[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
HOW THE FEDERAL POWER MARKETING ADMINISTRATIONS ARE IMPLEMENTING THE
ENERGY POLICY ACT OF 2005 AND AN ASSESSMENT OF THE PROPOSED FISCAL
YEAR 2007 BUDGETS FOR THESE AGENCIES
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON WATER AND POWER
of the
COMMITTEE ON RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
Wednesday, March 1, 2006
__________
Serial No. 109-41
__________
Printed for the use of the Committee on Resources
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
or
Committee address: http://resourcescommittee.house.gov
_____
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COMMITTEE ON RESOURCES
RICHARD W. POMBO, California, Chairman
NICK J. RAHALL II, West Virginia, Ranking Democrat Member
Don Young, Alaska Dale E. Kildee, Michigan
Jim Saxton, New Jersey Eni F.H. Faleomavaega, American
Elton Gallegly, California Samoa
John J. Duncan, Jr., Tennessee Neil Abercrombie, Hawaii
Wayne T. Gilchrest, Maryland Solomon P. Ortiz, Texas
Ken Calvert, California Frank Pallone, Jr., New Jersey
Barbara Cubin, Wyoming Donna M. Christensen, Virgin
Vice Chair Islands
George P. Radanovich, California Ron Kind, Wisconsin
Walter B. Jones, Jr., North Grace F. Napolitano, California
Carolina Tom Udall, New Mexico
Chris Cannon, Utah Raul M. Grijalva, Arizona
John E. Peterson, Pennsylvania Madeleine Z. Bordallo, Guam
Jim Gibbons, Nevada Jim Costa, California
Greg Walden, Oregon Charlie Melancon, Louisiana
Thomas G. Tancredo, Colorado Dan Boren, Oklahoma
J.D. Hayworth, Arizona George Miller, California
Jeff Flake, Arizona Edward J. Markey, Massachusetts
Rick Renzi, Arizona Peter A. DeFazio, Oregon
Stevan Pearce, New Mexico Jay Inslee, Washington
Henry Brown, Jr., South Carolina Mark Udall, Colorado
Thelma Drake, Virginia Dennis Cardoza, California
Luis G. Fortuno, Puerto Rico Stephanie Herseth, South Dakota
Cathy McMorris, Washington
Bobby Jindal, Louisiana
Louie Gohmert, Texas
Marilyn N. Musgrave, Colorado
Vacancy
Steven J. Ding, Chief of Staff
Lisa Pittman, Chief Counsel
James H. Zoia, Democrat Staff Director
Jeffrey P. Petrich, Democrat Chief Counsel
------
SUBCOMMITTEE ON WATER AND POWER
GEORGE P. RADANOVICH, California, Chairman
GRACE F. NAPOLITANO, California, Ranking Democrat Member
Ken Calvert, California Raul M. Grijalva, Arizona
Barbara Cubin, Wyoming Jim Costa, California
Greg Walden, Oregon George Miller, California
Thomas G. Tancredo, Colorado Mark Udall, Colorado
J.D. Hayworth, Arizona Dennis A. Cardoza, California
Stevan Pearce, New Mexico Vacancy
Cathy McMorris, Washington Vacancy
Vice Chair Nick J. Rahall II, West Virginia,
Louie Gohmert, Texas ex officio
Vacancy
Richard W. Pombo, California, ex
officio
------
C O N T E N T S
----------
Page
Hearing held on Wednesday, March 1, 2006......................... 1
Statement of Members:
Cubin, Hon. Barbara, a Representative in Congress from the
State of Wyoming, Prepared statement of.................... 90
McMorris, Hon. Cathy, a Representative in Congress from the
State of Washington........................................ 2
Prepared statement of.................................... 4
Napolitano, Hon. Grace F., a Representative in Congress from
the State of California.................................... 5
Radanovich, Hon. George P., a Representative in Congress from
the State of California.................................... 1
Prepared statement of.................................... 2
Walden, Hon. Greg, a Representative in Congress from the
State of Oregon............................................ 5
Statement of Witnesses:
Borchardt, Charles A., Administrator, Southeastern Power
Administration, Elberton, Georgia.......................... 67
Prepared statement of.................................... 68
Deihl, Michael A., Administrator, Southwestern Power
Administration, Tulsa, Oklahoma............................ 62
Prepared statement of.................................... 64
Graves, Thomas P., Executive Director, Mid-West Electric
Consumers Association, Wheat Ridge, Colorado............... 27
Prepared statement of.................................... 29
Hacskaylo, Michael S., Administrator, Western Area Power
Administration, Lakewood, Colorado......................... 58
Prepared statement of.................................... 59
Hosken, Charles, General Manager, Imperial Irrigation
District, Imperial, California............................. 24
Prepared statement of.................................... 25
Langer, Dwight, General Manager, Northern Wasco County
People's Utility District, The Dalles, Oregon.............. 20
Prepared statement of.................................... 22
McClennan, Mac, Vice President of External Affairs, Tri-State
Generation and Transmission Association, Denver, Colorado.. 10
Prepared statement of.................................... 12
Peterson, Dan, Commissioner, Pend Oreille County Public
Utility District, Newport, Washington...................... 7
Prepared statement of.................................... 8
Pope, James H., General Manager, Northern California Power
Agency, Roseville, California.............................. 14
Prepared statement of.................................... 16
Wright, Stephen J., Administrator, Bonneville Power
Administration, Portland, Oregon........................... 49
Prepared statement of.................................... 51
Additional materials supplied:
Taylor, George B., Jr., Chairman, PMA Structural Changes
Committee, Statement submitted for the record on behalf of
the Southeastern Federal Power Customers, Inc.............. 90
OVERSIGHT HEARING ON ``HOW THE FEDERAL POWER MARKETING ADMINISTRATIONS
ARE IMPLEMENTING THE ENERGY POLICY ACT OF 2005 AND AN ASSESSMENT OF THE
PROPOSED FISCAL YEAR 2007 BUDGETS FOR THESE AGENCIES''
----------
Wednesday, March 1, 2006
U.S. House of Representatives
Subcommittee on Water and Power
Committee on Resources
Washington, D.C.
----------
The Subcommittee met, pursuant to call, at 2:06 p.m. in
Room 1324, Longworth House Office Building. Hon. George
Radanovich [Chairman of the Subcommittee] presiding.
Present: Representatives Radanovich, Napolitano, Cubin,
DeFazio, Inslee, McMorris, Musgrave, Pearce, and Walden.
STATEMENT OF THE HONORABLE GEORGE RADANOVICH, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Radanovich. Good afternoon. The oversight hearing on
the Subcommittee on Water and Power will come to order.
This Subcommittee is meeting today to hear testimony on the
topic of how far the Federal Power Marketing Administrations
are implementing the Energy Policy Act of 2005, and an
assessment of the proposed Fiscal Year 2007 budgets for these
agencies.
Today's hearing focuses on the value of Federal hydropower
generation and transmission to our nation's communities.
Although Federal power generation seems to decrease every
year due to drought, environmental regulation and other
factors, it still provides an important resource for many
communities. In addition, the Federal transmission
infrastructure continues to grow in importance every year. In
light of these historic and future values, it is no surprise
that the energy bill signed into law by President Bush last
year acknowledged the future rules of the Federal power
program.
We are joined here today by a host of ``on-the-ground''
experts who see the daily impacts of Federal electricity
generation and transmission. They are the eyes and ears of the
Federal program who know firsthand what it takes to keep the
lights on and maintain consumer satisfaction. As I have often
said, Congress needs to hear more from these ``outside the
Beltway'' types and today's hearing topic is a good example of
why.
Because I cannot stay here for today's hearing, I am going
to hand the gavel over to the Subcommittee's very able Vice-
Chair, Cathy McMorris. Cathy, whom you know, Cathy knows
firsthand about the value of Federal power in the Pacific
Northwest and she is a proven leader in defending her
constituents from the ``inside the Beltway'' theoretical ideas
of the Office of Management and Budget.
Cathy, I look forward to working with you in the coming
year, and just happy to have you as my Vice-Chairman, and with
that I want to thank today's witnesses for their leadership and
ask our new Vice-Chairman to make a few comments. Cathy.
[The prepared statement of Mr. Radanovich follows:]
Statement of The Honorable George P. Radanovich, Chairman,
Subcommittee on Water and Power
Today's hearing focuses on the value of federal hydropower
generation and transmission to our Nation's communities.
Although federal power generation seems to decrease every year due
to drought, environmental regulation and other factors, it still
provides an important resource for many communities. In addition, the
federal transmission infrastructure continues to grow in importance
every year. In light of these historic and future values, it's no
surprise that the energy bill signed into law by President Bush last
year acknowledged the future roles of the federal power program.
We are joined here today by a host of ``on-the-ground'' experts who
see the daily impacts of federal electricity generation and
transmission. They are the ``eyes and ears'' of the federal program who
know firsthand what it takes to keep the lights on and maintain
consumer satisfaction. As I've often said, Congress needs to hear more
from these ``outside the Beltway'' types and today's hearing topic is a
good example of why.
Because I cannot stay for today's hearing, I am going to hand the
gavel over to the Subcommittee's very able Vice-Chair, Cathy McMorris.
Cathy knows firsthand about the value of federal power in the Pacific
Northwest and she's a proven leader in defending her constituents from
the ``inside the Beltway'' theoretical ideas of the Office of
Management and Budget. With that, I thank today's witnesses for their
leadership and ask our new Vice-Chair to make a few comments.
______
STATEMENT OF THE HONORABLE CATHY McMORRIS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WASHINGTON
Ms. McMorris [presiding]. Thank you very much, Mr.
Chairman. I am really excited to be the Vice-Chair of the
Subcommittee and have the opportunity to serve in this
position, and Chair this meeting today.
Many people unfamiliar with the Federal power program think
of Federal power as a relic of the past or about the days of
Franklin D. Roosevelt's rural electrification program. I can
tell you firsthand that Federal power is very much alike and
kicking in my district in the greater Pacific Northwest, where
40 percent of electricity sales and 75 percent of the
transmission come from the Bonneville Power Administration.
Today's Federal power program plays a major role in
regional markets. From Metaline Falls, Washington, to Marietta,
Georgia, and from Moorehead, Minnesota, to Waco, Texas,
communities and businesses continue to depend on the benefits
of low-cost Federal power.
Last year the Administration knocked on the front door
again by calling for market-based rates. It too failed. This
year, a novel back door approach is being tried to further
hamper Bonneville--one that would circumvent Congress and raise
rates in areas already hard hit by increased rates, and I will
fight to make sure this fails too.
The Administration's proposal of requiring Bonneville to
use surplus revenues to reduce debt sounds good on paper, but
it ignores the reality that debt is already being repaid. It
also raises electricity consumer rates by 10 percent by
mandating that surplus revenues can only be used for debt
reduction and not rate reduction. This is yet another
Washington, D.C. gimmick that will hurt Northwest consumers and
cripple an agency that needs financial flexibility.
It also hurts businesses like Ponderay Newsprint in my
district, which is already paying $400,000 more for electricity
than it did five years ago. To ask businesses and other end-use
consumers to pay even more should not be the business of the
Federal government. I will work with my colleagues to ensure
that this proposal meets the fate of the other ill-conceived
measures.
This proposal is even more logic free when you put into
context with the 45 percent rate increase over the past five
years brought on by drought, California market problems and
endangered species requirements.
While no one disagrees with the need to protect endangered
fish, the costs associated with Judge Redden's summer spills
are staggering. In the summer of 2004, Bonneville estimated
that it cost $77 million in foregone generation so that
ultimately 20 salmon could later return to spawn. If you do the
math on this mandated spill, each salmon cost $3.85 million.
Bonneville estimated that last year's court-mandated spill
would have cost somewhere between $250,000 and $3 million per
fish, to benefit anywhere from 25 to 300 salmon.
I guess that means we are getting better in terms of
lowering the cost--or what I refer to as ``salmon taxes''--but
it is still expensive salmon either way, especially for the
ratepayers who absorb these costs. It is safe to say that when
the lights are in the Pacific Northwest, the salmon meter is
literally running.
For this reason, I strongly believe that our ratepayers
have a right to know how much Endangered Species Act compliance
is costing them. I will soon introduce a bill that allows
Bonneville and other PMS as to make their ESA costs more
transparent to their wholesale consumers. Consumers deserve to
know what they are paying for and this bill will do just that.
In conclusion, I am pleased to announce that one of my
constituents, Mr. Dan Peterson, of Pend Oreille Public Utility
District, will testify about these rate issues and hydropower
relicensing. I welcome you, Dan, and appreciate you traveling
all this way to help educate Congress on these issues.
I also want to welcome Steven Wright, the Administrator of
the Bonneville Power Administration. Steve's knowledge base and
hard work on behalf of Bonneville and its ratepayers is
commendable.
Like Chairman Radanovich, I agree that it is important to
hear from witnesses who deal with these issues every day from
the real world and not from the cubicles of OMB. With that, I
look forward to hearing from the witnesses today.
I would now like to recognize the Subcommittee's
distinguished Ranking Minority Member, Grace Napolitano, for
her opening statement.
[The prepared statement of Ms. McMorris follows:]
Statement of The Honorable Cathy McMorris, Vice-Chair,
Subcommittee on Water and Power
Many people unfamiliar with the federal power program think of
federal power as a relic of the past or about the days of Franklin
Delano Roosevelt's rural electrification program. I can tell you
firsthand that federal power is very much alive and kicking in my
district and in the greater Pacific Northwest, where 40 percent of
electricity sales and 75 of the transmission come from the Bonneville
Power Administration.
Today's federal power program plays a major role in regional
markets. From Metaline Falls, Washington to Marietta, Georgia and from
Moorehead, Minnesota to Waco, Texas, communities and businesses
continue to depend on the benefits of low-cost federal power.
Despite this, some in Washington, DC continue their quest to
undermine the PMAs. In the 1990's, a frontal assault was waged to
dissolve the agencies. It failed. Last year, the Administration knocked
on the front door again by calling for ``market-based'' rates. It too
failed. This year, a novel, backdoor approach is being tried to further
hamper Bonneville--one that would circumvent Congress and raise rates
in areas already hit hard by increased rates. And I will fight to make
sure this fails too.
This Administration proposal of requiring Bonneville to use surplus
revenues to reduce debt sounds good on paper, but it ignores the
reality that debt is already being repaid. It also raises electricity
consumer rates by 10 percent by mandating that surplus revenues can
only be used for debt reduction and not rate reduction. This is yet
another Washington, DC gimmick that will only hurt Northwest consumers
and cripple an agency that needs financial flexibility.
It also hurts businesses, like Ponderay Newsprint in my district,
which is already paying $400,000 more for electricity than it did five
years ago. To ask businesses and other end-use customers to pay yet
even more should not be the business of the federal government. I will
work with my colleagues to no end to ensure that this proposal meets
the fate of other ill-conceived measures.
This proposal is even more ``logic free'' when you put it in
context with the 45 percent rate increase over the past five years
brought on by drought, California market problems and endangered
species requirements.
While no one disagrees with the need to protect endangered fish,
the costs associated with Judge Redden's summer spills are staggering.
In the summer of 2004, Bonneville estimated that it lost 77 million
dollars in foregone generation so that ultimately 20 salmon could later
return to spawn. If you do the math on this mandated spill, each salmon
cost 3.85 million dollars. Bonneville estimated that last year's court
mandated spill would cost somewhere between 250,000 dollars and 3
million dollars per fish, to benefit anywhere from 25 to 300 salmon. I
guess that means we're getting better in terms of lowering costs--or
what I refer to as ``salmon taxes,'' but it's still expensive salmon
either way, especially for the ratepayers who absorb these costs. It's
safe to say that when the lights are on in the Pacific Northwest, the
salmon meter is literally running.
For this reason, I strongly believe that our ratepayers have a
right to know how much Endangered Species Act compliance is costing
them. I will soon introduce a bill that allows Bonneville and the other
PMAs to make their ESA costs more transparent to their wholesale
customers. Consumers deserve to know what they are paying for and this
bill will do just that.
In conclusion, I am pleased to announce that one of my
constituents, Mr. Dan Peterson, of Pend Oreille Public Utility
District, will testify about these rate issues and hydropower
relicensing. I also want to welcome Mr. Steve Wright, the Administrator
of the Bonneville Power Administration. Steve's knowledge base and hard
work on behalf of Bonneville and its ratepayers is commendable. Like
Chairman Radanovich, I agree that it's important to hear from witnesses
who deal with these issues everyday from the real world and not from
the cubicles of OMB. With that, I look forward to hearing from our
witnesses today.
______
STATEMENT OF THE HONORABLE GRACE NAPOLITANO, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF WASHINGTON
Ms. Napolitano. Thank you, Madam Chairman, and like you, I
welcome our witnesses and those individuals that are sitting in
the audience listening, and hopefully being able to shed a lot
more light on this.
I do not profess to know much about the power
administration, et cetera, but I can certainly tell you from
vantage point in Southern California we have some of the
highest rates available to anybody, and it is hard, even though
we do have the economy, to be able to substantiate to the
ratepayer the increases wherever they may be.
I think that as we move forward, and I will make this very
brief, I certainly want to thank Mr. Hosken from the Imperial
Irrigation District because I have gotten to know them through
the committee process for awhile now because of water, and
congratulate you on your new position. You are literally being
dropped in today, I do not know how many days you have been on
the job, but welcome, and we thank you for agreeing to be here
to shed light on the area that you represent that also impacts
the rest of California.
I am hoping to listen to a lot more of the comments on the
budget documents, and I agree with you, Madam Chair, that this
administration has been looking for ways of making others pay
for budget deficits, and I think that is wrong. If this
administration is looking to do that, they need to
substantiate, and furthermore, we need to have it aired and
have input from all areas before this goes through, and one of
my questions is going to be directed at finding out where they
get their authority.
Thank you, Madam Chairman.
Ms. McMorris. Are there any other Members who wish to give
opening statements? Mr. Walden.
STATEMENT OF THE HONORABLE GREG WALDEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OREGON
Mr. Walden. Thank you, Madam Chairman. I want to express my
strong opposition and that of the Northwest Congressional
Delegation to the Fiscal Year 2007 budget proposal which I
believe will increase electric rates in our region by nearly a
billion dollars and cost thousands of jobs.
I also continue to be opposed to third-party financing debt
reclassification in the Administration's budget. This has been
repeated from last year's budget, and was sent to the Hill in
legislative form in June of 2005.
More generally, I want to express my strong dissatisfaction
that the Office of Management and Budget once again inserts
provisions into the budget of the Bonneville Power
Administration that are harmful to the Pacific Northwest
without so much as a single word of consultation or discussion
with this Member of Congress or others who represent this
region. I do not understand why we have such a failure at
communication.
As a small business owner, I fully understand the result in
rate increase of 10 percent, raising power rates by $145
million a year, cost retail consumers an additional $27 a year,
decreases personal income in the Northwest by $109 million, and
could result in the loss of 1,120 jobs. This economic blow to
our region would be entirely unwarranted, and yet destructive.
So Madam Chairman, I look forward to this hearing. I look
forward to finding out what we can learn about what the
Administration intends and what they plan to do to address the
concerns of those of us from the Northwest who year after year
have to fight these battles in an effort to strengthen our
economy, not weaken it; preserve affordable power for our
consumers, not jack up their rates; and I have to tell you it
is getting a little old, Madam Chairman, to have to fight this
fight every year, and the latest proposal is probably the worst
I have seen. So I have some questions.
Before I conclude, I want to extend a warm welcome,
however, to the head of the Bonneville Power Administration,
Steve Wright, as well as to Dwight Langer, who is from Wasco
County Public Utility District. He has 34 years in the
industry. He started when he was 7--21 years as--it is an
election year, he is a voter.
[Laughter.]
Mr. Walden. Twenty-one years as a General Manager. From
1993 to present, he is the General Manager of Northern Wasco
PUD. Prior to that he was with Peru Utilities in Peru, Indiana.
He is a member of the board of trustees of the Northwest Public
Power Association of Vancouver; past member of the Executive
Committee of the Public Power Council of Portland, Oregon;
member of the Oregon PUD Association; member of the American
Public Powers Association; has his B.S. from Indiana State
University. So Dwight, we are delighted you could join us today
as well, and all of our panelists, thank you for your testimony
you are going to give us. The insights and counsel are
appreciated by all of us.
Thank you, Madam Chair.
Ms. McMorris. Thank you.
Are there any other Members that want to make opening
statements?
At this time then I would like to introduce our first panel
of witnesses. First, Mr. Dan Peterson. He is Commissioner of
Pend Oreille County Public Utility District in Newport,
Washington; Mr. Mac McClennan, Vice President of External
Affairs, Tri-State Generation and Transmission, Denver,
Colorado; Mr. James Pope, General Manager, Northern California
Power Agency, Roseville, California; Mr. Dwight Langer, General
Manager, North Wasco County Public Utility District, The
Dalles, Oregon; Mr. Charlie Hosken, General Manager, Imperial
Irrigation District, Imperial, California; and Mr. Thomas
Graves, Executive Director, Mid-West Electric Consumers
Association, Wheat Ridge, Colorado.
I would like to recognize Dan Peterson then for five
minutes, and all witnesses' written statements will be
submitted for the hearing record. Please go ahead, Dan.
STATEMENT OF DAN PETERSON, PEND OREILLE COUNTY
PUBLIC UTILITY DISTRICT, NEWPORT, WASHINGTON
Mr. Peterson. Madam Chair, Ranking Member Napolitano, thank
you, Members of the Committee, for this opportunity to speak.
Here I am, a locally elected commissioner of a little
utility in the very far back corner of Representative
McMorris's district. Here I am to add my voice to the loud
outcry we have already heard from throughout the Pacific
Northwest Congressional Delegation against the Fiscal Year 2007
budget proposal that Bonneville Power Administration surplus
sales, or secondary revenues be used to repay Treasury.
This proposal, if not withdrawn, will increase rates.
Historically, Bonneville's secondary revenues have been used to
stabilize rates. In a hydro system, dry years follow wet years,
and financial flexibility is critical.
Quite contrary to the proposal's claim, sound business
practices have allowed these revenues to remain in the region
and provide that stability and flexibility, and at the same
time Northwest ratepayers have been faithfully continuing to
repay their Federal debt on time and with interest.
Now, I know that perhaps some of you are thinking rates are
so low in the Pacific Northwest, what is the harm in raising
them some?
Well, actually, rates are no longer as low as they once
were in the Northwest. They have been rising rapidly as we
continue to pay for the cost of the west coast energy crisis,
and as we build new generation to serve a growing region, that
generation is more expensive.
But even if our rates are among the lowest in the nation,
why raise them arbitrarily and force businesses out of the
region, and possibly overseas? Remember that the Federal
hydropower system was built to attract and keep business and
industry in the U.S.
The President in his recent State of the Union Address
cited energy independence and weaning ourselves off foreign oil
and showcasing our renewable resources. Why would that
administration want to increase the cost of a large, clean,
renewable domestic resource?
This proposal is not good energy policy. It is not good
economic policy, and it is certainly contrary to a national
goal of energy independence.
I will end by mentioning Endangered Species Act reform.
Pend Oreille Public Utility District has recently received a
new license from FERC for our Box Canyon Dam, a 72 megawatt
run-of-the-river hydroelectric project on the Pend Oreille
River.
We are beginning to implement the numerous mandatory
conditions that have been imposed by Federal agencies along
with our license from FERC. We have found ESA-related processes
to be inconsistent and lacking in both sound science and common
sense.
We understand that Chairwoman McMorris is introducing
legislation to encourage Bonneville and the other PMAs to have
greater transparency in regard to ESA-related costs. We
certainly support that, and Madam Chair, we will do all we can
to assist you in advancing that legislation.
Thank you very much for this opportunity to speak, and I
too do not yet know all there is to know on anything, and so I
look forward not only to the remaining witnesses, but to the
Committee's comments as well as questions. Thank you very much.
[The prepared statement of Mr. Peterson follows:]
Statement of Dan Peterson, Commissioner,
Pend Oreille County Public Utility District
Chairman Radanovich, Ranking Member Napolitano, Vice-Chair
McMorris, and members of the Subcommittee:
Thank you for the opportunity to testify. I offer the following
written comments on behalf of my local utility and my county's citizens
who have elected me Commissioner. As a past President of the Washington
Public Utility Districts Association and current chair of the
association's Legislative Committee, I also speak from a statewide PUD
perspective. And, as a utility member of the region's Public Power
Council, I support the broader interests of Public Power throughout the
Pacific Northwest.
Pend Oreille County is located in the very northeast corner of
Washington State's Fifth Congressional District, which is represented
by Congresswoman McMorris and shares borders with both Idaho and
British Columbia. Our county is nearly 60% federal lands, and that
percentage is even higher in our larger northeast region. Five counties
in Representative McMorris' District have PUDs that provide electric,
water, sewer, and telecommunication services.
Our county of 1400 square miles has 12,000 residents; the Public
Utility District serves electricity throughout the County to about 8000
customers. In addition to our own non-federal hydroelectric resources
on the Pend Oreille River, the PUD purchases power from the Bonneville
Power Administration (BPA) to supply a large newsprint plant.
In my testimony, I will address three issues:
1. The Administration's Fiscal Year 2007 budget proposal regarding
BPA's surplus revenues and third-party debt
2. Longer-term federal power matters
3. The Endangered Species Act reform
First, in regard to the Administration's budget proposal that BPA's
surplus revenues above $500 million be used to repay Treasury:
BPA supplies a quarter of my utility's total energy needs and is
nearly half of our total energy cost, with an annual BPA bill of
approximately $10 million.
Historically BPA surplus revenues have served to stabilize BPA's
wholesale power rates. The large federal hydropower system in the
Northwest is subject to variable water flow conditions. There are good
water years producing surplus revenue, and there are dry years that may
fall short of revenue projections. This proposal would limit BPA's
flexibility of taking advantage of the good years to deal with the bad
years. Contrary to the budget proposal's claim, ``sound business
practice'' has allowed surplus revenues to remain in the region and
help stabilize rates. At the same time, our ratepayers have continued
to faithfully repay federal debt on time and with interest.
Moreover, BPA has voluntarily made more than $1.46 billion in early
payments on its federal debt obligation, without raising rates. That
made good business sense for BPA and good economic sense for the
region. But what other business would voluntarily increase rates and
costs to its customers to pay off debt ahead of schedule, as the OMB
proposes?
Some argue that electricity rates in the Northwest are too low to
begin with, and there is no harm in raising them. But our rates are not
as low as they once were. We have taken a tremendous hit from the
Western energy crisis, which we are still--resentfully--paying off.
Also, as a fast-growing region, the Northwest and the West have had to
add new and expensive generation. Some claim that average residential
rates of BPA customers have recently moved close to or even above the
national average.
History reminds us that the hydropower system was built to attract
businesses and keep industry in the U.S. Even if our region did have
the lowest rates in the nation, why would the Administration
artificially raise those rates and force businesses out of the region,
possibly overseas?
The Northwest produces much of the cleanest power in the nation.
The President in his recent State of the Union Address stressed energy
independence. At a time when the President is urging our nation to wean
itself off foreign oil and showcase renewable energy, it makes no sense
to arbitrarily increase the cost of a large, clean, domestic, hydro
resource. This isn't good energy policy or economic policy, and it is
contrary to the national goal of energy independence.
Although the dollar impact of the budget proposal may be relatively
small in my utility's case because we purchase a specialized ``Slice''
product from BPA, this budget proposal, if implemented, will raise BPA
rates. It sets bad precedent, hurts my neighbor PUDs, and could do
unnecessary damage to the Pacific Northwest region.
I join the strong bipartisan opposition being expressed by the
Northwest congressional delegation. With them, I am extremely
disappointed that OMB and DOE have repeatedly ignored the substantive
concerns we raise about Bonneville-related proposals.
On another budget matter, we again oppose the OMB proposal to
change the accounting treatment of third-party financing arrangements
Bonneville has used to finance transmission infrastructure improvements
in the Northwest. OMB proposed this last year, and the Northwest
expressed opposition then as well.
According to DOE, the main purposes of the surplus revenue proposal
described above are to allow more financial flexibility for BPA and to
help build more transmission infrastructure. While I agree with those
goals, this third-party financing proposal runs completely counter to
that. If third-party arrangements were to count against Bonneville's
borrowing authority, it would effectively end financing arrangements,
such as the successful Shultz-Wautoma electric transmission line
project, which could effectively bring regional transmission investment
to a halt and would lead to dramatic electric rate increases.
The proposal also makes no sense because third-party financial
transactions create no taxpayer liability. The ratepayers of the
Pacific Northwest--not the United States Treasury--secure Non-federal
bonds backed by Bonneville, such as those issued by third parties.
Second, with regard to the long-term outlook for the federal power
program, I have these thoughts:
Long-term contracts for BPA power are in the best
interest of customers and the federal government. They benefit the
federal government because they assure BPA of a continuing revenue
stream to repay to the Treasury the investment in the facilities. They
benefit customers because they provide resource certainty.
Administrative burdens associated with short-term contracts are reduced
for both parties.
Solutions to energy problems are best formed when we
develop a consensus on BPA-related issues in the Northwest before
coming to the delegation and to Congress. Similarly, the region
benefits when the delegation develops a bi-partisan position on energy
issues and works together to protect our valuable Columbia River
system. Over the years, the House Northwest Energy Caucus has done a
terrific job of developing consensus positions on BPA matters.
Northwest consumers are the beneficiaries of those actions.
Third, in regard to the Endangered Species Act:
Pend Oreille PUD recently received a new FERC license for our Box
Canyon dam, a 72-megawatt run-of-the-river project on the Pend Oreille
River. We are beginning to implement the numerous mandatory conditions
of various Federal agencies. We have found ESA related processes to be
lacking in consistency and sound science. The following items detail
our experience:
Local control is lost as decisions are made far away in
regional headquarters or Washington D.C. Stakeholder comments rarely
altered draft federal documents in our case. Motives remain suspect
because only one small reservoir in a huge river basin unit was
designated as critical habitat. Only our project area--where a FERC
relicensing was ongoing and agencies could benefit from the financial
opportunity--was designated critical habitat.
Rules are applied inconsistently. Our project area does
not have bull trout populations, yet we are being forced to spend
millions of dollars for mitigation. Areas without bull trout are given
protected status, while areas with bull trout are not.
Decisions lack sound scientific basis. We must plan
enormously expensive fish ladders for bull trout, but there are no fish
to study to learn their habits and preferences, and no surrogate
species exist. In an ultimate irony, while the federal government
mandates our expenditure of millions of dollars for bull trout
restoration, it continues to fund a tribal hatchery for bass, a species
that eats bull trout! Furthermore, bass live in warm water; bull trout
thrive in cold water. Studies establishing historical warm/cold and
fast/slow water habitat conditions have been ignored.
