NORTHWEST ENERGY REVIEW TRANSITION BOARD
Thursday, May 14, 1998
NWPPC Conference Room, Portland, Oregon
Stranded costs and strawmen took center stage at the Northwest Energy Review Transition Board’s meeting. The board approved a final version of its progress report on development of the Northwest chapter of national restructuring legislation. All members were present, except Roy Hemmingway. The audience was about 35.
Next Meeting: June 11 in Spokane.
HEADLINES____________________________________________________________
Good News and Bad News on Stranded Costs and Subscription.................................p. 2 & 3
ORDER OF BUSINESS___________________________________________________
The Progress Report Goes Forth
Staffer Ken Corum explained the changes that had been made in response to comments in the latest version of the board’s "Progress Report on Development of the ‘Northwest Chapter’ of National Utility Restructuring Legislation." He said, for example, the executive summary has new text pointing out that BPA is not able to take positions on some of the issues discussed in the report. Corum stated that language in the summary was changed to reflect that while there is "reasonable agreement" on the kinds of problems that contribute to BPA’s cost risks, there is little agreement on which problems should be called stranded costs and on the mechanisms to collect such costs.
In the main report, it now says the Transmission Work Group has "put aside for the time being" the option of complete legal separation of BPA, Corum pointed out. The previous draft said the work group "abandoned" that option. The discussion of BPA’s cost problems was modified, including the description of how BPA’s ability to recover its costs differs from that of an investor-owned utility (IOU) facing restructuring, he said. Corum noted that the discussion of stranded costs now states that "the mechanism discussed most (because it appears to be the only non-contractual mechanism currently available to BPA) is a uniform transmission surcharge, commonly referred to as `peanut butter,’ imposed on all users of the federal transmission system."
In the subscription section of the report, language saying that the linkage between subscription issues and stranded costs "was severed," now says those issues continue to be connected, but the discussions of them "have been deliberately separated," Corum said. In addition, the report now notes that subscription development efforts have "been made easier by the increasingly common perception that future power markets may well allow BPA to be competitive absent significant cost increases."
The report now includes a list of subscription-related issues that remain to be resolved, Corum noted. While the previous draft said that prospects for a successful outcome to subscription appeared likely, this version says "much remains to be resolved and timing is critical to a successful outcome," he stated. "It’s a fairly significant change in tone," Corum said.
In the "cost control" section of the report, language describing two Cost Review recommendations was changed, he said. The first deals with allowing BPA to develop and implement a new personnel system, and the second with BPA developing "a more business-like procurement and property management system," Corum explained. Additionally, the report now states that the Transition Board does not anticipate incorporating the legislative changes recommended by the Cost Review into its draft of a Northwest chapter this summer, but that the board encourages BPA to work with the delegation to address the recommended changes, he said. Corum noted that the section on fish and wildlife (F&W) costs was "rewritten fairly extensively" to make it more readable.
Transition Board chair John Etchart asked if the audience had any comments on the revised report, and there were none. I guess we have your sanction to forward this on, he concluded.
Good News and Bad News on Stranded Costs and Subscription
Jim Baker of the Sierra Club said his comments reflect the views of the Friends of the Earth, the Natural Resources Defense Council, Save Our Wild Salmon, and Trout Unlimited, as well as the Sierra Club. The features that we like in the strawman proposal, he said, are:
-- Recognition of the need for a stranded cost recovery mechanism for protection of the U.S. Treasury and for robust BPA financial reserves.
-- Commitment to "total cost recovery" in BPA transmission rates. We think the board should expressly state that F&W costs are among those to be recovered through BPA transmission rates, Baker said.
-- Commitment to "sharing the benefits."
We believe these three features are crucial to assure the public BPA will fulfill its public interest obligations, such as conservation, renewable resources, and Columbia Basin salmon recovery, he stated.
Baker discussed five areas of the proposal that "need improvement":
1) BPA Reserves -- Because of the need for BPA to "maintain a robust reserve," we recommend that the proposal explicitly state that BPA must maintain a reserve fund that gives the agency a 98 percent probability of meeting its Treasury payments, "while covering all its actual and future costs at the very highest end," he said.
2) Second Stage Cost Recovery -- "BPA must recover all of its costs, period," stated Baker. He recommended dropping the cap on the total dollar amount recovered through transmission charges and the cap on the duration of the cost recovery mechanism. The annual cap on transmission charges should be set at $200 million, Baker said.
