The Northwest Energy Review Transition Board turned its proposal for Federal Energy Regulatory Commission (FERC) regulation of BPA transmission over to the elves in the legislative workshop, but sent a revised contingent cost recovery proposal out for another round of public review. All members were present, including new Washington representative Marilyn Showalter, as well as new Oregon member John Savage and outgoing Oregon member Roy Hemmingway. The audience was about 30.

Next Meeting: September 14 in Portland at the Northwest Power Planning Council central office, 1 p.m.

HEADLINES______________________________________________________________

Stay Tuned for the Latest on Subscription............................................................. .....p. 1
FERC Regulation Proposal Is A Wrap, For Now.................................................... ....p. 2
Contingent Cost Recovery Proposal Goes Back Out for Inspection..........................p. 3

ORDER OF BUSINESS___________________________________________________

Stay Tuned for the Latest on Subscription

    Consultant Al Wright explained that customers, staff from public utility commissions in the region, and public interest groups have been meeting to negotiate a five-year allocation of the Federal Base System. The Subscription Work Group has been on hold for the last few weeks because of those negotiations, he said. We had hoped to hear that agreement had been reached, but so far that hasn’t happened, according to Wright. At the moment, there is some favorable news coming out of the negotiations, he said. We hear they are progressing, but "there’s no white smoke yet," Wright stated.

    BPA is scheduled to come out with its subscription proposal the week of September 14, Wright continued. That proposal would be heavily influenced by the settlement, if there is one, he said.

    Angus Duncan of the Columbia/Pacific Policy Institute said he wanted to make it clear that the negotiations Wright described have involved customers and utility commission staff. No public interest group folks have been invited or allowed to participate, he stated.

FERC Regulation Proposal Is A Wrap, For Now

    Staffer Ken Corum said that the proposal before the board on FERC regulation of BPA transmission today "has no big surprises" for those who have been involved in discussions of it. It proposes that BPA’s Transmission Business Line be put more completely under FERC regulation, he stated. Much of this proposal results from the efforts of the Transmission Work Group, according to Corum. He noted that the proposal contains 11 recommendations. They are:

            1. FERC’s authorities over BPA should be based on Parts II and III of the Federal Power Act.
            2. Section 201 of the Federal Power Act should be amended to make it clear that FERC’s authority under the Act is limited to BPA’s transmission.   Except to the extent that FERC may be given authority over BPA’s contingent cost recovery, there should be no expansion of FERC authority over BPA power costs.
            3. BPA should be excluded from FERC’s authorities under Sections 204, 207, 209, 214, 302, and 305 of the Federal Power Act, and Section 212(i) should be repealed.
            4. FERC’s tools to enforce its authority over BPA should be based on Sections 307, 314, 315, and 316.
            5. Legislation should include a provision that makes clear that the new authority given to FERC supersedes any conflicting provisions in BPA’s organic statutes.
            6. Total recovery of BPA’s transmission costs should not be compromised.
            7. Nothing in FERC’s regulation of BPA should adversely affect BPA’s priority of payments or the security of its third-party debt.
            8. The environmental obligations of federal and non-federal users of BPA’s transmission sometimes require access to BPA’s transmission, and to the maximum extent possible, users should obtain this access and pay for it through a normal open access transaction. In "rare instances," where open access transactions may be inadequate to assure access and users require priority access, equitable compensation would be determined by "an after-the-fact mechanism."
            9. The redefined authority of FERC should apply only to transmission tariffs and other transmission matters proposed by the Administrator to be effective on or after October 1, 2001.
            10. BPA should be permitted to join a FERC-regulated independent system operator.
            11. FERC hearings on BPA transmission rates should be held in the Pacific Northwest.

    Corum explained that the staff has three tasks left with respect to the proposal. First, the board has asked staff to examine BPA’s organic statutes to identify provisions that should be repealed or amended to avoid subsequent argument over implementation of the Federal Power Act. Second, he pointed out that four sections of the Federal Power Act dealing with enforcement are still being discussed, and there are still questions about how much the specifics of those sections should apply to BPA. The board has asked staff to examine these sections to determine how they should be modified, and staff is doing that, Corum said. Third, the board has assigned staff to develop draft legislation, in consultation with regional parties and legislative staff, for regional review before January 1999, he stated.

