| Thursday, May 15, 1997 | NORTHWEST ENERGY REVIEW |
Crescent Court Ballroom, |
The Northwest Energy Review Transition Board took comments on its draft letter responding to Northwest members of Congress about recommendations for federal legislation. All members were present. The audience was about 45.
Next Meeting: June 2 in Portland.
HEADLINES_______________________________________________________________
What’s Wrong with the Draft Letter?
Transmission Work Group: Tackling the Big One
Federal Power Work Group: Moving Right Along
Montana First out of the Chute in Restructuring Roundup
River Governance: The Journey Begins
OPENING REMARKS_____________________________________________________
Transition Board chair John Etchart stated that he has heard complaints that the Transition Board process is too formal, doesn’t offer enough chance for "real discourse and dialogue," and that this formality is hindering its progress. Stating that some have likened it to "a parole board hearing," Etchart encouraged the public to submit suggestions as to how the board could do its work in a "more useful, friendly" way.
ORDER OF BUSINESS____________________________________________________
Staffer Dick Watson went over the Transition Board’s preliminary draft response letter to the Northwest delegation in the House of Representatives. The members of Congress had asked the governors to direct the board to identify which recommendations of the Regional Review would require federal legislation to implement.
Transmission. Watson said the letter suggests "permissive legislation" to allow BPA to participate in the formation of a regional Independent Grid Operator (IGO). Specifically, it recommends a change in Section 208 of the 1986 Urgent Supplemental Appropriations Act, which constrains BPA from turning over control of its transmission system to a regional IGO.
The letter also points out that a "regional working group" is examining the issues related to transmission separation and subjecting BPA’s transmission system to FERC regulation equivalent to FERC regulation of investor-owned utilities (IOUs). The group’s target for recommendations on draft legislation is this fall.
Subscription. The letter, Watson said, notes that BPA thinks it can achieve the Review’s recommendations for a subscription process for federal power without legislation, but he added that cooperation from customers will be necessary to allow BPA that flexibility. The letter states that a Federal Power Subscription Work Group is examining possible impediments to implementing the Review’s recommendations, and that a report on those issues will be forthcoming by the end of the year.
BPA Cost Control. The letter says that where there are regulatory barriers to improving BPA’s cost control "that can be implemented without diminishing BPA’s public accountability," those barriers should be removed, said Watson. But the Transition Board is not yet at the point of being able to identify specific measures, he added. Watson pointed out that comments have come in on the Review’s recommendation for a customer cost-control board. Some commenters think such a board needs broader membership than just customers, but the letter to the delegation makes no specific recommendation, he said.
Stranded Costs. The letter states that a successful subscription process would dramatically reduce the need for a stranded cost-recovery mechanism, Watson noted. It mentions the settlement agreement BPA has with most of its major customer groups that allows BPA to implement a stranded cost procedure under existing authorities. The procedure would be conducted under Section 7(i) of the Northwest Power Act, with FERC review. So while BPA may be able to recover stranded costs, its authority to do so could be challenged in federal court, he pointed out. This issue is "teed up" in the Transmission Work Group, and its recommendations are due out in late summer or early fall, Watson said.
River Governance. Watson said the letter points out that the Transition Board has asked leaders from the tribes, federal agencies, the states, utilities, fish and environmental interests, and other river users to provide the governors with recommendations on how to work toward more effective river governance. That process starts today, he noted, adding that the letter says that the outcome of these discussions will be reported to the delegation.
Etchart stated that the board’s intention is to approve a final version of the letter at its next meeting on June 2 in Portland.
What’s Wrong with the Draft Letter?
Don Guenther of Pend Oreille Newsprint said what’s missing from the letter is "a thumbnail sketch of where you want us to go as a region." The letter should address what you are trying to accomplish and "how I can plug in to help you in your efforts," he stated. What’s missing also is a time frame, according to Guenther. Do you want this accomplished next year or in two years or what? he asked. I thought the letter was "pretty soft" in dealing with BPA, Guenther continued. They’ve been good to us, and we don’t want BPA to be defensive, he stated. We want a partnership with the federal agency, but your language softens it, Guenther said. Your letter should say that, and say we are working together as a region, he suggested. As for legislation, the details will come -- I’m glad you took the "big picture approach," Guenther concluded.
Keep in mind that the letter responds to specific questions from the House caucus, noted Todd Maddock. It is targeted to legislation and is not a comprehensive plan, he said. Your suggestions are helpful, and we can incorporate some of your thoughts, Maddock stated.