3) Exclusion of Certain Costs from the Recovery Mechanism -- Since the trigger for the cost recovery mechanism is deferral of a Treasury payment, recovery will proceed no matter what the cause is for BPA’s higher costs, he continued. The Treasury doesn’t care what made BPA’s costs exceed its revenues, and the strawman proposal should not draw any distinctions among future costs either, Baker said. The cost recovery mechanism must address short-term revenue shortfalls, long-term market pricing below BPA’s costs, major system configuration changes, and all other categories of future BPA costs, he stated.
4) Exclusion of Costs for Major System Configuration Changes -- We object to the exclusion of the costs for major system configuration changes, Baker said. Regardless of which long-term path is chosen for Columbia Basin salmon recovery, BPA will incur higher costs, so the prudent course is to put in place a cost recovery mechanism for the most expensive proposed salmon recovery path, he urged, adding that that path may not be dam breaching or a major system configuration.
5) Structure for Sharing the Benefits -- We enthusiastically support the provision in the strawman for sharing the benefits, but our support is contingent on our previously stated recommendations to require BPA to recover all of its costs, including those for salmon recovery, Baker stated. He also said there are a lot of details that need to be worked out about the provision, such as what is the justification for BPA to collect 40 percent versus 50 percent or some other figure.
Baker said there are three "badly needed" additions missing from the strawman that must be included in a Northwest chapter. These are:
1) There is no unified Columbia Basin salmon recovery plan in the proposal and no process described to establish such a plan, he stated. We cannot support any proposal which remains so silent on "the most crucial issue to be decided in this legislation," Baker said.
2) The strawman makes no proposals for subscription, he stated. BPA should stop its efforts to launch subscription July 1, and the Northwest chapter must state expressly when and under what circumstances BPA may begin long-term subscription, Baker said.
3) The strawman does not propose to phase out BPA subsidies to the aluminum, agribusiness, and commercial navigation industries, and it should provide a timetable for doing so, he stated.
Shawn Cantrell of the Friends of the Earth introduced a document titled "The Salmon Chapter of National Energy Legislation," stating that the Northwest chapter will by de facto be a salmon chapter because "the Federal Columbia River Power System (FCRPS) is both the heart of our energy system and the primary cause of the Columbia Basin’s salmon extinction crisis." The elements that must be in the salmon chapter are, he said:
-- A unified federal, state, and tribal plan to restore Columbia Basin salmon must be in place "before deregulatory actions occur" for the FCRPS or BPA.
-- BPA’s "lawful obligations must be fully met and shared equitably among customers."
-- Funding for Columbia Basin salmon restoration must be assured.
-- Current wasted spending, "gold-plating of dams," and hydro system subsidies should be eliminated and/or banked to pay for implementation of the unified salmon plan.
DSI attorney Paul Murphy presented a proposal titled "Concepts for BPA/Customer Relationship," prepared on behalf of Kaiser, Reynolds, Northwest Aluminum, Goldendale, and Intalco. We generally support the strawman proposal for FERC-equivalent regulation of BPA’s transmission, but as for the strawman proposal for stranded cost recovery, "we didn’t like anything about it," he said. We have met with others on this issue and have tried to come up with an alternative proposal, and what we’ve found, Murphy said, is that "BPA does not have a stranded cost recovery problem." What it has are some risks in the future, he stated.
The Regional Review talked about aligning risks and benefits, and the normal way to do that is through contractual mechanisms, Murphy said. As we considered alternative proposals, it became obvious that we haven’t plumbed the degree to which potential BPA customers are willing to accept risks for a chance at the benefits of the system, and we think we need to let that process go further, he stated. The Regional Review anticipated that subscription would run further before there would be a need to go back and look at a contingency mechanism, Murphy continued. We have gotten the contingency discussion in front, even though we are not sure that it will need to occur, he said.
We recommend that we work harder to determine power costs and let the subscription process run, Murphy stated. The underlying assumptions of his proposal, he said, include:
-- BPA is current in its obligations to Treasury and third-party creditors, and past power consumers have paid fully for their past use of the Columbia River power system.
-- The Columbia River power system has substantial future value, and BPA’s projected ability to cover its cost obligations with revenues from the sale of electricity at competitively priced, cost-based rates is "very robust over a wide range of future contingencies."
-- While future power benefits appear to be large, the future is always uncertain, and the combined risk of low hydro conditions coupled with uncertain fish costs could cause periods when BPA’s revenues and costs don’t match.
-- The transmission of non-federal power over the federal transmission system (approximately 50 percent of total usage) was intended to be financially independent and self-supporting, "neither subsidizing nor being subsidized by federal power sales." Murphy noted that he had heard at a rate case workshop that by 2001, BPA estimates only 35 percent of the power on the federal transmission system will be BPA power.
-- Fish cost uncertainty must be reduced by "improving fish governance and defining reasonable budgets."
