Northwest Energy Review Transition Board

*Northwest Energy Review Transition Board*	John Etchart, Montana
851 S.W. Sixth Avenue, Suite 1100 Portland, Oregon 97204-1348	Roy Hemmingway, Oregon
Phone 503-222-5161 or 1-800-452-5161 FAX 503-795-3370	Mike Kreidler, Washington
	Todd Maddock, Idaho

NORTHWEST ENERGY REVIEW TRANSITION BOARD

Tuesday, February 3, 1998
NWPPC Conference Room, Portland, Oregon

DOE will insist the Northwest come up with a transition cost mechanism before federal power subscription goes forward, the Northwest Energy Review Transition Board was told at its meeting this week. The Transmission and Subscription work groups indicated they are considering issues related to a BPA rate case, and BPA reported that presubscription sales are going well. Representatives of customer and environmental groups contributed to a lively discussion about transition costs. All board members were present, with Todd Maddock participating by phone; the audience was about 40.

Next Meeting: March 3 in Portland; the February 19 meeting has been canceled.

Headlines________________________________________________________

ORDER OF BUSINESS___________________________________________

DOE Speaks: No Subscription Without a Transition Cost Remedy

Staffer Mark Walker said he had just returned from a trip to Washington, D.C., with Roy Hemmingway and Todd Maddock. We made the trip to touch base with the Administration and "the committees of jurisdiction," so they are up to date on what we are doing, he said. The group made several visits, according to Walker, including stops at the Department of Energy (DOE), Office of Management and Budget (OMB), and the Council on Environmental Quality (CEQ).

We came away from DOE clear about their thinking with regard to BPA and subscription, he reported. DOE said BPA cannot proceed with subscription without the region agreeing on some stranded cost mechanism, Walker stated. There does not have to be legislation, but there has to be agreement, he added. If the region cannot agree, they will be ready to make the decision themselves, Walker said of DOE. They expect a stranded cost mechanism will be agreed to before subscription goes forward, he emphasized.

The Administration is continuing to work on its own restructuring legislation, and the action in Congress is concentrated on the House side, Walker continued. The Schaefer bill is the most talked about piece of legislation, he said, noting that Congressman Dan Schaefer has announced he is retiring. Schaefer’s staff is confident some kind of action on restructuring will occur this year, Walker reported.

Schaefer has changed his mind about trying to exclude regional components in his bill, Walker said. In order to get enough support, Schaefer will need to include regional items, and it’s likely there will be a Northwest chapter, he stated. The Schaefer bill will likely be reworked by June, with his staff hoping for action later in the year, Walker reported. The House Resources Committee is not planning on a lot of action on restructuring this year, although there may be a hearing on the Doolittle [Congressman John] bill, he added. Doolittle chairs the committee’s Water and Power Subcommittee.

The Northwest delegation is serious in its effort to write a bill, Walker said. They are taking the threat of legislation very seriously, he added. Congressman Rick White of Washington has emerged as the region’s leader on the issue, Walker stated, adding that Mike Crapo of Idaho is running for the Senate, and Elizabeth Furse of Oregon is leaving Congress at the end of her term. White is working on a bill to introduce later in the year, he reported. On the Senate side, Slade Gorton of Washington is the most active, and last year he joined in a restructuring bill and added a Northwest chapter, Walker continued. The intent is to continue to revise the Northwest chapter of the Bumpers [Senator Dale]/Gorton bill and come out with something in the second half of the year, he reported. The Northwest chapter will include a section on river governance, Walker noted. It’s unclear what will transpire in the Senate Energy Committee, he added.

Our message to Congress included several points, Walker stated. We said the subscription and transmission groups are working, and we talked about transition costs, he said. We distributed the staff matrix on transition costs, and "it was quite well received -- people thought it conveyed progress," Walker reported. Roy Hemmingway briefed members on the three sovereigns and river governance processes, Walker added.

There’s still a push for developing and moving legislation, Walker concluded. The question is how far they can get in this short session, he said.