In general, land and water protection advocates seem to
use ESA as a cover for keeping areas wild and pristine, rather than for
actually preserving species. Listings result in a self-perpetuating,
never-ending business. Given the questionable presence of an endangered
species in our project area, it is terribly disconcerting when federal
agencies appear more interested in dollars than the actual existence of
a species. It feels to me like extortion!
Costs are not evaluated against human impacts. Our 8000
ratepayers--in a county where the average annual per capita personal
income is barely $22,000--could face a bill of $50 million or more for
ESA related passage, habitat, and lost generation. Will the expense
ever provide a real benefit?
We understand that Chairwoman McMorris will be introducing a bill
soon that will provide some transparency on how much BPA and other PMAs
spend on ESA costs. We support this legislation and look forward to
helping the chairwoman advance it.
Thank you for this opportunity to submit this written testimony. If
I can be of any further assistance to the committee, I am willing and
available.
______
Ms. McMorris. Thank you very much.
Mr. McClennan.
STATEMENT OF MAC McCLENNAN, VICE PRESIDENT OF EXTERNAL AFFAIRS,
TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, DENVER,
COLORADO
Mr. McClennan. Dan certainly puts a lot of pressure on the
rest of us.
Chairman McMorris, Ranking Member Napolitano, Members of
the Subcommittee on Water and Power, I appreciate the
opportunity to testify today.
My name is Mc McClennan. I am the Vice President of
External Affairs at Tri-State, which is a power supply
cooperative for nearly all of the cooperatives in Colorado,
Nebraska, Wyoming, and New Mexico. So Tri-State and its members
provide about a million rural electric consumers in that four-
state region with power. To do that, we are one of the largest
customers of Western Area Power Administration, and so your
review of their budget and look at it is certainly very
important to us.
I would like to emphasize though, however, Tri-State has a
very good longstanding relationship with Western. We have
developed relationships where we work with them to look at
their budgets, future planning expenditures, our issues as we
go forward, to be able to keep the system operating.
However, even having said that we do have issues as it
relates to this year's 2007 President's budget, and I am just
going to touch on two of those issues.
In Tri-State's case, we operate both in the Missouri River
Basin side and we also operate in the Colorado River side, and
so we have distinct set of issues in both of those regions.
Two issues I will just raise on the budget front is in the
President's budget there is a thing called ``Pick-Sloan cost
reallocation'', which is probably more appropriate for
tomorrow, but an issue called ``security cost'' which impact
us.
With respect to cost reallocation, it is an issue really
where the attempt by the Administration to have power pay for
irrigation costs. Power already in today's world pays for 85
percent of the irrigation costs in the Pick-Sloan region. What
is in the proposed budget would move another additional $23
million annually to the power customers. I think that is an
unfair movement and a payment that the power customers ought
not to pick up.
On the security cost side, in 2002, the Commissioner of
Reclamation, Commissioner Keys indicated that those costs
associated with security really ought to be non-reimbursable.
We agree. Security for the Federal generating and delivery
facilities is of national concern and should therefore be
funded from non-reimbursable appropriated funds. However, we
continue to see paying for security costs creep into budget
proposals for power rates.
Tri-State urges this Committee and Congress, as you
continue to review and look at agency budgets both today and
tomorrow, to make sure that as we look at those the development
of those proposals ensure a fair allocation and provide some
funding certainly for those people who are picking up the tab,
namely, those of us, the stakeholders.
I want to talk for just a moment as well, while I have a
moment, to talk about the drought. Colorado River Basin is in
its sixth year of consecutive year of drought. It reached its
lowest level since 1969 in April of 2005. It is approaching
minimum generation pool.
Why do we care? Well, while the hydrology is getting a
little bit better, if in fact we get to minimum general pool
there are significant economic consequences for the customers
and the members they serve. There is also a significant
consequences for the non-power programs that are funded by
those power revenues.
Our concern is that as we continue to go down this path as
the generation continues to decline at Glen Canyon, we are in a
situation where the power users potentially could pick up non-
power programs on the Colorado River. From a public policy
standpoint, these programs really are intended for the benefit
of the environment, the benefit of the public, and therefore
one of the things as we continue to move forward and look
forward to working with this committee as the drought, if it
continues, is how we work on those programs to continue to
maintain them as we go forward.
The final issue I want to address and it was referenced in
the beginning and it is referenced in the title is this idea of
Western's implementation or WAPA's implementation of the Energy
Policy Act.
In our region, WAPA has initiated efforts to upgrade
capacity for the transmission of electricity in our region. We
support that. Western is trying to engage in processes that
explore expanding and expediting the development of
transmission capacity in the inner-mountain west.
Along those lines Tri-State, along with Western, has
initiated a joint transmission project in the eastern plains of
Colorado and the western half of Kansas called the Eastern
Plains Transmission Project. It will include nearly 700 miles
of new high-voltage transmission system to relieve existing
transmission constraints and to meet future load growth in the
region.
The participation of Western in this project we believe
will serve to enhance the regional system, expedite the
permitting of the project, and provide the opportunity for
increased renewable generation development in the West.
We believe this is a prime example of the type of
partnerships that Congress envisioned in the Energy Policy Act
passed last year. Mr. Chairman, I think it is a great
opportunity for us to be able to move forward.
In closing, I just want to say thank you for holding this
hearing today, recognize Congresswoman Musgrave, who is in our
district, Mr. Pearce, Congressman Pearce, who is in it as well,
and appreciate their efforts as we move forward. So thank you.
[The prepared statement of Mr. McClennan follows:]
Statement of Mac McClennan, Vice President of External Affairs,
Tri-State Generation and Transmission Association, Denver, Colorado
Chairman Radanovich, Ranking Member Napolitano and members of the
House Subcommittee on Water and Power, I appreciate the opportunity to
appear before you today representing Tri-State Generation and
Transmission Association, Inc. and to share our views on the Power
Marketing Administrations implementation of the Energy Policy Act of
2005 and the proposed Fiscal Year 2007 budget for these agencies.
My name is Mac McLennan, and I am the Vice President of External
Affairs for Tri-State Generation and Transmission Association, a not-
for-profit wholesale power supply cooperative that provides electricity
to forty-four member distribution cooperatives in Colorado, Nebraska,
Wyoming and New Mexico. As Vice President, I oversee Tri-State's
government relations, communications and external association
activities. Tri-State is based in Westminster, Colorado, and has
facilities and employees throughout the four-state region. Tri-State
provides electric service through our member distribution cooperatives
to more than one million electric customers, primarily located in rural
communities. Tri-State is one of the largest customers of
hydroelectricity generated by the Bureau of Reclamation and the Army
Corps of Engineers in the interior West and distributed by the Western
Area Power Administration (Western) at facilities in the Colorado River
Storage Project as well as the Pick Sloan Missouri Basin Project.
I would like to emphasize that Tri-State has had a very positive,
long-standing working relationship with Western. We have worked
together on joint transmission projects to improve efficiencies for the
benefit of the end-use consumers. We have worked with other power
customers to develop a Memorandum of Understanding with our federal
power partners, Western, the Bureau of Reclamation (USBR) and the Army
Corps of Engineers that provides the opportunity for our input into
planned future expenditures in the federal power program. We appreciate
the expertise and professionalism of our federal partners and the
combined efforts to keep the federal facilities operating efficiently
and cost effective.
As I mentioned earlier, Tri-State receives a power allocation from
the Pick Sloan Missouri Basin Project as well as the Colorado River
Storage Project. Tom Graves, Executive Director of Mid-West Electric
Consumers Association, of which Tri-State is a member, is on the panel
testifying today, and we endorse the testimony that he is presenting. I
want to make special emphasis regarding his comments on the inequity of
the proposed Pick Sloan Cost Reallocation in the President's budget.
Power entities are already paying over 85% of the irrigation costs for
Pick Sloan irrigation and it is unfair to shift an additional $23
million annually to the power customers. While not contained in this
years budget request for Western, Tri-State supports the concept of Net
Zero to provide annual funding for Western, providing it can be done in
a way that provides for appropriate congressional oversight and
customer involvement.
I would like to now turn to some crucial issues for the Colorado
River Storage Project (CRSP). They include the ongoing drought and
purchased power impacts; the role of Glen Canyon Dam operations in
adaptive management for the Grand Canyon; the operational impacts and
costs from environmental processes for the Aspinall EIS now underway;
and federal infrastructure security costs. Tri-State is a member of the
Colorado River Energy Distributors Association (CREDA) which represents
us on CRSP issues.
DROUGHT IN THE COLORADO RIVER BASIN
The Colorado River Basin is in its sixth consecutive year of
drought. In the 100 years of record keeping by the Bureau, there have
never been six consecutive years of drought. Lake Powell reached its
lowest level since 1969 on April 5, 2005, 144 feet below full pool. It
was approaching minimum power generation level. The hydrology has
improved since the spring of 2005, but there is still a chance this
level could be reached as soon as 2007. If minimum power generation
level is reached, there will be little CRSP generation available to the
CRSP contractors. This will have significant economic consequences for
the CRSP contractors and the customers they serve, as well as for a
number of other non-power programs that are funded with CRSP power
revenues.
THE UPPER COLORADO BASIN FUND AND DROUGHT IMPACTS
The Basin Fund is a revolving fund maintained by CRSP power
revenues. The Basin Fund is the source of CRSP project repayment,
including: repayment of the capital investment with interest,
operation, maintenance and replacement expense, 95% of the irrigation
investment, and the USBR and Western employee salaries (about $80
million annually). In addition, the Fund has been the economic source
for other ``non-power'' programs:
Nearly $18 million for the Colorado River Salinity
Control Program;
$179,577,774 for the Glen Canyon Adaptive Management
Program;
$40,399,329 for the Upper Colorado River Basin and San
Juan Basin Endangered Fish Recovery Programs
The programs listed above cost about $20 million per year.
In addition, due to reduced generation levels from the CRSP
resource, Western has had to purchase power on the open market to meet
its contractual requirements. Last year alone, they spent $50.5 million
from the Upper Colorado Basin Fund for replacement power. In order to
maintain a sufficient Basin Fund level, in October 2001, Western
increased the CRSP rate 17%. In October 2003, Western reduced energy
deliveries to its customers by 26%. Each customer has had to ``make
up'' the shortfall on its own. On October 1, 2005, Western increased
the CRSP rate nearly 23%.
NON-POWER RELATED PROGRAMS SHOULD BE FUNDED BY APPROPRIATIONS, NOT CRSP
CUSTOMERS
Tri-State is concerned that, when generation is ceased or close to
being ceased at Glen Canyon Dam, an effort will be made to require CRSP
power users to fund the non-power programs described above. This would,
in effect, be a subsidy from the electric consumers in six Western
states to all the parties that benefit from the Salinity Control,
Adaptive Management and Endangered Species Recovery programs on the
river.
Instead, the non-power programs should seek appropriations from
Congress to fund activities when the Basin Fund is depleted. Further,
the Basin Fund should be limited to ``the basics,'' namely, those costs
that are mandated by law to be repaid by the Fund. The Glen Canyon
Adaptive Management Program authorizes, but does not mandate, the use
of CRSP power revenues for program funding. The Endangered Fish
Recovery Programs legislation requires the Bureau and WAPA to seek
appropriations in times of financial need.
From a public policy standpoint, these programs are intended to
benefit the environment, which is in the public interest, and therefore
should be funded by appropriations. Providing appropriations for these
programs would assist in maintaining the Basin Fund's solvency.
GLEN CANYON DAM/ADAPTIVE MANAGEMENT
In 1989 the Department of Interior initiated an Environmental
Impact Statement (EIS) process that produced a Record of Decision (ROD)
and was signed by the Secretary of Interior in 1996. It created an
alternative dam operating plan that was intended to permit recovery and
long-term sustainability of downstream resources while limiting
hydropower capacity and flexibility only to the extent necessary to
achieve recovery and long ``term sustainability. The Adaptive
Management Work Group (AMWG) was created which is a 23-member
stakeholder federal advisory committee charged with making
recommendations to the Secretary of the Interior regarding dam
operations and management actions necessary to achieve the intent of
the EIS/ROD. Of particular note is that science is now finding that
pre-ROD assumptions regarding dam operation effects on humpback chub
were wrong and that fluctuating flows (providing load following) may
actually benefit the chub by impacting predator populations. In 2000,
Congress included language in the appropriations bill which capped the
amount of CRSP power revenues that can be used to fund this program. In
the summer of 2001, experimentation on water flows cost $23 million,
funded by CRSP power customers. In November 2004 a high-flow test was
initiated with the intent of improving sediment conditions; the cost
was nearly $2 million. Since CRSP power revenues are the funding source
for this program--and given ongoing drought impacts--it is imperative
that any experimentation enhance power production. It is now time,
after 12 years of monitoring and research, to enhance hydroelectric
power production from this renewable resource. Unfortunately, on
February 15, 2006, several environmental groups filed suit in U.S.
District Court, District of Arizona against Interior Secretary Gale
Norton and the Bureau of Reclamation to challenge the current
management operations and reopen an environmental review. This could
significantly impact operations on the Colorado River.
ASPINALL EIS UNDERWAY / BLACK CANYON OF THE GUNNISON
The USBR has begun a scoping and cooperating agency process for an
EIS on the operation of the Aspinall Unit of the CRSP. The Aspinall
units are on the Gunnison River a tributary to the upper Colorado
River. The effort is to review the impacts of river flows and make flow
recommendations for endangered fish. Tri-State believes the Upper Basin
Recovery Program should be the primary focus of recovery efforts.
Complicating the process is ongoing litigation by environmental
interests in an attempt to overturn a memorandum of understanding
between the Interior Department and the State of Colorado (April,
2002). Oral arguments will be held in early March 2006. Tri-State is
concerned that these issues clearly overlap and need to be resolved in
tandem, so as to avoid a ``second bite of the apple'' situation with
regard to Gunnison flows. The EIS will take three to four years.
FEDERAL INFRASTRUCTURE SECURITY COSTS
In April 2002, USBR Commissioner Keys issued a policy statement
indicating that the increased security costs for federal dams as a
result of the events of Sept. 11, 2001, should be non-reimbursable.
Security of these federal generating and delivery facilities is a
national concern and should therefore be funded from non-reimbursable,
appropriated funds. The FY 2006 Omnibus Appropriations Bill contains
language providing that $10 million of the costs of guards and patrols
will be reimbursable, slightly less than half of what USBR requested.
The USBR must provide a report to Congress delineating its proposed
allocation and reimbursement methodologies. Tri-State urges this
Committee and Congress to continue to review and work with the agencies
on the development of proposals to ensure a fair allocation and to
provide some certainty to the funding stakeholders.
IMPLEMENTING THE ENERGY POLICY ACT
The final issue that I would like address is the implementation of
the Energy Policy Act by Western. Western has initiated a process to
look at upgrading the capacity for transfer of electricity in Wyoming
and Colorado. We support Western's efforts to engage in processes that
explore expanding and expediting the development of transmission
capacity in the intermountain West. Along those lines, we have
initiated a joint transmission project with Western. Tri-State has
signed a contract to partner with Western in a much needed transmission
project on the eastern plains of Colorado and western Kansas referred
to as the Eastern Plains Transmission Project. Over 700 miles of new
high-voltage transmission lines are envisioned that will relieve
existing transmission constraints and meet future load growth. The
Eastern Plains Transmission Project will meet the transmission needs of
Tri-State in its development of new baseload power generation in the
region as well as provide much needed opportunities for new renewable
development in the area. The participation of Western in this project
will serve to enhance the regional system, expedite the permitting of
the project and provide the opportunity for increased generation
development. Tri-State appreciates the expertise provided by Western in
this joint venture and believes this is a prime example of the type of
partnerships envisioned in the Energy Policy Act passed last year.
Mr. Chairman, in closing, I would like to thank you for holding
this hearing today and providing Tri-State with the opportunity to
express our views on significant issues affecting us, our member
systems and ultimately the end-use consumers.
______
Ms. McMorris. Thank you.
Mr. Pope.
STATEMENT OF JAMES POPE, GENERAL MANAGER,
NORTHERN CALIFORNIA POWER AGENCY, ROSEVILLE, CALIFORNIA
Mr. Pope. Thank you, Madam Chairman, and the Members of the
Committee. I really appreciate the opportunity to testify here
today on these issues.
A little bit about NCPA. It is a joint action agency in
Northern California, and our members are pretty diverse. We
have BART in the Bay Area, the Port of Oakland, City of Santa
Clara, Palo Alto, and Alameda in the Silicon Valley, Lodi,
Biggs, Gridley, Redding, and Turlock Irrigation District in the
Central Valley. We are a very strong dynamic partnership in our
joint action agency, and we really want to continue that dialog
with Western and with the CVP customers to forge this
partnership between the customers and Western.
I have six points I would like to cover in my remarks.
First of all, security costs must be allocated properly and
close overseen. NCPA is willing to create a cost-sharing
partnership for reclamation's post-September 11 security costs.
However, it is vitally important that the allocation of these
costs per project reflect the uses of the project and are
divided accordingly. The costs must be quantifiable, and the
customers of these projects must provide adequate cost review
and input.
However, we only feel that security costs should be
collected for the national critical infrastructure facilities.
Only costs for these facilities should be up for allocation.
The President's budget removed the $10 million cap on
reimbursable security measures which Congress put in place last
year. This cap should be preserved.
Second, the Bureau is seeking to require customers to
provide up-front funding for power share of these costs without
adequate consultation or analysis to determine if this could be
properly credited to our bills.
These two issues warrant the Subcommittee's careful review
and consideration.
My second point, OMB's interest rate sets a bad precedent
and is just flat bad policy. The Office of Management and
Budget's agency rate proposal may have a nominal impact on the
Central Valley Project customers, but sets a unsound policy and
precedent. This proposal should be rejected and at a minimum
words urge that this Subcommittee take the necessary steps to
prevent OMB from making further changes in the PMA ratemaking
and repayment policies without direct approval of Congress. We
think Congress sets policy, not OMB.
My third point, the Folsom Dam bridge replacement is
unrelated to the power generation. There is no benefit from
this bridge for water and power users. As detailed in my
testimony, it is important that Congress make clear that no
cost for the Folsom Dam replacement bridge be assigned to water
and power customers.
Next, CVPIA, the Central Valley Project Improvement Act,
review design to effectively implement the Act, and the process
includes stakeholder involvement. We have been involved with
the CVPIA Act for 14 years. The water and power customers have
jump-started this process consistent with the legislation. The
Department of Interior's review of the Central Valley Project
Improvement Act activities is an appropriate and necessary
process required to honor the department's legal
responsibilities and should continue.
This process has included stakeholder involvement to ensure
that the Act is effectively implemented. This has been a two-
year process within the roundtable, and a small subgroup has
been working to develop the areas where we feel that the Act
has been implemented.
Next, forecast-based operations needed for optimal
management of Federal facilities. In other words, not spilling
more water than needs to be spilled because if you spill water
you spill energy. We recommend that they switch to a forecast-
based operations for the CVP, would provide the same level of
flood protection without spilling water that could be used for
power production. That needs to be reviewed.
Ms. McMorris. Mr. Pope. Yes, I need to ask you to summarize
and finish your remarks, and then you can probably make more of
your points in the question and answer period.
Mr. Pope. Thank you. My last remark is that OMB proposal
limit third-party financing for transmission by BPA should be
rejected.
I do not think I need to say anymore. Thank you.
[The prepared statement of Mr. Pope follows:]
Statement of James H. Pope, General Manager,
Northern California Power Agency
Introduction
Mr. Chairman, members of the subcommittee, thank you for this
opportunity to testify at today's hearing. I am James H. Pope, General
Manager of the Northern California Power Agency (NCPA), a joint action
agency that serves as the supplemental power supplier for 15 public
power systems that purchase power from the Western Area Power
Administration (Western). For our members--municipal utilities,
irrigation and special purpose districts, the Bay Area Rapid Transit
System, and a rural electric cooperative--the power they receive from
Western is an integral part of their power supply, and an essential
component in providing their communities and consumers with reliable
and affordable electricity. Given the importance of Western to our
communities and districts, we commend the subcommittee for providing
this important oversight hearing.
Overview
Western's third-party transmission activities require
close oversight.
Bureau of Reclamation's (Reclamation's) dam security
costs must be reviewed, controlled and properly allocated.
The Office of Management and Budget's (OMB's) ``agency
rate'' proposal appears to have a nominal rate impact on CVP
customers--but sets an unsound policy precedent.
No costs for the Folsom Dam replacement bridge should be
assigned to power and water customers.
The Administration's request for Western's ``purchased
power and wheeling'' account should be supported.
OMB's initiative to limit third-party financing of
Bonneville Power Administration (BPA) transmission should be rejected.
BPA and Western should be encouraged to further enhance transmission
capability between the Pacific Northwest and the Pacific Southwest.
The Department of the Interior's review of Central Valley
Project Improvement Act (CVPIA) activities should continue.
The Central Valley Project should switch to Forecast
Based Operation.
Background on the Western Area Power Administration and the Central
Valley Project Customers
The federal Central Valley Project (CVP) consists of 11 power
plants at federal multipurpose projects with a combined generating
capacity of almost 2,000 MW. Western also owns almost 900 miles of
high-voltage transmission lines that deliver power from the federal
dams to Western's customers. The costs of the CVP system are repaid--in
full and with interest--by the power customers. In addition, the power
customers pay for significant fish and wildlife measures, and assist in
repayment of the irrigation investment. CVP power, on average, meets
more than 30% of NCPA member communities' and districts' energy needs.
But this is not a static partnership. Rather, it is one that has
grown and evolved:
CVP customers provided advanced funding for rewinding the
generators and replacing the turbine runners at Shasta Dam, a
collaborative effort that extended the life of these units, resulted in
an efficiency gain of 2%, and produces an additional 98 megawatts of
electricity;
CVP customers, acting through the Transmission Agency of
Northern California (TANC), partnered with Western to construct the
California-Oregon Transmission Project, the third major link between
California and the Pacific Northwest;
TANC--comprised of public power systems--played a
prominent role in promoting completion of the Path 15 transmission
project that relieved congestion and improved the reliability of the
California grid;
CVP customers provide direct customer financing for
important CVP capital and operational expenditures to ensure that, in
light of constrained federal appropriations, the facilities continue to
operate reliably, efficiently and cost-effectively, and;
CVP customers worked collectively to create the
Sacramento Municipal Utility District/Western Area Power Administration
Control Area to ensure that Western's transmission facilities operate
efficiently and in compliance with the statutory purposes and
obligations of the Central Valley Project.
There is an effective partnership between Western and its
customers--and the Subcommittee on Water and Power has played an
important role in fostering that partnership which has produced many
public benefits.
Western Area Power Administration-Related Provisions of the Energy
Policy Act
One of the key Western-related features of the Energy Policy Act of
2005 is the provision authorizing Western to accept third-party funds
to construct transmission facilities. As noted above, NCPA supports,
and has participated in, cooperative arrangements with Western to
facilitate transmission construction. Partnering with Western provides
a number of advantages, including the ability to integrate with
Western's backbone facilities, use of federal eminent domain authority,
and Western's proven track-record of project design and construction.
As we noted during congressional debate of this provision, however,
it is important that use of this new authority be used judiciously and
appropriately. It is important that this provision neither distract
Western from its core mission of operating the federal facilities, nor
result in the direct or indirect transfer of costs from third-party
transmission projects to federal power customers.
The Subcommittee on Water and Power should provide careful and
consistent oversight of Western's activities under this provision.
Dam Security Costs Must be Reviewed, Controlled and Properly Allocated
Reclamation has incurred significant expenses in its post-September
11 security program. Historical precedent argues that these security
costs should be fully non-reimbursable (not subject to repayment by CVP
customers). Further, the facilities are on the national critical
infrastructure list and, therefore, a small number of citizens should
not be responsible for paying for security costs that benefit the
entire nation. However, Reclamation's May 1, 2005 report to Congress
assigned CVP power customers the obligation to pay for roughly two-
thirds of the CVP security costs--an amount that is not commensurate
with the underlying multipurpose project cost allocation based on the
multiple public purposes of these projects.
Congress stipulated in the FY 2006 Energy and Water Development
Appropriations Act that only $10 million of the Reclamation's security
costs could be recovered from water and power customers of the CVP.
Reclamation has also been told by the Congress that it needs to better
allocate costs to align with the purpose of the funding, and provide
improved cost accountability and transparency.
NCPA is supportive of an appropriate assignment of CVP security
costs to power customers, provided that the costs are quantifiable and
reflect a proper allocation, and that customers are provided
appropriate cost review and input. In fact, there have been positive
developments in this regard as Reclamation now appears ready to adjust
cost allocations so that CVP power customers are assigned a percentage
of costs that match the underlying multipurpose cost allocation.
Yet, there are two remaining areas of concern that warrant
congressional review:
The President's 2007 budget removes the $10 million cost
cap on reimbursable security measures.
Reclamation seeks to require customers to provide up-
front funding for the power share of these costs. While this mechanism
could provide needed customer involvement and oversight, this funding
tool is being called upon in this instance without any customer
consultation, nor analysis to determine if the advanced customer funds
could be properly credited on their bills. Moreover, the customer
funding contracts only allow for funding of direct power operations and
maintenance costs--and not multipurpose activities.
NCPA is willing to create a true cost-sharing partnership for
Reclamation's post-September 11 security costs. In order to succeed,
this partnership must provide customers with assurance that costs will
be legitimate, known and limited. We greatly appreciate the efforts of
Chairman Pombo and Chairman Radanovich to promote a fair and
transparent process, and look forward to continuing to work with this
Subcommittee to advance these objectives.
OMB Interest Rate Adjustment Sets Troubling Precedent
The FY 2007 budget stipulates that the Department of Energy will
alter its policy governing interest rates for investments by the
federal power marketing administrations (PMAs), including Western. This
change will affect only those facilities, such as the CVP, where the
interest rate is not set by law. Under the proposal, new investments
will incur an interest charge similar to the rate at which federal
corporations borrow funds from the Treasury. The budget claims that
this ``agency rate'' was .4% higher on average than PMA rates from
1997-2005.
OMB claims this change will have a minimal rate impact--and NCPA is
still evaluating the rate consequences. However, we are troubled by the
precedent of making significant changes in policy without adequate
consultation with and review by Congress. As this Subcommittee knows,
over the years OMB--under both Democratic and Republican
Administrations--has attempted to make discriminatory and punitive
changes to the rate policies of the federal power marketing agencies.
Enabling major shifts in repayment policies through a simple change in
an obscure Department of Energy budget directive could result in
significant rate increases for consumers, jeopardize the operations and
viability of these important multipurpose projects, and undermine the
essential role of Congress in setting and overseeing the policies
affecting the nation's water and power resources.
Given the history of numerous assaults on PMA rate setting
policies, we believe such changes should only be made with the express
consent of Congress. Ideally, we would hope Congress would reject this
incursion in the repayment policies of the PMAs. At a minimum, the
Subcommittee on Water and Power should take necessary steps to convey
its dissatisfaction with this presumptive action, and to prevent OMB
from making further changes in PMA ratemaking and repayment policies
without the direct approval of Congress.
Folsom Dam Bridge Replacement
NPCA supports efforts to build a new bridge downstream of Folsom
Dam to address traffic congestion created by the closure of the Folsom
Dam road for security purposes. However, because the bridge project
will not provide any benefit to power and water customers, the costs of
the bridge should therefore not be assigned to these customers for
repayment. Assigning costs to project purposes where there is not a
direct and corresponding benefit sets an unsound policy precedent that
could undermine cooperation between stakeholder groups, and jeopardize
other project investments.
The Subcommittee on Water and Power should carefully monitor this
process to ensure that the federal government's share of the new bridge
remains a non-reimbursable expense.
Purchased Power and Wheeling
Each year, Western and the other PMAs receive a federal
appropriation to cover the costs of purchasing power to ``firm'' power
sales and arrange for transmission. In the case of the CVP, Western's
purchased power and wheeling (PPW) expenses have dropped significantly
as a result of the post-2004 marketing plan--but the activity remains
critical for Western to meet its obligations to some of its smaller
California customers, including BART and the Lassen Municipal Utility
District. These PPW appropriations are repaid to the Treasury within
the same fiscal year from revenues collected from PMA customers. In
recognition of this fact, Congress adjusted the budget rules so that
these appropriations do not ``score'' as part of the federal budget.
Nonetheless, there are often annual debates over the level of the PPW
account.
This year appears to be an exception to the rule, as the FY 2007
budget includes the appropriations needed to fully fund for Western's
Purchased Power and Wheeling activities for the coming year.
NCPA is pleased that the FY 2007 budget includes an adequate
appropriation for Western's PPW activities and urges Congress to
support this amount.
Third-Party Financing of BPA Transmission Facilities
As the members of this Subcommittee know, California and the
Pacific Northwest are joined at the hip--we are physically integrated,
make considerable sales between the regions to take advantage of
seasonal diversity, and support each other to advance system
reliability.
Consequently, investments in the Northwest transmission grid are
important for all of California as well. It is with this in mind that I
raise with the Subcommittee NCPA's concern regarding with the
persistent effort of OMB to limit the ability of BPA to finance and
construct needed transmission.
Unlike Western, BPA has direct borrowing authority from the U.S.
Treasury to finance transmission additions and upgrades. Recently,
Congress increased that borrowing authority, but directed BPA to seek
partnerships with non-federal parties in order to leverage the limited
borrowing authority and include others in the planning and financing of
its facilities. As we have noted, these partnerships have great
potential to meet the infrastructure demands of the West--and it is for
such purposes that Congress authorized Western to enter into these
types of arrangements.
It is, therefore, highly ironic that after directing BPA to pursue
third-party financing, and granting Western authority to enter into
arrangements with third-parties, that OMB has proposed to undercut this
important tool. In July of last year, OMB sent legislation to Congress,
which it reasserts in the FY 2007 budget, that would count third-party
financings against BPA's limited borrowing authority--effectively
denying any value in pursuing these arrangements, and leaving BPA in a
precarious position with only sufficient borrowing authority to meet
its infrastructure needs through 2011.
The Subcommittee on Water and Power should take appropriate action
to affirmatively reject this treatment of third-party financing of BPA
transmission, and encourage BPA and Western to participate in further
enhancements to transmission capability between the Pacific Northwest
and California.
Review of CVPIA Activities
The Department of Interior's review of certain activities under the
Central Valley Project Improvement Act (CVPIA) is receiving
considerable attention. Let me take this opportunity to clarify certain
facts:
CVPIA established a Restoration Fund to be used along
with federal and state appropriations to accomplish 33 specific
objectives. CVP water and power customers were statutorily obligated to
contribute $30 million annually (adjusted for inflation) to the
Restoration Fund.
Neither the federal nor state financed share of the
Restoration Fund has fully materialized, but to date, CVP water and
power contractors have contributed over $500 million toward the
accomplishment of the objectives.
The CVPIA calls for cutting contributions to the
Restoration Fund in half once the objectives are completed, and
Congress expressly anticipated that such action would occur within 10
years of enactment.
It has now been 13 years, and no meaningful review of
programmatic accomplishments has been conducted, and no metric exists
to measure program accomplishments.