-- Congress should address the recovery of the cost of major dam removal or reconfiguration only when and if Congress authorizes such actions.
Our proposal focuses on contractual arrangements that align the risks and benefits of the power system with the same entities, are compatible with competitive markets for electricity, and maintain the security of BPA’s Treasury payments and third-party debt, Murphy said. We think we need long-term contracts to preserve the benefits for the Northwest, not short-term contracts, he stated. Under our proposal, short-term risks to customers are mitigated by capping cost-based rates at market prices; and the current low risk that BPA’s cash flow will result in a missed Treasury payment is mitigated by new cash-flow management tools for BPA, Murphy noted. The Federal Energy Regulatory Commission (FERC) would regulate BPA’s transmission business to assure the Northwest access to non-discriminatory service at cost-based transmission rates, he said.
Our proposal contains ideas for subscription sales and contracts, and it recommends that the residential exchange for IOUs be converted into power contracts, Murphy noted. It covers power in excess of subscribed entitlements and in excess of total subscription sales, and it states that resale of subscription power is allowed to permit each customer to mitigate the risk of its subscriber purchase, he stated. It also includes pricing recommendations, for example, cost-based rates would be subject to periodic revision, but BPA cannot charge subscribers in excess of the prevailing market price, Murphy said.
The "core" of the proposal deals with "mitigation of cash flow and deferral risks," Murphy explained. It says if any deferral of Treasury payment actually occurs, the deferred amount "must be separately accounted for and should bear interest as set and periodically revised by Treasury to fully compensate Treasury for its interest costs," he explained. Any deferred balance would be repaid by a surcharge on BPA’s power sales, applicable whenever BPA’s costs are below market prices, but the surcharge would be capped at the prevailing market price, Murphy said. Subscription contracts would have off-ramp provisions that allow a customer to terminate its contract without penalty if BPA does not meet specified cost or other targets, he noted.
Pay Now, Receive Later. Murphy suggested "an advanced power sales option" as a mitigation tool. Whenever BPA would otherwise have insufficient cash to meet its current obligations, it would be authorized to sell purchase rights to future power, with the power to be paid for now, but delivered at a future specified time, he explained. Customers would prepay for future rights to power, Murphy said. We are discussing these ideas with other customers and hope to get a consensus before the Transition Board sends its report to the delegation, he stated.
Q&A. You obviously thought the peanut butter approach was not a great idea -- "why is it anathema to apply something on the wires?" asked Mike Kreidler. We see a wires fee as a shifting of costs -- a lot of entities use the transmission system, but don’t have rights to the federal power system, and that’s inequitable, Murphy replied. Also, if you eliminate the limitation the market imposes on what BPA can spend, it takes away BPA’s motivation to control costs, he said. A wires fee is inappropriate -- we don’t accept the proposition we heard earlier today that "it should be whatever we can extract from people," Murphy added.
Your proposal "is more progressive than I anticipated, and I commend you for it," stated Kreidler. Your recommendation for a BPA customer cost oversight board "would be a tough sell," he stated. It would look at managerial issues, not policy decisions, responded Murphy. We are not asking for customers to have the right to determine what BPA’s responsibilities are, he said. It might be better if the Council or another group was the intermediary, suggested Kreidler. We think if customers sign contracts in which they take on risks, they need a way to manage the risks, replied Murphy.
Are you suggesting the residential exchange be converted into power contracts and that the amount of that power be reallocated only to IOUs with existing exchange load? asked Todd Maddock. We are suggesting that there needs to be some limit, but if the IOUs and the regulators think it should involve those that are not in the exchange now, that’s okay with us, replied Murphy.
What’s the basis for your belief that customers are willing to go with longer-term contracts, and "what part of the customer universe" subscribes to that view? asked Etchart. If you look at the staff work, you see that BPA’s costs and the market are likely to be close, but sometimes they will deviate, so you need long-term contracts to deal with the cash flow issue, responded Murphy. Power costs are important to my clients, but they understand the need to make long-term investments, and as we move away from the "current roiling of the market," people will be looking more at the long term, he said.
That’s a good development, commented Etchart. If people are feeling good enough about subscription that they’re willing to consider going long term, it’s a change in the thinking, he said. It’s nice to hear there’s interest in long-term contracts once more, Maddock agreed. Murphy stated the contracts need to have some limits in the form of exit-ramp provisions, and that there can’t be open-ended commitments. Most contracts have "force majeure" provisions, he noted.