Maureen Carr of the Public Power Council (PPC) said PPC believes that the transmission, subscription, and river governance processes now under way will be able to come up with administrative solutions to Northwest problems. PPC’s comments try to respond "in a positive vein," she said, and they include some specific suggestions:
1) A successful subscription process will require certainty on the level of fish and wildlife (F&W) costs to be borne by the hydro system in the post-2001 period.
2) A successful subscription process will require increased cost-cutting by the BPA Administrator and staff. We commend them for what they’ve done so far, Carr said, and she suggested the delegation could help BPA by providing the agency relief from unneeded or cumbersome regulations and their associated costs.
3) The letter should ask the delegation to support Bonneville’s traditional power marketing role.
Legislative separation of BPA is our biggest concern, Carr said. PPC’s Executive Committee opposes legal separation, she noted. The concern is that we don’t want to be seen as taking any action that would impair the security of the net-billed obligations of BPA, Carr said.
PPC thinks the potential for BPA to under-recover its costs is a function of BPA’s success in marketing its products and services and keeping costs under control, Carr said. We don’t know if there will be a cost under-recovery problem in the post-2001 period, but we think if there is, that it will be small, she stated.
Mike Kreidler asked about the draft letter’s recommendation to give permissive authority to BPA to participate in a regional IGO. PPC supports BPA’s participation in the IndeGO discussions, Carr responded. At this point, we don’t know if BPA should be part of IndeGO or not, she added. It depends on how the permissive authority is interpreted, Carr continued. If it means BPA can make unilateral decisions to join IndeGO, our members might have some reservations. We might say, provided it’s good for BPA’s traditional customers, she said.
The Transition Board is an implementation group, not a policy board -- the Regional Review decided policy issues, observed Roy Hemmingway. Legislative separation did not receive negative comment from the public power representatives on the Review’s Steering Committee, he said. Procedurally, there is a question -- when you recommend something that is different from what the Review recommended, what should we do? Hemmingway asked. I feel a loyalty to the people who served on the Steering Committee and to staying faithful to the recommendations of the Review, he added.
When I look at the Review’s report, I see the Transmission Group recommending legal separation, and the Federal Power Marketing Group recommending administrative solutions, and they are potentially in conflict, Carr replied. The Federal Power Marketing Group studied the issue in depth, she noted. "They looked over the cliff and said, we don’t want to go there," Carr stated. So there are two potentially conflicting recommendations involving one agency, she said, adding, there may be problems that were not acknowledged fully in the Review’s report.
I have a concern about timing, Kreidler said. I think we need to discuss how to deal with potential cost under-recovery, he stated. If we postpone that discussion, which is likely to be protracted, we may run out of time to figure out a backup mechanism, even if it turns out we don’t ever need it, Kreidler said. What do your members think about that concern? he asked.
Our members’ biggest concern is a successful subscription process, Carr replied. We are committed to putting a lot of energy into that. The concern is if we start to address stranded costs now, we will damage the subscription process because everyone "will immediately go into defense," she said. We have a little bit of time, Carr suggested, adding, there’s no problem between now and 2001, and then we don’t know if we’ll have a problem. Let’s put our energy on things that have a good chance for positive results, she urged. We think the stranded costs discussion will be disruptive and ugly for the region, and we hope we don’t have to have it, Carr said. We intend "to keep turning the screw on our friends at Bonneville" as hard as we can, and we think the subscription process will work, she stated. We don’t think the BPA Administrator and staff will preside over the demise of BPA -- they will respond, as they always have, Carr concluded.
Steve Waddington of the Direct Service Industries (DSIs) called the draft letter "pretty good," and said he wanted to comment on Hemmingway’s question of how procedurally to modify the specifics of the Review during the implementation of its recommendations. We support BPA’s participation in a regional IGO, but as we have gotten into the details, we’ve found that it could potentially mean a doubling of transmission rates for the DSIs, Waddington said. We have to be open to modify the Review’s recommendations, he suggested. The recommendations were all a means to an end, Waddington said. We need to keep our eyes on the policy objectives that we’re trying to achieve, and we need to be flexible, he concluded.