NCPA joined with CVP water customers in preparing our own
assessment of the CVPIA accomplishments, and determined that our
obligations regarding the 33 objectives have been met.
The Department of Interior received our analysis and,
while it did not choose to exercise its statutory discretion to reduce
Restoration Fund contributions, it did realize that a rigorous analysis
of the program's status, accomplishments, goals and objectives was
necessary.
At the direction of the Office of Management and Budget,
The Department of Interior is reviewing the CVPIA Section 3406
objectives as part of the Department's Program Assessment Rating Tool
(PART) process.
The Department of Interior's process is both public and
open, with broad stakeholder participation.
The Department of Interior is conducting this review with broad
stakeholder participation, and we look forward to the establishment of
program objectives, milestones, and measurements to allow for effective
implementation of the Act.
Forecast Based Operations
The CVP system plays an important role in providing flood control
protection to the Sacramento Valley and beyond. NCPA believes, however,
that the CVP can meet the same or higher level of flood protection by
releasing water based on accurate weather forecasts rather than through
overly stringent adherence to rigid operating rules.
Today, the Bureau of Reclamation releases water through the CVP
system--at the direction of the Corps of Engineers--to stay within a
storage requirement known as the ``flood control curve.'' Under this
regime, water is released anytime storage exceeds a specific amount--
without adequate consideration of what the forecast for additional
precipitation might be in the following days. As a result, we have
witnessed instances in which significant water releases are followed by
dramatic flow reductions, when a more levelized release schedule would
have been possible. These high, unnecessary water releases necessitate
bypassing the dam's power generating facilities, resulting in a loss of
generation and power revenues. Similarly, when the reservoir inflows
and rain forecast make it highly likely that flood releases are
imminent, then increasing flow up to the power plant, rather than
bypassing the generators, would capture more energy.
Let me illustrate this situation. On February 3, the Corps of
Engineers directed Reclamation to release 30,000 cfs from Shasta due to
the emergence of a small storm. These high releases continued until
February 8, at which time the flow rate was reduced to 16,000 cfs. Then
flows were reduced to below 10,000 cfs a few days later. Since only
16,000 cfs can go through the generators, bypasses were required, and
the value of the energy bypassed totaled approximately $3.5 million.
Yet, the weather forecast unequivocally indicated that we would have
clear weather after that small storm. Consequently, if Reclamation had
maintained releases at 16,000 cfs, it would have taken a few more days
to get within the flood control curve, but we would have had the same
level of flood protection, and would have avoided a $3.5 million loss
of resource value.
Forecasting has improved to the point where we should be capable of
making sound resource and business decisions for flood control releases
through Forecast Based Operations, rather than through an overly strict
interpretation of the flood control curve, and we would urge the
Subcommittee on Water and Power to encourage the Bureau and Corps to
take the necessary steps to implement this methodology.
Conclusion
Western remains a vibrant and important player in promoting a
reliable, affordable power supply in California and throughout the
West. We appreciate the role of this Subcommittee in maintaining that
value, and conducting this important oversight hearing.
Thank you for this opportunity to testify, and I welcome your
questions.
______
Ms. McMorris. OK, very good.
Mr. Langer.
STATEMENT OF DWIGHT LANGER, GENERAL MANAGER, NORTH WASCO COUNTY
PUBLIC UTILITY DISTRICT, THE DALLAS, OREGON
Mr. Langer. Madam Chairman, Members of the Committee, it is
my honor and privilege to have this opportunity to share with
you some serious concerns.
My name is Dwight Langer, and I am General Manager of
Northern Wasco County People's Utility District in The Dallas,
Oregon.
We concur strongly with the President's statement in the
State of the Union Address that energy drives our economy and
national security. At Northern Wasco it is part of our
philosophy that energy in all its form, but in particular,
electric energy is an essential service.
We respectfully would add that adequate supplies of energy
at affordable prices are the prerequisites for a vibrant and
healthy economy, which adds to the foundation for maintaining
our nation's quality of life and security.
There are provisions in the Administration's Fiscal Year
2007 budget, unfortunately, that are at cross-purposes with
that philosophy. My testimony pertains to the 2007 proposed
budget for the Department of Energy Public Enterprise Fund's
BPA.
This proposal would shift the use of revenues for BPA when
they exceed a set amount, and change the rules on BPA debt
repayment. We are alarmed about both the particulars and the
public process concerning the proposed future disposition of
revenues from secondary sales, energy sales by the Bonneville
Power Administration. This proposal is unfair, not consistent
with prudent ratemaking processes or sound business practices.
My message today has three themes: BPA rates have been high
and painful the last few years; two, administrator proposals
that increase short-term rates in the Northwest or that
diminish the value of BPA to the region's customers are unfair
and unacceptable, and require congressional review; three, some
of BPA's costs, such as fish mitigation, are excessive, beyond
the agency's control, and indicative of a lack of an overall
plan that makes economic sense.
In an analysis by the Northwest Power and Conservation
Council, an independent counsel whose members are appointed by
the respective Governors of Washington, Idaho, Oregon, and
Montana, this budget provision to divert secondary sales
revenue away from stabilizing customer rates and involuntarily
moving it to debt repayment would have, in part, the following
effects:
Revenue collected for Bonneville's public utility customers
would increase by $145 million average per year; $109 million
decrease in regional personal income; a decrease of 1,120 jobs;
additional effects on aluminum and other energy-intensive
industries; $18.5 million decrease in Federal personal income
tax revenues to the government.
The entire region shares the council's concerns. Quite
appropriately and importantly, the question becomes who should
decide these issues that affect customers' pocketbooks.
In the past, BPA has run public processes to develop long-
term financial plans, showing many alternatives and with good
public participation. In this instance, if the Administration
wants to abruptly change standing BPA financial practices, it
is imperative that Congress weigh into this matter and
determine what is in the public interest.
We look to Congress to establish the rules of the road, our
treasury obligations of BPA. In this case, it is unwise and
unfair for OMB to change these rules without action of
Congress.
While we are not against early debt retirement and
increasing borrowing authority, we need to have an open process
that is also sensitive to the retail rates issue. The best
interest of the customers should come first, not last.
Similarly, we need to stand back and objectively examine
the rationale for counting BPA's third-party debt against the
agency's U.S. Treasury borrowing authority ceiling even if it
is expanded by 200 million in Fiscal Year 2007.
I believe to all BPA customers' credit, we have weathered
the storm of higher rate, attributed to market conditions,
supply availability, and excessive costs tied to fish
mitigation programs. While local economies have suffered, our
obligations to the U.S. Treasury have been met in full and on
time. We need time to heal and to reshape our local economies
to respond to challenges from abroad and from other regions. We
need long-term contracts with BPA where we don't have to worry
each year about some administrative initiative in which we are
not consulted. We need the ability to continue to be
successful.
Therefore, we ask your support for binding language to:
One, prevent OMB from repeatedly suggesting changes in
ratemaking methodologies and/or the treatment of revenues from
the sale of power and energy by BPA;
Two, that you include----
Ms. McMorris. Mr. Langer, will you just summarize?
Mr. Langer. Yes. That you submit language that would
prevent this from happening again.
Thank you for this opportunity.
[The prepared statement of Mr. Langer follows:]
Statement of Dwight Langer, General Manager, Northern Wasco County
People's Utility District, The Dalles, Oregon
Mr. Chairman and Members of the Committee, it is my honor and
privilege to have this opportunity to share with you some serious
concerns concerning current and proposed federal actions that affect
wholesale power rates of the Bonneville Power Administration.
My name is Dwight Langer and I am General Manager for Northern
Wasco County People's Utility District (a municipal electric utility
corporation) in The Dalles, Oregon. The Dalles is in Oregon's 2nd
Congressional District and very ably represented by your colleague,
Rep. Greg Walden. My utility's offices look out on the beautiful
Columbia River and are located 85 miles east of Portland, Oregon.
My comments pertain to the Administration's Fiscal Year 2007
proposed budget for the Department of Energy, Public Enterprise Funds--
BPA. We are alarmed about both the particulars and the public process
concerning the proposed future disposition of revenues from secondary
energy sales by the Bonneville Power Administration. This proposal
would shift the use of revenues for BPA when they exceed a set amount.
It ``changes the rules'' on BPA debt repayment. The proposal is unfair
and not consistent with the BPA ratemaking processes or sound business
practices. My message today has three themes 1.) BPA rates have been
high and painful the last few years. 2.) Administrative proposals that
increase short term rates in the Northwest or that diminish the value
of BPA to the region's customers, are unfair and unacceptable, and
require Congressional review. 3.) Some of BPA's costs, such as fish
mitigation, are excessive, beyond the Agency's control, and indicative
of a lack of an overall plan that makes economic sense.
Northern Wasco PUD is a Full Requirement customer of BPA. Relying
upon BPA as our exclusive wholesale supplier, we provide electrical
services to our retail customers. Any changes in BPA rates for power
supply or transmission services are passed on directly to our
customers. The proposal for change due to ``excess secondary revenue''
has been estimated to cause an increase of 10% in BPA's wholesale rates
to public power customers. A 10% BPA rate increase forces our utility
to increase retail rates by at least half that amount, plus any
increases over time reflecting our local operating costs. In summary,
what happens to BPA financially finds its way directly into the pockets
of our retail customers. With nearly 9,000 residential customers, the
Administration's proposed budget for BPA would extract nearly $400,000
per year from residential customers within Northern Wasco's service
territory, as well as the compounding economic effects of reduced
income and the impact on the business decisions of energy-intensive
industries.
Northern Wasco PUD did not cause the Northwest energy crisis of
2000--2001, but we suffered the consequences. The combination of failed
deregulation in the electric industry, higher than anticipated BPA
loads, and a Northwest drought resulted in BPA imposing a 46% increase
in its base rates on October 1, 2001. BPA reserves were inadequate to
cover higher costs, and as a consequence the Agency triggered Load
Based, Financial Based and Safety Net Cost Recovery Adjustment Clauses
as an increase to the base rate structure. The Agency continues to make
all required payments to the U.S. Treasury, an action which we fully
support. However, this was not without severe economic consequences in
Oregon, Washington, Montana and Idaho attributable to higher rates to
assure full Treasury payment. BPA did what it could to cut costs, by
$100 million, undertook refinancings, and extension of Columbia
Generating Station Debt. We commend their efforts. But they were not
nearly sufficient to fully mitigate high market purchases when the
Agency was resource short, and as a result we were really hurt. We
stood by the deal, though, paid the higher rates, and Bonneville made
all Treasury debt repayments.
Now we are in a situation---and this may well be temporary--- where
BPA has secondary resources to sell and market prices are attractive.
However, BPA's wholesale power rates are still 31% above 2001 base
rates, and BPA's initial rate proposal for FY 07--09 includes an
additional increase for next year. Given our current rate levels, it is
inexcusable for OMB to make a determination that funds that would
otherwise be available for rate relief should be siphoned off to pay
down BPA debt. You simply don't make a double house payment of
principal when there is not enough cash available to feed your family.
In an analysis by the Northwest Power and Conservation Council
(NWPCC) [an independent council whose members are appointed by the
respective governor's of Washington, Idaho, Oregon and Montana] this
provision would have in part the following effects:
$145 million average increase in the annual cost of power
from Bonneville to its publicly owned utility customers
$109 million decrease in regional personal income
decrease in regional jobs by 1,120
additional effects on aluminum and other energy-intensive
industries
$18.5 million decrease in federal personal income tax
revenues
The NWPCC goes on to state and I quote, ``The proposal sets an
alarming precedent by administratively imposing a mechanism on BPA that
collects funds for national deficit reduction purposes. While the
impacts we analyzed are relatively small in the first years of
implementation, it appears that the Administration has the ability to
further increase the dollar amounts in future budgets without the need
for authorizing legislation.''
We share the Council's concerns. But more importantly, the question
becomes who should decide these issues that affect customers'
pocketbooks? In the past BPA has run public processes to develop a
long-term financial plan, showing many alternatives, and with good
public participation. In this instance, if the Administration wants to
abruptly change long standing BPA financial practices, then it is
imperative that Congress weigh into this matter and determine what is
in the public interest. We look to Congress to establish the ``rules of
the road'' on Treasury obligations of BPA. In this case, it is unwise
and unfair for OMB to change those rules, without action by Congress.
While we are not against early debt retirement and increasing
borrowing authority, we need to have an open process that is also
sensitive to the retail rates issue. Similarly, we need to stand back
and objectively examine the rationale for counting BPA's third party
debt against the Agency's U.S. Treasury borrowing authority ceiling
even if it is expanded by $200 million in FY 2009. Northern Wasco PUD
is a transmission customer of BPA and we recognize the need for the
Agency to make capital intensive investments in infrastructure to
preserve and expand our regional transmission grid. Transmission is our
``highway'' and absent highways our regional commerce is significantly
impeded.
In addition to discussing the Administration's budget proposals, I
feel the need to use this opportunity to advise the Subcommittee of one
other major variable impacting BPA costs, and consequently our rates.
On the surface it seems compelling to considering BPA as a long-term
power supplier, given the value of a hydro system, with no fuel costs,
compared to other resources. However, BPA's fish and wildlife program
costs of about $340 million represent 20% of the Priority Firm power
rate. In addition, because of the fish related constraints on power
production, BPA foregoes another $350 million in revenues that could
otherwise be used to reduce rates. Fish and wildlife costs have
increased 270% in the last ten years alone. These are our best
estimates, but fish costs are difficult for us to track.
In addition through the Corps of Engineers Columbia River Fish
Mitigation Project there are between $1.5 - $1.6 billion of
Congressional appropriations for projects planned through 2014 which
the Agency--through its customers--will have to pay.
But that isn't the end of the story. Federal action agencies have
been subject to continued litigation by outside parties claiming that
Federal hydro projects are not doing enough to protect Endangered
Species Act stocks. These litigants have been successful attacking the
value of the hydro system, while other critical recovery plan
components, such as harvest, hatcheries, and habitat appear to receive
only cursory examination.
We are concerned that we are rapidly depleting the value of our
hydro system in pursuit of endeavors not based on the best available
science, while forcing more expensive resource alternatives to be used
that have their own negative environmental consequences. We need an
orderly plan, based upon the best available science that establishes
reasonable limits on ESA financial obligations.
In conclusion, I believe that to all BPA customers' credit, we have
weathered the storm of higher rates attributable to market conditions,
supply availability, and excessive costs tied to fish mitigation
programs. While local economies have suffered, our obligations to the
U.S. Treasury have been met in full and on time. We need time to heal
and to reshape our local economies to respond to challenges from
abroad, and from other regions. We need new long-term contracts with
BPA where we don't have to worry each year about some administrative
initiative in which we were not consulted.
At Northern Wasco it is part of our philosophy that energy in all
its forms, but in particular electric energy, is an essential service.
We concur strongly with the President's statement in the State of the
Union address that energy drives our economy and national security. We
respectfully would add that adequate supplies of energy at affordable
prices are the prerequisites for a vibrant and healthy economy which
adds to the foundation for maintaining our Nation's quality of life and
security. This budget proposal for BPA unfortunately appears to be at
cross purposes with that philosophy.
Therefore, we ask your support for binding language to (1) prevent
OMB from repeatedly suggesting changes in rate making methodologies
and/or the treatment of revenues from the sale of power and energy by
the Bonneville Power Administration; (2) that you include (again)
language that OMB will not propose to interfere with the
responsibilities of the customers of the Bonneville Power
Administration without consultation with the congressional delegation
of the Pacific Northwest; and (3) that third party financing for
infrastructure cannot be scored against the financing limits for BPA.
Thank you for the opportunity to testify. I would be pleased to
answer any questions the Members of the Committee may have.
______
Ms. McMorris. Very good. OK, thank you for being here.
Mr. Hosken.
STATEMENT OF CHARLES HOSKEN, GENERAL MANAGER,
IMPERIAL IRRIGATION DISTRICT, IMPERIAL, CALIFORNIA
Mr. Hosken. Madam Chair, and other Members of the
Committee, my name is Charlie Hosken. I am the new General
Manager of Imperial Irrigation District. IID is a community-
owned utility that provides water and electric power to
consumers in Southern California.
My purpose here today is to oppose the President's Fiscal
Year 2007 budget proposal to require the Western area,
Southeastern, and Southwestern Power Marketing Administrations
to raise the interest rate they charge for future capital
investments.
IID has been in the electric business since 1936, and today
serves more than 130,000 homes, businesses, farms, and
industries in the Imperial Valley and parts of Riverside in San
Diego Counties.
IID purchase 32 megawatts of Federal power from the Parker-
Davis Project located on the Colorado River below the Hoover
Dam. Although the Parker-Davis allocation is a relatively small
part of our overall resource portfolio, it is one of our lowest
cost resources and is critical to our ability to maintain
affordable electric rates.
Today, Western, Southwestern, and Southeastern charge the
treasury yield interest rate on capital investments in power
facilities, which reflects their cost of government borrowing.
The President's Fiscal Year 2007 budget directs that these
three PMAs instead use the higher government corporation rate
that entities like Fannie Mae and Ginnie Mae use. Western tells
us that this rate will be about half a percentage point higher
than the treasury yield rate.
What the Office of Management and Budget is doing by
including this directive in the budget is to ignore the real
cost of borrowing and use instead a higher proxy cost of
borrowing in order to raise more money from the Federal power
customers. This violates the principles of cost-based pricing
and truth-in-borrowing.
OMB recently offered two explanations for its
discriminatory treatment of the interest due on Federal debt
for multi-purpose water projects. By the way, this rationale
was not included in the budget when it was initially sent to
Congress.
First, OMB claims that the new power investments at multi-
purpose water projects should carry a higher risk premium
because they depend on a revenue stream for repayment. That is
actually nonsense.
Decisions to build multi-purpose projects are integrated
decisions. The component parts of these projects are not
financed individually. The entire project is conceptualized and
financed as one.
Second, OMB argues that because the PMAs can repay the
Federal investment on power facilities early, the initial
investment is like a call bond that can be retired early and
thus should bear a higher rate of interest. Again, this is also
nonsense.
Any canceled Federal power contract would be replaced
immediately by another identical or longer term power sale
contract so the stream of repayment dollars to the treasury
would be the same.
We suspect that OMB's rationale is simply to raise money
from the Federal power customers. OMB is directing these PMAs
to make the interest rate change because it has the power to do
so administratively. IID thinks that this is a bad precedent
and bad policy. We hope Congress will reject the proposal.
Thank you.
[The prepared statement of Mr. Hosken follows:]
Statement of Charles Hosken, General Manager,
Imperial (CA) Irrigation District
Madame Chairman and Members of the Subcommittee, my name is Charles
Hosken and I am the General Manager of the Imperial Irrigation District
(IID). IID is a community-owned utility that provides water and
electric power to consumers in southeastern California.
A. Background on IID
IID was established in 1911 under the California Irrigation
District Act. Today, IID is the largest irrigation district in the
nation. It provides irrigation water to the Imperial Valley, which
ranks among the top ten agricultural areas in the country. Ninety-eight
percent of the water that IID transports is used for agriculture in the
Imperial Valley. The remaining two percent is delivered to seven
Imperial Valley cities and to unincorporated residential areas, which
treat the water to safe drinking water standards and sell it to their
residents.
IID entered into the power business in 1936, when access to
electric energy in the Imperial Valley was very limited and very
expensive. Today, IID Energy serves more than 130,000 homes, businesses
and industries in the Imperial Valley and parts of Riverside and San
Diego counties. These areas are experiencing very rapid growth in
electrical demand, with growth rates of nine percent in Riverside
County and six percent in Imperial County. These are among the highest
demand increases in the country.
IID was one of the original contractors for federal power generated
from the Parker-Davis Project and has been a Parker-Davis customer
continuously since 1948. The Parker-Davis Project consists of the
Parker and Davis Dams located on the Colorado River below Hoover Dam.
The dams are owned and operated by the U.S. Bureau of Reclamation;
power generated from the projects is marketed by the Western Area Power
Administration (Western).
IID's allocation of Parker-Davis power is 32 MW, representing
approximately five percent of our resource portfolio. Although the
Parker-Davis allocation is a relatively small part of IID's total
resources, it is one of our lowest cost resources and, as such, is
critical to our ability to maintain affordable electric rates.
IID's allocation of Parker-Davis power plays an important role in
our local and regional economy. Unemployment in southeastern California
is significantly higher than the national average and the per capita
income of our customers is low. In addition, the extreme temperatures
in this part of California result in higher per capita energy use than
in other parts of the county. For these reasons, IID pays a great deal
of attention to proposals to change federal power allocation or
repayment policies.
I might add here, on a personal note, that until recently I was the
General Manager of the Chelan County (WA) Public Utility District,
which is a customer of the Bonneville Power Administration. During my
tenure at Chelan, I was engaged in a number of battles with the Office
of Management and Budget (OMB) over repayment policies for the power
marketing administrations.
B. OMB Announcement of Administration's Intent to Raise Interest Rate
on Future PMA Investments
The President's Fiscal Year 2007 budget announces the
Administration's intention to require the Western, Southeastern and
Southwestern Power Marketing Administrations (PMAs) to change the
interest rate they charge for future capital investments in power-
related facilities from the ``Treasury yield'' rate that these PMAs
currently use to the ``government corporation'' rate that entities like
Fannie Mae and Ginnie Mae use. This new policy will be applied to new
power related investments at projects whose interest rates are not
specified in law.
According to Western, the impact of the interest rate increase will
be about .4 of one percent. This will translate to an increase in costs
to the Parker-Davis Project of about $1.8 million over five years.
While the amount of money at stake might seem small, there are very
important principles at stake. Those principles are 1) the application
of cost-based pricing for federal power; and 2) ``truth in borrowing''
or ``truth in repayment.''
C. Fallacies with Administration Plan
The foundation of the federal power program is that power is sold
at cost-based rates. The real interest cost to the government for a
water or power project is the cost the government incurs when it builds
a project.
If a government corporation, like Ginnie Mae or Fannie Mae, builds
a project, the real interest cost is the government corporation's
interest rate at the time of construction.
On the other hand, if the federal government itself builds a
project, such as a water and power project, the real interest cost is
the government's borrowing cost at the time of construction.
In the case of new capital investments in the Parker-Davis Project
and the other federal power projects that will be affected by this
interest rate change, the federal government itself will be the
borrower. So, the actual government borrowing rate should apply--not
some ``proxy'' rate as proposed by the Administration.
This change is proposed, apparently, in a scramble for additional
revenue. Using the same rationale (``the more cash the better'') and
applying the same justification for the current proposal, the
Administration could just as easily have chosen Wall Street's prime
rate or the rate credit card companies charge the government on
government-issue credit cards.
To justify the interest rate increase, the Administration notes
that the Bonneville Power Administration pays the ``government
corporation'' rate on its new investments. While true, the explanation
in no way amounts to a justification for the Administration's proposal.
What the Administration failed to say is that the BPA interest rate was
part of a package of legislative changes that the Northwest delegation
proposed and enacted almost ten years ago, to restructure BPA's overall
debt to address concerns about cost recovery. No debt restructuring is
involved here, so the BPA example is not relevant. It certainly
supplies no rationale for the Administration's proposal to depart from
the principles of cost-based pricing for PMAs and the federal
government's departure from the principle of ``truth in borrowing.''
D. Recent OMB Explanations of Change in Administration Policy.
We understand that OMB has recently offered two explanations for
its discriminatory treatment of the interest due on federal debt for
multi-purpose water projects which were not included in the budget
package sent to Congress. First, it argues that the investments should
carry a higher risk premium because they depend on a revenue stream for
repayment. Second, OMB argues that since PMAs can repay power feature
investments early, investments which depend on them for repayment are
akin to investments financed through ``call'' bonds (implying the
possibility of early debt retirement). The Treasury currently does not
use ``call'' bonds, but if did, OMB argues that Treasury would have to
pay a higher interest premium on them. Thus, OMB argues, power
customers should also pay a higher interest rate on investments costs
allocated to the power function of multipurpose projects.
Neither argument has anything to do with federal decisions to
develop natural resources or the federal government's borrowing cost at
the time multipurpose water projects were constructed. They advance
never-before-heard theories which are odd, at best, and which read more
like after-the-fact attempts to justify the Administration's announced
intention of revenue enhancement rather than justifications for
determining the interest rate attributable to reimbursable features of
multi-purpose water projects.
Multi-purpose water projects are fundamental investments in the
nation's infrastructure and natural resources to yield navigation,
flood control, irrigation, recreation and power benefits. The decisions
to build them are integrated and, once the benefit-cost ratios of their
features are established, there is no separate conceptualizing or
financing of their component parts. The benefits they produce,
including electricity, occur no matter what, and the cost-based rates
charged for the power produced removes all market risk of non-sale.
Finally, the justification for a higher risk being attributed to power
features because a power contractor's contract might be ``called''
early is nonsensical. Any cancelled power contract would be replaced
immediately by another identical or longer-term power sale contract so
the stream of repayment dollars would be identical to the federal
government.
E. Recapitulation
What is the rationale for this discriminatory treatment?
Essentially, OMB chose to increase interest rates for the Parker Davis
and Central Valley Projects because it could. 1 The interest
rates for the other projects are set by statute, and OMB could not
reach them through an administrative decision.
---------------------------------------------------------------------------
\1\ I would also point out that, in Western's service area, the OMB
proposal would only apply to the Parker-Davis Project and the Central
Valley Project. It would not apply to the Pick-Sloan Project, to Hoover
Dam, to the Colorado River Storage Project or to the Fryingpan-Arkansas
Project.
---------------------------------------------------------------------------
Recognizing the value of cost-based federal power to consumers,
Congress has repeatedly rejected OMB initiatives to change PMA rate-
setting policy. This year, OMB is trying a different tack: proposing
administrative changes that will not require Congressional approval. We
think this sets a very bad precedent for federal power rates, and we
encourage this body to reject the proposal.
______
Ms. McMorris. Thank you.
Mr. Graves.
STATEMENT OF THOMAS GRAVES, EXECUTIVE DIRECTOR, MID-WEST
ELECTRIC CONSUMERS ASSOCIATION, WHEAT RIDGE, COLORADO
Mr. Graves. Thank you, Madam Chairman and Members of the
Committee. I am Thomas Graves, Executive Director of the Mid-
West Electric Consumers Association in Wheat Ridge, Colorado. I
also serve as the Chairman of the National Preference Customer
Committee of the National Rural Electric Cooperative
Association. We certainly appreciate the opportunity to testify
before the Subcommittee today on the Federal power program.
Mid-West was founded in 1958 as the regional coalition of
consumer-owned electric utilities in the Missouri River Basin
that purchased hydropower generated at Federal multi-purpose
projects in the basin and marketed by the Western Area Power
Administration under the Pick-Sloan Missouri Basin Program.
The Administration's budget request for Fiscal Year 2007
includes three troubling issues to the Federal power program,
troubling in substance and troubling in process. They are
proposing to administratively change the interest rate on new
Federal power investments. They are proposing to reallocate
certain irrigation costs in the Pick-Sloan Missouri Basin
Program, and they are also proposing to administratively change
the management of secondary revenues for the Bonneville Power
Administration.
Historically, the interest rates charged on Federal power
investment has been the Treasury's long-term rate yield. The
Treasury provides this data to PMAs every year for the interest
rate to be charged for investment booked in that year. Those
investment cost plus interest are repaid to the Treasury
through power rates charged to Federal power customers.
Now the Administration proposed to charge an agency rate
which they say is the rate charged to governmental
corporations. That is great, except the Federal Power Marketing
Administrations are not government corporations. They do not
have the same authorities or the same responsibilities. They do
not have borrowing authority.
The Power Marketing Administrations are Federal agencies
within the Department of Energy and are funded annually by
congressional appropriations.
The current practice of using Treasury's long-term yield
rate has worked well, and it is wrong to assign an interest
rate formula for government corporation to Federal agencies
that are in fact not government corporations.
The proposed reallocation of the Pick-Sloan Missouri Basin
irrigation investment is apparently a rehash of a similar
proposal in last year's budget request. It is quite hard to
tell exactly what is proposed since, again, there is no
legislative language or even a detailed explanation of this
proposal.
The short explanations in the budget are inconsistent. Once
section calls for repayment of construction costs. Another
section calls for repayment of construction and operation
costs. It is simply impossible for us to parse this issue until
we know exactly what is being proposed.
The budget request erroneously states that Pick-Sloan power
customers have not heretofore been responsible for repaying
these costs. Pick-Sloan customers are responsible for repaying
all the costs of the power investment, joint costs allocated to
the power function and a huge portion of the investment costs
related to irrigation. Currently in our rate there is some $727
million related to irrigation development that is the
responsibility of the Federal power customers under aid to
irrigation.
These repayment obligations have been organized under the
concept of ultimate development which sets the schedule and
timing for the repayment of these investments.
The budget process remains an inappropriate forum to
undertake a reform of this sort of magnitude. The allocation
and repayment of the Federal investment in Pick-Sloan Missouri
Basin program is extremely complex, and is the result of years
of negotiations in the basin. It cannot be easily undone.
The consequences of tinkering with ultimate development go
far beyond any financial spreadsheet that OMB may be looking
at.
In the first session of this Congress, a bipartisan
delegation of Members of Congress from the region and from the
full committee here expressed their opposition to this
proposal. Those reasons remain valid today.
The Administration also currently plans to implement
administratively a change in Bonneville's repayment practices.
This is incorrect. Administrative approaches to changing the
Federal power program we find strongly objectionable. We oppose
any attempts to remove Congress from its historical role in
providing oversight and policy direction for the Federal power
program.
The National Rural Electric Cooperative Association
recently adopted a resolution to that effect. A copy is
attached to my testimony.
We are well aware of the budget difficulties facing
Congress on the issue of deficits that you confront every day.
Deficits force unenviable choices in curtailing government
spending. For the PMAs, limited budgets and earmarks can mean
changes in programs. We think there is a better way to do this.
The annual costs of the Power Marketing Administrations are
turned to the Treasury every year in which they are incurred.
The budget process does not recognize this. We would suggest
for the annual costs of the PMAs a net-zero appropriation that
recognizes this is a not a permanent outlay would assist the
Congress in dealing with its responsibilities while maintaining
the integrity and reliability of the Federal power program.
Thank you.
[The prepared statement of Mr. Graves follows:]
Statement of Thomas P. Graves, Executive Director,
Mid-West Electric Consumers Association, Wheat Ridge, Colorado
Good afternoon, Mr. Chairman. I am Thomas Graves, Executive
Director of the Mid-West Electric Consumers Association, headquartered
in Wheat Ridge, Colorado. I also serve as chairman of the National
Preference Customer Committee of the National Rural Electric
Cooperative Association. We appreciate the opportunity to testify today
before the House Resources Subcommittee on Water and Power on the
federal power program.
