[Congressional Record Volume 141, Number 100 (Monday, June 19, 1995)]
[Senate]
[Pages S8625-S8627]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                      THE SERVICE OF LARRY HOBART

  Mr. HATFIELD. Mr. President, I thank my colleagues for this 
opportunity to recognize the longstanding service of Mr. Larry Hobart, 
the executive director of the American Public Power Association. Mr. 
Hobard joined the APPA 35 years ago. Today, he is recognized nationally 
as an innovator and broker of solutions to complex problems in the 
public power industry.
  I have come to know Mr. Hobart through our work together to address 
issues facing public power generally and Bonneville Power 
Administration in my home State of Oregon in particular. Mr. Hobart has 
never failed to bring constructive expertise to the table in our 
efforts to resolve differences among parties. I have valued 
tremendously the knowledge, creativity, and experience he contributes 
to the process.
  In addition to his work in the power industry, Mr. Hobart serves as 
vice president and a member of the board of directors of the Consumer 
Federation of America, the largest consumer organization in the United 
States.
  I was sorry to learn that Larry will be retiring from the American 
Public Power Association. I know I am joined by many other members of 
this body in expressing regret at his departure but great thanks for 
his many valuable contributions to the legislative process on behalf of 
public power.
  I appreciate this chance to share with my colleagues a speech Hobart 
gave on a recent trip to the Northwest. His remarks demonstrate a 
comprehensive grasp of the complex energy and natural resource issues 
facing the Pacific Northwest that only decades of active involvement 
and much thoughtful consideration can provide. I ask that it be printed 
in the Record.
  The speech follows:
               Update From Your Changing Nation's Capitol

                           (By Larry Hobart)

       A lot of things have changed for public power in the past 
     few years. Let me tick off six of them of importance to the 
     Pacific Northwest:
       1. The Energy Policy Act of 1992 was passed by Congress. 
     Now the Federal Energy Regulatory Commission can order any 
     transmitting utility, including Bonneville Power 
     Administration under certain circumstances, to provide 
     transmission services for any entity--utility or non-
     utility--generating electricity for sale for resale inside or 
     outside of the region. FERC decisions encourage network 
     access, comparability in pricing, and creation of Regional 
     Transmission Groups. A more competitive bulk power supply 
     market has developed with bidding pitting utilities against 
     independent power producers against IOU subsidiaries against 
     federal power marketing agencies.
       2. Because of federal requirements, the price of salmon 
     protection rose to an annual rate of $500 million a year, and 
     combined with the effects of drought and lost revenues due to 
     releases to flush fish, shoved BPA rates
      up near or beyond the point of noncompetitiveness, and 
     raised the question for some preference customers as to 
     whether federal power is the best buy.
       3. Federal court interpretations of the Endangered Species 
     Act reinforced the rigid nature of that statute, and 
     suggested that there is no way short of an amendment by 
     Congress that will prevent the imposition of an open-ended 
     expense on power users that could ultimately price BPA power 
     right out of the market and leave taxpayers to swallow an $8 
     billion investment.
       4. Provisions of the Pacific Northwest Electric Power 
     Planning and Conservation Act passed by Congress and signed 
     by President Carter 15 years ago began to look increasingly 
     obsolete because regional planning has been eroded by 
     individual utility purchases in a competitive bulk power 
     supply market, environmental demands placed on the federal 
     power system have escalated costs, demand-side management 
     approaches are now focused more on cost-effectiveness and 
     customer information, and renewable resources must meet the 
     economic test of gas-fired generation.
       5. Global competition for sales of goods and services in 
     international markets caused industries and businesses to 
     engage in continuing rounds of down-sizing and cost-cutting; 
     electric bills--even for firms that are not considered 
     energy-intensive--became important expense items, and for 
     some utilities, the principle for structuring rates for big 
     users became ``whatever it takes to keep the consumer.'' 
     Retail competition became a reality across the nation. 
     Failure to meet the challenge can now mean loss of industrial 
     customers or even loss of the franchise.