Hemmingway highlighted two items, which he said he saw as priority issues. First, the transition cost mechanism could hold up subscription and the BPA rate case; and second, the region needs a fish funding mechanism, "whether it’s a memorandum of agreement or something else." BPA can’t offer a rate without it, Hemmingway observed. Maddock added that the trip was "timely" and that some aggressive proponents of legislation have realized they can’t move as fast as they once thought.

Mike Kreidler asked about timing of the Administration’s bill, noting it was not mentioned in the President’s State of the Union address. Walker said there is a push to get it "out the door." The CEQ staff was interested in our timeline and what elements we think are critical in the Northwest, he said. Dan Adamson of DOE was clear that it doesn’t matter what the form of the stranded cost mechanism is, Walker continued. They have an open mind about the mechanism, and they’re hoping the region can come together, he added.

Work Groups Gain On Their Tasks

Consultant Al Wright reported that issues related to a BPA rate case have recently emerged and that they are significant to both the Subscription and Transmission work groups. We were assuming that once the presubscription work on products, contracts, and pricing was completed in 1998, we would do a three-month rate case, he said. When people began focusing on what that means, a large number of issues emerged, Wright stated. He offered several examples: Should the rate case address power only, with a customer waiting for a transmission rate, or should the power business line (PBL) offer a delivered product and bear the risk of whatever transmission rate is settled upon later? Should BPA do a transmission business line (TBL) and PBL rate case in tandem? Wright added that there is also a question of whether the traditional rate case is what is needed.

All these questions need to be focused upon, Wright stated, adding that DOE’s pronouncement on stranded costs also adds complexity. Does this issue have to be resolved before the rate case or before the power contracts are signed? he asked. There is a substantial difference, Wright added. By July, BPA has to price products and services, he continued. The question of fish costs is part of the budget, and it has to be resolved, Wright said, adding that he is not sure how that question is being addressed. "If it’s getting resolved, they are doing a good job because it’s really quiet," Wright observed.

Syd Berwager of BPA and Dick Adams of PNUCC would like to schedule some time to brief you in detail on some of the subscription issues, Wright told the board. "The work group doesn’t want to surprise you folks," he said, noting that some of the subscription work "may look a little different from the Comprehensive Review recommendations." We’ll get together a list of issues and set up a consultation, Wright said.

Hemmingway asked when the subscription group would be finished. When the rate case begins and BPA is in bilateral negotiations, the group will be finished, Wright responded. Do you intend to write a contract? Hemmingway asked. No, Wright said, but the group is working on defining "a business relationship" with BPA. Adams pointed out that the group will put together a compendium that reports the work done on each of the issues. Our current thinking is that it would be done in the spring or early summer, he said.

Transmission Group Back on Track

Wright noted that the Transmission group is again making progress, after calling off its meetings in October. "We’ve walled off transition costs, and we’re back to the FERC-equivalency issues," he said. By some time this spring, we should be able to report an agreement on all but the transition cost issue, Wright reported. He pointed out that if there is a PBL rate case with the TBL case put off into the future, BPA will still have to clearly functionalize costs between the two areas. We have to do this better than in past rate cases, Wright stated. This issue will influence the discussion of FERC equivalency, he added. Is FERC equivalency "good enough" or should you have an institutional or legal separation? Wright asked. That question is still unanswered, he said.

The transmission positions are staked out and well defined, Hemmingway observed. Why will it take until summer to resolve this? he asked. Wright said "the sides on FERC equivalency are well defined, and we are testing how strong or weak they are." The reason to take the time is to see how much we can consolidate the positions, he explained. "If we can keep the transition war going on another front, we can resolve this, but some of the debate is colored by transition costs," Wright added.

Across the spectrum of choices, the sides may be closer together than we believe, Hemmingway said. "I have a hard time believing it will take months and months," he stated. I will take that message back to the work group, Wright responded. "Strict FERC equivalency is the fallback," he continued, "and if we don’t want to go there, you have to get something else on the table." Wright suggested that without the Northwest’s influence, national legislation would require strict FERC equivalence. I agree, Hemmingway responded. If all the parties knew how transition costs would be resolved, these other issues would move faster, Wright said.