Mid-West was founded in 1958 as the regional coalition of consumer-
owned electric utilities--rural electric cooperatives, municipal
electric utilities, and public power districts--that purchase
hydropower generated at federal multi-purpose projects operated by the
U.S. Army Corps of Engineers and the U.S. Bureau of Reclamation. Mid-
West members utilize federal hydropower marketed by the Western Area
Power Administration under the Pick-Sloan Missouri Basin Program in
nine states--Montana, Wyoming, Colorado, North Dakota, South Dakota,
Nebraska, Kansas, Minnesota, and Iowa.
The National Preference Customer Committee of the National Rural
Electric Cooperative Association is comprised of federal power
customers across the country and their regional associations.
The Administration's Budget Request for Fiscal Year 2007 includes
three troubling proposals relating to the federal power program:
Changing the interest rate on new federal power
investments;
Reallocating certain irrigation costs in the Pick-Sloan
Missouri Basin Program; and
Changing the management of secondary revenues of the
Bonneville Power Administration.
Historically, the interest charged on federal power investment has
been the U.S. Treasury's long-term yield rate. Each year, the Treasury
provides to the Power Marketing Administrations the interest rate to be
charged for investments made in that year. Those investment costs plus
interest are repaid to the Treasury through power rates charged to
federal power customers.
Now, the Administration has stated that it intends to change that
practice and charge the ``agency rate,'' which is the rate charged to
governmental corporations. The difference between this rate and
Treasury's long-term yield rate is described as ``small,'' averaging
about .4 per cent, which would garner about $2-3 million per year from
federal projects where the interest rate is not set by law.
The federal Power Marketing Administrations--Western, Southeastern,
and Southwestern are not government corporations. They do not have
borrowing authority or other authorities available to government
corporations. The Power Marketing Administrations are federal agencies
within the Department of Energy and are funded annually by
congressional appropriations.
The current practice of using Treasury's long-term yield rate has
worked well for decades. It is wrong to assign an interest rate formula
for a government corporation to federal agencies that are not
government corporations.
The proposed reallocation and acceleration of Pick-Sloan Missouri
Basin investment is apparently a rehash of a similar proposal in last
year's Budget Request. It is hard to tell exactly what is proposed
since there is no legislative language or even a detailed explanation
of the proposal.
The short ``explanations'' that have been offered are inconsistent.
One section of the Budget calls for repayment of vaguely defined
construction costs--``Power customers will be responsible for repayment
of all construction from which they benefit.'' (p. 188 Department of
Interior: Mandatory Proposal Recover Pick-Sloan Project Costs).
However, Bureau of Reclamation Highlights (BH- 36) calls for
``repayment of construction and operations costs...''
The Budget Request erroneously states that Pick-Sloan power
customers have not heretofore been responsible for repaying these
costs. Pick-Sloan power customers are responsible for repaying all the
costs of the power investment, joint costs allocated to the power
function, and a huge portion of investment related to irrigation. These
repayment obligations have been organized under the ``ultimate
development'' concept.
Most simply put, the Administration's Budget Request would destroy
the ultimate development concept that allocates costs among the various
project purposes and determines repayment practices.
The budget process remains an inappropriate forum to undertake a
reform of that magnitude. The allocation and repayment of federal
investment in the Pick-Sloan Missouri Basin Program is an extremely
complex issue that is the result of years of negotiations in the basin.
It cannot be easily undone. The consequences of tinkering with ultimate
development go far beyond any financial spreadsheet.
In the first session of this Congress, a bi-partisan delegation of
Members of Congress from the region and from the full committee
expressed their opposition to this proposal. Those reasons are still
valid.
The Administration currently plans to implement the change in
Bonneville's repayment practices and imposition of higher interest
rates for PMA power-related investment through administrative actions
rather than seeking Congressional endorsement and action.
We strongly object to any attempts to remove Congress from its
historical role in providing oversight and policy direction for the
federal power program. The National Rural Electric Cooperative
Association passed a resolution at its annual meeting last month
opposing these changes. A copy is attached.
We are well aware of the budget difficulties Congress faces.
Deficits force unenviable choices in curtailing government spending.
For the Power Marketing Administrations, limited budgets have been
further curtailed by earmarks in construction programs for new work not
included in its proposed budgets. Last year, Western had some $6
million earmarked for projects not in the current work plan. Without
additional appropriations, that sort of earmarking can wreak havoc with
planning PMA construction projects.
Federal power customers have worked diligently to help maintain the
reliability of the federal power systems. The Western Area Power
Administration, for example, has over 17,000 miles of high voltage
transmission facilities in fifteen states that serve all utilities in
the region.
In Pick-Sloan, we have established the Western States Power
Corporation to provide stop-gap funding for critical projects whose
funding is precluded by the deficit issues confronting Congress. Other
regions have established similar financial mechanisms to deal with
funding shortfalls. That being said, none is in a position to shoulder
all the funding needs of the PMA's and federal generating agencies.
Federal power customers are also partnering with the Power
Marketing Administrations in ensuring adequate transmission. The
recently completed Path 15 in California is but one example of this
sort of collaborative relationship. In Pick-Sloan, Tri-State G & T and
WAPA are working together to develop much needed transmission through
the East Plains Transmission Project.
Mid-West thinks there are approaches to funding the federal power
program that would ensure adequate funding for the Power Marketing
Administrations, while preserving Congress' role in determining budget
levels and oversight. Federal power customers believe strongly in the
role of Congress and the federal power program.
The budgets of the PMA's can be divided into two major categories--
capital investment and annual expenses. Both of these categories are
funded through congressional appropriations. Both of these categories
repay those costs to the U.S. Treasury.
The annual expenses of the PMA's--program direction and operations
and maintenance--are funded by congressional appropriations each year,
but are ``scored'' as if they are permanent outlays of money. Those
dollars are returned to the U.S. Treasury by the end of that fiscal
year.
So, in reality, the annual costs of the PMAs have no impact on
federal deficits. Sadly, the congressional budget process does not
recognize this. As a consequence, PMA's find their annual budgets
curtailed by appropriations committees' spending allocations or reduced
by deficit reduction measures.
The current funding practice does not contribute to Congress'
management of federal deficits and threatens the reliability of the
federal power program.
Mid-West suggests that a ``net-zero'' appropriation for the PMA's
annual expenses recognizes the fact that these costs are not a
permanent federal outlay of monies and helps to ensure that the PMAs
will have adequate resources to fulfill their mission. In fact, last
year, the Administration included this concept in their Budget Request
to Congress. The Federal Energy Regulatory Commission is currently
funded by such a mechanism.
A net-zero appropriation would maintain congressional budget
authority. The PMAs would still submit a budget to Congress. Congress
would still set the spending levels for these annual costs, as well as
PMAs' capital programs. Congress would maintain all of its oversight
authorities as well.
Federal power customers wouldn't have it any other way.
Thank you.
______
[Attachments submitted for the record by Mr. Graves
follow:]
[GRAPHIC] [TIFF OMITTED] 26463.007
[GRAPHIC] [TIFF OMITTED] 26463.008
[GRAPHIC] [TIFF OMITTED] 26463.009
Ms. McMorris. Thank you very much. Really appreciate each
one of you being here today. I wanted to start with a follow-up
question to Mr. Peterson from Pend Oreille PUD, because in the
midst of this proposal from the Administration you are still
dealing with a lot of uncertainty as to the way the Endangered
Species Act is implemented and the impact that it is having on
the Pend Oreille PUD and specifically the Box Canyon Dam
project that you operate.
It is my understanding that in 2001, FERC issued 228 hydro
licensing projects and asserted that the average cost of
protection, mitigation, and enhancement (PMEs) dollars
nationwide was 212 per kilowatt. The Box Canyon Project PMEs
right now are 3,100 per kilowatt.
So I just wanted to ask if you would explain why Box Canyon
has 14 times the national average, and then also just expand a
little bit on the impact that it is having on a very small
county in northeastern Washington, a county of 10,000 people,
and the largest employer, Ponderay Newsprint. Thanks.
Mr. Peterson. Well, the short answer is they are so much
higher for us because we are being picked on.
[Laughter.]
Mr. Peterson. And this is an illustration of the
inconsistency with the application of ESA, and a large river
basin in the northeast part of our state known as Unit 22 only
one small area was designated as critical habitat for bull
trout. It happens to be our small reservoir where a FERC
licensing proceeding was going on.
It looks like Federal agencies saw money rather than an
opportunity to preserve a species. We do not have bull trout
populations in our area. We are designated critical. There are
other areas that have bull trout populations and are not so
designated as critical.
Ponderay Newsprint is indeed an important employer, not
just in our county, but in the entire northeast region of the
state. It is interesting that the two subjects I testified to
come together in their case. Our own resources, which we serve
them with, is being impacted by ESA-related issues in our FERC
license.
The Bonneville product that we purchase for them is subject
to influence as Bonneville's costs go up PMC's costs go up. In
an industry in papermaking where 30 percent of their budget is
energy cost, it is critical that we keep rates low on every
front.
Ms. McMorris. Very good. Thank you.
I want to just have each of you briefly--the timer was not
working, so we will just try to do it quickly, but I wanted
just to have you talk a little bit about security costs. It
seems that most water and power customers are willing to pay
their fair share of 9/11 security costs but they believe that
transparency and certainty are needed.
Has there been any progress on getting more transparency
and certainty on these costs, and how would you guarantee
transparency and certainty without undermining national
security?
Mr. McClennan. I am not certain there is a formula. I think
your opening statement, Madam Chairman, was appropriate in that
I think there are costs that the consumers are willing to, or
the customers are willing to bear if you can assure us that
they are actually security costs and that they are for
maintaining those provisions as they relate to in our case the
power functions.
I think from our perspective it is inappropriate for us to
just pick up the tab for security cost for the entire projects
based on either historical allocations. I think you have to
look at what is the value of those.
I guess the answer to your question is, one, there could
certainly be additional congressional oversight as it relates
to the costs associated with this; and then second, I think
Congress needs to look at with the agencies whether or not
there is a cap, if you will, or some funding mechanism that
caps the exposure from the consumer side or the customer side
because if you simply allow them to continue to recover costs
on security as you continue to go you, you will just see what
happens as we see in other programs. They just move dollars
around.
So I think a couple of things that clearly you could look
at as you go forward or the agency look at as you go forward
is, one, can you cap the exposure which the customers are
facing; and second, can you have an allocation of those costs
that actually reflect what happens as it relates to those costs
or who should bear the cost of those because having those--I
mean, generally what happens at all of these programs, ESA is a
perfect example as well, is because we have, if you will, that
can raise dollars from the program, paying for the power, we
are always looked at as the cash register for each of these
programs, whether it is ESA-related, adaptive management-
related, security cost-related or otherwise.
So I think it is important to be able to find some way to
cap that, and then find some way to allocate appropriate fairly
to those who are bearing the burden.
Ms. McMorris. Would anyone else, Mr. Hosken?
Mr. Hosken. Madam Chair, the issue of security costs at a
Federal dam, they are pretty significant issue. I have
experience with the non-Federal major dam on the Columbia River
where we installed state-of-the-art security.
The best thing we did was vet this in the public forum. We
had workshops on it. We made sure the public knew what we were
doing to the extent and scope, and we had a lot of good input,
but basically what we got from a lot of our constituents do not
gold-plate it. It is to protect the facilities, but really you
need to protect the people working there, but you can do that
in a manner where you do not have to break the bank, and I
guess that is the kind of thing that you can talk about this
quite a bit in a public setting, and get good public input.
The very specific details, well, that is for a different
story, but not overdoing it, and making sure you know what you
are trying to accomplish when you are done because it can be a
moving target, and security is like safety in many respects,
very important, but how far do you go with it?
You have to be reasonable and you have to be prudent, and I
do believe in my experience having a good public vetting of
these issues is really where you get the best value. Thank you.
Ms. McMorris. Does anyone else wish to comment? Mr. Pope?
Mr. Pope. Thank you. I second the remarks, but the national
critical infrastructure as set forth in the Nation possibly
could be interjected into the process of transparency and a cap
as was stated earlier. It gives you a guideline of what should
be covered under security costs and I do support a transparency
and a cap.
Ms. McMorris. OK, Mr. Graves.
Mr. Graves. Thank you, Madam Chairman. I think one of the
problem is the Bureau of Reclamation, as I understand it, is
allocating their security costs based on the cost/benefit
ratios that were made when they designed these projects as to
who is going to pay for what.
In fact, that is not appropriate because the benefit is
different than the danger of the risk. If we lost a power plant
at one of the Bureau's dams, that would certainly not be a
happy event. It would not compare to if we lost the dam because
then you would be threatening water supply, irrigation,
downstream flooding. All of those are a much more dangerous
event than the loss of a single powerhouse.
So we think the very formula they are using to allocate
these costs is flawed.
Ms. McMorris. OK, thank you.
Ms. Napolitano.
Ms. Napolitano. Thank you, Madam Chairwoman.
Mr. Pope, on page 8 of your statement you state that
Congress expressly anticipated the contributions to the Central
Valley Project Restoration Fund would be cut in half within 10
years of the date of enactment of the CVPIA.
Where does the source of that statement come from?
Mr. Pope. The source of that statement came from the CVP
Improvement Act that was enacted in 1992, and the basis of that
was that the improvements needed to be made, and everyone
recognized that the environment needed to be protected. The
idea was the first 10 years we are going to focus on the
capital improvements, and it would move toward more maintenance
and operation.
The idea is the 33 projects would be completed, and once
complete the would be just operation and maintenance of those
projects, and any capital investment would be completed in 10
years.
We have now been through the process of 14 years, and that
it is time to review the accomplishments in the CVPIA.
Ms. Napolitano. Thank you. And given that, could you
provide this Committee the information of where in the Act this
is addressed?
Mr. Pope. Yes.
Ms. Napolitano. You do not have it with you.
Mr. Pope. I do not have it with me.
Ms. Napolitano. But you can submit it to the Committee?
Mr. Pope. I can.
Ms. Napolitano. OK, a follow-up question is your
organization a few months ago asked the Department of Interior
to review its implementation of CVPI Act. In the letter, you
signed to Assistant Secretary Mark Limbaugh, ``The contractors
conclude that their responsibilities under Section 3406 are
sufficiently complete to satisfy the language of Section
3407[b][2][A].''
Is it your position then that most of the goals have been
accomplished?
Mr. Pope. It is our position that the goals have been
accomplished. We have sat down with the Department of Interior
and the Bureau of Reclamation and have agreed to a process to
come to an agreement on what goals are complete and develop a
criteria through a stakeholder process going forward.
In our belief, we feel that the 33 projects are complete,
and there has been reasonable effort toward that completion
over the last 14 years.
Ms. Napolitano. Thank you. Then I would ask, I have a
couple of minutes here, to Mr. Hosken. Do you believe that the
interest rate that the Western Area Power Administration now
applies to new investments in Federal power utilities, the so-
called Treasury yield rate, is the right measure of the Federal
government's borrowing costs for new construction?
Do you know why the Administration is proposing to change
the interest rate on construction going forward?
Mr. Hosken. I do understand the interest rate they are
being charged, and I do believe that the move by OMB is to
increase revenues to the Federal government. I believe there is
a view that the power users are able to share that burden when
it is spread over such a large number of constituents that
nobody will have that significant of an impact.
That is a major concern for us. It is a major concern that
when is it going to end. Is OMB going to find ways to chip away
at us where they have the ability to do so?
The rates the Federal government pays for capital
investment is the rate we should pay as users of that power.
Ms. Napolitano. And you have testified the amount of money
at stake here is not that large, or large. Why would Imperial
then oppose the interest rate change?
Mr. Hosken. Imperial Valley is one of the lowest income per
capita county areas in the State of California. The last thing
we want to do is add additional cost to already an area that is
burdened with cost structures that they struggle with daily.
We have a large population of folks coming into the
country. They work hard. It is an irrigation district-based
area where we have farming. These folks are living pay check to
pay check. The last thing we ever want to do is add an
additional surcharge to their bill to cover these costs that we
do not think are fair or are appropriate.
Ms. Napolitano. Right, but most of those costs are for
agriculture, not necessarily for cities. Most, what is it, 80
percent, 90 percent is ag, and the other--I cannot remember the
percentage, but it is quite small.
Mr. Hosken. Yes. Ninety-eight percent of our irrigation
water is used for farms.
Ms. Napolitano. Ninety-eight.
Mr. Hosken. But the thing is of the 130,000 electric
customers we have, that is where the impact is really the most.
That impact is on 70 some thousand customers within Imperial
County who are living barely above the poverty level. They
cannot afford any additional cost increases, and when you look
at the cost of gas to fuel some of our power plants right now,
we are charging a lot more than we would care to.
We would love to be able to charge less. We are looking
aggressively at that, but this is a cost adder that we cannot
do anything about.
Ms. Napolitano. Thank you, Madam Chairwoman.
Ms. McMorris. Ms. Musgrave.
Ms. Musgrave. Thank you very much.
Mr. McClennan, proud to have a couple of Coloradans here
today, and I have a couple of questions for you.
You talked about Tri-State being involved with the joint
transmission project with Western Area Power Administration on
the eastern plains of Colorado and into Kansas, and I think you
stated earlier that was about 700 miles of transmission line.
Could you explain Tri-State's interest in this very
extensive transmission project?
Mr. McClennan. Thank you, Congresswoman.
About a year ago our board made a decision that we need to
develop significant infrastructure in our region, which
includes Colorado, Wyoming, Nebraska, New Mexico obviously, to
meet the load growth needs. And so as we looked out to do that
our board made a decision to invest in a significant generation
assets. But to be able to do that we needed to get it delivered
to places along the front range and other places in Colorado.
So as a part of that, in what I will call the front range
or the eastern half of Colorado, there are significant
transmission constraints to deliver both existing resources as
well as future resources. And so we began to move forward with
a project.
During the course of that sat down with Western, who has
some significant constraints delivering to its loads as well,
and have worked out now, we hope, a joint transmission project
which will be one of the largest projects developed on the
transmission side certainly in a long time.
So our interest in that project is to deliver what we need
in terms of significant generation to meet our membership
needs. I think certainly Mr. Hacskaylo can testify about
Western's needs on it, but I think what it also does is
provides a tremendous opportunity to increase the backbone and
efficiencies at least in the state and in the region in fact,
to increase transmission assets.
So it is one of those areas where I think, if you will, the
Federal government's role in working with its consumers and
customers is appropriate to have the agency work with us on the
development of the project, have the permitting moved forward,
and then be able to get significant generation assets in place
for both the state and the region.
Ms. Musgrave. Thank you. I wondered also if you could
comment on projects that, or wind generation in this area. You
know, it is just an optimum area for that. So what
opportunities would this project provide for the development of
new wind generation resources?
Mr. McClennan. Thank you, Congresswoman.
I think what it does is it creates in an area where there
are transmission constraints, certainly the eastern plains of
Colorado have a significant transmission constraints today, it
provides an opportunity to take advantage of that what you
described was the wind opportunities on the eastern plains. It
will create a backbone system.
Now, I want to be careful here. We are not creating an
interstate highway. This will be a toll road. There will be
significant expenses for people to hop on and hop off of this
process. This is certainly not by any means inexpensive in the
transmission world. But what it does is it creates a backbone
that does not currently exist for additional, whether it be
biomass, wind. Actually in fact it would be other fossil-based
resources out on the eastern plains that are not currently--
were not currently available to do based on the current
transmission system.
So I think it is a phenomenal opportunity, to answer your
specific question about wind, to have a backbone system that
they can utilize from the eastern plains of Colorado.
Ms. Musgrave. Thank you for your fast-talking answers. I
appreciate it. Thank you.
Ms. McMorris. Very good. Yes, Mr. Walden.
Mr. Walden. Thank you, Madam Chair.
Dwight, thanks for being here, and thanks to all our
panelists. Sorry I had to step out for a moment when you
testified, but I have your testimony.
What do you think the financial impact of the current OMB
budget proposal on the customers of the Northern Wasco PUD, of
which I might add I am one? What do you think that is going to
be? How do you look at this impact?
Mr. Langer. The impact on our customers, Representative
Walden, on an annual basis, so my testimony, as you read, for
all of BPA customers is about $145 million a year. To our 8,500
customers, it would be $400,000 additional revenue taken from
our residential customers.
The danger of this proposal, in addition to that, not
that----
Mr. Walden. Right.
Mr. Langer.--additional rate increases is not bad enough,
but the precedent that this sort of action makes. If they are
going to take the revenues, which they claim are excess, which
is not excess----
Mr. Walden. Right.
Mr. Langer.--beyond a certain amount. If the bar is set at
$500,000, what is it going to be next year? If it can be
administratively changed so it is not only----
Mr. Walden. How did they pick 500 million?
Mr. Langer. Have no idea.
Mr. Walden. See, I look at this as like I am paying down a
home mortgage, and for 50 years I have been paying on time with
interest. They came in and they said, you know, we are going to
refinance you here, which they did what in 1994 or some time.
Mr. Langer. Yes.
Mr. Walden. And we resolved----
Mr. Peterson. 1996.
Mr. Walden. 1996, before I got to the Congress. Resolved
all these past questions about whether ratepayers in the
Northwest are paying their fair share and paying down debt and
paying it on time, resolved all of those
Now I am on this new mortgage plan, and I am making my
payments every month. Then at work I get a raise. And now my
mortgage company says, hey, that raise you just got, kick it
into the principal here. And I say, wait a minute, I have an
agreement with you on what I owe every month.
I do not care. Kick in the principal. Kick it in.
Am I looking at this right? Is not that----
Mr. Langer. Yes.
Mr. Walden. And I have seen wild swings in the energy
market, so have all of you, and I saw what happened to
ratepayers in the Northwest in an environment that was going to
be sort of free of regulation. We saw what that got us.
Mr. Langer. Yes.
Mr. Walden. And we have never recovered from those rate
increases.
Mr. Langer. That is exactly right. We are still recovering,
the region, and Bonneville Power Administration and its
customers have done a wonderful job trying to--in managing a
tremendous challenge.
Mr. Walden. Yes, they have.
Mr. Langer. California also has experienced the same--is
aware of the same problem.
Mr. Walden. But if we get a bad water year and we do not
have the power to flow when we need--the water to flow to make
the power to build, we could eat up those reserves pretty
rapidly, could we not?
Mr. Langer. Exactly.
Mr. Walden. And then what happens?
Mr. Langer. This proposal looks only at the costs or the
revenues. It does not look at what those costs are. In your
analogy about the mortgage company taking the money and putting
it toward principal, that was money that you had budgeted to
feed your family.
We have costs in the Northwest that we do not know what the
costs are going to be if there is purchases that need to be
made on the market.
Mr. Walden. What if Judge Redden says spill more water,
instead of 150 million, it is 300 million out of the system,
then what happens?
Mr. Langer. None of that is taken into account in this
proposal. Bonneville would have to increase its rates further.
Mr. Walden. I do not get it. None of this makes sense to
me. I did not come here to raise peoples' power rates. I do not
know anybody in this body that did.
Mr. Langer. No.
Mr. Walden. But somewhere between here and downtown
somebody has a brilliant idea that says let us keep messing
around so we can make those poor folks in the Northwest pay
more, because that is going to be the outcome here.
Mr. Langer. That is going to be the outcome, and the
welfare----
Mr. Walden. I tell you.
Mr. Langer.--of the public have to be taken into account
first, not last, and we just do not feel that that is what is
happening in this proposal. It is arbitrary. This does not make
sense to take hard-earned money to pay off low-interest costs,
so we have to go out and borrow money at a higher interest
cost.
Mr. Walden. Isn't our interest rate, which is locked in by
that 1996 Act, actually above the market interest rate?
Mr. Langer. From what I understand, the average rate back
in 1996, when the refinancing of the Treasury debt, the average
rate went from 3.4 percent up to 7.2 percent, plus there was
$100 million premium paid to Treasury for the privilege of----
Mr. Walden. You are being charitable.
Mr. Langer.--to be able to get away from the criticism that
we were not paying----
Mr. Walden. Yes, we gave them a bonus payment to get off
our back.
Mr. Langer. Yes.
Mr. Walden. In effect. But then everybody agreed this is
the set rate. This is the set balance. Pay it on time or you
are going to be fined.
I am just concerned we are headed down a real slippery
slope here.
Mr. Langer. This is a terrible slippery slope.
Mr. Walden. And from which we could end up missing a
payment. Can you imagine the outcry here if we missed a
payment?
Mr. Langer. That is a fear that the Pacific Northwest has
worked very hard to avoid. We have taken great pride at great
expense to our customers to keep rates at a level that it would
ensure Treasury payment.
There were three adjustments made to Bonneville's rates--
Load-based crack, finance-based crack, and a safety-net crack--
to ensure the Treasury is paid on time----
Mr. Walden. That we made.
Mr. Langer.--and in full.
Mr. Walden. Yes. I have exceeded my time. Thank you, Madam
Chair, Dwight, and Panel Members, thank you for your testimony.
Ms. McMorris. Mr. Pearce.
Mr. Pearce. Thank you, Madam Chair.
Mr. Graves, on page 3 you state that the budget request
erroneously states that Pick-Sloan power customers have not
heretofore been responsible for repaying these costs.
Can you document a little bit about how you have not been
paying those costs all along.
Mr. Graves. They are all part of the power repayment study
that the Western Area Power Administration conducts every year.
They are scheduled for payment. They are made. Pick-Sloan is
ahead of time in repaying the capital investment in the
program.
Mr. Pearce. Do you get any answers when you point those
things out to the agency?
Mr. Graves. To Western or to?
Mr. Pearce. To the OMB.
Mr. Graves. OMB? OMB does not talk to us.
Mr. Pearce. I thought they just did not talk to us.
[Laughter.]
Mr. Pearce. I am glad where it is equal opportunity sitting
here.
Mr. Hosken, you declared strong words at one point,
nonsense, and you said it, but then you also put it into print.
Do you stand by those strong words?
Mr. Hosken. Yes, I do, sir.
Mr. Pearce. All right. I suspect we agree on more things
that that, but I think we probably agree on that too.
Mr. Peterson, you had mentioned that the EPA costs appear
to be lacking in sound science and common sense. Have you, as
they try to lump the cost and send them at you, have you gone
in and tried to de-construct any of the lump cost of EPA
enforcement? That is a fairly technical thing.
Mr. Peterson. As a policymaker, I hoped for a question
where I could say, like you, I depend heavily on staff. We are
just beginning to implement the new license, and whether our
accounting processes are going to enable us to segregate that,
I do not know.
Mr. Pearce. But you have not gone back upstream? In other
words, the EPA costs are passed down to you from the power
association, right?
Mr. Peterson. From agencies imposing conditions on our
license.
Mr. Pearce. It is not that they are doing things up there
and passing the cost down. It is that they are imposing
things----
Mr. Peterson. It is that we are having to spend money.
Mr. Pearce.--for your license.
Mr. Peterson. Exactly.
Mr. Pearce. What sorts of things? Do you have a couple of
examples of some of the things they are imposing on you?
Mr. Peterson. Well, one of the ironies that I mention in my
written testimony is that we are being asked to spend millions
and millions and millions and more millions of dollars in
providing passage and improving habitat for bull trout, an
endangered species.
Mr. Pearce. Sure, and you are the only ones.
Mr. Peterson. And at the same time those Federal agencies
that are seeking to do that are also funding a tribal bass
hatchery on our reservoir. Bass eat bull trout.
[Laughter.]
Mr. Peterson. Bass swim in warm water. Bull trout need cold
water. That is where sound science and common sense seem to
come together and both seem to be violated.
Mr. Pearce. Points well made.
Mr. McClennan, you had mentioned that it appears that they
are trying to get you to pay--get the power companies to pay
for the cost for irrigation. Can you explain that just a little
bit?
Mr. McClennan. Congressman, it is a similar issue to the
one Mr. Graves referred to, is that it is an attempt ultimately
to accelerate the repayment of irrigation costs, which are
really the obligation of irrigation customers, by the power
customers in the proposal.
And so what you end up doing is there is obviously an
agreement that power helps pick up those costs, certain costs
for irrigation. This is really an acceleration of costs that
ought to be paid for, at least initially, by irrigation as
those are developed.
Mr. Pearce. Mr. Langer, we fought back a proposal last year
for--I mean, it was a different technique but the same deal.
They were going to pass increases along to all the small
electric co-ops or whoever buys power, and everybody is going
to get an increment, and it is all going to go into the kitty,
and everybody is going to be happy the further upstream you
get.
We beat that back last year. Is this just another attempt
from a different direction? In other words, they did not want
to come at it the same way, so they thought we would all be
asleep this year. Is that kind of the----
Mr. Langer. Yes, sir.
Mr. Pearce. That would be enough.
[Laughter.]
Mr. Langer. Trying to do this administratively this time,
so it is the same.
Mr. Pearce. Yes, it has some of the feel for it that, you
know, those country boys, you know, figures it out last time.
Let us get a little smarter, and the interest, they never look
at interest. I do not know. We will go to work on it again this
year. I think that you see the mood of the Committee is to not
take it lightly once again. So we will weigh in on it.
But thank you all for your presentation, and Madam Chair,
thank you, and I hope we have not missed our vote.
Ms. McMorris. We are going to be racing across the street.
We are going to take a quick recess. If you all will just
hang tough. I wanted to ask this panel a couple more questions.
So if you would just be so kind, we will be back with you
shortly. Thanks.
[Recess.]
Ms. McMorris. Call the meeting back to order.
I wanted to go back to Endangered Species Act just to get
some more input. I think we all recognize that drought has been
playing quite a role in the Northwest.
I also wanted to hear what kind of an impact the Endangered
Special Act compliance has played in increasing rates, and if
there is uncertainly, what kind of uncertainty you face in
future ESA cost, and if you feel these costs are being
implemented consistently or not.
So if anyone would like to take a stab at that question.
Mr. Pope?
Mr. Pope. I cannot give you a quantification, but anyone--
we have one of our members of the Placer County Water District,
who is facing a hydro relicensing on 2012 or 2013, and they are
as worried about having an endless process, and I think if just
clarity can be made on what the endangered species are, how to
deal with them, and some approach so that if you are going to
do a relicensing you are not caught in what appears to be a
continuous loop of issues that do not really match each other.
Bass in warm water, and trout in cold water, I mean, it
does not make any sense.
So I think what we are looking for is clarity around
today's Endangered Species Act. I think everybody does not want
to do away with the Act completely, but just bring it up to
date so that everybody understands the rules and the standards.
Ms. McMorris. Mr. Langer, you had testified that fish costs
are difficult for us to track. I was wondering if you would
just comment on how much you believe customers understand the
impact of Endangered Species Act and its impact on rates, and
if they do not, do you think it would be helpful for the PMAs
to transmit this information to you as an estimated percentage
of your bill?
Mr. Langer. Based on a recent survey that was completed as
to what the estimated costs in their bills were, 5 percent of
the, or the majority of the public in the survey felt that
their costs included in their retail rates was like 5 percent.
In actuality, BPA's fish and wildlife costs are $340 million a
year, 20 percent of the priority rate.