       6. And lastly, the Republicans took control of the U.S. 
     Senate and House of Representatives. The Pacific Northwest 
     has nine new U.S. Representatives. Tom Foley is gone as 
     Speaker of the House, but seniority still gives your region 
     important Republican representation. Mark Hatfield is 
     chairman of the Senate Appropriations Committee, Bob Packwood 
     heads the Senate Finance Committee, Frank Murkowski chairs 
     the Senate Energy and Natural Resources Committee, Ted 
     Stevens controls the Senate Rules and Administration 
     Committee, and Don Young leads the House Natural Resources 
     Committee.
       Republicans attempted to ``nationalize'' issues in the 
     campaign, running on a ``contract with America'' that 
     stressed a balanced budget, tax cuts, and a build-up of 
     national defenses. Meeting these goals will call for some 
     form of new ``revenues,'' which currently includes sale of 
     four federal power marketing agencies--the Alaska Power 
     Administration, the Western Area Power Administration, the 
     Southwestern Power Administration, and the Southeastern Power 
     Administration.
       This morning I want to talk to you about some questions I 
     think you must consider in the face of these facts as you 
     plan the future of public power in the Pacific Northwest.
       How can we avoid flushing down the river North America's 
     greatest renewable energy resource--the Bonneville Power 
     Administration?
       Who is responsible for saving the system?
       What steps need to be taken now?
       Why should we worry about it?
       We face a different situation than we confronted last year. 
     Last year, the problem was political and the answer was 
     economic: BPA critics charged that historically low interest 
     rates constitute a subsidy, and BPA supporters responded with 
     a scheme to restructure repayment. This year, the problem is 
     economic, and the answer is political: BPA rates have become 
     noncompetitive, and turning around the situation requires 
     congressional decisions to change the ground rules.
       If BPA's rates are not competitive, consumer-owned electric 
     systems in the Pacific Northwest will increasingly turn to 
     other less expensive sources of wholesale power. As the bulk 
     power supply market expands with open access transmission, 
     the opportunities for ``shopping'' the market will become 
     greater, intensifying interest in suppliers other than BPA. 
     Loss of load will leave BPA with the same fixed costs but 
     fewer customers to share the burden. Even higher rates could 
     result, giving other systems a reason to depart. The dismal 
     reading is a ``death spiral'' in which BPA collapses like the 
     pull of gravity into a black hole.
       BPA is taking the business steps that any such threatened 
     institution is expected to initiate in similar circumstances. 
     It has backed away from a number of deals where power costs 
     loomed larger than market prices at the margin, including a 
     unit at McNary Dam, a gas-fired generating plant to be built 
     by an IPP, and purchase of power from the province of British 
     Columbia. It is seeking to control and cut costs, it is 
     reducing personnel, it is restructuring to streamline 
     operations, it is scaling back transmission line construction 
     and improvements, it is emphasizing customer relations, and 
     it is promoting packages of power at prices it hopes will 
     hold in place existing markets. But the job is a tough one. 
     BPA must deal with a significant body of statutory law that 
     dictates how it operates, including 42 pages of dense
      language contained in the Pacific Northwest Electric Power 
     Planning and Conservation Act. BPA must follow federal 
     personnel practices, and accept the dictates of 
     policymakers in the Department of Energy, the Office of 
     Management and Budget, and the White House. It has looked 
     at restructuring itself as a federal corporation, but the 
     Office of Management and Budget and some members of 
     Congress simply see such a solution as the first step 
     toward privatization. BPA is the target of plenty of 
     advice within the region from the regional council 
     appointed by four governors, the press, and interest 
     groups of all kinds.
       But right now, the overriding fact about BPA economics is 
     its open-ended obligation to pay for salmon survival. While 
     the expenditures posted or postulated have produced 
     questionable results in terms of fish, the one sure thing is 
     that they represent the marginal measure of BPA's economic 
     trouble. If these costs are not capped and cut back, their 
     continued escalation poses the federal equivalency of 
     bankruptcy with the loss of a source of revenue to repay 
     taxpayer investment, the elimination of monies that might be 
     employed to preserve fish under a practical program, and the 
     disappearance of the regional asset at a ``going out of 
     business'' sale.