Kreidler asked about the influence of the BPA cost review recommendations on the work groups’ tasks. Staffer Dick Watson said the cost review touched on the functionalization issues. Functionalization will be the first thing on the table in a rate case, Wright said. If the new Administrator adopts some of the cost review recommendations, it would help the transition cost recovery effort, Maddock commented. "The more faith the parties have that you won’t need a stranded cost mechanism, the easier it will be to get one," Wright observed.

Three Sovereigns’ MOA Still in Committee

The three sovereigns’ senior staff met Monday to look at the drafting subcommittee’s draft memorandum of agreement (MOA), staffer John Volkman reported. The MOA proposes to create two new groups: a Forum, made up of the Northwest’s governors and other political officials, which would meet occasionally; and a Committee, made up of policy-level people, which "would do most of the work," he explained. The Committee would have discretion to develop agendas and decide how to treat issues, Volkman said.

The scope of the process is very broad, he continued. "The senior staff wants the process to be capable of addressing broad issues," Volkman stated. The draft MOA calls for three phases: phase one would be a survey of the landscape of issues now being addressed and their schedules; phase two would be development of a unified plan to integrate the various fish and wildlife (F&W) plans in the region and to provide policy guidance; and phase three would be implementation of the unified plan. "The process would have no legal authority -- no one gives up any authority," according to Volkman. He said there are two primary procedural issues: Which issues get taken up? and How do they get resolved? There has been discussion that "a super majority" would be required to get an issue on the agenda and that consensus would be required to resolve an issue, he reported.

The senior staff considered whether the draft MOA is "close enough" to put out for public review, Volkman noted, but some parties said they still need time. A big question is how the work would be staffed and funded, he added. The preliminary list of issues focuses on the 1999 decisions on hydro operations, Volkman continued. There are efforts to rough out a budget, and another meeting is scheduled for February 27, he said. We hope to release the draft MOA in early March, Volkman concluded.

"There is some impatience, including that of my governor, to get this rolling," Hemmingway commented. Oregon was hoping to take the draft out in its current state, but that didn’t happen, he continued. "We are optimistic that by February 27 we can take the draft out [for public review] and can wrap this up and get to work," Hemmingway stated. Kreidler also said some people are impatient to have the group pick up an issue to see if the process will actually work, rather than continue to describe it.

What Will Fish Need Post 2001?

"We are not headed for a second MOA," staffer John Shurts said of discussions on BPA’s F&W budget after 2001. Bob Lohn of BPA reported that there has been a series of informal meetings and two public meetings on the topic, which have had "good, diverse attendance." The focus is on the 2002 to 2006 period, he added.

Lohn listed several points that have emerged in the meetings: There is no agreement on what needs to be done, and it is unlikely there will be agreement. There is also no agreement on who decides. We don’t want to foreclose options, and there is an emerging group of options that will give us a range of the potential future costs, he said. There is also some acknowledgment of BPA’s need to move ahead with subscription, Lohn added.

The next question is how do we respond, Lohn said, and "it’s a difficult question." BPA’s senior staff believes the agency needs to keep its options open and has been deliberating on a rate case structure that allows for not making the decision today, he explained. We have to have the means to cover "core F&W costs" by collecting the money up front, and we need "a contingency mechanism" to handle other expenditures, so we don’t preclude other choices, Lohn said.

People don’t want to continue to gather in large regional meetings, and over the next several weeks, BPA will be networking and holding small informal sessions, Lohn stated. At the end, there will be a report issued and a public meeting, he explained. Then, there will likely be a decision by the Administrator, Lohn stated. "It would have been great to have a regional body striking a balance. Any advice this board can offer would be welcome," he said. These activities need your support, Lohn added, noting that work is under way to get a better understanding of operations costs, including foregone revenues.