Steve Weiss of the Northwest Energy Coalition (NWEC) said we agree that customers should be expected to take risks in a long-term fashion, but in Paul’s proposal, customers take no risks. And that’s our criticism of your strawman proposal -- if BPA gets in trouble, customers are bumped up to market, and the worst condition they face is market, he told the board. What you have is a subscription product that is non-risk, Weiss said. If it’s a no-risk proposition to subscribers, it puts the risks on Treasury or on transmission users, he stated.
Public utilities are saying, this will be a great product -- the worst I could do is market, Weiss continued. Currently, the Regional Review’s limits on Phases 1, 2, and 3 for subscription are being argued, and it’s likely the publics will get 4,500 average megawatts (aMW), and there’ll be nothing for residential exchange, IOU, and DSI customers, he stated.
We like a lot of the strawman proposal, Weiss said. We support a mechanism that ensures non-subscribers that subscribers will not be able to take advantage of below-market power while excess costs are pushed to the transmission system, he said. We like implementation via a public process, and recognition of BPA’s need for robust financial reserves to cover a more uncertain market, Weiss explained. We like the "sharing the benefits" idea which recognizes that risks beyond the immediate five-year rate period must begin to be accounted for early, and that Treasury must receive some compensation for assuming risks not covered by the stranded cost mechanism, he said. We should start talking to Treasury about this, and we should start banking the benefits, Weiss continued. We need a mechanism in the first rate period to build up reserves for the second rate period, he said. Weiss noted several areas where the NWEC takes issue with the strawman:
-- Categorization of Costs: While we agree there are different factors that may contribute to BPA having stranded costs, the characterization of these as distinct problems, which can be solved with distinct solutions, is not reasonable or practical, he stated, adding "it is simply impossible to isolate any particular revenue shortfall to a particular cause." How does one separate a shortfall due to a combination of a short-term revenue deficiency, the beginning of a persistent low market, a Tenaska settlement, and some significant new salmon collection facilities? Weiss asked. Treasury would see only that BPA was unable to make its payment, he stated. The NWEC recommends that the section of the strawman proposal describing the different problems stranded cost mechanisms are to cover be reworked into a discussion of the risks BPA faces, Weiss said. The proposal could then recommend that BPA build financial reserves as its first line of defense; include the rate adjustment mechanism ("subscribers to market") as its second line; and the transmission surcharge as its final weapon against any shortfall that triggers Treasury default, he stated.
-- Unrealistic and Imprudent Trigger: We think the trigger mechanism won’t work, Weiss said. It is imprudent for BPA to have to run its reserves down to zero before being allowed to implement any of the mechanisms the NWEC describes in its proposal, he stated. It prevents BPA from building up reserves in one rate period to cover costs which might be expected in the next, Weiss said. The NWEC proposes that all stranded cost mechanisms be available to BPA as soon as forecasted reserve levels fall below certain limits, and that those limits include end-of-rate period targets for forecasted and authorized costs expected to occur in the next rate period, he stated.
-- Exclusion of Costs for Major System Configuration Changes: We think there are a lot of reasons that BPA "may need major money," Weiss said. We’ve seen Clean Water Act costs that are higher than the costs of dam breaching, he stated. Weiss noted these possibilities: a large Tenaska settlement; major accident, repair, or premature decommissioning at WNP-2; and "major new spending requirements which may be needed with or without dam configuration changes to fix the river." He said that but for the WPPSS disaster, the dams could afford to take care of themselves, and that "it is outrageous for fish to be scapegoats for the failure of the nuclear program." The problem BPA faces is not a fish problem, it is a nuclear problem, Weiss stated, adding we find it troubling "to watch parties who supported WPPSS publicly walk away from those obligations while blaming fish for BPA’s troubles."
-- Failure to Incorporate the Regional Review Conclusion that Subscribers Should Pay for Long-term Rights to the Benefits of the System: A critical piece of the Regional Review recommendations was that subscribers should pay an "option fee" to secure the rights to purchase cost-based power from BPA in the future, Weiss stated. The NWEC recommends that option fees, which are payments for future rights to cost-based power, be used to build reserves for future costs that may be incurred after the current rate period, he said. Option fees are integral to all of the stranded cost discussions, Weiss stated. Given that people "are getting panicky" about power being available, we recommend that customers who demonstrate their long-term commitment to the system through payment of the option fee be given priority access to subscription, he added.
-- Customers Receiving the Benefits of the System Should Be Expected to Pay the Costs of that System: The strawman’s "first-stage mechanism" of "subscribers to market" does not go far enough, Weiss said. We recommend a cap of one to two mills above market instead, he stated. Our concept is "subscribers pay costs even if over market, subject to a rate or cost cap," Weiss said.