    Corum also noted that while the board is recommending substantive changes in the standards for FERC decisions, it is recommending very little change in the decision process. The board’s proposed process for FERC review of BPA transmission rates is intended to be identical to that followed for investor-owned utilities, except that hearings on BPA rates would be held in the Pacific Northwest, he said.

    The board intends to "sew this piece of the Northwest chapter up" -- to set it aside and seek no further public comment on it until the other parts of the chapter are done, Wright pointed out.

    Why are we doing this? asked Alfred Canada of Grants Pass, Oregon. One of your documents said it is being done "in the interest of fairness," he said. That seems a bad reason to "lay these sanctions" on BPA, Canada commented. The fairness issue comes from the concept that BPA is the "8,000-megawatt marketing gorilla" in the region and that it controls much of the transmission grid, responded Wright. The whole reason for this exercise is that you can’t have any one entity with that type of ownership and power in a deregulated environment, he said. Has there been abuse? asked Canada. I don’t think so, but some in the audience might disagree, replied Wright. We disagree about whether there has been abuse, but we’re talking about the future here, stated Pamela Jacklin of PacifiCorp. We’ll set this aside and begin the spadework for writing the legislation, said Transition Board chairman John Etchart.

Contingent Cost Recovery Proposal Goes Back Out for Inspection

    Staffer Dick Watson said the board received a lot of comments on its previous draft contingent cost recovery mechanism recommendations, and that the board has put together a revised proposal, based on those comments. The latest recommendations will be sent out for public comment, and the board intends to make a decision on the issue by mid-September, he said.

    One "major area of change" in the revised proposal involves the trigger for the cost recovery mechanism, according to Watson. The board was told in comments that the use of Treasury deferral as the trigger for the mechanism was "akin to being constrained to run the truck over the cliff before being allowed to reach for the brake," he stated. The new proposal uses the projected levels of BPA reserves as the trigger for the mechanism, Watson explained.

    The board is recommending a "staged" mechanism, with four stages of "progressively more aggressive actions," Watson continued. The second, third, and fourth stages would be triggered by projected levels of reserves, and the trigger for the fourth stage would be a "forecast reserve level that implies a high probability of deferral of Treasury repayment absent remedial action," he explained. The four stages are:

        Stage 1 - Use of Credits and Reserves. Any revenue insufficiency would first be addressed through application of 4(h)(10(c) credits to the extent possible, and the use of financial reserves, including any unused borrowing authority. This recommendation, Watson said, is "an endorsement of current policy."
 
        Stage 2 - Cost Control. BPA would project its end-of-fiscal-year financial reserves periodically during its operating year, but at a minimum, each July, and in the event of a development that could substantially affect these reserves. If the projected reserves drop below the first trigger level, BPA would identify proposed cost reductions consistent with meeting its obligations and hold a public hearing to present them. BPA would take public comments and then decide which reductions to implement. This, Watson explained, is based on the belief that effective cost control is an essential element of contingent cost recovery and that it should be done in time to minimize the extent to which the subsequent stages would have to be implemented.
 
        Stage 3 - Capped Rate Adjustment Clause. If the projected end-of-fiscal-year reserves are below the first trigger level, the Administrator would implement a capped rate adjustment mechanism for BPA’s power rates for the next fiscal year of the rate period. This mechanism would raise subscriber rates to the lower of: 1) "the level necessary to restore reserves to the level necessary to assure the desired level of Treasury repayment, taking into account the effects of any cost reductions implemented in Stage 2"; or 2) a predetermined rate cap.

    The board believes that the cap should be based on an independent index, if possible, and recommends the cap be set by the New York Mercantile Exchange (NYMEX) futures market at the California-Oregon border, over the year following imposition of the rate adjustment, said Watson. Currently, this futures market, out more than four to five months, is "thin," and there are concerns about whether it represents a "true market," he said. Expanded participation in this market over time may remedy the problem, Watson stated. If the futures market, at the time of potential application, is judged not to be sufficiently "deep" to represent a true market, then the fallback would be a cap set by the margin between actual prices in the past year’s spot market and BPA’s monthly prices in the same period, he explained. The clear preference is to rely on a futures market index, provided that market develops sufficiently, Watson added.
 