Kreidler pointed out that timing is a major concern, with the rate case, subscription, and transition cost issues looming. Lohn responded that BPA is narrowing down a range of costs, but "how to meet that range for planning purposes is a tougher task." We need to have "a credible statement" of how to provide for the costs -- "customers need to know," he said. What we will have is "a series of devices," Lohn explained. At a minimum, we need an understanding of the mechanisms available and we need to be able to say the mechanism will be there, if it is needed, he said.

John Etchart asked about anticipated capital expenditures. Lohn said there are both cash outlay and revenue impacts involved in the F&W budget. The cash outlay in the near term is about the same for the various system configuration options -- between $310 million and $325 million -- because even on "the fastest track," the large expenses wouldn’t come until after 2006, he explained. As for operating impacts, "revenues drop precipitously if a dam goes out of service," Lohn said.

Maddock said the cost review suggested there were efficiencies to be gained in the F&W area. Lohn said he believed individual projects were being done efficiently, but there are efficiencies to be gained within BPA. He also suggested the region could do "a better job of making decisions. We don’t have a clear, consistent approach to what we are doing." The "biggest single savings" would be in a more focused program, Lohn added. For example, the states and tribes disagree about whether to have a hatchery or a natural fish approach in certain watersheds, he said. The priorities and decisions would be different if there were a decision to have one or the other, Lohn explained.

A Note On The Cost Review

Watson reported that the BPA cost review recommendations are out for comment. Three public meetings are scheduled: February 9 in Portland, and February 11 in Spokane and Richland; the close of comment is February 20. Watson said the management committee’s recommendations focus on three areas: gaining efficiency improvements; focusing activities on the core mission; and refunctionalizing some costs between the PBL and TBL to better conform to the Energy Policy Act. The committee also recommended the region attempt to enhance revenue from hydro system operations, he said. The committee did not address F&W costs, but did say there are efficiencies to be gained, Watson added.

BPA Flirts With Presubscription Boundaries

Paul Norman of BPA reported that the presubscription activity authorized by the Transition Board has helped BPA avoid missing out on customers who are ready to make purchases. The board previously agreed that BPA could sell a total of 1,300 megawatts (MW), 500 MW in-region and 800 MW out-of-region, prior to subscription, he explained. "It has worked out fairly well," Norman said. It has allowed us to be responsive and make sales above what our costs are likely to be, he reported. The sales have also "created a little momentum and perception that BPA is likely to be competitive," Norman stated.

Norman gave the board a chart that summarizes the sales, and noted that BPA has signed contracts for 400 MW of sales, in addition to a 150 MW sale from the Hungry Horse project, which he said BPA has never considered to be within the presubscription limit. If the agency wraps up its "very close" and "maybe" transactions, the sales would total 1,208 average MW, he stated. Norman acknowledged that a lot of the sales have been to marketers so "we don’t know where the power is going," but it looks like it will serve extraregional load. I’m not suggesting we raise the limits, he said. "We’re on track, and we ought to keep moving under the limits," Norman suggested. "If the limits become an issue, we’ll be back," he said.

You have to be pleased about the interest at these rates, Kreidler observed. The interest "has been great -- it’s encouraging," Norman replied. Are there stranded cost provisions in the contracts? Hemmingway asked. For in-region sales, there is language in the contracts that BPA is not giving up the right to collect, nor the purchaser the obligation to pay, stranded costs, Norman replied.

Parties Air Some Stranded Cost Laundry

Representatives of customer and environmental groups came forward to explain the status of discussions on a stranded cost mechanism.

Watson referred the board to a matrix of stranded cost proposals that the staff prepared. The matrix lists several questions; for example, what is the problem to be solved, how are stranded costs determined, what are the incentives to control costs, and what triggers a stranded cost mechanism? The questions are followed by a list of the positions of various parties in the stranded cost discussions. There is one area of consensus: is legislation necessary? Watson noted. The consensus is yes, he said. Wright said he recommended the group consider whether the matrix captures the range of positions, and then decide how far it can go in narrowing the positions. How many times do we try? he asked.