In addition, BPA forgoes another $350 million in revenues
that could have otherwise been used to reduce rates. Fish and
wildlife costs have increased 270 percent in the last 10 years.
In addition, through the Corps of Engineer Columbia River
Fish Mitigation Project, there are between 1.5 and 1.6 billion
dollars of congressional appropriations that will be paid back
by the agency through its customers through 2014.
With the ongoing litigation, the salmon recovery program in
Judge Redden's court, it is very unpredictable as to what the
future costs will be.
Now, just as my colleague, Mr. Peterson, testified earlier,
common sense seems to have gone out the window, and the best
science. Our customers in the Pacific Northwest have paid over
$6 billion in fish and wildlife costs, $4 billion since 1997.
All of that information that has been gained seems to be just
ignored and not put applied to the programs.
The impact on the customers, the impact to our economy, it
just, again, seems to be ignored, and the customers are not
aware, and I think that, though I believe that Bonneville and
its customers do a good job of communicating to the public, we
need to do a better job because clearly they do not understand
the impact.
Ms. McMorris. Good. Anyone else? Mr. McClennan?
Mr. McClennan. Thank you, Madam Chair.
Just a couple of quick comments. In the Colorado River
portion of it, about 16 percent of the direct costs are related
to ESA. It does not include what I will call operational costs,
which is lost generation as a result of fish flows and so on.
In terms of putting the program together, we have spent
about $200 million to get an adaptive management program put
together, and this really goes at your issue of what I will say
is future uncertainty. You spend all of the dollars, you create
a 23-member advisory panel which includes the environmental
community, to try to set up a management program for the last
12 years about how do you manage the program. You get 12 years
into the program, seems to be because adaptive management needs
to have some changes as you move forward, and now we find
ourselves in a situation where two environmental groups have
sued the Secretary of Interior and the Bureau of Reclamation
that in fact adaptive management program put in place by those
23 individuals, including the environmental community, is not
working.
So in fact we have to spend another $200 million just to do
an environmental review, and you change the flows again you
will face additional ESA costs when in fact what you thought
you would do--one of the challenges here is the program I am
referring to is held up as the model for how you put an
adaptive management program together. And in fact if the model
does not work on the ESA as you go forward, I am not really
certain what does.
Ms. McMorris. Anyone else? Mr. Graves?
Mr. Graves. Madam Chairman. On the Missouri River, we are
just wading into the issue of adaptive management relating to
the pallid sturgeon. We also have two endangered bird species
on the river, the least tern and the piping plover.
The problem we have is we have dueling endangered species.
The piping plover and the least tern were first listed prior to
the pallid sturgeon. These days they nest on sandbars below the
last dam in the system, Gavin's Point. Historically, they would
never have nested there because the historical hydrograph of
the Missouri River is that in June, around the time of the
summer solstice, there is this huge flood that used to come
down from the melting of the mountain snow pack. So there were
no birds nesting on those sandbars because there were no
sandbars at that time of year. The dams have created that
habitat.
Now, the pallid sturgeon needs a big spring pulse. The
pallid sturgeon also needs hours of daylight, and water
temperature. All of these from the historical information that
the USGS and Fish and Wildlife have presented show this all
occurs right around the summer solstice.
But the adaptive management plan, when it is developed,
will not be able to meet that need of the pallid because they
would be destroying the habitat for the birds that are already
there. So our fear is, beyond the operational constraints which
already exist because of the birds, we are gong to be in an
adaptive management process that simply is ignoring some of the
basic realities about the pallid sturgeon and its spawning
habits.
Ms. McMorris. OK. Go ahead.
Mr. Langer. I would like to take this opportunity, Madam
Chairman, to recognize the work of Representative Walden,
Representative Baird, and Representative Dicks on the ESA
salmon recovery issue. The focus primarily has been with
regards to hydro and a little bit on habitat, and with their
regional field forums that they are having focus is being put
on harvest and hatchery that we have not had before, and the
region is very appreciative of this leadership in this area,
and feel that there is a great deal of benefit, good science to
be gained from this leadership, and initiative. Thank you.
Ms. McMorris. Very good. Mr. DeFazio, do you have any
questions?
Mr. DeFazio. No, I do not.
Ms. McMorris. OK, Ms. Musgrave.
Mr. Musgrave. Thank you, Madam Chair.
If this has been asked, please just let me know while we
were running back and forth, but this question is for Mr.
Graves. It is my understanding that OMB has justified the
agency rate increases as a way of mitigating taxpayer risk, and
I would like comment on that.
Then I would like to know if there has ever been a default
on any of the loans in question.
Mr. Graves. Thank you. Pick-Sloan customers have never
defaulted on their repayment obligations paid through their
power rates. Mr. Hacskaylo can speak directly to defaults in
the Western Area Power Administration. I am not aware of any of
them.
I am not sure what the risk factor is. The Federal
hydropower in the Missouri River Basin, which includes eastern
Colorado, is a very important resource for cooperatives in the
region. It can be on average 30 percent of their power supply,
for some municipalities it is 100 percent of their power
supply.
We take our repayment responsibilities very seriously,
which is why we have always maintained a record on repayment of
capital investment that actually has us ahead of schedule in
terms of our repayment obligations.
Ms. Musgrave. Thank you very much. Thank you, Madam Chair.
Ms. McMorris. Ms. Cubin.
Ms. Cubin. Thank you, Madam Chair.
I would like to start with Mr. McClennan. You mentioned in
your testimony the memorandum of understanding that was
developed to help facilitate the working relationship with
power customers like Tri-State, or power customers like Tri-
State have with WAPA, the Bureau of Reclamation and the Corps
of Engineers.
Could you explain to me how that memorandum was developed
and how it is being implemented?
Mr. McClennan. Certainly. Thank you, Congresswoman.
It was developed because we keep facing these issues
annually about budget cuts, about agencies not being able to
have enough funds to do annual operations at times, about the
customers not having a sense of where the dollars are actually
spent in these programs.
So several years ago a number of the customers sat down
with the agencies and said we need to be able to find a way,
and part of it was being driven by the fact that the agencies
were coming to the customers saying could you help advance
funds because we do not have enough appropriations to carry out
our annual activities, in some cases to carry out emergency
operations, and otherwise.
So from the customers' side, you know, we are obviously the
largest beneficiaries of these things continuing to be
financially solid and move forward and be operationally sound,
and so we said we would be happy to do that, but we are not
doing this in terms of writing you a blank check. You have to
be willing to sit down with us.
So what happens now is that the process is on a regular
basis we sit down with the agencies and look at their work
plans as they go forward so we have some sense of where they
are going to be spending dollars, what those dollars look like,
where does it fit into the needs and appropriate issues as it
relates to the customers.
So to this point it is a relatively, I will say new, last
couple of years option where we have got the agencies, I think,
to all sit down with the customers and figure out where we are
going collectively, to be able to meet what really are some
budget shortfalls. They are issues associated with emergencies.
They are how do we keep this system up, but it also provides,
if you will, an additional beyond what Congress does, a check
and balance; that if we are going to put up our dollars to help
the Federal agencies move forward, we have some understanding
of where they are going.
Ms. Cubin. So that is working out relatively well?
Mr. McClennan. It has worked out. I will say that it is not
without struggles. Some of the agencies are better than others
in terms of being able to provide information that is helpful
to figure out where you are going. We have a little bit more of
a struggle, if you will, with the generating agencies than we
certainly do with WAPA in this case in terms of the memorandum.
Part of it, I assume, is just the size of their budget, where
they are spending dollars and so on.
So I will say I am cautiously optimistic that we are going
to be able to work through these issues as we go forward, but
certainly it is not without some pain in certain cases.
Ms. Cubin. Thank you. You also expressed in your testimony
your opposition to the Pick-Sloan cost reallocation that is
included in the Administration's budget?
Mr. McClennan. Right.
Ms. Cubin. I was a vocal opponent of this proposal last
year, and I will be again this budget cycle. I would like you
to reiterate, if you would for the record and for me, if the
Administration's Pick-Sloan proposal were to be implemented
roughly what cost increase would my constituents and others in
rural communities expect? What would they expect? Thank you.
Mr. McClennan. Thank you, Congresswoman.
I have not done the calculation to say if we took it all
the way down to consumers through Tri-State and the member
distribution systems. My understanding is at this point you are
somewhere north of a 10 percent increase to Tri-State that we
would then pass on to our individual members and move forward
in terms of the customers.
So I have not done a calculation that says by member what
is the impact, but the impact coming to us potentially that we
would have to pass on, we have no choice to pass on to the
consumers is near or above 10 percent.
Ms. Cubin. Well, that is close enough, and that is still
unacceptable, so I will continue to do everything I can to see
that that does not happen.
Mr. Graves, good to see you again, and welcome.
In your testimony you discussed Midwest support for a net-
zero approach to PMA appropriations, and you even stated that
the current system threatens the reliability of the Federal
power program.
However, I have also heard concerns that a net-zero
approach would decrease congressional oversight of PMA
operations as well as hinder customer input.
Could you please explain how you think the net-zero
approach benefits rural customers?
Mr. Graves. I would be happy to. Thank you very much.
There are currently, under the current budget process the
Western Area Power Administration's budget can be cut through
rescissions that Congress has to invoke dealing with deficits.
It can also be reduced by the fact that each committee, each
appropriating committee has an allocation, and they have to do
all of their spending within that allocation.
The annual costs of the PMAs are not permanent outlays of
Federal money. They come back by the end of the year, so there
is a net-zero cost to the Treasury.
It absolutely would not reduce congressional oversight. We
do not want that. The Federal power customers are vitally
interested in maintaining Congress's role. The PMA would still
be required to submit budgets to Congress. The PMA would still
be required to justify that. The Congress would be setting the
number that the PMA would be spending for its annual expenses
combined with the MOU which Mac had mentioned where we sit down
with the agencies three or four times a year to go over their
costs.
I mean, we really care how much money is being spend
because we are going to pay for it one way or the other. We are
going to pay for it, and we want Congress to have that
confidence as well, which is why the budget process in terms of
submittals to Congress and Congress's role in setting the
spending limit does not change. What changes is the way the
revenues are treated because right now the budget process does
not recognize that the annual costs that are appropriated come
back to the Treasury in the same year that they are
appropriated.
Ms. Cubin. Yes, that is true, but I am going to have to
think about this a little more. I appreciate your answer.
Mr. Graves. Sure.
Ms. Cubin. But I am going to have to think about this a
little more because I can see how it would take more, in my
opinion, more than due diligence for the Congress to have the
oversight that it has now, but I will think that over, but
thank you.
Mr. Graves. Yes. Well, we appreciate that, and as I said,
we are really exercising due diligence and we certainly
encourage Congress to maintain its role in oversight and due
diligence in that as well.
Ms. Cubin. Thank you.
Mr. Graves. Thank you.
Ms. McMorris. OK, thank you everyone again. Really
appreciate you being here, sharing your perspectives, some of
your challenges and your opinion of the Administration's
proposals specifically. So it has been very helpful. We are
going to move to the next panel at this time.
Mr. Steven Wright--I guess I will wait a minute here.
[Pause.]
Ms. McMorris. OK, just to keep this moving along, I will go
ahead and introduce the next panel. Mr. Steven Wright,
Administrator of Bonneville Power Administration; Mr. Michael
Hacskaylo, Administrator, Western Area Power Administration;
Mr. Michael Deihl, Administrator, Southwestern Power
Administration; Mr. Charles Borchardt, Administrator,
Southeastern Power Administration.
I am pleased you are all here. Go ahead an start with your
testimony. Mr. Wright, please.
STATEMENT OF STEPHEN J. WRIGHT, ADMINISTRATOR,
BONNEVILLE POWER ADMINISTRATION, PORTLAND, OREGON
Mr. Wright. Thank you very much, Madam Chairman, and thank
you to the Subcommittee for your ongoing attention to these
issues which we think are of national importance.
The critical event in this decade for electric utilities
was the west coast energy crisis, and there are two big things
that came out of that, both for western utilities and for
Bonneville specifically.
First, it did tremendous financial damage from which we are
still recovering; and second, it unmasked the fundamental
supply and demand problem in the West that resulted in the
tremendous price volatility and reliability problems that
consumers encountered.
I am here today to report on BPA's substantial progress
toward recovery and implementation of lessons learned from the
crisis. On the financial side, we finished for the third
straight year in the black in 2005. We lost approximately $700
million, you may recall, in 2001 and 2002. We believe we have
righted the financial ship by finishing in the black in 2003
and 2004, and finishing at $126 million in the black last year.
We made our full scheduled annual treasury payment last
year for the twenty-second straight year, and we are well
positioned to do the same in 2006.
In terms of addressing the supply and demand issues, we
have made substantial investments in infrastructure over the
last few years. Since last year's hearing, we energized the
Shultz-Wantoma line, the third major 500 kv line to be built in
the region since 2003. FERC records indicate that ours is the
largest transmission construction program in the country right
now. We have completed further refurbishments of the hydro
system, increasing the energy output of that system, and we
have accomplished about 40 megawatts of energy efficiency last
year as well.
None of this could have been accomplished without the
congressional approval in 2003 of an increase in our borrowing
authority. We greatly appreciate this Committee's support for
that initiative, and wanted to report to you that it is going
well.
Now, to move beyond history into some of our challenges for
this coming year. I want to put those into six categories.
First, long-term power sales contracts. Our current
contracts expire in 2011. These contracts define the rights to
40 percent of the Northwest electricity supply. The neutron
tracks that we are working on with customers are being designed
to create certainty for utilities and accountability as to
responsibility for serving load growth. Both are necessary to
deploy the large amounts of capital needed to assure adequate
electric infrastructure that will allow our economy to grow.
Second, salmon restoration. BPA is the primary funder for
the largest environmental restoration program in the world. Our
2004 salmon plan was remanded by the Federal District Court and
we have embarked with states and tribes on an extremely
ambitious effort to, first, define recovery goals; second,
define necessary actions across the salmon's life cycle to
achieve recovery; and third, secure commitments from all the
affected parties to move forward toward recovery.
Our third major challenge, we need to set power rates for
2007 and 2009. Rates need to be adequate to assure BPA can
carry out its mission, and have a high probability that we will
cover all costs, including the treasury repayment. We are also
seeking to keep our rates as low as possible. We believe we
have created an exemplary process for creating transparency and
stakeholder involvement in cost decisions that impact our rates
and continue to work closely with them as we move forward in
this rate case.
Fourth major issue is transmission congestion management.
Despite our aggressive construction program, we continue to
have congestion that threatens both reliability and disrupts
commercial traffic on our system. We are committed to an effort
to cost-effectively relief congestion while minimizing impacts
on our transmission customers.
Fifth, we continue to make investments in transmission and
the generation system as well as investments in energy
efficiency for the loads we serve. We are committed to
continuing our infrastructure investment program.
Sixth, we continue our efforts to define a mechanism to our
realization of a one utility vision for transmission operations
and planning in our region.
Finally, my written testimony explores the many ways that
the Energy Policy Act of 2005 impacts the Bonneville Power
Administration. I am going to highlight only one.
We believe the evolution of our industry it was necessary
to provide for authority to establish mandatory reliability
standards and an enforcement mechanism. While there has been
great trepidation about the implementation of that provision of
the Act, we believe the FERC is doing a thoughtful and good job
of balancing national standards with accommodations for
regional differences that have been particularly important to
the West.
Madam Chair, if I could take one more moment and just
address the President's budget proposal, and the comments that
many of the members here have made.
Last year's budget included moving the Bonneville Power
Administration and the other Power Marketing Administrations
from a cost-based rate approach ratemaking to market-based
rates. The Administration has sought to learn from last year's
proposal and has dropped that proposal and has proposed a new
alternative.
The new alternative addresses what should happen with
extraordinary surplus sales revenues above BPA's historical
record high. The $500 billion represents the historical record
high for surplus sales revenues.
The Administration believes the proposal in the budget
retains the benefits of these surplus revenues for Northwest
ratepayers by repaying Bonneville's debt. The proposal extends
BPA's borrowing authority that is limited by law to make
infrastructure investments as needed.
However, the Administration does recognize there has been a
strong reaction from Bonneville's customers and from the
Northwest Congressional Delegation to this proposal. And while
the Administration does intend to move forward with this
proposal on a BPA rate case beginning in July, we are also
prepared to work with the Northwest's interests, members of the
delegation, BPA customers and others to address the issues that
have arisen.
That concludes my testimony, Madam Chairman. I will be
available for your questions.
[The prepared statement of Mr. Wright follows:]
Statement of Stephen J. Wright, Administrator,
Bonneville Power Administration, U.S. Department of Energy
Mr. Chairman and Members of the Subcommittee, I appreciate the
opportunity to be here today to discuss both the Bonneville Power
Administration's (Bonneville) implementation of the Energy Policy Act
of 2005 and the President's FY 2007 budget as it relates to Bonneville.
The Subcommittee's attention and support have been and will continue to
be essential as we move ahead.
In my testimony today, I will first share with the Committee how
Bonneville is working to incorporate the provisions of the Energy
Policy Act. I will then discuss Bonneville's significant successes over
the past year and the challenges we are facing for the upcoming year,
followed by an overview of the FY 2007 budget and its proposals.
ENERGY POLICY ACT IMPLEMENTATION
The Energy Policy Act is far-reaching and has the potential to
impact energy issues in the Pacific Northwest for a long time.
Bonneville has a long history of providing reliable transmission
service in the Pacific Northwest and has, since 1996, filed reciprocity
tariffs with the Federal Energy Regulatory Commission (FERC) that apply
transmission terms and conditions to all transmission users on a
comparable, nondiscriminatory basis. Bonneville has also been at the
forefront of regional and national efforts to strengthen system
reliability. While the Energy Policy Act of 2005 does not single
Bonneville out for action in any particular instance, it will cause
changes to Bonneville's operating environment, and so we are
proactively contributing to its implementation.
Two of the most important provisions potentially affecting
Bonneville are Sections 1211 dealing with reliability and 1232
authorizing Bonneville to join a regional transmission entity.
Section 1211 provides for FERC to designate a single Electric
Reliability Organization (ERO) for the United States. This entity will
be authorized to propose, for FERC's review and approval, mandatory
reliability standards that will govern the practices of all users,
owners, and operators of the bulk power system, and to enforce them
through a system of sanctions and monetary penalties to be administered
by regional reliability organizations. Bonneville has been actively
contributing to the implementation of this system by working with the
North American Electric Reliability Council (NERC), which will apply to
FERC for certification as the Electric Reliability Organization (ERO),
and with the Western Electricity Coordinating Council (WECC), which
will seek the enforcement role in the Western Interconnection. The
success of complex relationships between FERC and NERC and WECC, and
the generation and transmission operators in the West is absolutely
crucial to the smooth functioning of our part of the Nation's bulk
power system. It is a part that is physically quite different from the
East, so the challenge is to achieve a uniformly high quality of
reliability through sometimes different regional means. This is an
extremely complex undertaking and managing this transition is our
highest priority in the coming year. FERC sent encouraging signals in
their final rulemaking on Section 1211 by acknowledging and providing
for accommodation of regional differences and by allowing NERC and the
regional reliability organizations to create a first approach to
specific application of many of the governance and process
prescriptions of Section 1211.
Section 1232 authorizes The Secretary of Energy or, upon
designation by the Secretary, the Bonneville Power Administration, to
make arrangements for Bonneville to participate in a regional
transmission organization under certain conditions. Bonneville is
involved with efforts to address transmission functions that could be
carried out by a regional transmission entity under a ``one-utility''
vision for Northwest transmission where the region's transmission
system would be managed as though owned by a single utility. Although
this is a vision for the Northwest power system that has guided
regional policy making for decades, there is a wide divergence of
opinion within the Northwest regarding the type of transmission
organization that is appropriate for the Region.
An attachment is included with my testimony today that highlights
Bonneville's approach to several other provisions of the Energy Policy
Act. Our actions are designed to support the Administration's
commitment to expand our Nation's energy supply by developing a
diverse, dependable energy portfolio for the future, and the critical
infrastructure that is necessary to sustain it.
BONNEVILLE'S RECENT SUCCESSES
FY 2005 was marked by another major stride in improving
Bonneville's financial health while making significant investments in
our region's electric infrastructure. We exceeded our net revenue
targets, earning just over $126 million in modified net revenues, the
highest since the big losses were suffered during the West Coast energy
crisis. The table, which follows, shows a historical comparison of
modified net revenue results. BPA has determined that modified net
revenues are a better representation of the outcomes of normal
operations and are more similar to calculations developed as part of
the initial rates for the current rate period.
[GRAPHIC] [TIFF OMITTED] 26463.002
For the twenty-second year in a row, Bonneville made its planned
repayment to the Treasury on time and in full.
It was also a year of major milestones in our business. On the
transmission side, we continued our program to shore up the region's
reliability, meeting our target for completing construction projects on
schedule and within budget. The Grand Coulee-Bell 500-kilovolt line in
eastern Washington, our largest transmission project in two decades and
one of the largest in the Nation, was energized last December. The line
relieves congestion from east to west and enhances system reliability
while increasing capacity to move new generation to consumers.
On the power side, Bonneville conducted a public process called the
Power Function Review (PFR) to help determine program funding levels
for the next power rate period, 2007-2009. We completed a short-term
Regional Dialogue to address power sales contract issues relevant
through 2011. We also opened up a long-term Regional Dialogue on
Bonneville's power supply role beyond 2011.
We met our 2005 targets for conservation savings and efficiency
improvements to the generating system, achieving 43 megawatts of new
conservation and 20 megawatts of additional hydro generation
capability.
These and many of our other successes in 2005 were guided by the
development of our long-term Strategic Plan that was completed in early
2004. This Plan laid out Agency direction through FY 2011 and grew out
of the need to set long-term objectives along with strategies to reach
those objectives. Bonneville has now moved into the implementation
phase of this Plan with a focus on Bonneville's future power supply
role along with infrastructure development, risk management,
technological innovation, conservation and renewables, facilitation,
and efficiency initiatives--all of which help set the stage for the
region's long-term energy future.
UPCOMING CHALLENGES
Bonneville markets wholesale power and provides other benefits to
virtually every utility in the Pacific Northwest. With current power
rates set to expire in 2006, Bonneville is in the midst of its first
full-fledged wholesale power rate case in five years. In addition to
the completed Power Function Review, Bonneville is currently initiating
a second public review of costs to seek further reductions in order to
hold FY 2007-2009 rates down. Bonneville is scheduled to adopt a final
proposed rate structure this July that will take effect October 1,
2006.
With existing power contracts due to expire in 2011, Bonneville
must establish clearly its future power supply role and has initiated a
long-term Regional Dialogue that is designed to create more certainty
for the region and that should lead to more investment in electric
system infrastructure. We believe increased clarity about how much
power Bonneville will provide beyond 2011, and at what price, is
essential to assuring adequate infrastructure investment by other
parties.
Bonneville funds a diverse and comprehensive fish and wildlife
program to mitigate impacts of Federal hydropower development on
Columbia Basin fish and wildlife. All together, our direct fish and
wildlife costs, plus foregone revenues, are expected to average nearly
$700 million annually in the FY 2007-2009 period. Litigation, dating
back to 1995, continues over the operation of the Federal Columbia
River Power System (FCRPS). Bonneville, the Army Corps of Engineers,
the Bureau of Reclamation, the National Oceanic and Atmospheric
Administration, and the Northwest States and Tribes are all currently
collaborating to gain agreement on performance objectives, the
scientific framework, and the Government's Proposed Action. Without
such agreement, the stability and predictability of the hydro system is
at great risk.
Bonneville is also focusing internally. We are in the midst of a
multi-year, agencywide efficiency program designed to further lower our
costs. Implementation of efficiency recommendations is occurring
incrementally and has already led to consolidation and centralization
of some agency functions, and simplification of operational processes.
BONNEVILLE'S BUDGET INITIATIVES
Beginning in the President's Fiscal Year 2007 budget released to
Congress and consistent with sound business practices required under
the Federal Columbia River Transmission System Act of 1974, the budget
provides that Bonneville Power Administration will use any surplus
power sales (net secondary) revenues it earns in excess of $500 million
per year to make early payments on its federal bond debt to the U.S.
Treasury.
This administrative action will both reduce the federal deficit and
provide BPA with needed financial flexibility to invest back into
energy infrastructure and to pay down debt. BPA will make no additional
payments to the Treasury as a result of this action if surplus revenues
do not exceed $500 million in a year.
BPA markets its surplus electricity production to customers both
inside and outside the Pacific Northwest. In the last decade, BPA has
an average of $457 million per year in net secondary revenues. BPA will
potentially realize record high levels of surplus revenues due to high
wholesale electric prices in the West. The budget reflects a total of
$924 million from FY 2006-2016 from net secondary revenues greater than
$500 million per year.
The President's budget action would extend the use of Bonneville's
borrowing cap with the U.S. Treasury by about three years. Absent the
President's Budget, BPA could have run out of borrowing authority in
the year 2011.
It is the Administration's position that it is sound business
practice to use higher-than-historical net secondary revenues to pay
down debt, consistent with statutory priority of payment requirements.
The Administration believes this action will help to provide Bonneville
with needed financial flexibility to meet its future energy investment
needs, including new transmission capacity, and that long-term power
and transmission customers of Bonneville will benefit from these
advance amortization payments through lower long-term rates than would
otherwise be the case.
BPA's surplus sales revenue lowers power rates today in the Pacific
Northwest. The Budget does not reduce the historic level of regional
benefit from such sales- it retains the benefit of all surplus sales
revenues for BPA ratepayers, but changing the time frame that such
benefits will be realized. This proposal is not expected to have a rate
impact in 2007, but it could prevent rates from being about 5 percent
lower for retail customers than they otherwise would have been in 2008
and 2009, without this early repayment program. This rate impact will
be offset by benefits in future years.
In addition, the Budget provides that Energy Northwest will
refinance a portion of its debt in the calendar year 2006 and 2007. The
additional $382 million freed up from these future refinancings will be
used to pay down BPA federal debt.
The combined effect on the U.S. budget deficit of these two
proposals is estimated to be $1.3 billion. This is an amount that could
be borrowed again by Bonneville in the future under its Congressional
borrowing ceiling. This initiative takes advantage of a potential
unique opportunity to make a long-term investment in the Pacific
Northwest's electricity future. We are proceeding with implementation.
The expedited rate case is scheduled to begin in July 2006.
FY 2007 BUDGET OVERVIEW
Mr. Chairman, Bonneville is in sound financial condition. Our
reserves are at a level that will assure we can make our full annual
payment to the U.S. Treasury at the end of this fiscal year, despite
having been through six straight below-average water years before this
year. Bonneville's FY 2007 budget projects $2,464 million for operating
expenses, $95 million for Projects Funded in Advance, and $477 million
for capital investments. Since its budget is funded by sales of power
and transmission services, and proceeds of bond sales to the Treasury,
Bonneville has not requested or received annual appropriations since
1974.
Bonneville's commitment to fish and wildlife mitigation and
enhancement is exemplified in its direct program budget of $178
million, capital and expense, for this purpose in FY 2007.
Bonneville's full time equivalent (FTE) staff projection included
in this budget is 3,000 for FY 2007. Bonneville's cost management
initiatives have brought this number down from the higher level we
needed during the ramp-up of our infrastructure expansion program.
Bonneville utilizes numerous performance measures linked to its
strategic vision and financial results. The President's budget
performance measures for Bonneville encompass overall electric hydro
availability, transmission reliability, repayment to the U.S. Treasury
and safety. The safety measure includes a Department determined stretch
target for FY 2007 of no more than 2.7 for Recordable Accident
Frequency Rate.
Bonneville's budget assumes that the Spectrum Relocation Fund
(SRF), established in the Treasury to facilitate the relocation of
Federal radio communication systems, will provide Bonneville, through a
non-expenditure transfer from the SRF, with full budget authority and
cash to cover the cost of relocating Bonneville's 1710-1755 megahertz
radio communication systems. The estimated Bonneville cost of this
relocation is $48.7 million.
The following table provides budget data (dollars in 1,000's) based
on current services for FY 2005 through FY 2007:
[GRAPHIC] [TIFF OMITTED] 26463.003
The accompanying notes are an integral part of this table.
Budget estimates included in this budget are subject to change due
to rapidly changing economic and institutional conditions in the
evolving competitive electric utility industry.
Bonneville Bond Amortization/Capital Transfers in this FY 2007
budget reflect, beginning in FY 2007, advance amortization payments to
the United States Treasury on Bonneville's bond obligations. The
advance payments are dependent on an equivalent amount of assumed net
secondary revenues over $500 million and anticipated debt optimization
refinancing of ENW obligations, consistent with both the President's
budget and the sound business practices required under the Federal
Columbia River Transmission System Act of 1974. The policy of the
President's budget regarding use of extraordinary net secondary sales
revenues will be implemented through a Bonneville rate proceeding.
Amounts of such estimated payments to Treasury vary from associated
net secondary revenues and debt optimization amounts due to timing of
Treasury payments and other factors. Actual associated net secondary
revenues and debt optimization effects could vary due to volatility of
secondary power markets, stream flow variability, volatility of
financial markets affecting ENW debt optimization, and other
uncertainties.
BONNEVILLE TREASURY PAYMENTS
Bonneville made its planned payments to the U.S. Treasury on time
and in full in FY 2005, for the twenty-second consecutive year.
Included in these payments totaling $1,088 million was $313 million in
early amortization of our Treasury debt. Since its creation in 1937,
through FY 2005, Bonneville has returned $21.6 billion to the U.S.
Treasury. During FY 2007, we anticipate paying $1,329 million to the
Treasury, of which $878 million will be repayment of principal, $430
million will be interest, and the balance of $21 million will be
applied to the unfunded liability of the Civil Service Retirement
System.
In recent years, Bonneville has made amortization payments in
excess of those scheduled in its FERC-approved rate filings resulting
in a balance of advance repayment. The cumulative amount of advance
amortization payments as of the end of FY 2005 is about $1,460 million.
CONCLUSION
In conclusion, I am pleased to say we have made significant
progress in regaining Bonneville's financial health since the West
Coast energy crisis of 2001-2002, and we are well on our way to meeting
the upcoming challenges facing us today. Bonneville will continue its
efforts toward long-term financial stability and its commitment to
meeting its overall responsibilities to keep the lights on in the
Pacific Northwest. Bonneville is well positioned as it looks forward.
Attachment A
Additional Energy Policy Act Provisions Likely to Have a Significant
Impact on Northwest Electric Power Issues in Which Bonneville is
Actively Involved
Section 368 provides for the Federal Government to designate
``energy corridors'' on Federal lands that would be used for electric
power transmission lines, and pipelines to transport oil, natural gas,
hydrogen, and potentially other fuels. Bonneville is supporting this
effort in the Pacific Northwest. DOE is coordinating the Federal
agencies involved in this issue. Bonneville believes it is important to
assure that safety, security, and electric reliability issues are not
created when pipelines are considered for location in proximity to
electric power transmission lines.