-- Unwieldy "Sharing the Benefits" Mechanism: This should not be labeled as "a dam modification downpayment" because the funds could be tapped for other reasons, he stated. The "share the benefits" piece of the proposal should be modified so the money could be accessed for any costs not recoverable with other mechanisms in the package, such as WNP-2 decommissioning, Weiss said. The NWEC proposes that a one-third/one-third/one-third split of the difference between BPA’s costs and market be allocated to Treasury (as a prepayment), to F&W, and to customers, he said. The F&W portion could be used to accelerate spending on priority measures or accumulated for authorized large expenditures, Weiss stated. The Treasury prepayments would cease if and when a Treasury deferral was forecast in any five-year period, he said.
-- Cost Cutting and Elimination of Subsidies: The NWEC proposes the implementation of an open process and timetable to examine opportunities to consolidate management of the federal dams and to eliminate outdated subsidies, "which threaten BPA’s financial survival," as well as periodic independent audits of BPA budgets, Weiss stated.
-- Link to Subscription: We endorse Deputy Energy Secretary Moler’s admonition that subscription not proceed until an adequate stranded cost recovery mechanism is in place, he said. BPA may need to delay subscription for a few months -- we can’t rush into it until we get some of these issues decided, Weiss concluded.
Q&A. With respect to sharing the benefits, Kreidler inquired if Weiss thought the Congressional delegation would ask, "once you start down that road, where will it end?" The point is to use reserves, replied Weiss. Building up reserves ahead of time is sharing the benefits, he said.
Are you saying BPA will subscribe even if subscription implies a responsibility for major system configuration? asked Etchart. Maybe not completely, replied Weiss. We’ve always said there have to be some risks, but that’s why we want a cap of one or two mills over market, he stated. I think it’s less acceptable to Treasury if we insist on "a no-lose product" where customers never pay more than market, Weiss said. We have to make a contribution -- it can’t be unlimited if we are going to get people to sign up, but "these fish are everyone’s fish," and zero risk isn’t going to go far, especially if a transmission surcharge is the alternative, he stated. We’d like to avoid that at all costs, Weiss said. It won’t last because people will take it to court, he added.
Jim Litchfield, consultant to the IOUs, told the board he wanted to talk about things "going on outside this room." Your strawman proposal has gotten us engaged, we’ve been meeting a lot, and I’m encouraged about some of the ideas coming up, he said. It’s important that those that get the benefits "stand up and be counted" for their share of the costs of those benefits, Litchfield stated. New ideas have surfaced about innovative cash management techniques for BPA, and we are going to talk more about them, he said. I hope that by the Transition Board’s next meeting, "we’ll have some real flesh on the bones," stated Litchfield.
We are working on the legal issues associated with FERC regulation of BPA’s transmission, he continued. It’s becoming clear that FERC regulation is correct, but what special rules are needed to reflect "BPA’s uniqueness" have not been determined, Litchfield said. That’s a critical element for which legislation will be required, he stated. It will be the centerpiece of a future Northwest chapter, and we’re working on it, Litchfield said.
As for subscription, we are trying to define who takes what risks, who gets what benefits, and what kinds of cash management techniques there are to deal with spikes in costs, he explained. New ideas have come up that could increase BPA’s revenues when BPA needs it, Litchfield noted. There’s hope, "but don’t cash the check yet," he concluded, exhorting the board to "wait until June 11."
As for the stranded cost strawman, I noted before that it lacked a sense of key principles, Litchfield stated. You are trying to align risks and rewards, and the discussion in the strawman about cost adjustment clauses, which BPA has used for years, is going in the right direction, he said. The proposal to apply a charge to all transmission users "pushes the equity button," Litchfield stated. This section of the report does not seem to be based on principles, and it poses some special problems, he said. The discussion about historical beneficiaries is not clear, Litchfield continued. "How would you find the good guys and the bad guys?" he wondered.
I suggest as a principle that you need to ask the question of who’ll benefit from the costs recovered from the power side, said Litchfield. The whole section needs thought on how it could be implemented and whether it follows the Regional Review’s recommendations, he stated. I’m hopeful we’ll find a compromise package and bring it back to you, Litchfield said.
Q&A. I’m encouraged about what we’re hearing, but concerned by the fact we made a commitment to have final recommendations in July, said Maddock. The schedule says we’ll have a draft proposal by our next meeting, he noted. Can the movement occur fast enough to meet the schedule we set out? he asked. I’d be willing to keep you apprised of our efforts, and if it looks like we will or won’t make the deadline, I’ll let you know, replied Litchfield. It takes time for these consensus-building efforts to operate, he added.
