.

 BPA’s subscription proposal differs from the Comprehensive Review in that the DSIs are now at the end of the line, there are no real take-or-pay contracts, and some customers get short-term contracts for BPA power below current market prices and an option at the end of the initial contracts to increase their demand or walk away based on BPA’s relative costs, he continued.  BPA is violating the principle of selling at cost, according to Wilcox.  He showed a chart of  “BPA available secondary energy” and said that there is more energy available than BPA will allocate in the subscription process.  BPA seems to be taking the position that it wants to sell energy outside the region at California Power Exchange prices, rather than sell in region at cost, Wilcox stated.

BPA’s controllable operational costs continue to rise, but because it wants to maintain rate levels, it is selling more and more energy at market rates to fewer and fewer customers, according to Wilcox.  The DSIs don’t want or need a subsidy, he asserted.  We want access to BPA’s existing inventory at cost, and we want BPA to sell the power it has available to regional customers at cost, Wilcox said.  That’s what the Comprehensive Review said, and “that’s the right thing to do,” he stated.

The survival of the aluminum industry is at stake, said Wilcox.  It’s unfair to sell power outside the region and jeopardize regional jobs, he stated.

“The world has changed dramatically,” and let’s be honest -- we are not implementing the Comprehensive Review, Wilcox said.  We no longer have a cohesive, balanced vision of the system, and “the Comprehensive Review is dead,” he stated.

The Regional Act is also dead as a unified system, Wilcox declared.  It doesn’t work any longer, and we are doing things that are totally inconsistent with it, he said.  We need to recognize the Regional Act is broken and we need to change it, Wilcox stated.  I urge the governors and the Transition Board to stay involved – there needs to be a consensus, rather than “the divisive way we are approaching things now,” he concluded.

Where Does the T-Board Go From Here?

We’ve heard the Transition Board “should live forever and also that it should drop dead,” said Etchart.  The question for the governors is what role we want to play in this “regional energy racket,” he stated.  When the governors next get together, they should deliberate on this, Etchart said.

Savage told Wilcox the staff report is incomplete and that “our intent is to address the breadth of the issues.”  We will take the written comments and revise the transmission aspects of the report, said staffer Dick Watson.  It was our intent initially to take a broader look than this report takes, he noted.  The Comprehensive Review had a consensus that we could go forward without fundamental legislative changes, but we can only do that as long as everyone agrees it can be done without legislation, Watson stated.  The question is where we go from here, and the Transition Board needs to discuss that with the governors, he said.

What we thought would be a regional consensus from the Comprehensive Review turns out not to be a consensus, observed Wright.  After your trip to D.C., you should talk with the governors and then decide what the Transition Board will deal with, he advised.  We’ll get back to you on a schedule for a follow-on meeting, Etchart told the audience.

Meeting Adjourned

Transition Board Members:  John Etchart, Montana Governor’s Representative;  John Savage, Oregon Governor’s Representative; Tom Karier, Washington Governor’s Representative; Todd Maddock, Idaho Governor’s Representative.  This meeting report is a service provided by the Northwest Power Planning Council.