       What's the answer? The answer is congressional legislation, 
     either through amendment of the Endangered Species Act or a 
     specific statute limiting BPA's financial responsibility to 
     an amount that allows it to price power at levels that permit 
     a competitive response to current conditions.
       Is this a special subsidy for BPA? No way! What is 
     happening is that federal fish figures, activist jurists, and 
     environmental groups are force-feeding BPA with experimental 
     programs and giving no consideration to the costs versus the 
     benefits.
       Let's get real about this matter. Saving salmon with the 
     methodology now in place is going to result in no money for 
     repayment or fish. Randy Hardy said it right in testimony 
     before a congressional committee earlier this year. ``In 
     today's competitive utility [[Page S 8626]] marketplace, 
     Bonneville must first succeed as a business if it is to serve 
     its wide-ranging regional mission and meet its federal 
     responsibilities,'' he said. ``Without revenues from the 
     power side, it will be difficult, if not impossible, to 
     continue to fund the region's fish, wildlife, conservation 
     and renewables programs.''
       If the situation were not serious, it might be viewed as 
     silly. The Direct Service Industries reported recently that 
     under the Endangered Species Act, at least 214 West Coast 
     salmon subspecies are potential candidates for ESA listing, 
     even though they were members of four healthy species of 
     salmon. ``The listing of just three of those 214 subspecies 
     has already created regional economic unrest and a greater 
     than $500 million per year recovery price tag.'' The recently 
     released National Marine Fisheries Service Snake River Salmon 
     Recovery Plan suggests that doubling the 2,000 adult wild 
     salmon now returning to the Snake to spawn could cost 
     $300,000 a fish--assuming the plan works and that BPA can 
     generate the money to finance the plan.
       Where is the money to come from? If power users decline to 
     pay higher prices to BPA than those charged by competitors, 
     will fish interests cough up the cash? The navigators? The 
     irrigators? The flood control beneficiaries? Federal 
     taxpayers? In the current federal budgetary environment, is 
     the U.S. Treasury likely to spawn money for salmon eggs? Not 
     likely.
       Power users cannot be forced to make electricity choices 
     that are not in the interests of their consumers.
       The Pacific Northwest Electric Power Planning and 
     Conservation Act, enacted December 5, 1980, declares ``that 
     Congress intends that this Act not be construed to limit or 
     restrict the ability of customers to take actions in 
     accordance with other applicable provisions of Federal or 
     State law, including, but not limited to, actions to plan, 
     develop, and operate resources and to achieve conservation, 
     without regard to this Act.''
       ``Cost-effective'' is defined by the Act to mean handling 
     of the needs ``of the consumers of the customers at an 
     estimated incremental system cost no greater than that of the 
     least-cost similarly reliable and available alternative 
     measure or resource, or any combination thereof.'' Put 
     differently, if consumers of public power systems and rural 
     electric cooperatives would benefit from less expensive 
     purchases made elsewhere, that would be the ``cost-
     effective'' decision.
       What is happening in the wholesale bulk power segment of 
     the electric industry is that it is undergoing a fundamental 
     transformation from a monopolistic segment of the economy, 
     regulated on a cost-of-service basis, to an open access, 
     competitively priced, commodity-oriented activity. 
     Competition has created within regions a ``market clearing'' 
     price--a charge that represents the lowest marginal rate 
     within a marketing area. This can cause ``stranded 
     investment''--that portion of the cost of a utility's 
     facilities that is more expensive than the market price of 
     electricity will support.
       Who bears the cost if customers switch? Here are the four 
     possibilities:
       Write it down against utility shareholder equity
       Charge to remaining customers through rates
       Levy a ``wires charge'' by moving the investment to 
     transmission
       Create a ``competitive transition'' assessment
       Some non-power interests are arguing that if consumer-owned 
     electric utilities diminish their take from BPA, they must 
     pay an ``exit fee'' to cover costs of WPPSS #2, renewable 
     energy resources, conservation programs, and fish recovery 
     plans. There is no requirement in law or contract that public 
     power systems and rural electric cooperatives make payments 
     of this type, and to do so would be detrimental to the 
     interests of their consumers. To the extent that the charges 
     equaled the differential between BPA prices and that of other 
     suppliers, competition in the bulk power supply market would 
     be diminished.