Are other customer groups interested in this train of thought? Etchart asked. It’s an informal group that just formed, replied Litchfield. Public power, IOUs, DSIs, and industrial customers are all involved, he added. We do have a schedule, and we’d like to get a read as soon as possible on how it’s going, said Etchart.
"Now for the bad news," stated Jason Eisdorfer of the Oregon Citizens’ Utility Board, noting that he represents residential customers of the IOUs. People have been talking about the linkage of the benefits and responsibilities for the costs of the system, and as we get closer to assigning responsibilities, we are moving further away from the allocation agreement discussed in the Regional Review, he said. I thought a stranded cost mechanism wouldn’t be a product of consensus, but rather something overlaid on the regional agreement on how to allocate the system among the publics, IOUs, and DSIs, Eisdorfer stated.
In the Regional Review, we thought there were 8,000 aMW in the system, and "customers had their hands on the exit door," he said. Now times have changed, and there’s about 6,100 aMW in the system, and the futures market looks higher, Eisdorfer stated. People are "rushing toward a smaller pot" now, instead of "rushing away from a larger pot" then, he said.
The best you can do is below market, and the worst you can do is market, Eisdorfer continued. The problem is that those who don’t have access to the market will end up paying stranded costs, but they won’t get the access to BPA power we thought was there during the Regional Review, he said. The publics’ take was 4,500 aMW of the system then, but they are arguing they have rights to 5,500 aMW, Eisdorfer stated. If that goes to the publics, and they can do no worse than market, we’ve lost the premise that access to BPA should link up with the responsibilities that go along with it, Eisdorfer said. I hope the publics "don’t use the statutory law to hide from politics," he stated.
I didn’t come here to "burst the balloon," but you have to look at this issue carefully, Eisdorfer urged. Forty-seven days until the beginning of subscription is not long enough, he emphasized. It is politically unsustainable to say that a significant set of people don’t have access to the benefits but have to pay the costs, Eisdorfer said. We need to take care of the fish issues, but until we link stranded cost proposals and how to allocate responsibilities of the system, and mirror that with the allocation of the benefits of the system, "it’s a politically unstable solution," he reiterated.
Q&A. Opening up subscription in 47 days -- it’s becoming more of a reality that is not going to happen, commented Kreidler. I don’t think you’ll see it happen, he predicted. Your point about residential customers is a good one, Kreidler told Eisdorfer. Whether it involves historical exchangers or a broader group, we have to come to grips with the question of access and make sure the benefits are spread across the region, he stated.
What kind of allocation are you talking about? asked Etchart. I’m saying even if it’s historical exchangers only, the question is, is there enough power for them, Eisdorfer replied. Adding in Washington Water Power and Idaho Power exacerbates the situation, he noted. Eisdorfer suggested two possible solutions. One, residential customers could sign up and BPA would meet their loads with power, and what it couldn’t meet with power, it would meet with a financial transaction; and two, BPA could firm up the system with market purchases so more power is available, he explained. There’s a range of solutions, and some are better than others, he said. My preference is that we fix this problem here in the region, not in Washington, D.C., Eisdorfer stated. It will require compromise by all parties, not just by IOU residential customers, he added.
Is 6,100 aMW or 8,000 aMW of power available? asked Maddock. BPA should bring the latest numbers to you, suggested Eisdorfer. What was the amount of the historical residential exchange? asked Maddock. For historical exchangers, it was 3,200-3,300 aMW; adding Washington Water Power and Idaho Power means another 1,000 aMW, replied Eisdorfer.
"This is shaping up as a problem," commented Etchart. "It was simpler when BPA didn’t look so good," he noted.
Maureen Carr of the Public Power Council (PPC) noted, with regard to the stranded cost strawman proposal, that the primary objective of the Regional Review was to preserve the benefits of the federal hydro system for the region. The key to do that is maintaining cost-based rates, public and regional preference, and BPA as a financially and operationally viable power supplier, she said. The strawman proposal minimizes and ultimately threatens the value of the FCRPS for the Northwest, Carr stated.
The proposal to "share the benefits" gives credence to those who argue that below-market, cost-based rates confer an inequitable benefit to BPA customers, she said. PPC "opposes the appeasement of these interests" and believes that the "share the benefits" proposal increases the likelihood that all BPA power will be sold at market rates, Carr continued. Pre-funding fish programs undermines efforts to secure appropriate federal funding of future fish measures, she said. In addition, the Treasury is not such a benign creditor as some would have you believe, Carr stated.
The list of items excluded from coverage in the proposal is inappropriate, she said. It threatens BPA’s financial health and sets up the need for a complicated "cost-causation scheme" which will be difficult to monitor and expensive to implement, Carr stated. Any cost recovery mechanism must be available to cover shortfalls, regardless of the source, and to assure timely Treasury payment, she said.