We’ve been meeting since summer, and the issues aren’t that technical, according to Steve Weiss of the Northwest Energy Coalition. "So why haven’t we come up with something?" he asked. People will compromise only if the default is worse than sticking with their position," Weiss said. DOE’s announcement about a stranded cost mechanism may move people along, but some people will want to see the DOE proposal before they move, he said. "I don’t see any real driver," Weiss stated, adding that he is "pessimistic" about making more progress. The fish and environmental advocates will be upset at a subscription that offers below-market prices, without a stranded cost mechanism, he added. If the market is at 23 or 24 mills, with people buying at 16 or 17 mills, and we hit 2006 without any money in reserve, "that’s not acceptable," Weiss stated.

Paul Murphy, representing the Pacific Northwest Aluminum Group, said that "by defining the problem and dealing with the issues one by one, we may come up with a solution." Some are management issues and some deal with how to address unknown future policy developments, he said. If we treat them separately, we may come to an answer, Murphy stated. Ken Canon of the Industrial Customers of Northwest Utilities said he agreed with Murphy. These are relatively new issues, and we’re finding something new every time we meet, he said, adding that the discussions are helping us evolve our proposals and "marry them with other proposals." Canon said the issue is the same as it was in the Comprehensive Review: "there are 22,000 MW [regional firm load] chasing 7,000 MW [federal subscription power]." And there is a "definitional issue," he added, suggesting the group talk about things "that are actually stranded costs and transition costs." The difficulty is in looking at future cost overruns, Canon stated.

A Viable Wolf At The Door?

"We have a lot of good work yet to do," according to consultant Jim Litchfield. "A viable wolf at the door helps," he added. This is one of the most difficult institutional issues to come up, Litchfield said, and we haven’t worked that hard as a region to solve it. I like the structure of the problem the staff put together -- how do we get a compromise proposal that deals with these issues? he asked.

Maureen Carr of the Public Power Council suggested the group look at "what we know today." First, BPA’s year-to-year cash flow can be a problem, Carr said. We know DOE won’t let BPA go ahead with subscription without "a safety net," she stated. Second, how do you deal with the future F&W exposure? Carr asked. No one knows, and no one can give us a good number, she stated. PPC has been trying to develop approaches that can be phased in, depending upon the order of magnitude of the problem, Carr said.

There isn’t a single problem; there are a number of potential contingencies we may or may not have to deal with, Murphy said. For example, what about the policy judgment that is necessary to deal with the salmon problem? We have a real problem with how that will be funded, he continued.

What if we need to do something large in the future? Weiss asked. Most parties will define that as "not the problem," he said. "They want cheap power now and to push the problem off," Weiss contended. If the market is 23 and BPA sells at 17, "BPA has given away the store," he said. We have to have a mechanism in place that will cover big issues -- it has to be there, Weiss stated. It is a definite strategy by those who don’t want to pay, to put the problem off into the future, he said. We have to have a proposal that deals with a large contingency, Weiss emphasized.

"That characterization is totally wrong," Murphy responded. BPA can decide under the circumstances that rather than sell at 17 mills, it will sell at 20, he said. We are concerned about empowering BPA "to collect money for some unknown purpose in the future," Murphy stated. He said that the economy of the region is based on low-cost power, yet the suggestion is to impose "a unique transmission tax" in this region that won’t exist elsewhere. There are serious policy questions, Murphy added.

Carr said that a tenet of public power is cost-based rates. We don’t support the pre-collection of moneys for future use, she stated. We have a proposal to deal with those costs in the future, Carr added.

Are you saying that some revenue should be put aside in anticipation of future costs? Wright asked Weiss. That’s different than a mechanism to respond if something drives BPA’s costs above market, Wright pointed out. If we can agree on the trigger and collection mechanisms, that’s fine, Weiss said. I’m not happy if BPA sells below market, and we have no mechanism, he added. In other parts of the country, investor-owned utilities are imposing involuntary stranded costs on their customers, Weiss stated.

No IOU has been authorized to collect future costs on transmission, Litchfield said, and FERC would disapprove such an idea. "BPA’s future fish costs are quite unique," he noted. No one knows about major system configuration in the future, Litchfield continued. The important questions are what are the proposed biological benefits and what are the costs, he said. "It seems like a poor policy framework to have a unique tax to use whenever the debate figures out the biological benefits," Litchfield said. "No one will give you their wallet in advance of those issues being decided," he stated.