Section 1221 provides for the Federal Government to designate
``public interest corridors'' for siting of new transmission needed for
reliability. Bonneville is actively involved in supporting DOE's
efforts to identify potential transmission corridors in the Northwest.
Bonneville expects to stay engaged in this effort through its
completion.
Section 1231 provides FERC authority to require by rule or order
that transmitting utilities that are public bodies, like Bonneville,
provide their unregulated transmission service at rates comparable to
those the utility charges its own generation, and on terms and
conditions that are similarly comparable and not unduly discriminating
or preferential. Bonneville believes it already meets these standards
and has been operating this way since 1996. FERC has opened an inquiry
regarding revisions to its pro-forma tariff, and Bonneville is actively
contributing to that process.
Section 1233(b) assures that load-serving utilities, like
Bonneville, will continue to be entitled to use transmission rights to
meet their service obligations. FERC has recently issued a Notice of
Proposed Rulemaking on this issue. Bonneville expects to comment to
FERC on its proposed new rule and participate in this important policy
development.
Section 1234 provides that the Secretary of Energy must conduct
annual studies of the procedures used by electric utilities to perform
economic dispatch, of possible revisions to those procedures, and of
potential benefits to consumers from improving such procedures. The
Secretary is also directed to recommend appropriate legislative and
regulatory actions with respect to economic dispatch. Bonneville has
provided comment regarding the important differences between thermal
and hydro systems and the need to take these into account when
considering economic dispatch.
Section 1286 grants the Federal Energy Regulatory Commission (FERC)
refund authority when a non-jurisdictional utility's sale of 31 days or
less, made through an organized market in which the rates for the sale
are established by a Commission-approved tariff (rather than by
contract), violates the tariff or FERC rule. Bonneville actively
monitors FERC's requirements and its own operations to assure it is not
violating the tariff or FERC rule.
Section 1834 instructs the Departments of Energy, Defense and
Interior to jointly conduct a study of the potential for increasing
electric power production capability at federally owned or operated
water regulation, storage, and conveyance facilities. Bonneville and
other Power Marketing Administrations in the Department of Energy have
been working with the U.S. Army Corps of Engineers and the Bureau of
Reclamation on such a study. Results from the study are expected to
become available in early 2007.
Additionally, Bonneville has for several years been funding
projects within the hydroelectric investment program that support
generation efficiency improvements within the Federal Columbia River
Power System. This has included replacement of existing turbine runners
with higher efficiency ones and development of operational process
improvements that have resulted in increased efficiency. The program to
date is estimated to have achieved an increase of 87 annual average
megawatts, assuming average water conditions.
Subtitle G of Title XII contains several provisions that deal with
electricity market transparency, enforcement and consumer protection.
Bonneville is actively following FERC developments in this area.
Bonneville is subject to these new rules and has taken steps to assure
that it is in compliance with their requirements. Bonneville believes
these new rules are an important tool to address market manipulation
that plagued the West Coast market in 2000 and 2001.
Subtitle A of Title I relating to Energy Efficiency contains a
number of provisions that affect Bonneville's procurement practices.
For example, Section 104 provides for agencies to procure products that
meet certain energy standards. In many instances, Bonneville had
implemented procurement policies that meet or exceed the requirements
of the Act before its enactment. In other instances, Bonneville may
need to update its practices. For example, Bonneville has had a
standard policy to purchase recycled concrete products, where feasible,
for many years, as now required by Section 108. Bonneville is looking
into whether these and similar procurement policies may need to be
updated in light of the new Act.
Title VI contains provisions relating to nuclear energy. Through
Energy Northwest, Bonneville receives power from Columbia Generating
Station, a large nuclear power plant located in Richland, Washington.
Several provisions change various requirements for operators of nuclear
facilities. For example, Subtitle D adopts a number of security-related
practices for nuclear operators. Bonneville and Energy Northwest either
have made appropriate modifications in policy to comply with the Act,
or are in the process of doing so.
The Act contains many provisions encouraging energy efficiency, new
technological developments, and renewable resources within the electric
power sector of our economy. Bonneville has been active in these areas
for many years. Bonneville has a very active and successful energy
efficiency program which yielded 43 aMW of new electricity savings in
2005, adding to a total of 900 aMW achieved over the last 25 years.
Bonneville has supported more stringent energy standards for
appliances, buildings, and other electric-power-consuming applications
for many years.
Bonneville is also an active participant in the Department's
GridWise program where it is working with the Pacific Northwest
National Laboratory and other Northwest utilities to test devices
installed in Northwest home appliances, such as water heaters and
clothes dryers, that detect system problems and automatically respond
by shutting the appliance off or on, as appropriate, to respond to
system conditions. This is a promising technology that Bonneville
believes could pave the way for cost-effective demand response and a
``smart grid'' that detects and responds automatically to system
disturbances and related operational problems.
Section 503(a) amends the Energy Policy Act of 1992 to provide that
each Power Marketing Administration (PMA) Administrator shall encourage
Indian tribal energy development by taking such actions as the
Administrators determine to be appropriate, and that an Administrator
may provide technical assistance to Indian tribes seeking to use the
high-voltage transmission system for delivery of electric power.
Bonneville is developing long-term contracts and policies that we
believe will encourage resource development by tribes and other
resource developers in the Pacific Northwest, and we routinely provide
transmission technical assistance to tribes. Bonneville provides the
tribes open, non-discriminatory access pursuant to its FERC-approved
transmission tariff. Bonneville has also assisted tribes in forming
electric distribution utilities to provide retail service to tribal
facilities and communities. This section also provides that, within two
years of passage of the Act, the Secretary of Energy is to submit to
Congress a report that, among other things, describes tribal use of PMA
power and barriers that impede tribal access to and use of Federal
power, including an assessment of opportunities to remove those
barriers and improve the ability of power marketing administrations to
deliver Federal power. We will actively support and contribute to that
report.
Energy Policy Act Provisions that may have a Significant Impact on
Northwest Electric Power Issues that Bonneville is Following, but Not
Directly Involved
Section 1303 extends the renewable energy production tax incentive
through 2007. Bonneville is purchasing substantial quantities of wind
generation now, but is not seeking new renewable power purchases at
this time. A number of utilities in the Northwest are pursuing wind
acquisition strategies. Bonneville is taking a number of actions to
facilitate these efforts by regional utilities. Bonneville has received
and is processing a number of requests for integration studies, and has
also received requests to reserve transmission for many of these
projects.
Subtitle F to Title XII contains provisions that repeal the Public
Utility Holding Company Act. Bonneville is following developments in
this area because of the potential for utilities in the Pacific
Northwest and nearby areas to become involved in mergers and
acquisitions. Currently three Northwest utilities are involved in
potential change of ownership: Portland General Electric (which is
being sold by Enron Corporation), PacifiCorp (which is being acquired
by Mid-America), and Northwestern (which is being solicited by several
potential buyers). A change of ownership of these utilities could
change the approach they have had historically toward investing in new
transmission and generation, supporting a regional transmission
organization, and working with Bonneville on common issues of interest.
______
Ms. McMorris. Thank you.
Mr. Hacskaylo.
STATEMENT OF MICHAEL S. HACSKAYLO, ADMINISTRATOR,
WESTERN AREA POWER ADMINISTRATION, LAKEWOOD, COLORADO
Mr. Hacskaylo. Thank you, Madam Chair.
I am Mike Hacskaylo, Administrator of the Western Area
Power Administration.
For our Fiscal Year 2007 program, we are proposing a total
program of $688 million. That is comprised of $212 million in
appropriations, authority to use receipts for purchase power
and wheeling of $274 million, and customer advanced funding,
net billing and bill crediting of approximately $200 million.
The Energy Policy Act of 2005 provides additional
authorities for Western Area Power Administration to construct
transmission in partnership with others to eliminate
bottlenecks as well as to improve transmission capacity where
it is requested.
For example, we are working with the Wyoming Infrastructure
Authority and Trans-Elect, a private company, to eliminate a
bottleneck in transmission between southeastern Wyoming and the
front range of Colorado.
We are also a partner with Tri-State Generation and
Transmission Association on the eastern plain transmission
project which would construct substantial new transmission,
enhance reliability in the area, improve Western's transmission
system, improve the ability of Tri-State to meet its growing
loads. We are doing so in partnership, and we believe it is
going to be a good product for not only the State of Colorado
but also for the region.
Finally, with regard to the agency interest rate provision
in the President's budget, the proposal is to assign agency
interest rate to new obligations beginning in Fiscal Year 2007.
The agency interest rate is the grade at which Federal
corporations and Bonneville borrow money from the Treasury.
It would be applicable prospectively to administrative set
interest rates for eight of the 15 projects in which Western
markets power as well as the Southeastern and Southwestern
Power Administration projects.
We estimate the rate impacts would be less than 1 percent,
and we have calculated that this agency interest rate is
approximately four-tenths of a percent higher on average than
the rates, the yield rates applied to the Power Marketing
Administrations from 1997 to 2005.
That concludes my statement. I will be pleased to respond
to any questions.
[The prepared statement of Mr. Hacskaylo follows:]
Statement of Michael S. Hacskaylo, Administrator,
Western Area Power Administration, U.S. Department of Energy
Good afternoon and thank you. Mr. Chairman and members of the
Subcommittee, I am pleased to report on the Western Area Power
Administration's (Western) implementation of selected sections of the
Energy Policy Act of 2005, and to discuss our FY 2007 budget request.
Western, as one of four power marketing administrations (PMAs)
within the Department of Energy, markets and delivers electricity
primarily generated from hydropower projects located at Federally-owned
dams. The transmission systems owned and operated by the PMAs, as an
integral part of the nation's interconnected electrical grid, make a
significant contribution to ensuring the reliable delivery of the
country's energy supply.
Transmission is central to our mission. Western provides reliable,
cost-based transmission using an integrated 17,000 circuit-mile, high-
voltage system, spanning most of the western half of the United States.
While utility regulatory changes and restructuring efforts capture most
of the headlines, Western is pursuing a number of initiatives to
increase transmission capacity and reliability. Our efforts will
support continuing utility industry change, evolving regional needs
such as increased interest in renewable resources, and requests from
many developers for interconnections to Western's system.
Transmission system modernization is a necessity to support cost
effective wholesale electricity markets. Western has been progressive
in making incremental improvements to its facilities to enhance grid
reliability. We are well served by our continuing commitment to
improving our business practices, and successful in our longstanding
commitment to jointly plan, develop and finance system enhancements.
Robust regional planning processes identifying both economic and
reliability needs of the grid are in place in the West, encouraging
partnerships for transmission development. Joint ownership of
transmission projects has resulted in a highly integrated system that
has fostered extensive cooperation and economic coordination among
transmission partners.
Western has existing authority to participate in joint transmission
projects, and has done so many times. In 2004, Western constructed the
Path 15 Upgrade Project in central California to relieve a major
transmission bottleneck. We are currently involved in expanding the
regional transmission network in eastern Colorado and western Kansas in
a partnership with Tri-State Generation and Transmission Association.
Funding for these joint efforts is provided primarily by non-Federal
partners. The Energy Policy Act of 2005 expands Western authority to
use non-Federal funding to construct or participate in the construction
of new transmission that will relieve bottlenecks in ``national
interest electric transmission corridors,'' or is necessary to
accommodate an actual or projected increase in demand for transmission
capacity.
Through state-of-the-art technology and equipment enhancements, we
continue to improve transmission system capability as well as
performance and reliable operation of the Federal system. These
enhancements mitigate some constraints without adding new lines to the
grid. We continue to field test high-capacity composite conductors
designed to significantly increase the transfer capacity of existing
transmission lines in relieving system congestion.
Wind generation and other renewable energy options look promising
to Western's customers as solutions to increasing energy needs. Wind
energy is the world's fastest-growing energy technology. With the
recent passage of the Energy Policy Act of 2005, we expect to see
average annual wind capacity expanding at rates exceeding 20 percent.
The two-year extension of the Production Tax Credit for renewable
resources assures that requests for transmission service and
interconnection to Western's transmission system, mainly from wind
generation developers, will continue. However, reinforcement and system
upgrades will be necessary to meet these requests and maintain grid
reliability. Western's recently-completed Dakotas Wind Transmission
Study (December 2005), authorized and funded by the Energy and Water
Development Appropriations Act of FY 2004, provides the engineering
analysis which supports this conclusion.
Transmission system modernization is necessary to provide increased
open access to Western transmission facilities. We have a longstanding
practice of allowing third parties to use available capacity in the
Federal transmission system, confirmed through our initial Open Access
Transmission Tariff filing in 1997, and revised as filed last year to
incorporate the Federal Energy Regulatory Commission's (FERC) Large
Generator Interconnection standards. Western also joined the Midwest
Independent System Operator (MISO) as a non-transmission owner in 2005,
allowing us to better represent our load-serving interests in various
MISO committees as a voting member.
The Energy Policy Act of 2005 strengthens the industry commitment
to transmission system reliability by giving FERC expanded authority to
approve and enforce reliability standards. We continue to participate
in developing binding reliability standards that are effective in
protecting the interconnected electric system. Western is proud of its
reliability record, as we consistently exceed national system standards
set by the North American Electric Reliability Council.
BUDGET HIGHLIGHTS
In the FY 2007 President's budget, Western continues to disclose
all of the funding sources required to accomplish its program.
Western's FY 2007 Construction, Rehabilitation, Operation and
Maintenance (CROM) budget request totals $688.5 million, including
$212.2 million from appropriated dollars. The total funding requirement
increases $115.6 million from the FY 2006 enacted program of $572.9
million, primarily due to increases in purchase power and wheeling
(PPW) caused by higher prices and increasing ``custom product''
purchases for the Central Valley Project customers. The appropriated
request decreases $19.5 million from the FY 2006 level of $231.7
million, as greater use of customer advances is assumed.
In addition to the $212.2 million net appropriated funds requested
for the CROM Account, the request assumes $274.9 million in offsetting
collections for normal and drought-related purchase power and wheeling
(PPW) requirements, and $3.7 million in receipts from the Colorado
River Dam Fund for Boulder Canyon Project activities. Also included is
$197.7 million from alternative customer financing. Of this, $10.7
million is estimated for requirements in Program Direction and
Operation and Maintenance, $33.9 million for Construction and
Rehabilitation activities and $153.1 million for the PPW program.
The appropriated CROM request includes a non-reimbursable
contribution of $6.9 million to the Utah Mitigation and Conservation
Account.
The use of mandatory offsetting collections from the Spectrum
Relocation Fund (SRF) is not included in Western's budget amounts. The
SRF, established by the 2004 Commercial Spectrum Enhancement Act, will
provide non-reimbursable funding for relocating Federal systems from
certain spectrum bands to accommodate commercial use. Western estimates
the multi-year costs of relocating its communications systems at $106.7
million.
The following table shows all funding sources for the FY 2007 total
Western program.
[GRAPHIC] [TIFF OMITTED] 26463.004
[GRAPHIC] [TIFF OMITTED] 26463.005
Western's FY 2007 Program Direction (PD) request of $147.7 million
(comprised of $135.1 million in appropriated funds, customer advances
of $9.6 million and $3.0 million in power receipts) provides
compensation and related expenses for our workforce to market power as
well as plan, design, construct, operate and maintain the high-voltage
interconnected transmission system and associated facilities.
The total PD program increased $4.1 million, or 2.8 percent above
the FY 2006 level ($143.7 million), predominantly due to an increase of
$6.2 million in salaries and benefits, a shift of 10 full-time
equivalent staff (FTE) from the Colorado River Basins Power Marketing
Fund to support regular operation and maintenance activities and an
increase of 5 FTE for various support functions throughout Western.
These increases are offset by decreases in support services and other
related expenses of $3.1 million to contain costs in Western's indirect
activities.
Western has established formal workforce planning activities as the
foundation for its Human Capital Management Program to ensure we have
``the right people in the right place at the right time'' to sustain
its exemplary customer service ethic and power system reliability
record.
Western's FY 2007 Operation and Maintenance request is $45.7
million, comprised of $43.9 million in appropriated funds, $1.1 million
in customer advances and $0.7 million in power receipts. This is a 3.3
percent decrease from the FY 2006 program, including activities funded
directly from the Colorado River Dam Fund and customer advances. The
decrease is primarily attributable to extraordinary needs in the FY
2006 budget, and/or facility replacement requiring larger efforts,
resulting in projects falling under the Construction and Rehabilitation
program.
Western is requesting $60.2 million (comprised of $26.3 million in
appropriated funds and $33.9 million in customer advances) for its FY
2007 Construction and Rehabilitation program for high-priority
replacements and upgrades of system equipment and facilities to sustain
reliable power deliveries. Although Western's FY 2007 request is $6.2
million above the FY 2006 level ($54 million), the FY 2007 budget
authority of $26.3 million decreased by 51 percent from FY 2006 ($53.4
million). The remaining $33.9 million (56 percent of the total program)
will require customer-advanced funding for necessary planned upgrades.
During this past year, we weathered what Mother Nature tossed at
us, and were reminded of the value of controlling costs and
implementing improvements in how we do business. While we were
fortunate in the West not to have experienced the devastating impacts
of recent hurricanes, the prolonged drought continues to test our
ability to meet our contractual power commitments in a cost effective
manner.
The FY 2007 Purchase Power and Wheeling program ($427.9 million)
has grown 33.1 percent from FY 2006 ($321.4 million) to further
implement the Central Valley Project's Post 2004 Marketing Plan, and
mitigate drought impacts to hydropower generation affecting the Pick-
Sloan Missouri Basin Program. Program increases are funded through
alternative financing methods. The request for authority to use
offsetting PPW collections (receipts) has dropped slightly from $279
million in FY 2006 to $274.9 million in FY 2007, with the program
increase in FY 2007 funded through net billing and reimbursable funding
of $148.1 million and $5 million in customer advances.
Because appropriations are only about 20 percent of Western's total
funding picture, the ability to fund annual PPW expenses with power
sales receipts has assisted us in long-term planning for mission
critical operations.
Starting in FY 2007, the interest rate for new obligations incurred
by Western for power-related investments will be set at the rate
equivalent to what Governmental corporations pay when borrowing in the
market, identified as the agency rate. This will align interest rates
on certain investments with those paid by Bonneville Power
Administration. This new interest rate will apply only to investments
whose interest rates are not set by law. All Western investments
currently in service will continue to retain existing interest rates.
This will result in a rate increase of less than 1 percent, beginning
in Fiscal Year 2007.
Western is ``getting things done'' ... regional planning is
occurring and transmission lines are being rebuilt as we continue to
solve transmission and reliability issues to facilitate the use and
future expansion of the transmission grid in the West.
Thank you, Mr. Chairman. I would be pleased to answer any questions
that you or the Subcommittee members may have.
______
Ms. McMorris. Thank you.
Mr. Deihl.
STATEMENT OF MICHAEL A. DEIHL, ADMINISTRATOR,
SOUTHWESTERN POWER ADMINISTRATION, TULSA, OKLAHOMA
Mr. Deihl. Thank you, Madam Chairman.
Members of the Committee, I am Mike Deihl, Administrator of
the Southwestern Power Administration, and I appreciate this
opportunity to present our 2007 budget request and discuss the
implementation of the 2005 Energy Policy Act.
In 2005, Southwestern marketed 6.3 billion kilowatt hours
of Federal hydropower which generated $123 million of revenue,
and therefore we remain on target to repay all the Federal
investment. To date, Southwestern has repaid $587 million or 48
percent of the $1.2 billion investment.
Southwestern's 2007 budget request of $31.5 million in
appropriations and $3 million in use of receipts for purchase
power and wheeling is a total increase of $1.7 million, or 5.6
percent above last year's budget.
Southwestern's purchase power and wheeling portion of the
budget request is developed assuming average water conditions
with the continuing fund as the backstop funding source in
below normal water conditions. In late 2005, Southwestern
activated the continuing fund due to extreme drought
conditions. For the first four months of this Fiscal Year,
2006, the reservoir system in-flow averaged only 15 percent of
normal, and last month this in-flow has dropped further to 10
percent of normal.
The amount of water currently stored in the lakes for
generation is only 7 percent above the 75-year all-time low.
With low lake levels, high energy prices, and heavily loaded
transmission lines, one might say we have the perfect storm
without the rainfall. And as long as these weather conditions
persist, we will continue to utilize the continuing fund for
purchasing power.
The Administration also proposes in this budget that
interest rates paid by Southwestern's customers on new power-
related investments would increase to a rate equivalent to what
is called the agency rate. This agency rate is what
governmental corporations pay when borrowing in the market, and
is like the interest changed when Bonneville Power
Administration borrow from the Treasury. This proposal would
apply starting in 2007, but not apply to interest rates set by
law.
I also want to report Southwestern continues to provide
open access transmission as emphasized in the Administration's
national energy policy, and we have taken aggressive steps to
implement the new Energy Policy Act. For example, Southwestern
has successfully signed an operating contract with the FERC-
approved Southwest Power Pool Regional Transmission
Organization. This contract provides regional use of our
Federal transmission system, provides Power Pool Administration
of our open access tariff, and provides regional reliability
services.
Consistent with the Act, Southwestern and Southwest Power
Pool are analyzing future regional transmission expansion needs
and identifying potential national interest to electric
transmission corridors. Southwestern will also be utilizing
advanced technology, composite core, high-temperature
conductors, and a planned transmission line upgrade project
beginning in 2008.
In keeping with the Act, Southwestern and the other PMAs
have been working with the Bureau of Reclamation, Corps of
Engineers in analyzing and identifying those existing Federal
hydropower plants which could be beneficially upgraded to
provide increased electrical power. Southwestern will continue
to be an active participant in our region as additional Energy
Policy Act initiatives progress.
Last year, Madam Chair, I reported to this Committee that
Southwestern shared the Regional Coordinated Black Start Task
Force that developed procedures to restore power during area-
wide outages. These efforts paid off on October 1. Following
Hurricane Rita's devastation in southeast Texas, Southwestern
played an instrumental role of coordinating efforts between
various customers and the Corps of Engineers to use Federal
hydroelectric power generated at Sam Rayburn Dam. This
emergency power restored vital public services while repairs
were made to the regional grid system. The men and women of the
Corps of Engineers at the Sam Rayburn Project deserve a special
recognition for a job well done.
In closing, Madam, I thank you very much, and I will be
happy to answer any questions you or any member of the
Committee may have.
[The prepared statement of Mr. Deihl follows:]
Statement of Michael A. Deihl, Administrator,
Southwestern Power Administration, U.S. Department of Energy
Mr. Chairman and Members of the Subcommittee, I appreciate the
opportunity to highlight Southwestern's efforts to market Federal
hydroelectric power in its region and implement the Energy Policy Act
of 2005 (EPACT) and to present an overview of Southwestern Power
Administration's (Southwestern) Fiscal Year 2007 budget request.
PROFILE OF SOUTHWESTERN POWER ADMINISTRATION
Southwestern markets and delivers all available Federal
hydroelectric power from 24 U.S. Army Corps of Engineers' (Corps)
multi-purpose projects and participates with other water resource users
in an effort to balance diverse interests with power needs.
Southwestern operates and maintains 1,380 miles of high-voltage
transmission line, 24 substations, and 47 microwave and very high
frequency radio sites. Southwestern's Headquarters is in Tulsa,
Oklahoma; the Dispatch Center is in Springfield, Missouri; and power
system maintenance crews are based in Jonesboro, Arkansas; Gore,
Oklahoma; and Springfield, Missouri. In Southwestern's region, Federal
hydropower is distributed to nearly seven million end users in a six-
state area: Arkansas, Kansas, Louisiana, Missouri, Oklahoma, and Texas.
Southwestern's program goal is to provide the benefits of Federal
power to customers by selling and reliably delivering power from
Federal multipurpose hydroelectric dams at the lowest cost-based rates
possible that produce revenues sufficient to repay the American
taxpayers' investments allocated to power (principal and interest), as
well as operation and maintenance costs of the Southwestern Federal
Power System.
MEETING REQUIREMENTS OF THE ENERGY POLICY ACT OF 2005
In support of the EPACT, the Administration's National Energy
Policy goals, and transmission open access, Southwestern is
participating in the Southwest Power Pool's Regional Transmission
Organization (SPP RTO), through a contract containing provisions
consistent with those set out in the EPACT.
Consistent with the EPACT, the SPP RTO has indicated that it may
consider working with the Department of Energy to seek designating
portions of Southwestern's Federal transmission system as part of a
National interest electric transmission corridor to serve significant
load growth in northwest Arkansas.
Also consistent with EPACT, Southwestern has participated in
meetings with the other PMAs, the Corps, and the Department of Interior
Agencies to jointly report the potential to increase electric power
production at federally owned or operated water regulation, storage,
and conveyance facilities.
Southwestern, in coordination with the SPP RTO, is supporting
regional electric reliability through the establishment of a training
center at its Dispatch Center in Springfield, Missouri, to provide its
system operators training courses certified by the North American
Electric Reliability Council (NERC) in response to the blackout of
August 2003. Training is also being provided to operating personnel
from other utilities on a ``space available'' basis. Since April 2005,
Southwestern has provided training to over 340 students and awarded
over 3,000 Continuing Education units.
REGIONAL COOPERATION AND IMPROVING RELIABILITY
Southwestern has worked with the SPP RTO to identify needed
improvements to the entire regional grid that will improve electric
reliability and Southwestern plans to participate in these improvements
and upgrades. Southwestern's budget forecast includes approximately
$9,000,000 in upgrades to its Federal transmission system through FY
2010 to address these issues. Demonstrating its support to the region,
Southwestern is represented in many planning and operational committees
of the SPP RTO. Southwestern chaired the Regional Transmission
Organization's Coordinated Blackstart Taskforce and, based on the North
American Reliability Council's requirements, developed the Blackstart
Capability Plan and a Regional Restoration Plan.
In addition to working with the SPP RTO, Southwestern and a
neighboring utility are in the process of completing a new
interconnection to relieve overloads on the transmission system in
northwest Arkansas. Southwestern is also discussing establishing an
additional interconnection in southwest Missouri to provide further
support to the region.
To promote improved reliability, communication, and system control,
Southwestern is replacing its Supervisory Control and Data Acquisition
system to provide monitoring and control of system operations. This
upgrade will also provide the ability to improve communications between
the Regional Reliability Coordinator and Southwestern's staff during
emergency conditions.
SYSTEM COORDINATION
Following Hurricane Rita's devastating landfall in September 2005,
Southwestern utilized the information learned during the development of
the Regional Restoration Plan to help restore power to the people of
southeast Texas. Hurricane Rita had downed hundreds of thousands of
trees and numerous power lines in the region and left thousands of
people and businesses in Jasper County and surrounding areas without
electricity and telecommunications. More urgently, a hospital, water
treatment plant, police departments, and other critical services were
without the power they needed to respond to the disaster. Southwestern
was instrumental in the coordination efforts between various customers
and the Corps to use Federal hydroelectric power generated from Sam
Rayburn Dam to provide power to these vital public services while
repairs were made to bring power back to this hurricane-ravaged area.
SYSTEM RATES
To ensure repayment of the Federal investment, the Integrated
System rates were adjusted to increase revenues by 7.3 percent
($9,000,000) effective February 1, 2006. This increase included an
adjustment to Southwestern's purchased power adder rate component to
recover increased costs of energy purchases. In addition, a revenue
increase of 12 percent ($302,000) was implemented for the Sam Rayburn
Dam project and a revenue increase of 43.1 percent ($195,000) was
implemented for the Robert D. Willis project, both effective January 1,
2006.
FY 2005 ACCOMPLISHMENTS
Southwestern marketed approximately 6.3 billion kilowatt-
hours of energy and transmission services that generated revenues of
$123 million.
Southwestern has cumulatively repaid all annual operating
costs and approximately 48 percent of the $1.2 billion in capital
investments attributable to Southwestern's activities. All required
capital investment payments have been made on time.
Southwestern exceeded the NERC control compliance ratings
for power system operations reliability.
Southwestern saved 10.7 million barrels of oil, 3.1
million tons of coal, or 65.6 billion cubic feet of gas through
hydropower generation, and prevented greenhouse emissions of
approximately 5.4 million tons of carbon dioxide, 16,200 tons of sulfur
dioxide, and 12,900 tons of nitrogen oxides.
Southwestern provided $488 million in economic benefits
to the region from the sale of hydroelectric power.
[GRAPHIC] [TIFF OMITTED] 26463.001
BUDGET HIGHLIGHTS
Southwestern's FY 2007 budget request provides for maintenance,
additions, replacements, and interconnections to assure a dependable
and reliable Federal power system, which is an integral part of the
Nation's electrical grid. Southwestern's budget request shows a modest
increase, allowing Southwestern to maintain its aging transmission
system while meeting the demands of increased regional power loads and
alleviating power flow constraints. Participation in future
transmission system projects to improve reliability will depend on
greater use of non-Federal reimbursable authority for facility
improvements, interconnections, and maintenance required by the
security coordinator of the Regional Transmission Organization.
Program Direction
Program Direction provides compensation and all related expenses
for 179 Federal personnel who market, deliver, operate, maintain, and
administer the high-voltage interconnected power system and associated
facilities. Southwestern performs critical functions in meeting the
challenges of operating and maintaining the Federal power system to
assure reliability, while responding to the growing regional demand for
power and avoiding deterioration of the infrastructure, including
planning, designing, and supervising the construction of replacements,
upgrades and additions to the transmission facilities, and marketing
power and energy produced to repay annual expenses and capital
investments with interest.
Operations and Maintenance
Operations and Maintenance funds routine repair, maintenance, and
improvement of Southwestern's substations and high-voltage transmission
lines, and assures power is reliably and safely delivered to customers.
Southwestern's facilities, most of which were built some 60 years ago,
are routinely evaluated through a maintenance management information
system. The funding level is derived from variables such as age, risk
of failure, life cycle of equipment, and field crew evaluation.
Internal and external factors include obsolescence of technology and
lack of replacement parts. This budget request reflects Southwestern's
assessment of the funding required to assure continued reliability of
the Federal power system by replacing aging equipment and removing
constraints that impede power flows, thus, meeting the expectations of
the National Energy Policy, EPACT, transmission open access, and the
Department of Energy's Strategic Plan. Southwestern will continue to
use appropriations and alternative financing arrangements, including
net billing, bill crediting, and/or reimbursable authority (customer
advances) to fund maintenance and replacements to assure a dependable
and reliable Federal power system.
Construction
Construction provides funding for the addition, replacement, and
modification of communication equipment and systems that provide
monitoring and control of power system generation and transmission
assets. The funding for FY 2007 will complete an important
communication pathway which will improve reliability in the region.
In December 2004, the Congress passed and the President signed the
Commercial Spectrum Enhancement Act, creating the Spectrum Relocation
Fund (SRF) to streamline the relocation of Federal systems from certain
spectrum bands to accommodate commercial use. Funds will be made
available to Southwestern following the crediting of auction receipts
to the SRF, anticipated in Fiscal Year 2007. Southwestern estimates
$6.3 million in relocation costs, as approved by the Office of
Management and Budget, and as reported to the Congress by the
Department of Commerce in December 2005.