Instead of facilitating subscription, the proposal punishes subscribers by layering charges on them through an inequitable and complicated scheme, Carr continued. The proposed cost recovery adjustment clause (CRAC) would disadvantage BPA in competing for customers, reduce its predictable revenue stream, and discriminate against future customers that did not sign presubscription contracts, she said. In stage two of the proposal, subscribers are punished again through directed transmission charges and then through uniform transmission charges, Carr stated. By this point, loyal BPA subscription customers appear to be required to pay four penalties for being BPA customers: 1) the "share the benefits" charge; 2) the CRAC; 3) directed transmission charges; and 4) uniform transmission charges, she said. The proposal relies on market forecasts and indices that either do not exist or are unreliable, Carr added.
In contrast to the strawman, PPC’s proposal offers a simple, direct, and easy-to-understand mechanism that covers any BPA stranded cost within defined limits, she said. It can be implemented by BPA within its current statutory framework and can be ready on a timetable consistent with the subscription and rate case efforts, Carr stated. It would enhance subscriber confidence and thus improve BPA’s financial condition, she said.
As for the strawman for FERC regulation, it seems to be based on the principle that FERC’s command and control over BPA’s transmission system will be superior to regional decisions reviewed by FERC and implemented by BPA, stated Carr. Providing FERC with such expansive decisionmaking authority and discretion over BPA’s transmission involves FERC very directly in BPA’s financial decisions and affects BPA’s stranded costs, she said. It is not clear that FERC regulation of BPA’s transmission will remotely resemble IOU regulation because of the fundamental differences between BPA and IOUs, Carr said.
While the proposal implies it is easy to implement, in fact, it will not be easier to apply the Federal Power Act (FPA) to BPA with exceptions, she stated. The tedious work of combing through both the FPA and BPA’s organic statutes will be required, Carr said, noting that PPC has begun putting together "a list of carveouts" PPC thinks are required to have the FPA apply to BPA, and there appear to be at least 25 changes needed. In addition, statutory carveouts from the FPA will not be sufficient to protect the security of the Supply System and other net-billed and third-party obligations of BPA, she stated. Applying the FPA to BPA diminishes or eliminates many of BPA’s existing statutory obligations and its ability to perform its unique role in the Northwest, according to Carr.
The proposed rate procedure eliminates any decisionmaking role for BPA, except developing the initial rate proposal, she stated. It does not prohibit FERC from applying Order 888 stranded cost provisions to BPA, Carr noted. PPC believes this is a dangerous omission because the nature of the costs which BPA may have trouble covering do not fit neatly within the 888 context and will be difficult to specify in advance, she said.
PPC’s approach to FERC regulation of BPA recognizes the unique characteristics of BPA and its role in the region, Carr stated. While it increases FERC review of BPA’s transmission rates, terms, and conditions, it does not sacrifice our special statutory framework, she said.
Q&A. I sat on a bank board for 14 years, and if we thought there might be a bad loan, we started reserving funds to meet the shortfall in case the loan went bad, said Kreidler. If you don’t want to reserve money for fish or share the benefits with the feds, where do we stand? he asked. Carr replied that she had heard the Pick-Sloan projects had prepaid Treasury, but when they experienced problems and asked Treasury for some relief based on the fact they had prepaid, Treasury said, "where’s our money?" There’s not a lot of confidence we can enforce a deal with Treasury, she said. BPA has well-established tools to shelter it from the shocks you are concerned about, Carr stated. We suggest putting a mechanism in place that won’t distort the competitive marketplace, she added.
You oppose prepaying Treasury, but you are not opposed to having sufficient reserves? asked Kreidler. There’s a question of reasonableness, Carr replied. If BPA were to collect an additional $800 million a year on the chance an aggressive F&W approach is adopted, public power wouldn’t think that was reasonable, she said. I’m not sure the costs are all fish -- they could stem from the Clean Water Act, responded Kreidler. I hope public power agrees on the need for reserves, he said. I’m dealing with the contingencies we know about, Carr said.
How do you align risk and reward if you set up a system where the successful subscriber gets the reward and the unsuccessful subscriber has to pony up to meet the risk? asked Etchart. BPA is required to charge rates sufficient to cover costs and to sell at cost, and unless you change the statute, that maintains, Carr replied. When BPA puts a price on the table, marketers will arrange to be slightly below BPA -- BPA has a role in making the price, she said. The folks I represent prefer there be cost-based rates, and we’re willing to work with BPA to ensure that it has the tools to manage costs, Carr stated.