       A ``wires charge'' is totally inequitable because it 
     arbitrarily moves the cost of investment in generation--the 
     principal element of ``stranded investment''--and renames it 
     ``transmission.'' Furthermore, doing so is tantamount to 
     creating a tying arrangement illegal under the antitrust 
     laws.
       Use of a ``competitive transition'' assessment punishes 
     customers for a condition they did not create--the advent of 
     a more competitive market driven by open access transmission, 
     surplus capacity among utilities, and the development of gas 
     turbine generation with short lead-times, high efficiencies, 
     and low costs. The arrival of this competitive market is not 
     a surprise--the trend has been evident for years--and where 
     consumer-owned electric utilities choose to exercise their 
     contractual options to switch or supplement a supplier to 
     decrease consumer costs, they should not be penalized for 
     doing so.
       As APPA told FERC recently, the imposition of stranded cost 
     payments--be they ``wires'' or transition'' fees--would have 
     anticompetitive effects in the marketplace because they:
       erect artificial restrictions on new entry for alternative 
     suppliers and trades;
       discriminatorily favor individual entrenched suppliers and 
     their shareholders;
       give that entrenched competitive a paid-off asset with 
     which to punish rivals;
       distort relative transmission prices if charges are placed 
     there;
       reduce electricity consumption to suboptimal levels and 
     distort the investment of electricity-using industries into 
     more labor-intensive technologies; and
       slow the diffusion of new technology.
       Exit fee proposals skirt the real issue. The real issue is 
     maintaining a competitive price for BPA power.
       ``Exit fees'' are a solution advocated where monopolists 
     wish to preserve the status quo by enforcing their will; BPA 
     has no legal or economic power to implement this approach. 
     Furthermore, it is completely contrary to the thrust of the 
     National Energy Policy Act passed by Congress in 1992 and now 
     being carried out by the Federal Energy Regulatory 
     Commission. The likelihood that, at this juncture, Congress 
     would decide to circumvent that law and write into statute a 
     special deal for BPA is virtually nil.
       There is no apparent authority for BPA to assess an ``exit 
     fee.'' While BPA's rates are subject to ``confirmation and 
     approval'' by FERC that they are sufficient to assure 
     repayment of the Federal investment over a reasonable number 
     of years and are based on total system costs, this authority 
     is unlikely to mean that ``stranded investment'' can be 
     encompassed. If the issue comes to a head at the Commission, 
     it is perhaps more likely to result from application of the 
     FERC's regulations dealing that transmission.
       The Energy Policy Act of 1992 specifies that FERC has the 
     authority to ``order the Administrator of the Bonneville 
     Power Administration to provide transmission service and 
     establish the terms and conditions of such service.'' While 
     provisions of ``otherwise applicable Federal laws'' continue 
     in full force and effect, FERC is charged with determining 
     that ``no rate for transmission of power on the system shall 
     be unjust, unreasonable, or unduly discriminatory or 
     preferential.'' Administrative procedures for requesting 
     transmission services from BPA are outlined in the law, and 
     BPA cannot be required to provide transmission service ``if 
     such order would impair the Administration's ability to 
     provide such transmission services to the Administrator's 
     power and transmission customers in the Pacific Northwest.''
       BPA is defined under the National Energy Policy Act as a 
     ``transmitting utility'' because it ``owns or operates 
     electric power transmission facilities which are used for the 
     sale of electricity at wholesale.''
       It's important to understand what FERC is doing in the area 
     of transmission.
       The Commission has issued a major proposed rule on this 
     issue.
       Under the proposal, IOUs are required to file generic 
     nondiscriminatory open access transmission tariffs that will 
     assure ``comparability'' between use of transmission systems 
     by the transmitting utility and third party transmission 
     customers.
       The tariffs would functionally ``unbundle'' wholesale 
     transmission from wholesale bulk power sales.
       Each utility must have a tariff for network service, and 
     for firm point-to-point service, including the necessary 
     ancillary services.
       The tariffs would include a duty to expand transmission 
     capacity where necessary, and reassignment rights for firm 
     point-to-point service.
       Firm service requests would have the same priority as new 
     transmission service for the utility's native load.
