[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/
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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.

                                 
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