OMB and others are well aware if BPA’s price is below the market that "there’s something good out here," said Etchart. What’s wrong with the idea of "sharing the benefits?" he asked. "I’ve heard too cheap to meter before," replied Carr. It’s more likely we’ll bounce around above and below the market because of the role BPA plays in the Northwest market, she stated. If BPA sets the price at 24 mills, marketers will offer 23, Carr said.
Angus Duncan of the Columbia/Pacific Policy Institute said he wanted to respond to Paul Murphy, whose position six to eight months ago, Duncan said, was that there is no stranded cost problem in light of FERC Order 888. Now he says that we don’t have a stranded cost problem because "we have lots of money," Duncan stated.
Today, we have a different perception about BPA’s place in the market, Duncan said. This morning, I saw an analysis from Council staff which suggests "we have a manageable problem, but a problem nevertheless," he stated. There are still significant risks to Treasury, Duncan said. We’ve got a conjunction of low market prices and a set of significant costs for things like WPPSS and fish, and we need to plan for that contingency, he stated.
The objective is to have sufficient revenues to meet costs, Duncan continued. We need to delineate in the first stage what mechanisms are available, short of "pulling customers to market," he said. We need to determine what management tools we can talk about, for example, building reserves, more cost cutting, different ways of disposing of WPPSS costs, and aggressively negotiating option rights with customers, he said.
In the second stage, bringing customers up to market ought to be written into the contracts, Duncan stated. Stage three would be the stranded cost recovery mechanism, and I hope we don’t get to that, he said.
I agree with Maureen that any money we send to Treasury will be hard to get back -- we can’t expect to build an account and draw on it, Duncan continued. I’m concerned about differentiating among causes that could trigger a stranded cost mechanism -- it will be impossible for the region to agree on a cause, he said. In the strawman proposal, there’s a provision that allows FERC to review the stranded cost mechanism the Administrator puts into place, Duncan noted. "That invites FERC into territory we’ve resisted inviting FERC into," he commented.
For the transmission strawman, the assumptions I proceed on are that: 1) there should be greater FERC review of the transmission business line; 2) we need to leave in place the one Bonneville fund; and 3) we would not allow for increased FERC review of power business line business decisions, Duncan explained. The modifications staff has proposed to the FPA go a long way in allaying those concerns, he said.
The part I’m most concerned about, Duncan said, is the staff proposal that we start with the FPA and carve out exceptions. We should start with BPA’s organic statutes instead, he recommended. Most of the important parts of the FPA were written in the 1920s and provide for FERC to deal with power sales and transmission as a system, Duncan pointed out. The IOU representatives propose that some prefatory language can be written to draw a set of restrictions on FERC, but I’m not sure that is so, he said. We need a "disinterested legal review" before we can agree on this, Duncan urged.
I commend to you the comments that Liston Darby, manager of Clatskanie PUD, submitted in writing on the stranded cost strawman proposal, said Duncan. Darby states that we all benefited from the system, and we all ought to plan to bear the costs of it, Duncan noted.
Q&A. Is that true if you don’t get to subscribe? asked Etchart. Yes, there were still benefits that accrued in the past, replied Duncan. If we can determine who benefited in the past and how much, "that’s a path worth proceeding down," he stated.
How would you handle the matter of reserves? asked Etchart. I’d handle it the way BPA presently handles reserves, with no prepayment, replied Duncan. It may be better to allocate risk management responsibility between reserves and rate adjustment clauses, he stated. But "don’t build a huge pot of money that invites a hostile takeover from Treasury, Duncan said.
Final Remarks: BPA Notes a Few Numbers
Steve Hickok told the board BPA considers its Firm Energy Load Carrying Capability to be about 7,800 aMW, down 500 aMW from the 8,300 aMW there was before the Endangered Species Act. After taking into account Treaty and non-subscription contract obligations, what remains for subscribers is about 6,300 aMW, he said. Under the Regional Review’s formula, the publics are eligible for about 4,300 aMW, and that leaves about 2,000 aMW for Phase 2 of subscription, Hickok stated. Fighting over the 2,000 aMW is "the question that’s in play now," he said.
Should we surface a preliminary draft of our proposals at the June 11 meeting? Etchart asked. That was the plan, said staffer Dick Watson. But, he added, "we don’t want to turn a deaf ear to any progress being made." We need to stick with the June 11 date to have a draft, said Kreidler. My governor expects we will present him with something around the first of July, he added. There is an expectation by the governors that we’ll have something in July, Etchart agreed. In the interim, we invite anyone to contact us and staff to discuss their ideas and the progress of proposals, he stated.
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).