Purchased Power and Wheeling
Purchased Power and Wheeling is based on average hydropower
generation under normal operating conditions at pre-Katrina prices with
energy banking assumed available. However, in FY 2006, a significant
shift to a post-Katrina pricing regime and the loss of availability of
energy banking arrangements will cause future years' purchase
requirements to increase. Purchase Power and Wheeling will be funded
through use of Federal power receipts and alternative financing
arrangements, including net billing, bill crediting, and reimbursable
authority or customer advances, and other operational arrangements with
customers.
Southwestern will continue to utilize its Continuing Fund for
emergency expenses associated with purchase power to ensure continuity
of electric service and continuous operation of the facilities on an
on-going basis to pay for purchase power and wheeling expenses when
necessary to meet contractual obligations for the sale and delivery of
power during periods of below-average hydropower generation. The fund
was activated during Fiscal Year 2005 and again this fiscal year for
purchased power and wheeling expenses during the extended drought we
are experiencing in our region. As of mid-February, inflows are at 10%
of median and the available system storage for generation of
hydroelectric power is approximately 11% below the previous 18-year
minimum, which is only 8 percent above the 75-year all-time minimum.
Pool levels at the reservoirs which supply Southwestern's hydroelectric
generation resources are approximately half full.
Agency Rate Proposal
Starting in FY 2007, the interest rate for new obligations incurred
by Southwestern for power-related investments will be set at the rate
equivalent to what Governmental corporations pay when borrowing in the
market, identified as the agency rate. This will align interest rates
on certain investments with those paid by Bonneville Power
Administration. This new interest rate will apply only to investments
whose interest rates are not set by law. All Southwestern investments
currently in service will continue to retain existing interest rates.
This will result in a rate increase of less than 1 percent, beginning
in Fiscal Year 2007.
CONCLUSION
In conclusion, Southwestern's Fiscal Year 2007 budget request will
allow Southwestern to continue operating in a business-like manner and
meet the requirements of the Energy Policy Act of 2005 while supporting
the Nation's energy goals and the development of the transmission and
generation infrastructure. As the demand for power increases on the
Nation's transmission systems, the need to maintain, replace, and
provide for additions and interconnections on the Federal power system
is critical in assuring reliable delivery. Southwestern will continue
to examine its overall business strategy while making the improvements
necessary to ensure reliability of the Federal power system.
Mr. Chairman, this concludes my testimony. I would be pleased to
address any questions the Subcommittee may have.
______
Ms. McMorris. OK, thank you.
Mr. Borchardt.
STATEMENT OF CHARLES A. BORCHARDT, ADMINISTRATOR,
SOUTHEASTERN POWER ADMINISTRATION, ELBERTON, GEORGIA
Mr. Borchardt. Thank you, Madam Chairman and other Members
of the Committee.
My name is Charles Borchardt, and I am Administrator of the
Southeastern Power Administration in Elberton, Georgia. I
appreciate the opportunity to appear before the Committee today
to discuss the Energy Policy Act of 2005 as well as the Fiscal
Year 2007 budget request from Southeastern.
Southeastern markets power from 22 multiple-purpose
projects operated by the U.S. Army Corps of Engineers and its
power is marketed under the authority of Section 5 of the Flood
Control Act of 1944. It is marketed to public bodies and
cooperatives located in an 11-state area in the Southeast.
Southeastern does not operate or maintain any transmission
facilities. The marketing function is achieved through wheeling
contracts with utilities in the area. Last fiscal year
Southeastern sold 8,730 gigawatt hours of energy, realized
total revenues of $220 million. Also in that year Southeastern
integrated the John H. Kerr project into the PJM RTO, and this
has proven to be a very satisfactory arrangement for
Southeastern and its customers.
Southeastern, along with the other PMAs, the Corps of
Engineers, and the Bureau of Reclamation, is currently working
on a study to identify science for potential increased
hydropower production at exiting Federal facilities, and this
study is a requirement of Section 1834 of the Energy Policy Act
of 2005.
As a result of Southeastern's encouragement, many of its
customers are using a web-based e-government process called
Pay.gov to make their power payments online. Working with the
Treasury, Southeastern has also implemented a paper check
conversion process for those customers who still want to pay by
check.
This process, once a customer's check is received, an
immediate electronic deposit or credit is made to
Southeastern's treasury account. These systems significantly
improve the cash-flow to the Treasury.
Under its fiscal year budget request, Southeastern
respectfully requests $5.7 million in appropriations for
program direction, and to finance the purchase power and
wheeling program requirements Southeastern requests the use of
$34.4 million in offsetting collections and $13.6 million in
alternative financing and net billing arrangements.
Starting in Fiscal Year 2007, as the other administrators
have mentioned, the interest rates for the new obligations
related to power investments will be set at the treasury agency
rate, and this will place in the interest rates on investments
related to power production in Southeastern's area in alignment
with the interest costs paid by, among others, the Bonneville
Power Administration and the governmental corporation.
Madam Chairman, this concludes my remarks, and I will be
glad to answer any questions you and the other members of the
Committee may have.
[The prepared statement of Mr. Borchardt follows:]
Statement of Charles A. Borchardt, Administrator,
Southeastern Power Administration, U.S. Department of Energy
Mr. Chairman and members of the Subcommittee, I appreciate this
opportunity to present a written statement on the President's proposed
Fiscal Year 2007 budget request for the Southeastern Power
Administration (Southeastern).
PROFILE OF SOUTHEASTERN POWER ADMINISTRATION
The mission of Southeastern is to market and deliver Federal
hydroelectric power at the lowest possible cost to public bodies and
cooperatives in the southeastern United States in a professional,
innovative, customer-oriented manner, while continuing to meet the
challenges of an ever-changing electric utility environment through
continuous improvements.
With a staff of 42, Southeastern markets power produced at 22
multiple-purpose projects operated and maintained by the U.S. Army
Corps of Engineers (Corps). This power is marketed in an 11-state
marketing area. Preference in the sale of power is given to public
bodies and cooperatives in accordance with Section 5 of the Flood
Control Act of 1944 (16 U.S.C. 825s).
Southeastern coordinates the operations of the projects using
customers' load schedules and meets the North American Electric
Reliability Council's control area criteria while complying with Corps'
operational and environmental requirements. All of Southeastern's
system operators meet North American Electric Reliability Council
certification standards.
Southeastern does not own or operate any transmission facilities
and carries out its marketing program by using the existing
transmission systems of the power utilities in the area. This is
accomplished through ``wheeling'' contracts with area transmission
providers that agree to deliver power to preference customers. In turn,
Southeastern agrees to compensate the transmission provider for the
wheeling services.
Rates are formulated to repay all costs of Southeastern, as well as
the costs of the Corps allocated to power. The rates are designed to
recover operation and maintenance expenses, interest expense, and
purchased power and wheeling expenses annually. The costs of capital
investments are also recovered over a reasonable number of years.
Starting in FY 2007, the interest rate for new obligations incurred
by Southeastern for power-related investments will be set at the rate
equivalent to what Governmental corporations pay when borrowing in the
market, identified as the agency rate. This will align interest rates
on certain investments with those paid by Bonneville Power
Administration. This new interest rate will apply only to investments
whose interest rates are not set by law. All Southeastern investments
currently in service will continue to retain existing interest rates.
This will result in a rate increase of less than 1 percent, beginning
in Fiscal Year 2007
ENERGY POLICY ACT OF 2005
Southeastern is participating in a study to identify the potential
for increased hydropower generation from existing Federal facilities.
The requirement for this study is set forth in Section 1834 of the
Energy Policy Act of 2005. Southeastern is working with the other power
marketing administrations to develop benefit evaluation criteria
related to the study. Representatives from the Corps and the Bureau of
Reclamation are also involved in the study.
PROGRAM ACCOMPLISHMENTS
In Fiscal Year 2005, Southeastern sold 8,730 gigawatt-hours of
energy, with revenues totaling $220 million.
On May 1, 2005, Southeastern integrated the Kerr Project into the
PJM Interconnection L.L.C. regional transmission organization (RTO).
Southeastern will participate as a stakeholder as additional
transmission owners join RTOs.
Southeastern has used the President's Management Agenda to become
more efficient and effective. We have integrated the principles of the
initiatives in the President's Management Agenda into our organization
and have continued working with the Office of Management and Budget and
offices within the Department of Energy (DOE) to ensure that the
performance measures are more focused and useful in making management
decisions. Southeastern has consistently achieved high ratings on DOE's
quarterly President's Management Agenda Scorecard process and met the
criteria for annual targets and the Program Assessment and Rating Tool.
Southeastern has many customers utilizing Pay.gov, a web-based e-
Government initiative that allows customers to make payments on-line.
Southeastern, in conjunction with the U.S. Treasury, has implemented a
paper check conversion process, which, upon receipt of a customer's
payment, enables an immediate electronic deposit or credit to
Southeastern's Treasury Account. Both of these systems, Pay.gov and the
paper check conversion, significantly improve cash flow to the U.S.
Treasury.
Southeastern has also implemented, through the U.S. Treasury, an
on-line secure payment system for making payments. Southeastern
maintains sound physical and cyber security practices. DOE Orders and
National Institute of Standards and Technology documents provide the
basis for protection of the critical infrastructure. Southeastern's
physical security is enhanced with remote video surveillance equipment
and cyber security is improved by updating internet firewalls to block
intruders and secure data transmission. Southeastern meets the
standards for physical and cyber security required by DOE regulations
and orders.
[GRAPHIC] [TIFF OMITTED] 26463.006
The Fiscal Year 2007 budget request provides for $5.7 million in
appropriations for program direction. The request also provides $34.4
million in offsetting collections and $13.6 million in alternative
financing/net billing arrangements to finance the purchase power and
wheeling program requirements. Use of offsetting collections enables
Southeastern to operate more like a business by allowing Southeastern's
revenues to pay for purchase power and wheeling costs rather than using
appropriations. There are no new program starts included in
Southeastern's Fiscal Year 2007 budget request.
Mr. Chairman, this concludes my presentation of Southeastern's
Fiscal Year 2007 budget request and program status. If you or any of
the Subcommittee members have questions, I will be pleased to answer
them.
______
Ms. McMorris. Thank you very much. I understand you have
recently announced your retirement, and your wife Lola is with
you today, so we want to wish you well on your retirement and
thank you for your service.
Mr. Borchardt. Well, thank you very much.
Ms. McMorris. Yes.
Mr. Borchardt. I appreciate that.
[Applause.]
Ms. McMorris. OK.
Mr. DeFazio. Madam Chair.
Ms. McMorris. Yes, Mr. DeFazio.
Mr. DeFazio. If the Chair would entertain a request. I have
questions which go in a detailed manner to the Bonneville Power
Administration's proposal in ways that I believe the
Administrator cannot answer, which have to do with assumptions
made at OMB, and I understand that a Ms. Sharon Segner of OMB
is here monitoring the proceedings, and I would ask that she be
seated and allowed to answer questions regarding the
assumptions and some of the underlying bases that she used in
coming up with these proposals.
Mr. Walden. If the gentleman would yield----
Mr. DeFazio. Yes, sir.
Mr. Walden.--I would second that request.
Ms. McMorris. OK.
Ms. Segner. I appreciate the offer but I am sorry I am not
authorized to answer questions.
Mr. DeFazio. Well, Madam Chair, since she is a public
employee, and for some reason she is here, she is the author,
and yet she will not--I am going to ask very factually based
questions. They do not go to policy assumptions. She will not
be called on to make political judgments. She will just be
asked to provide some factual underpinnings for these rather
extraordinary proposals that emerged under her authorship.
So I would assume that she could at least as a public
employee who is here being paid by Federal taxpayers, that she
could answer a few very factual questions. And if she feels I
am transgressing into a political realm or a policy realm, I
would certainly defer to her in that. But these would be very
factually based.
Ms. Segner. I do appreciate the offer, but I am sorry, I am
not authorized to answer questions today.
Mr. DeFazio. Well, I guess I wonder why you are here then
if you cannot answer questions.
Ms. Segner. As an observer to the proceedings.
Mr. DeFazio. Right, you are like--it is like the old Soviet
Union. We have the government person, and you are the party
person who monitors what they say. And if they transgress, then
you try and put them in the gulag.
So with that, Madam Chair, again, I find this
extraordinary, and I would say it is probably a waste of
taxpayer's money that she is just sitting here to monitor
someone else's testimony. She could read the transcripts later.
Ms. McMorris. OK. Well, let the record reflect that the
request was made, and that Ms. Segner declined.
Mr. DeFazio. She took the fifth.
Ms. McMorris. OK. Let us see here, do you want to--OK,
anyone else have any questions?
Mr. Walden. I have questions.
Ms. McMorris. OK.
[Laughter.]
Ms. McMorris. OK, OK, OK, I guess I will start, get back on
track here.
I will start with Mr. Wright, and I guess I am under the
impression that what has largely driven this approach by the
Administration this year is the fact that we have more
rainfall, more expected revenue from generation of electricity,
and wanted to ask if the proposal includes any recognition of
what is going to happen when we have bad water years, and if
the Administration would be willing to allow for transfer of
treasury revenues back to BPA during those bad water years.
Mr. Wright. The President's budget proposal does not
address specifically what would happen in bad water years, but
I would say, in conversations with the Secretary, we understand
that that is a significant concern on the part of Northwest
constituents and the Northwest Congressional Delegation, and we
are prepared to address that in discussions, in conversations
with all of you to see if there is something that could be done
there.
Ms. McMorris. In the last 10 years has BPA received
revenues from secondary sales in excess of $500 million, and if
yes, how have those revenues been used?
Mr. Wright. The President's budget proposal addresses net
secondary revenues in excess of $500 million, and we believe
that if it has happened, it has happened in only a very small
amount.
To the extent that it would have happened, those revenues
would have been used as other net secondary revenues are, and
that is it would have been used to go into Bonneville's
reserves and ultimately would have been reflected in rates, in
ratemaking as we go forward.
Ms. McMorris. To your knowledge, has CBO ever assumed
revenues in an incomplete rate case before?
Mr. Wright. I would have to say to my knowledge it has not,
but then again, I am not sure how in depth my knowledge goes
there.
Ms. McMorris. I guess I would like to ask all the witnesses
to talk about impacts of Endangered Species Act on driving up
cost, and I wanted to ask if at this present time you take any
action to inform your customers as to Endangered Species Act
cost, and if there is any kind of a line item in their bills.
Mr. Hacskaylo. The Western Area Power Administration over
the last five fiscal years has averaged about $96 million a
year to comply with Endangered Species Act costs. That is
primarily in the Colorado River Storage Project where we have
had to purchase energy to replace energy generate foregone at
Glen Canyon Dam.
We have also paid for portions of the adaptive management
program run by the Geological Survey, Fish and Wildlife, and
others, in the Department of the Interior. We have been
involved in the recovery implementation program where power
revenues have paid for some of those costs as well.
We also have costs on the Missouri River that Mr. Graves
alluded to with regard to the pallid sturgeon. Those costs are
just starting to come in because of the recovery program there.
In addition, with regard to the Central Valley project in
California, we have costs involved with Endangered Species Act
compliance.
Western does not presently put a line item on its bills to
its wholesale power customers of what these costs are.
Ms. McMorris. OK.
Mr. Deihl. For Southwestern, currently we have one issue
with ESA and that is the interior least tern, mainly in
Oklahoma and on the Texas/Oklahoma border. It has not resulted
in any lost generation but the operational changes affect the
release of the water from a non-peak, or from peak times to
non-peak hours, so there is an impact on the customers as far
as the benefits of about a million dollars a year because of
the change in the value because the time of day that the water
is released.
As far as direct costs for Southwestern that the customers
have to repay would be approximately, I would say about
$100,000 a year in staff and overhead cost to administer the
work related to the Endangered Species Act, plus average energy
purchases somewhere between three and four hundred thousand
dollars a year, so roughly about a half a million dollars a
year goes into our rate base as a result of ESA.
We do report quarterly to our customers update status on
activities related to ESA, particularly least tern, but we do
not have anything on their monthly billing statements at this
time that show a percentage of their bill dedicated to that.
Ms. McMorris. OK, thank you.
Mr. Borchardt. For the Southeastern Power Administration,
we have several species of fish, sturgeon and darters, and we
have also have some fresh water mussels that have been
identified on the endangered species list. However, the habitat
has not been identified, so consequently we have been very
fortunate in not having to incur any of those types of costs,
and consequently we do not have anything on the customers' bill
in that regard.
However, I would say that we and the other PMAs, the Corps
does spill water to enhance low dissolved oxygen and to help
with the put-and-take operation of fisheries downstream, and we
have lost revenues in that regard. It is not exactly endangered
species, but it is that type of operation.
Ms. McMorris. OK, thank you.
Mr. Wright. Madam Chairman, I do not have the numbers at my
fingertip with respect to our ESA costs. We have calculated
that, and I would be happy to provide that as an insert for the
record.
Our customers tend to be more focused on our overall fish
and wildlife mitigation costs, and those costs currently run
about $600 million a year if you include both the direct costs
and the costs of changes on hydro system operations.
We do not at this point show that on the wholesale bill.
The information though has been provided to customers.
Ms. McMorris. OK, thank you.
Ms. Napolitano.
Ms. Napolitano. Thank you, Madam Chairwoman.
I apologize. I had a speaking engagement at ACWA so I had
to be present.
To Mr. Hacskaylo, your statement on page 10 refers to the
proposed use of what you call the agency rate. As justification
for this proposal you say that this will align interest rates
on certain investments with those paid by Bonneville Power
Administration.
Why is it so important to align the interest rates, and is
there any other reason given to support the Administration's
decision to make this change?
Plus what legislative authority, and I alluded to that
earlier, now exists that allows the change in the interest
rates, and can you provide us with written opinion to the legal
counsel that supports the Administration's position that no new
legislative authority is needed to implement this new policy?
I want to be sure that a copy comes to this Committee to
support that.
Mr. Hacskaylo. Yes, ma'am, thank you.
With regard to the agency rate, currently Western Area
Power Administration, Southeastern and Southwestern use the
treasury yield rate which does recover to the treasury of the
cost of borrowing funds.
However, the agency interest rate, the agency rate
represents an additional risk factor which the Administration
believes is appropriate given the potential risk somewhere down
the road of the Power Marketing Administrations not being able
to make repayment to Treasury because of----
Ms. Napolitano. Excuse me. I am sorry. Explain potential
risk.
Mr. Hacskaylo. Potential risk could be a catastrophic event
taking out a power plant, for example, where we would have to
purchase additional very expensive energy. There could be some
risk there in terms of not being able to collect revenues from
customers in selling power, and thus not make our treasury
payments every year.
Ms. Napolitano. OK. I am sorry, you were explaining.
Mr. Hacskaylo. Yes. With regard to the question about a
legal, or the legal authority, I believe the legal authority is
within the Department of Energy Organization Act as well as the
Reclamation Project Act of 1939 for Western Area Power
Administration.
Finally, with regard to any sort of legal opinion, I am not
aware of any, but I will be certain to carry your request to
the Department of Energy, and if there is such an opinion, we
will deal with that with the Committee at that time.
Ms. Napolitano. I would really appreciate it, and to me the
risk is great if you have had episodes that demand attention to
that type of risk. Have you had any of those things happen?
Mr. Hacskaylo. No, ma'am.
Ms. Napolitano. Second question. The Bureau of
Reclamation's budget request includes a proposal to reallocate
irrigation costs for the Pick-Sloan Program, and this is
expected to increase power rates.
Are you familiar with the Bureau's proposal?
Mr. Hacskaylo. I am aware of the proposal in the
President's budget for the Bureau of Reclamation, yes, ma'am.
Ms. Napolitano. Were you consulted on it?
Mr. Hacskaylo. No, ma'am.
Ms. Napolitano. Can you explain how the proposal might
affect your agency?
Mr. Hacskaylo. If the reallocation by the Bureau of
Reclamation results in additional costs to power users, those
additional costs will be picked up and paid for in the power
rates we charge to the Pick-Sloan Missouri Basin Program power
customers.
Ms. Napolitano. I appreciate that.
I would like to submit some others for the record.
Ms. McMorris. OK.
Ms. Napolitano. Right now, I am trying to formulate in my
mind. Thank you, Madam Chair.
Ms. McMorris. Ms. Musgrave.
Ms. Musgrave. Thank you, Madam Chair.
Mr. Hacskaylo, this question is for you. In your written
statement and in the President's budget proposal the Eastern
Plains Transmission Project is referenced. This will have a
huge impact on my constituents, and I would like you to explain
WAPA's role in this project.
I also would wonder if there are any other requirements
from Congress that you might need to proceed on this project.
Then also I would like to know what criteria does WAPA use to
determine its participation in these types of projects.
Mr. Hacskaylo. Yes, ma'am.
Western Area Power Administration is a partner with Tri-
State Transmission and Generation Association on the Eastern
Plain Transmission Project. By good coincidence and good
planning, Tri-State has determined that it needs additional
generation to meet its growing load in its multi-state service
territory, and Western Area Power Administration needs
additional transmission reenforcement and additional efforts on
transmission to enhance the system reliability in southern and
southeastern Colorado.
Working together, working closely with Tri-State, we have
come up with a plan where Western Area Power Administration
would acquire right-of-way. We would do the environmental
impact statement for the project. We would design and oversee
the construction of the transmission facilities that would be
needed, anywhere between 600 to 800 miles of 340,000-volt
transmission lines for this project over a good five to seven-
year period.
With regard to anything additional we might need from the
Congress, we believe we have existing legal authority. We have
existing partnership arrangements and contracts with Tri-State
to get this job done.
You also asked what criteria we use in terms of planning to
come up with a project like this. Western participates in all
the planning processes within the Western Electricity
Coordinating Council regional reliability area, which is the
western half of the United States.
We work closely with all utilities to do the planning, to
learn where the transmission needs are, where the transmission
bottlenecks are, and how working jointly, working together with
other utilities we can solve those problems so that we can
provide open access to the transmission system and move power
from wind generation and other renewable generation as well as
other sources of generation like coal to best meet customer
need and keep the cost as low as to the consumer that we can.
Ms. Musgrave. Thank you, Mr. Hacskaylo, and thank you,
Madam Chairman.
Ms. McMorris. Mr. DeFazio.
Mr. DeFazio. Thank you, Madam Chair.
Mr. Wright, as I understand your advocacy of the OMB
provisions in the budget here, the theory is that it would be
good to prepay debt. Now, I understand prepayment and I make a
little prepayment on my mortgage, but at the end I get my
house. Do we get BPA when we are done repaying this debt?
[Laughter.]
Mr. DeFazio. A simple answer would suffice, yes or no.
[Laughter.]
Mr. Wright. The Federal government will retain.
Mr. DeFazio. OK, all right, thank you.
So then let us maybe go to the other great reasons for
prepaying debt.
My understanding is that theoretically this would free up
some of your statutory borrowing authority to construct
transmission, but I seem to remember, and you know, again,
since OMB refuses to testify here, you will have to fill in for
them, but did not in the 2003 and 2004 budget OMB advocate that
we should have third-party financing so that we would not
encumber the Federal government with this debt and only the
ratepayers would be encumbered through third-party
transactions?
And did you not develop actually a procedure to do that,
and did you not in fact go forward with some third-party
financing, and did not in fact it work out quite well?
Mr. Wright. The 2003 budget did include a request, the
President's budget did include a request for an increase in
Bonneville's borrowing authority, and associated with that was
an encouragement for us to move forward with non-Federal
financing.
And of course, Congress did grant the borrowing authority
and we did move forward, and implement non-Federal financing on
the Shultz-Wantoma line, a $125 million line that was built. So
yes, we have actually accomplished some non-Federal financing
at this point.
Mr. DeFazio. OK, and so the Federal taxpayers are not on
line there, it did not create any theoretical obligation and/or
debt for the Federal government, correct?
Mr. Wright. Well, there has been concern on the part of the
Administration. Certainly the bond covenants as they have been
written reflect that the ratepayers are on the hook.
Mr. DeFazio. Right.
Mr. Wright. But there has been concern that as a Federal
agency Bonneville is incurring a liability, and hence the
proposal that is included in this budget for the Financial
Transparency and Accountability Act that would count on----
Mr. DeFazio. So there has been some sort of change in OMB's
positions since 2003-2004 when they wanted us to do this
because they thought it would be great because it was
privatizing debt, and now they do not want us to do that, so
now they have come up with something new.
Let me get into the specifics of this. The assumptions, I
am thinking maybe you could do away with the people in BPA if
these folks are so good at OMB, because I notice here that
their assumptions are much more optimistic than yours in the
rate case about so-called surplus revenues. In fact, over a
three-year period they estimate $509 million more than you do.
Now, are you low-balling or they high-balling?
Mr. Wright. The estimates were made at different times.
Mr. DeFazio. Oh, I see. OK, good. So do you think then
maybe you ought to revisit all your estimate and jack them up
to these extraordinary levels that OMB assumes? And if so, then
maybe you should in reopening the rate case you would not want
to just provide room for them, but you would want to lower our
rates because we are going to have a lot more revenue than you
anticipated just a couple of months ago when you entered into
this rate case.
If there is new information out there, if you are going to
reopen the rate case for their proposal, would you not be
required at the same time if their estimates are accurate to
include those enhanced revenues in that, and perhaps lower our
rates instead of jacking them up to accommodate their
proposals?
Mr. Wright. I would say the good thing about our initial
rate proposal and the President's budget proposal is they are
forecasts from which the actual impact will only be whatever
our secondary revenues are. So under our initial rate proposal,
our rates will reflect whatever our actual secondary revenues
are.
Mr. DeFazio. Right, because you have authority to do
interim rate increases if you do not realize your goals.
Mr. Wright. Or rate decreases.
Mr. DeFazio. Right. OK.
Mr. Wright. And so we actually have set this up----
Mr. DeFazio. So you think that their estimates, as I
understand, OMB used some very high estimates for gas, and that
exceed now what is being offered in futures contracts rather
considerably for gas in the western U.S.
Are you optimistic that--I mean, are you pessimistic? Do
you think gas prices--I mean, I am just trying to get a little
advice here. You know, I might go out and get some futures. Are
gas prices going to go up dramatically. Is OMB right or are you
right here?
Mr. Wright. The markets are extremely volatile. I would
urge you, Congressman DeFazio, to not make any investments on
the basis of the advice that I would give you.
Mr. DeFazio. Again, I should not----
[Laughter.]
Mr. DeFazio. And I probably should not go with OMB's
numbers and bet on those either. I mean, my predecessor really
liked to get into futures contracts. I was thinking about it.
[Laughter.]
Mr. DeFazio. All right, I will not do that. Now, let me
understand this new extraordinary process. What is this
supplemental rate case we are going to get into? What is it
based on?
I mean, how is it going to work? I mean, I really do not
understand it. I mean, I know we have had interim rate cases
because of huge unanticipated events, you know, like Enron and
things like that, or bad water, but this is a proposal by the
Administration where you are going to hold--how do we reopen or
have a supplemental rate case based upon their estimates about
the future for power versus your estimates about the future
costs of power and/or the availability and/or sale of surplus
power, and the revenues that might or might not be realized?
This sounds like kind of a ``whooooo''. You know, this is
going to be kind of a strange procedure here based on--I mean,
are they going to come in and testify at the rate case?
Mr. Wright. Let me say first of all----
Mr. DeFazio. I mean, they cannot talk here. Maybe they can
talk there. I do not know where they can talk other than
whisper in peoples' ears.
Mr. Wright. So first the----
Mr. DeFazio. And write things down. You know, I remember Al
Swift. He used to talk about the trolls at OMB. I mean, they
are looking a lot better than in Al's day, but they always hid
under the bridge and they came out at budget time, and you
know, there have been so many proposals to attack BPA over the
20 years I have been in Congress. This is the most creative
because it uses the inherent powers doctrine to do this
administratively, but it is still nothing but, it seems to me,
an availed way to either make the deficit look smaller because
they seem to be very optimistic revenue assumptions and surplus
revenue assumptions.
But what are you going to base this new rate case on?
Reality or supposition or wishful thinking or making the
deficit look smaller or what?
Mr. Wright. It is important to understand, first of all, we
intend to complete the current rate case. And if the----
Mr. DeFazio. But then immediately undertake another
supplemental one right here?
Mr. Wright. That is right. So we have not made a decision
yet as to how we will handle secondary revenues. That is a
decision that actually I need to make as part of that rate
case, and I am not going to prejudice that decision here.
Mr. DeFazio. No, of course it is an ex-parte contact. I
understand.
Mr. Wright. Right.
Mr. DeFazio. And you would not be reopening it just because
you are being pushed there, you are reopening it because you
just think there is new things out there that should be
considered.
Mr. Wright. So our intent would be to complete this current
rate case, and then to move forward with a separate rate case
to implement the President's proposal, and exactly how that
would be implemented I could not answer today because we would
need to complete the first rate case to figure out how we are
going to deal with secondary revenues.
There are a variety of issues that would come up in a rate
case. You know, the most typical issues are rate design, who
pays. And you would also have to deal with the kind of
questions like on secondary revenues are you making an
assumption about what the secondary revenues will be, or do you
just create a mechanism that says whatever those secondary
revenues are if they are above $500 million a payment will be
made, and that will be reflected in subsequent rate adjustment
clauses. So those are the type of issues that we would be----
Mr. DeFazio. All right, some experts have estimated that
the rate increase to accommodate the proposal of this
administration would be between 6 and 10 percent.
Mr. Wright. So our estimate based on if the secondary
revenues did come in at the levels projected in the President's
budget is that we would have no change in rates in 2007, but
rates would vary by about 10 percent in 2008 and 2009.
Now, that will change based on whatever the actual
secondary revenues are though, and that was just based on the
forecast, and that forecast was put together in January. The
market is different today than it was in January.
Mr. DeFazio. January this year?
Mr. Wright. January of this year, yes.
Mr. DeFazio. So OMB's forecast is based on--no, wait a
minute. The President's budget came at the end of January too,
so what did they base their forecasts on?
Mr. Wright. No, the President's budget is what I was
referring to.
Mr. DeFazio. OK.
Mr. Wright. The President's budget forecasts.
Mr. DeFazio. Sorry. OK, yes. So your information in the
rate case is dated, but by June things will change yet again,
and will you use new forecasts that are impartial or are you
obligated to use in this impartial, quasi-judicial proceeding
the forecasts of the Administration, which would by then be six
months dated?
Mr. Wright. I would anticipate in any rate case we would
use the most current information that is available.
Mr. DeFazio. And would you obtain them from the experts at
OMB or from impartial experts in power marketing and gas
pricing and things like that?
Mr. Wright. Actually, the way our ex-parte rules work
Bonneville officials can only conduct conversations off the
record with other officials in the Department of Energy. And so
we would not be conducting off-the-record conversations with
other members of the Administration, including the folks at
OMB.