We are trying to preserve cost-based rates below market, but "if there is a contingency, we go after the transmission customers," Murphy said of some proposals. We need to look closely at the problem we are trying to solve, he advised. It isn’t evident why the transmission system should pay for BPA’s variable operating costs, Murphy said.

If you sign up for cost-based rates, the costs may be below the market, and later they may be above the market, Canon said. In 2013, when the WPPSS costs go away, the people who are operating in the market will "live or die in the market," he suggested. The challenge is that this issue requires people to make a choice, Canon stated.

"If everyone goes to the market, BPA does not have a mechanism robust enough to solve the problem. We want a solution that will work, that will not have us back here in six months," Carr said. Kreidler asked if there is enough flexibility to have a mechanism that would reserve funds now, but could be backed off, depending upon what happens in the market. "There would be pretty serious resistance to prepaying the bill," Carr responded. Our mechanism kicks in when it’s needed, she said. Given the potential for big fish cost exposure, let’s set up a mechanism that can trigger when it’s needed, Carr urged.

My clients would be nervous about prepaying, Murphy said. "Would we simply be creating a pot for spending that is not deemed prudent?" he asked. My clients would prefer prudent contingencies, and if BPA can get reasonable contingencies within its prices, they might not object, Murphy said. Canon pointed out that the issue of schedule is fundamental. Does subscription come first, factoring in the stranded cost proposal? he asked. Some folks say we need to have this all tied down, Canon said. An important element of the matrix is when the decision has to be made, he stated.

In public power’s view, the FERC-equivalency and transition cost issues are "inextricably linked," Carr said. Let’s get together on a working level, and maybe we can bring the board something of value, she suggested. Wright noted that "spin" is critical to the way the mechanism is characterized. "It’s not cash stacking up somewhere," he said. Litchfield referred to Lohn’s earlier presentation on BPA’s F&W funding and pointed out that there may be an opportunity to change the management of the F&W program to reflect market conditions, "so you don’t need to put money in a kitty somewhere."

Where do you want to go with this? Etchart asked. "It sounds like they aren’t ready to give up," Wright observed. We need eight to 10 hours of meeting time, Carr said. We need to have a relatively small group sit down and roll up its sleeves, Watson suggested. He recommended the Transition Board cancel its February 19 meeting and have the transition cost group use that time to meet. The group would report back to the board in early March, Watson suggested. It would be helpful to get the board members involved, Weiss said. "We need direction and forceful leadership," he commented. Eventually the board has to decide its role and whether it has to force a solution, Etchart said.

Steve Hickok of BPA said the agency needs several products by April to prepare for a rate case. We need fish costs, non-fish costs, functionalization, revenue projections, and a description of the transition cost recovery mechanism, he said. Those elements are the underpinning of the rate case we need to conduct for subscription, Hickok stated. We’re going to put together our rate case proposal in May, and "this is all critical path stuff," he said. We can’t do much business until we have a rate, Hickok added.

If the market is above your costs, you might not be in such a tight situation, Weiss suggested. With subscription looking as though it might be quite popular, there is a reluctance to let us sell beyond the 1,300 MW in presubscription, Hickok replied. The downside of "going dark" for some period of time is undesirable, he added. The deputy secretary of DOE told us she expects the region to have a consensus position for the delegation on the Northwest chapter of national restructuring legislation, Hickok continued. DOE will be pleased to write it themselves, if they say we need it to do subscription, he said. Hickok indicated that BPA needs to know if it can rely on a non-power mechanism to cover contingencies. "We are relying on the Transition Board to keep this fire burning," he concluded.

It’s good to hear BPA worrying about over, rather than undersubscription, Murphy said. "The views of post 2001 are still in two camps," Hickok replied.

The group decided it would hold several work sessions on stranded costs in February and report to the Transition Board on March 3.

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).