         Stage 4 - Recovery of Remaining Unrecovered Costs. Stage 4 would be implemented if, after the implementation of the first three stages, projected reserve levels are at or below a second, lower trigger level that implies a high probability of Treasury deferral. The recovery of any remaining costs necessary to restore reserves to the level required to assure the desired probability of Treasury repayment would be accomplished through a mechanism and allocation methodology adopted by FERC. Recovery by this mechanism would be limited to $100 million in any year, up to a cumulative total of $600 million. Legislation would direct FERC to carry out a proceeding promptly to design and adopt the mechanism and allocation methodology so it may be implemented without delay.

    Watson noted that the region has been unable to reach a reasonable level of agreement on this stage of contingent cost recovery. Consequently, he said, the board proposes that FERC be directed to develop an appropriate methodology because FERC is experienced in these issues and is equipped to deal with them. The duration of this stage of the recovery mechanism would be 15 years, Watson noted. He pointed out that the proposal includes two additional recommendations:

        End-of-Rate-Period Reserve Level. A target reserve level should be established for the last year of the initial rate period that takes into account anticipated costs during the 2007-2012 period. The trigger levels in the final years of the initial rate period should be selected to achieve the end-of-period reserve level.

    This recognizes that if BPA is going to experience cost recovery problems, those problems are more likely to occur in the 2007-2012 period, when BPA could be subject to larger costs and/or reductions in power production capability as a result of salmon mitigation measures, said Watson. The intent is to ensure BPA has reserves entering into that period, he stated.

        Trigger Reserve Levels. Stage 2 measures would be implemented coincident with Stage 3 measures, and then Stage 4 would be implemented. This means, according to Watson, that the first trigger must be at a higher level of projected reserves than the second trigger. The margin between trigger levels should be sufficient to allow each stage’s effects a chance to make implementation of the next stage unnecessary, he said. The coordination among the target level of reserves and the trigger levels for contingent cost recovery stages will require "a significant analytical effort," Watson stated. BPA has performed analyses like these in the past and should set these levels as part of the rate case, he added.

        Questions. Why are we doing this? asked Canada. BPA has done a superior job of paying its bills and managing its resources -- "why are we now teaching them Cost Accounting 101?" he asked. Watson reminded him of discussions during the Regional Review about Treasury being unwilling to accept risks and the fact that BPA faces some extraordinary risks in the future.

    Is the legislative drafting effort for these recommendations going to be open? asked Maureen Carr of the Public Power Council. Yes, replied Etchart. He reiterated that the board considers that the FERC oversight proposal is "essentially done," but that the board wants to give the public an additional 30 days to consider the revised contingent cost recovery proposal.

    Why are there limits of $100 million and $600 million on what FERC can do in Stage 4? asked IOU consultant Jim Litchfield. What’s your thinking on what the size of the future problem might be and what decisionmakers could do to resolve it? he asked. I agree -- I’d prefer not to have the numbers, said Hemmingway. But they reflect a judgment that there’s a certain level at which a whole new discussion about cost recovery would trigger, and probably that level would be driven by extraordinary fish costs, he added.

    Would all four stages be set out in legislation? asked Jacklin. All the pieces can be implemented without legislation, except the direction to FERC in Stage 4, replied Watson. Is this on the website yet? asked Carl Van Hoff of the Washington Public Power Supply System. It will be today, replied Watson. He requested that written comments on the contingent cost recovery proposal be submitted by the close of business on September 4.

    An Invitation. Marilyn Showalter took a moment to introduce herself as Governor Gary Locke’s new representative on the board. She noted that she has read the comments submitted on the contingent cost recovery issue, and she encouraged members of the audience and others to contact her to present their views on the subject. The most distinctive element of this proposal is Stage 4, and I’m interested in hearing your comments on it, Showalter said.

Transition Board Members: John Etchart, Montana Governor’s Representative; Roy Hemmingway, Oregon Governor’s Representative; Marilyn Showalter, 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).