Mr. DeFazio. But if OMB talked to these other people who
aren't bound by your rules at the Department and Energy, and
they--as your bosses tell you, you will assume these
assumptions as part of this, that could happen, right?
I mean, you are not telling me that somehow impartially you
are going to come up with assumptions about the market and use
say neutral experts outside the Administration. You are going
to consult with the Administration on what the projections
might be about future gas prices and other pertinent costs that
would affect the power markets?
Mr. Wright. Actually, the way the ex-parte rules work, the
code----
Mr. DeFazio. Yes, but you will not be ex-parte on this new
process. You will be out of your old process and before you go
into the new process there is no ex-party rules, right?
Mr. Wright. Yes. In the period before we start the rate
case----
Mr. DeFazio. Right.
Mr. Wright.--on ex-parte applies.
Mr. DeFazio. Right.
Mr. Wright. Once the rate case starts, ex-parte applies to
all Department of Energy officials.
Mr. DeFazio. OK, but where would you go to obtain the
assumptions at that point in time? Would they come from within
BPA? Would you use their assumptions? Would you use some
neutral third-party expert assumptions? I mean, would you
commission some--where would get, I mean, because since there
is a half a billion dollars difference between your estimates
and their estimates, if you are going to base a rate case on
these differences, where are you going to get the information
and entering into that rate case?
Mr. Wright. Well, without making judgments, because that is
a judgment----
Mr. DeFazio. No, not judgment. That is a factual question.
Where do you get them? That is not a judgmental thing. That
does not violate anything. Where will you get them?
Mr. Wright. Actually, within the rate case you usually have
a number of parties who make pleadings, and so it actually
would be a judgment I need to make in the rate case as to what
forecast I would use.
Mr. DeFazio. So you would let--so people come in and say, I
think this, I think that, I think this, I think that, and you
will choose one?
Mr. Wright. That is the way it is.
Mr. DeFazio. OK, and if OMB cannot testify in the rate
case, or can they testify in the rate case?
Mr. Wright. I am unaware of any prohibition.
Mr. DeFazio. OK, so they could come in and testify, and you
might just happen to choose their numbers? I mean, it could
happen.
Ms. McMorris. Mr. DeFazio.
Mr. DeFazio. Thank you, Madam Chair. Thank you.
[Laughter.]
Ms. McMorris. I appreciate your line of questioning. If we
want to do a second round, we will do.
Mr. Walden.
Mr. Walden. I think we ought to do a second, third, and
fourth round myself.
[Laughter.]
Mr. DeFazio. I am appreciating more Mr. Borchardt's
position of retiring soon.
[Laughter.]
Mr. Walden. Well, you are not exactly the one we have in
mind to retire.
[Laughter.]
Mr. Walden. All right. I have had to step in and out
because of other issues going on in the world, and so I just
wanted to ask point blank, Steve, are you starting a new rate
case to implement this proposal in the budget?
Mr. Wright. So the intention of the Administration is that
we would initiate a new rate case in July.
Mr. Walden. July.
Mr. Wright. After the completion of----
Mr. Walden. You did say that.
Mr. Wright.--the completion of the current rate case.
Mr. Walden. And you have and the Administration has the
authority to engage in that without consulting Congress?
Mr. Wright. We believe we have that authority.
Mr. Walden. OK. So absent us acting, the Administration
could move forward in July with a new rate case?
Mr. Wright. Yes, sir, we believe that.
Mr. Walden. Do you think FERC would have to approve any
revision of EPA's rate-setting methodology consistent with the
Northwest Power Act of 1980, to certify that they represent,
and I quote, ``the lowest possible rates for consumers
consistent with sound business principles?''
Mr. Wright. The standard for FERC, excuse me, for
Bonneville to establish rates, as low as possible rates
consistent with sound business principles, I would need to
check for the FERC standard for review. I just cannot pull it
up off the top of my head.
Mr. Walden. It sounds very similar, lowest possible rates
for consumers consistent with sound business principles.
Mr. Wright. That certainly does sound very similar.
Mr. Walden. Because I guess some of us would say that you
might be able to make the argument for a different business
principle out there by changing how all this is structured,
although I would question whether it is sound or not. But the
threat to higher rates, which you have testified to here, would
certainly not meet the test of the first provision, would it?
Mr. Wright. I would say that it would not meet the test of
lowest possible rates, but the test is a combination of the
two, lowest possible rates consistent with sound business
principle, and the administrator is frequently challenged with
trying to find the balance between those two.
Mr. Walden. Are you aware of the fact that the standard
statutorily settled repayment period for Federal investment,
such as the Columbia River System, is 50 years?
Moreover, are you aware of the fact this proposals runs
contrary to the legal opinions of past administrations as
articulated in the 1983 letter and memorandum of Reagan
Administration, Energy Secretary Don Hodel who wrote, and I
quote, ``That it is our belief that Congress would have to
approve any of the amortization period on existing projects.''?
Mr. Wright. I am familiar with those. I would have to say I
do not believe the President's budget proposal is inconsistent
with that.
Mr. Walden. If I pay down my home mortgage by paying an
additional interest--oh, I guess we are not paying down the
principal, are we? We are not advance paying principal under
the Administration's proposal?
Mr. Wright. We could be advance paying principal.
Mr. Walden. Would that be a subject of your rate case and
how the money is allocated, or does the surplus----
Mr. Wright. Yes.
Mr. Walden.--money is envisioned at OMB simply flow to the
Treasury deficit reduction or other expenditure?
Mr. Wright. It does not flow just as deficit reduction. It
flows as a repayment of Bonneville's debt.
Mr. Walden. OK, so that would shorten the amortization
schedule perhaps if I am paying down principal, I pay off my
home mortgage quicker, do I not?
Mr. Wright. It could do that, but recall that the period--
by the way, the 50-year period is associated with generation
assets. It is different periods for different assets.
Mr. Walden. OK.
Mr. Wright. It is 20 years for conservation, 35 years for
transmission, et cetera.
The way repayment policy works there is no requirement that
we wait until the last possible moment to repay. There is a
regularly scheduled set of payments, and in fact projects can
be paid off in advance of the absolute due date, and in fact
frequently are. So this, I do not believe, would be
inconsistent with the previous repayment policy.
Mr. Walden. We obviously have some concerns about the
formula used by OMB to come up with their projections regarding
projected future revenues, and we think there are some issues
with gas pricing and everything else.
That aside, if you are prepaying and use the $500 million
to prepay or to whatever, that all works if you have a good
water year and you have reserves. What happens in the reverse?
What happens if you have a bad year? Do you get any credit for
having paid in advance?
Mr. Wright. The President's budget proposal does not
address that issue specifically, and what the Secretary has
said is that that is an issue that is worthy of further
discussion with the Northwest Congressional Delegation,
Bonneville customers, and others that have an interest here.
Mr. Walden. Because my concern is you go down this path and
it appears we will have to pass something this time, I agree
with my colleague, you have been most creative this time. Of
course, that also means somehow they have to pass the budget
around here. Let me just put that marker down.
Mr. Wright. Yes.
Mr. Walden. Because some of these proposals are a bit hare-
brained, and some of us are getting real tired of them, and I
am just going to lay that down right here right now, and I
think you have done a good job managing Bonneville during some
really tough times, but I do not understand this notion of
every year we get a new poison pill we are supposed to swallow
that is going to adversely affect the Northwest region and its
ratepayers, and an economy gets rattled all the time by
different things involving the Federal government. We are
fighting a lot of battles right now, and this is the latest.
So I am just concerned we are headed down a real slippery
slope here. This year it may be $500 million. Next year, the
next administration or this one comes back and says, well, $400
million, and the next one says, well, what is wrong with $200
million or $300 million or no million, and then you miss a
treasury payment, and they say, ``Ah-ha, so you cannot even
make your treasury payments.'' This is serious stuff in our
region. You know that, and I think you hear it from both sides
of the aisle, and I hope our friends at OMB hear it, and hear
it clearly.
Ms. McMorris. Mr. Inslee.
Mr. Inslee. Thank you. I would like to start by trying to
follow my parents' admonition to say something positive, so I
want to get that done, and I want to thank you, thank you, Mr.
Wright, for working, to try to work on our transmission issues,
to get our windpower projects fully realized, and I appreciate
your efforts to solve those problems so we can really get that
resource fully maximized, and I appreciate your efforts in that
regard.
But I do want to turn now to this vexing proposal that
there are only two people in the Pacific Northwest who believe
this really is sound business judgment. They are both heavily
sedated and in custody right now.
[Laughter.]
Mr. Inslee. And I think it is fairly obvious that none of
us share the view that if you shove this down the throats--not
a few--if the Administration shoves this down the throats of
ratepayers in the Pacific Northwest, it really will have been
adding insult to injury.
What I mean by that is, just so you will know why we feel
so strongly about this, I remember a conversation I had with
the Vice President during the Enron debacle, and we went and
met with him on a bipartisan basis, and we pleaded with him to
do something to deal with this through FERC--this enormous
theft that was obviously going on across the Pacific Northwest.
I remember showing him that 30 percent of the generators
were shut off at the time we were having these brown-outs, and
told him that obviously someone was gaming the system. It was
quite obvious to any objective observer.
We asked him to take some action, and I remember he looked
right at me and said, you know what your problem is, you just
do not understand economics. And I was tempted to say that I
actually do understand economics. I just do not understand
people killing us, and that is what this Administration is
trying to do again.
I think anyone that understands economics understands it is
not in the Pacific Northwest's benefit to go on this schedule
that is going to increase dramatically these rates when we
experience this in the Enron debacle in part due to this
Administration's failure to act.
If this was ever, and I do not believe it would be, but it
was ever sound business judgment, it is not after we have
suffered the deprivations of Enrons at the hands of this
Administration, which has now turned around and try to shove
this increase down our throat from 6 to 10 percent plus, which
is going to cost, according to the best estimates I have from
the Northwest Power and Conservation Council, 1,120 jobs in the
next two years. It is a job killer.
So you have an unenviable job trying to sell this lemon to
us, and I do not think you are going to success, and to our
benefit. But I just have a question. Why should we in the
Northwest, whose fates are dependent on this, if in fact the
law is that we receive the lowest rates consistent with sound
business judgments, why should all of us in Northwest, this
sort of elected board of directors of the Northwest and a
bipartisan basis, defer to an Administration who let us suffer
so grievously during the Enron debacle, and let them decide
what sound business judgment is?
Do you not think it would be healthy for Congress to make
that decision if indeed we are going to change this repayment
situation, not only from a scope of fairness but for the
relationship of BPA with the Pacific Northwest, which I know
you have tried to keep and have done an admirable job of having
good working relationships with, do you not think it would be
wise to report back to the Administration that this is going to
severely impact the working relationship of the Administration
and BPA with the Northwest and it is not worth a candle to keep
this fight going?
Mr. Wright. Sir, if I could say that I think the Secretary
has heard very clearly the reaction of the Northwest members of
the congressional delegation, and as well as Bonneville
customers and others, and the Secretary has committed to
further discussions with all of you to address the issues and
concerns that you have.
Mr. Inslee. Well, I hope that you will deliver that message
with great force, and I just want to tell you that there are
such lingering hard feelings about this Administration leaving
us hang out to dry during this Enron debacle.
You know, it is interesting, Mr. Cheney said, I did not
understand economics. Today is Ken Lay is on trial, and we
understand economics, that it is not sound business judgment
for our community to expose itself to these rate increases
under these economic conditions. So I just hope that you will
be forceful and deliver that message, and I want to reiterate
my personal appreciation for your efforts to do this job as
well as you could today. I do not think you should volunteer
for it, but thank you.
Mr. Wright. Mr. Inslee, I can also commit to you that I
will certainly report back to all the folks at the department
that are engaged in this issue about what we heard here today.
Ms. McMorris. Any further questions? Mr. DeFazio? Yes, go
ahead, Mr. DeFazio.
Mr. DeFazio. Thank you, Madam Chair. You were most generous
in the last round. I promise not to carry on quite as long. No,
no, I can deliver here.
Again, this fairly extraordinary process, this new
ratemaking, what would be this year's budget makes--as my
colleague pointed out, assumes over $500 million--what would
preclude you from being required to go and have another
ratemaking next February 2, after we have next year's budget
which says $200 million? Would there be a statutory prohibition
on again reopening the rates?
I mean, if you can reopen them in June after you have just
set them based on these assumptions, I assume you could reopen
them again, right? Is there a limit on how many times you could
be asked to reopen and/or supplement the rates?
Mr. Wright. We believe we have the authority to implement
this proposal and consequently implement it at different
levels. Having said that, the Secretary has heard very clearly
the concerns that you and others have raised here, and would
like to be clear that we are offering a dialog to see if there
are ways that we could address that concern, so-called slippery
slope concern.
Mr. DeFazio. Well, we will look forward to whatever
proposals there are that might stem that slippery slope
concern, and I just want to go back to, is there any guarantee
here, I mean, let us just say that BPA's experts were right in
the assumptions they made in the current rate case, and we
prepay $30 million of debt one year and the other years we
would not prepay any. But you are saying there would be an
2007-2008 rate impact of 10 percent.
Where would that money go? We have a guaranteed rate impact
but we do not have a guarantee prepayment and/or loosening up,
you know, freeing up borrowing authority to go out and
construct transmission. How would that benefit the Northwest
ratepayers to pay 10 percent more but not get the theoretical
benefit of possibly, or theoretically going out and doing some
more transmission reenforcement or congestion management or
whatever?
Mr. Wright. If the President's budget proposal moves
forward and we continue with the proposal that we have in our
initial rate proposals as to how we would structure rates, and
if in fact the secondary revenues turn out more like what is in
our initial rate proposal, the $30 million over three years,
there will not be an impact of 10 percent.
My expectation is that the most likely scenario and the way
that we calculated the rates is that it assumed that whatever
the actual impact is will flow through to rates. And so if
there is a very small or no payment to the Treasury, then there
would be a very small or no impact on the rates.
Mr. DeFazio. But you base in part your rate proposals on a
very high probability of meeting your mandatory statutory
treasury obligations as renegotiated and legislated back--I was
the House author and Mark Hatfield was the Senate sponsor, and
so I am quite familiar with the terms of that, but you
predicate on a high probability for that.
If they are assuming--you know, essentially their
assumption say there will be a floor of $500 million a year
available, right, because they are assuming over $500 million.
So $500 million would then have to get cranked into your rate
case, all right, which is higher than you have currently
assumed.
How is that going to spill through into the rates? Does
that mean maybe then you would lower the rates? And if you
lowered the rates, but then we did not reach their optimistic
levels of surplus sales of $500 million, then you would have to
do one of those interim crack things or whatever they are
called, the interim rate increase.
Mr. Wright. That is exactly right. First of all----
Mr. DeFazio. They are kind of messing with the process here
that is not elegant to begin with, and we are creating a whole
new level of uncertainty.
I guess the key is going to be where you get the
assumptions, and I know you cannot exactly answer that, but in
reopening this where are you going to get the assumptions? So
if OMB can testify and/or they can put their assumptions
forward, I guess I could come and put my assumptions forward,
and then you and your quasi-judicial hat are going to have to
make a decision, but I cannot fire you and the Administration
can. So it is a tough place to be in.
Mr. Wright. This job usually is.
Mr. DeFazio. Yes, and you have done a very good job, and we
would hate to lose you over something that does not go to the
core mission of BPA, which is not to somehow make the Federal
deficit look smaller, but to meet its obligations to the
Federal treasury first and foremost, and then secondarily, to
meet its statutory obligations to the ratepayers of the Pacific
Northwest.
Mr. Wright. Mr. DeFazio, if I could clarify one thing, I
think. I cannot tell you today how the rates will actually work
because, again, that would be prejudicing a decision in a rate
case, and we have not even entered into that rate case. But our
assumption in doing the analysis was that the amount of revenue
that would flow would be dependent on what our secondary
revenues would be and the actual rates would be dependent upon
what the amount of review was that flowed across.
So if in fact our secondary revenues are low, then there
would be low to no rate impact. It is not that we would set the
rates in this new rate case and they would be fixed, our
assumption was that they would be variable rates as we are
currently proposing in this rate case, and they will reflect
what the actual secondary revenues are.
Mr. DeFazio. Right, but if there is a higher assumption
that underpins their assumption that you are going to have more
surplus sales, but that also spills through into thermal
generation, which you have to acquire, and so then they are
also predicting the weather here, right, three years out?
Mr. Wright. Well, at least under the initial rate proposal
we have tried to take all of that out of the equation and make
our actual revenues less dependent on a forecast----
Mr. DeFazio. Right.
Mr. Wright.--because we have been not all that good at
forecasting, to be honest.
Mr. DeFazio. Right.
Mr. Wright. And so we have a lot to learn.
Mr. DeFazio. But now we have found someone who thinks they
are better at it.
Well, thank you for your indulgence, Madam Chair. If they
dump you over this, I think the State Department could use you.
You have done a great job here today, and very diplomatic.
Thank you.
Mr. DeFazio. Sir.
[Laughter.]
Mr. Radanovich [presiding]. No sweat. I cut my hair while
you were looking the other way.
[Laughter.]
Mr. Radanovich. I used the same barber you used too.
[Laughter.]
Mr. Radanovich. I did not like them until I came and saw it
on you. I am thinking about growing a mustache next.
Mr. Deihl, tell me a little bit about the challenges of
transmission, the increasing of transmission capacity.
Mr. Deihl. The Southwester region, we work very closely
with the Southwest Power Pool Regional Transmission
Organization, which has been recognized by FERC. We have an
operating contract with them. We look at planning for a
regional perspective with the power pool. We have several
projects on the drawing board underway to increase some
transmission in some heavily congested areas. We have a
transformer job that we are going to do some cost-sharing with
them to eliminate a constraint.
We also do some interconnection work with several different
local entities, one being Energy. Our biggest area right now we
are looking is northern Arkansas, southern Missouri area,
heavily congested, and we do have quite a bit on the books
planned into the future to relieve that, working with Southwest
Power Pool
Mr. Radanovich. What would drive most of your increases in
transmission, update lines or increased population or both?
Mr. Deihl. In the area I am talking about in the
southeastern part of Missouri, northeastern Arkansas is
population growth in that area, Branson area
Mr. Radanovich. Springdale, my daughter lives there and we
have two grandkids. My wife goes, and if the lights go out, I
mean, you know, you just have to answer these questions at
home, domestic tranquility.
[Laughter.]
Mr. Deihl. If you give me her address----
Mr. Radanovich. You bet.
Mr. Deihl.--I will put that on our priority list
Mr. Radanovich. Mr. Deihl, I appreciate your effort there,
and it is one reason we are asking about.
What about the energy bill, Mr. Hacskaylo, did--let me see,
you are Western, are you not? Yes, Western, Southwester. You
got more authority to partner with third parties on
transmission.
How are you using that? In other words, what are we doing
with some of the increased authority?
Mr. Hacskaylo. What we are doing, Mr. Chairman, is working
with utilities in our service territory in joint planning,
determine where additional transmission is necessary. One good
example which may well fall under the Section 1222 authority
you are talking about is with the Wyoming Infrastructure
Authority, and TransElec, to build transmission from
southeastern Wyoming to the front range of Colorado, to
eliminate a transmission bottleneck and provide more access for
wind generation in Wyoming to be moved into to the front range
of Colorado. That is just one of the projects we are working
on.
Another one, because of a request for increased transfer
capability, increased transmission capacity from a project, a
natural gas fire power plant in northern Mexico that would move
power into southern Arizona called the San Luis Rio Colorado
Project. Again, examples of requests from merchant developers
to use capacity in our system, and if it is not there this
authority will provide us the legal authority to build
additional transmission
Mr. Radanovich. You are talking about wind generation. Are
you doing any other renewable biomass? Anything else, solar?
Mr. Hacskaylo. Merchant developers are looking at other
sources than wind. Biomass, as you say. The solar industry
seems to be coming along quite well with new development of
thinner solar panels which will be much more' reliable and
produce more energy.
As those projects become moved into the planning stage,
those developers that they were want to interconnection with
Western's system work with us in terms of planning to determine
how much capacity we might have available, and so they can move
their product onto our lines and we can move them to load.
Mr. Radanovich. Some of the renewables, what are the--I am
getting a little bit off the subject here, but if you do not
mind, we are having discussions in our district right now, but
what are some of the cost basis per kw? What are we looking at,
just approximately?
Mr. Hacskaylo. Oh, gee.
Mr. Radanovich. Say for biomass.
Mr. Hacskaylo. Biomass, I do not know. I do know that wind
is roughly in the three to four cents range. Solar, as I
understand, is more expensive than that. Biomass, Western has
very little experience moving biomass generation just because
there has not been that development in our surface territory in
enough quantity to move it onto the wholesale, high voltage
transmission system
Mr. Radanovich. I mean, I will ask the broader question so
that anyone can answer, but if we wanted to reach and grab a
number or a percent of power transition into renewables within
the next 10 years, what is a reasonable amount for you all, not
for the whole U.S., but for you all? What percent could we
reasonable accommodate? I will ask that question for all four
of you, just throw a number out.
Mr. Hacskaylo. For Western Area Power Administration, we
will accommodate under the FERC open access transmission tariff
any requests for generation we have from any source. So we look
really to the source of the generation
Mr. Radanovich. OK, but I am just saying what is a
practical, can we get 20 percent within the next 10 years?
Mr. Hacskaylo. My best guess is that would be a stretch
goal, but it is certainly--there is certainly public demand for
this renewable generation, and that goes a long way toward
ameliorating cost concerns on the part of the public.
Mr. Radanovich. Are any of you doing any biomass at all?
Mr. Hacskaylo. Western is not. We do not do generation.
Mr. Radanovich. I mean, but are you familiar with any
projects that are trying to feed into the system in your areas?
I am trying to broaden beyond my own back yard here.
Mr. Hacskaylo. Not within Western surface territory. Again,
the biomass that I am aware of are very small demonstration
plants, not large-scale that would actually need to use high-
voltage transmission
Mr. Radanovich. OK.
Mr. Deihl. And for Southwestern, we are in the same
situations. Primarily wind generation right now, Oklahoma, we
have I think it is about 150 megawatts of wind generation in
the state, and there is some developing projects in Missouri,
but we do not have any experience either in the biomass area
yet.
Mr. Radanovich. OK. I was sitting watching the earlier
panel, and having not gotten to hear your testimony, maybe you
said something, but OMB keeps talking about the agency rate on
this reimbursement of the interest. They say that is necessary
to stop defaults.
Have there been defaults? Talk a little bit about that if
you do not mind, Mr. Wright. Do you know of any defaults to the
system?
Mr. Wright. Sir, I am not familiar with any defaults
although I would just offer that the agency rate proposal does
not apply to Bonneville, and applies to the other Power
Marketing Administrations.
Mr. Radanovich. Mr. Hacskaylo?
Mr. Hacskaylo. No, sir, not for Western.
Mr. Deihl. No defaults for Southwestern
Mr. Radanovich. Well, it is all down to just you, Mr.
Borchardt.
Mr. Borchardt. Yes. We do not really--we are not aware of
any defaults that we have had in Southeastern. I would say
though that when Katrina came, and a lot of our customers down
in southern Mississippi, we could not deliver power to them.
Some of them just did not exist, and some of them had their
infrastructure totaled.
We were very fortunate in that we did generate and we had
other customers take that load, but I think that is one of the
things that may be of concern here by the Administration.
Mr. Radanovich. You think it is a valid concern?
Mr. Borchardt. I do not know
Mr. Radanovich. And a broader basis? I know we got the
specifics that could train them.
Mr. Borchardt. I just could not say
Mr. Radanovich. It is just among us friends. I am not going
to tell them down----
Mr. Borchardt. I understand.
[Laughter.]
Mr. Borchardt. That camera there does not have any film in
it or anything?
Mr. Radanovich. No, sir, they do not.
[Laughter.]
Mr. Radanovich. Trust me.
[Laughter.]
Mr. Borchardt. But I think that is of some concern,
everybody is seeing what has happened in New Orleans and some
of the other areas, and I think that is a concern that may have
jangled a nerve.
Mr. Radanovich. You think you have troubles. I am asking
for appropriations, those have all been zeroed out watching
this hearing here.
Mr. Borchardt. Sorry about that.
[Laughter.]
Mr. Radanovich. Well, we have to wrestle through the
difficult challenges of rate-type budgets and how to work with
it, but I will tell you the cost shifting that sometimes I see
is not one that I have been willing to support at any level,
and we will go ahead and we will ask the appropriate questions
on this particular budget round, and see, and if any of the
other panel, I think we are pretty unanimous, but if any of you
would like to dissuade me from that, well, feel free to do that
after the meeting.
Ms. Napolitano, you have been very gracious. Any closing
thoughts?
Ms. Napolitano. Mr. Chairman, all I can say is that we are
united and you hear it loud and clear from not only the Chair
and the Ranking Member, myself, but also from both sides of the
aisle of the unjust way of doing--the proposals that are being
put forth, I think the Administration needs to either reassess
and reenergize what they are trying to do and make it more
justifiable, because it certainly does not look justifiable to
anybody. And if it needs tweaking, whether it is legislatively
or through the budget process, then so be it because that is
where it is going to go. Thank you, Mr. Chair
Mr. Radanovich. Thank you very much.
If there are no other comments or questions from Committee
members, you have five days to update your testimony or many
any changes.
With that, the Committee stands adjourned.
[Whereupon, at 5:00 p.m., the Subcommittee was adjourned.]
[Additional statements submitted for the record follow:]
[The prepared statement of Mrs. Cubin follows:]
Statement of The Honorable Barbara Cubin, a Representative in Congress
from the State of Wyoming
Mr. Chairman:
The west is blessed with an abundance of natural resources that
help meet our nation's energy needs. However, while there continues to
be a strong focus in Congress and industry to develop those resources,
there has not, in my opinion, been an adequately equal focus on
assuring that our interstate transmission system also continues to grow
and evolve to meet the electricity demands of our nation.
The four Power Marketing Administrations play a vital role in
developing the power transmission framework for our nation. I hope in
today's hearing we will hear about how PMAs are utilizing new
authorities granted under the Energy Policy Act to expand and improve
grid reliability, increase utility coordination and make general
infrastructure improvements.
I know we will also spend some time today discussing particular
aspects of the Fiscal Year 2007 budget request. While I am pleased that
this year's request did not include last year's misguided ``market-
based rates'' proposal, there are several proposals--some
administrative--that power users in my home State of Wyoming have
expressed concerns about.
More specifically, I am interested to hear why the Pick-Sloan cost
reallocation was once again included in the Administration's budget
request after Congress rejected it in no uncertain terms last year. I
would also appreciate learning more about the proposed administrative
change PMAs are expected to make to their borrowing rates on federal
power investment. Just because an agency has been given a particular
authority does not necessarily mean its implementation is the best
approach.
Thank you, Mr. Chairman for calling this oversight hearing on such
an important topic to my constituents and I yield back the balance of
my time.
______
[A statement submitted for the record by George Taylor
follows:]
Statement submitted for the record by George B. Taylor, Jr., Chairman,
PMA Structural Changes Committee, on behalf of the Southeastern Federal
Power Customers, Inc.
Thank you for the opportunity to submit a statement for the record
regarding the March 1, 2006 hearing on the Administration's Fiscal Year
(``FY'') 2007 budget recommendations for the Southeastern Power
Administration (``SEPA''), which serves our membership, and the other
Power Marketing Administrations (``PMAs''). Southeastern Federal Power
Customers Inc. (``SeFPC'') represents the interests of cooperative and
municipal systems serving more than 6 million customers in Alabama,
Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina
and Virginia.
The SeFPC has significant concerns with a proposal contained in the
Administration's FY 2007 budget. Specifically, our members are
concerned about an Administration proposal to impose administratively a
higher level interest rate on new investment allocated to hydropower
production. This proposal would raise rates with no apparent benefit to
the hydropower customer; it is simply a back-door tax on the ultimate
consumers of power marketed by SEPA. The Administration's alleged
rationale simply ignores the statutory regime under which the PMAs like
SEPA operate.
The proposal to increase interest rates to the agency rate level
has emerged with virtually no public discussion. The hearing on March
1, 2006 provided the first opportunity to review fully the implications
of the Administration's proposal. Nonetheless, the magnitude of the
change proposed and the precedent that could result from it suggest
that Congress should provide much more active oversight over the Corps'
activities. Indeed, we have questions about the Office of Management
and Budget's (``OMB'') decision to make the changes administratively
without any input from Congress or customers of SEPA and the other
PMAs.
Rate-Making Authorities
The PMAs are the rate-making agencies charged with marketing
electricity from Federal hydroelectric facilities operated by the U.S.
Army Corps of Engineers (``Corps'') and the Bureau of Reclamation
(``Bureau''). In the Southeast, when the Corps makes an investment in a
hydro-electric facility, SEPA must recover the cost of that investment
in the rates charged to its customers. For a half century, the PMAs
have set interest rates either following explicit instructions from
Congress or by charging a rate that collects the Federal Government's
cost of appropriated dollars.
Now, the Administration's budget seeks to increase the interest
rate charged on all new investments at projects whose interest rate is
not set by law. This agency rate is higher than the yield rate, which
is the current interest rate paid by SEPA. This agency rate reflects
the interest cost to loan needed funds to government corporations.
However, SEPA, the Southwestern Power Administration (``SWPA'') and
Western Area Power Administration (``WAPA'') are not government
corporations and do not borrow funds from the U.S. Treasury. Their
rates are set to recover the appropriations established by Congress for
the investment in the hydro-electric facilities and for costs to
operate these projects.
We understand that the Administration has suggested that the
government corporation rate is more appropriate for the PMAs because of
the risk of default. This argument simply ignores the statutory
authority under which the PMAs operate and long-standing history of
repaying the federal investment in these projects. SEPA must collect
all of the costs of generating hydropower at federal facilities in the
Southeast.
By law (the Flood Control Act of 1944), SEPA must recover all of
the costs of producing power. Rate schedules are developed by SEPA
after a notice and comment period and submitted to the Secretary of the
Department of Energy for further review and implementation on an
interim basis. Once the Secretary approves the rates on an interim
basis, the Federal Energy Regulatory Commission (``FERC'') has the
responsibility to confirm on a final basis the rate schedule developed
by SEPA. SEPA, the Secretary of the Department of Energy and FERC must
set a rate that by law recovers the federal taxpayer's investment in
the Federal Power Program. If an existing rate is insufficient to meet
repayment obligations, SEPA must file a new rate and include
appropriate increases to ensure all repayment obligations are met. In
other words, there is a multi-layered review process and legal
obligation that ensures that the PMAs will not default on outstanding
obligations.
With no real threat to PMA defaults on outstanding debt, the
Subcommittee is left with little substantive reason why the interest
rate on new investment should be increased. As the proposed change will
only serve as a revenue enhancement measure and provide no additional
benefits for PMA customers, the members of the SeFPC wholeheartedly
encourage the members of the Water and Power Subcommittee and full
Resources Committee to stop the Administration from implementing this
budget proposal.