Bill Drummond of Western Montana G&T Co-op said the board had drafted a good letter, but that it needs strengthening in a few areas. He suggested the letter provide some specific legislative suggestions, in the event legislation starts to move quickly. Drummond suggested these four:
Drummond recommended that the board ask for the delegation’s support for a cap on F&W expenditures. It would be ill-advised to rush into the stranded cost debate, he suggested. The section of the letter dealing with stranded costs should say that the purpose of the subscription process is to allow BPA to meet its future obligations and to develop viable business arrangements with its customers, said Drummond. If the stranded cost discussion starts, the attention to the subscription process goes away, he stated. If we need to adjust the timing of the subscription process, that could be done, Drummond suggested. Starting a stranded cost discussion would detract from BPA cost-cutting, and would be "an ugly legal battle," he added.
The Regional Review did recommend legal separation of BPA’s transmission, but there were significant questions about the form of the IGO’s governance and pricing, Drummond noted. During the discussions, the IOUs were anxious to force separation because they feared BPA would put F&W costs on the wires, and they thought that a condition of BPA’s participation in the IGO would be separation, he said.
I support the permissive language to let BPA participate in IndeGO discussions about operational impacts, but like Steve Waddington, I’m worried about being forced into a situation where there would be huge increases in transmission costs, Drummond stated. Right now, the IndeGO discussions are trying to resolve how pricing will work, he continued. It appears that BPA’s transmission rates could double if the agency participates in the IndeGO pricing methodology, and that could put the Supply System debt in jeopardy, Drummond said. I can’t support legal separation of BPA if that would be the outcome, he added.
BPA’s participation has two parts, according to Drummond. The first involves operational impacts -- getting more efficiency from the system; the second is pricing, he said. I’ve no problem with BPA participating in the operational discussions, but I do have a problem with the impacts of IndeGO’s pricing methodology, Drummond stated.
How could transmission rates double? asked Hemmingway. IndeGO’s pricing methodology involves blending low-cost systems with high-cost systems, and that could double BPA’s transmission rates, Drummond replied.
I’ve participated in the IndeGO pricing discussions, and I don’t think that’s the way it’s going to work out, said staffer Wally Gibson. He noted that IndeGO has adopted a set of principles that includes "no cost shifts," and that the methodology and differences in billing may raise the rates of the DSIs, which have a high load factor, but may lower the rates of other participants. The question of rates doubling is a specific problem; it’s not a BPA-wide problem, said Gibson. It’s limited, and it’s not clear that it’s going to happen, he added.
You are still combining low-cost and high-cost systems, and it still begs the question of why we’d want to do that, said Drummond. Pricing is an unresolved issue, and at this point, I’m not willing to say that BPA should jump into IndeGO without knowing what the impacts will be, he stated.
On the one hand, all the parties seem to approach the subscription process in an open-minded fashion, observed Etchart. On the other, you say that having stranded cost discussions now would be bad; why is that? he asked. I’d prefer to talk with BPA in an environment where the stranded cost process is not going on, replied Drummond.
How do you derail the subscription process by beginning a process to discuss stranded costs? asked Kreidler. It seems like it would be in the best interest of some utilities -- there are risks in not taking up the discussion, he said. You could end up with the worst stranded cost mechanism if we don’t talk about the matter in advance, Kreidler continued. I’m concerned that if we wait for a successful subscription process, we may not have time to discuss stranded costs, he added. Starting the stranded cost process now has very detrimental impacts, not the least of which is on BPA’s cost control efforts, Drummond stated.
Merrill Schultz, consultant to Douglas County PUD, said I’ve been involved in this process for quite some time, and I’ve been consistently in opposition to most of the recommendations of the Review. What I want to raise today is the contrast between the conclusion that legislation is required for transmission separation, but not for the federal power subscription recommendations, he said. Power marketing is BPA’s "raison d’etre," Schultz stated. To say that participation in the IGO requires legislation, but that a radical change in BPA’s power marketing structure does not reminds me of the quotation in Matthew about "people who strain out a gnat and swallow a camel," he said.
Whether legislation is required for transmission depends on how much control BPA has in an IGO, Schultz said. You should change the letter and not be so sanguine about being able to achieve these objectives without legislation, he recommended. Providing such a constitutional change in BPA’s makeup administratively might be possible, but it is inadvisable and is the kind of thing that makes the public cynical about government, Schultz stated.
"That’s well put," said Hemmingway. This is a massive restructuring of the role of BPA and its relationship to its customers -- if you looked at the statutes, you wouldn’t be able to tell what BPA will be doing, he stated. As a lawyer, I’m troubled by the basic disconnect between what BPA will be doing and what its statutes say, Hemmingway said.
John Saven of Northwest Requirements Utilities said the letter should tell the delegation there may be differing views on the regional IGO. I don’t want them to think I necessarily support BPA joining IndeGO -- the tone in the letter is "more pro" than it should be, he suggested.
With respect to legal separation, timing is everything, said Saven. I voted in the Regional Review for legislative separation, but there were fundamental issues then, and they haven’t been resolved, he stated. When the Transmission Work Group is done, I’ll come back and say whether I support legal separation or not, Saven said.
Saven suggested that the section in the letter on the subscription process be rewritten. He recommended that the section about customers leaving and returning to the system at cost be more explicit and that the discussion about an option fee be removed.
"Stranded costs" are fundamentally the wrong words to use -- it’s "electrifying terminology" to some in the region, Saven said. He suggested the issue be framed in a broader category of BPA cost-recovery mechanisms. The issue, he said, is what happens after 2001 if there’s a difference between BPA’s revenues and costs. The question, according to Saven, is, do we need to act on that now or later? I suggest that BPA cost-cutting should be the first priority, and that the subscription process needs to be accelerated, he said. If someone can bring a fish number to us by mid-1998, I’d like to accelerate the subscription process by a year or so, Saven stated.
If we need to deal with stranded costs, it might be useful to establish some ground rules, to say, for example, that they are contingent, that the amount and duration would be limited, that they would be applied as broadly as possible, and that there might be more than one mechanism, Saven said. But that’s the last thing you do, and it has to fit as part of the package, he stated. Don’t set up a formal process to get to the number now -- it would be detrimental to the subscription process, Saven advised. Keep the cost-cutting pressure on BPA, he urged.
The points you’ve outlined are consistent with what the Transition Board has discussed, said Kreidler. I agree that getting to the specifics of how the cost-recovery mechanism might be put together will take a lot of time, he said. But I’m not sure we can’t do something consistent with the subscription process and put some of these things out now for the region to focus on, Kreidler stated.
BPA Administrator Randy Hardy gave the board some specific proposed language changes for the letter. With respect to IndeGO, he noted that BPA has participated in the IndeGO discussions for the past six to eight months. We’re making progress on a number of issues, but there are some fundamental public policy issues and choices, such as BPA’s cost-recovery responsibilities and postage stamp rates, that need to be addressed, Hardy said. You’ve heard the concerns about the pricing structure of IndeGO, he added. We need to address all these issues simultaneously, Hardy advised. Changing the 1986 Appropriations Act is the least of our problems, he said.
We need to address all these issues at the same time through legislation, or do it contractually through IndeGO, but if we do the latter, everyone has to be at the table, Hardy said. My personal judgment is that we’ll need legislation broader than changing the one-liner suggested in your letter, he said. The sooner we face up to the broader discussion, the better, Hardy added.
With respect to the subscription process, Hardy suggested that the language about customers giving up their rights under existing law be deleted. Don’t create an issue with this language, he counseled. The tradeoff to focus on, according to Hardy, is the legal risk of doing this administratively versus doing it legislatively, knowing that broad legislation risks "opening everything up" and creating what he called "the Christmas-tree effect."
With respect to cost control, it is not clear in the letter whether you are talking about a long-term structural issue or near-term cost-cutting, Hardy said. We’ve already committed to "2 cents in 2000," he noted, and he listed other cost-control measures BPA recently put into effect. We could get together with customers and others and have them give us advice on near-term cost cuts -- I’m willing to set up something, Hardy said.
In response to a question from Kreidler about legislation to grant BPA authority to participate in IndeGO discussions, Hardy suggested that "you can’t isolate one element -- it’s like pulling on a ball of string." The question, Hardy said, is how do you reconcile BPA’s public responsibilities and cost-recovery responsibilities with nondiscriminatory access and a regionally operated transmission system? These are fundamental choices that elected officials "have to have their hands on," and they are best done as part of a comprehensive package, he stated. We could do it contractually and then go to Congress and say, is this all right? Hardy continued. I’m nervous about making these decisions unilaterally without having elected officials involved, given what’s at stake, he said.
We’re better off moving this all forward at the same time, Hardy advised. Let elected officials make the judgments about cost shifts and cost-recovery responsibilities, and answer such questions as, does the transmission system carry the responsibility for F&W or not? We need to put all the issues out in front, he recommended. I’m still unconvinced at this time, stated Kreidler. We’ll continue to work with IndeGO to move as many issues forward as possible, said Hardy.
Transmission Work Group: Tackling the Big One
Consultant Al Wright said the Transmission Work Group is doing two things. The group is identifying all the legal separation issues, he noted. We have worked on that for three meetings, and the list of issues is now 10 pages, Wright said. Second, and simultaneously, we have singled out some issues to work, he explained. These are:
We hope to have a package addressing what needs legislation and what doesn’t this fall , Wright stated. The customer groups have agreed that by July, we’ll be ready to debate whether to go to legal separation or not, he said.
The Transmission Work Group is willing to consider cost-recovery issues; how is it that you differ from the Subscription Work Group’s reluctance to do this? asked Etchart. We’re looking at a narrow segment of the whole debate -- what you can and can’t do with cost recovery with transmission, replied Wright.
Federal Power Work Group: Moving Right Along
Gibson reported that the Federal Power Subscription Work Group spent its first meetings discussing business interests and the kinds of commercial contracts that customers want in place after 2001. A list of business interests is now on the table, he said.
At the last meeting, the group kept coming back to the larger question of whether the subscription process would solve BPA’s revenue problem or not, Gibson said. The implications of the under-recovery problem have been delegated to the Transmission Work Group, he noted.
The group is getting to the question of what specific contracts will make the subscription process work -- meaning BPA will recover its costs -- or fail, meaning BPA won’t recover its costs, Gibson stated. In talking about contracts customers want to sign, fixed prices for five years is most commonly mentioned, he reported. Customers don’t want to give a blank check to BPA for its costs, although they have indicated they would pay additional costs to get benefits "down the road," Gibson said.
There has been quite a bit of progress in the work group, and we’re ahead of the schedule, Gibson reported. We are also talking about related issues, for example, he noted that at the next meeting, BPA will describe its plan for "2 cents in 2000." Have you talked about what a "backstop mechanism" would look like? asked Maddock. We haven’t discussed it -- we’ve talked about what customers want, which will lead inescapably to whether BPA can recover its costs, Gibson replied.
Montana First out of the Chute in Restructuring Roundup
In a state-by-state legislative roundup, Maddock said Idaho has "taken it slowly," and that in this year’s session, a resolution was passed to establish a special committee to develop recommendations for the legislature’s next session. The Governor, he noted, is setting up an advisory group to assist him in developing a set of principles on retail access and industry restructuring. Idaho also passed a law to require the state utilities commission to move ahead with unbundling, Maddock reported.
In Washington, no legislation passed, noted Kreidler. Two legislative committees have set up a consultation process, he said. The consultation starts this month and will involve public workshops, Kreidler stated. The Governor’s office will monitor these activities and will likely put together an advisory group that can work with the legislature, he added.
In Oregon, the committee that has been debating restructuring legislation for the past four and one-half months has pledged to get something out soon, Hemmingway reported. A "big bill" won’t emerge, he said. It looks like a "much smaller" bill will come out that would set the date for retail access for some customers, and maybe all customers; would say when public purposes charges will be imposed; and would leave the details of retail access to future legislative sessions, Hemmingway stated. What else may get on that bill is anybody’s guess, he added. It could also just be a call for an interim study, Hemmingway noted.
In Montana, we passed comprehensive legislation, reported Etchart. The bill passed both houses by a big margin, and the Governor has signed it, he said. It provides customer choice for big customers by next summer and for all customers by 2002. Other provisions include:
The Northwest Power Planning Council’s website has a summary of the legislation, Etchart noted.
River Governance: The Journey Begins
Watson explained that the Regional Review concluded that river governance (how decisions are to be made with respect to the costs of F&W restoration and the operation and configuration of the Columbia River system) was important, but not in its purview. The Review asked the governors to convene a process on river governance, he said. Watson noted that a F&W governance workshop would begin that afternoon and extend into the next day. It will be facilitated by attorney Jim Waldo, and its charge is not to solve the problem, but to tell the governors how to move forward to find a solution to the problem, he said.
Watson said workshop attendees will include five federal agency representatives, 10 tribal representatives, four state government representatives, four environmental group representatives, and six representatives from utilities and industries. The governors and the tribes will meet June 3, and one item on their agenda will be to discuss the results of the river governance workshop, he said.
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).