       Utilities must also make available to potential 
     transmission users the same electronic network information 
     they use for their own transmission activities.
       All transmission tariffs will contain a reciprocity clause.
       With respect to ``stranded investment,'' FERC postulates 
     two situations:
       1. Wholesale contracts executed after July 11, 1994, would 
     be subject to recovery only if specifically provided for 
     under contract.
       2. For existing wholesale requirements customers, IOUs may 
     seek recovery of stranded costs through transmission rates if 
     (a) the contracts do not
      explicity address such recovery, and (b) the utility can 
     show it had ``a reasonable expectation'' of continued 
     service to the customer beyond expiration of the contract 
     term. There is a rebuttal presumption that if contracts 
     contain notice provisions, the utility had no reasonable 
     expectation of continuing to serve the customer beyond the 
     notice period.
       The IOU must attempt to ``mitigate'' stranded investment, 
     by absorbing, marketing or selling it, over a reasonable 
     period of time, and the customer must be given advance notice 
     of the maximum charge if no mitigation occurs.
       FERC's proposal provides that utilities that are not 
     private power companies but are ``transmitting utilities'' 
     can file a request to recover stranded investment under 
     sections of the Federal Power Act dealing with transmission. 
     However, they would be required to make the same evidentiary 
     demonstration that is required of private power companies 
     seeking extra-contractual stranded investment cost recovery.
       In April, Senator Mark Hatfield of Oregon held a hearing on 
     BPA problems. I think some of the material presented by 
     public power is significant. Here are some pertinent parts:
       While debt of the Washington Public Power Supply System is 
     controlled and is actually declining due to refinancing and 
     other cost control measures, making it a predictable and 
     certain future customer obligation, fish costs are 
     uncontrolled and escalating. Since 1990, the annual fish cost 
     (both capital and [[Page S 8627]] revenue expenditures) have 
     more than doubled and continue to increase each year.
       Forty percent of BPA's fish and wildlife costs are for the 
     direct cost of the program, while 60 percent of the cost of 
     the program is attributable to the cost of power purchases to 
     meet flow requirements and revenues foregone because of spill 
     or altered hydro availability. Fish and wildlife costs are 19 
     percent of EPA's total costs.
       Reducing the generating capability for the Columbia River 
     Hydro System is not a stranded investment subject to an exit 
     fee concept. It is a change of water use by the federal 
     government which should be subject to a recalculation of the 
     repayment obligation. Transmission under the 1992 changes in 
     the Energy Policy Act is a common carrier which should not be 
     subject to external costs not related to construction and 
     operation of transmission services.
       BPA's resource base is 12,000 MW of installed, renewable 
     and low-cost hydro. The advantage of purchasing power long-
     term from BPA is that it gives a utility access to this 
     federal hydroelectric system, which is insulated from changes 
     in energy costs due to changes in fuel prices. Gas prices and 
     the price of alternate suppliers will not stay low forever 
     while BPA;s costs will decline as the Supply System debt is 
     paid off. This is reason to believe that the BPA will 
     continue to provide cost-effective electricity in the future. 
     A long-term contract with BPA lessens the amount of decision-
     making on power supply that a utility needs to make. This 
     creates a sense of ``one-stop shopping'' versus being an 
     active participant in the market place. If BPA;s one 
     environmental externality (fish and wildlife concerns) can be 
     addressed in an economically sustainable fashion, this system 
     looks very good for a very long time.
       BPA's future is not the only issue before Congress of 
     interest to public power in the Pacific Northwest. For 
     instance, Senator Slade Gorton of Washington is circulating a 
     discussion draft of legislation to remove the public power 
     exemption from regulation of pole attachments by the Federal 
     Communications Commission. If his proposal were enacted into 
     law as part of the telecommunications legislation pending in 
     the Senate, FCC staff in Washington would decide what you 
     could charge for use of your facilities and rights-of-way.
       As many of you know, earlier this month, the House of 
     Representatives, by a vote of 309-100, approved an amendment 
     to the Clean Water Act that affirms the Federal Energy 
     Regulatory Commission's proper role as a final arbiter over 
     hydro-project licensing cases where Section 401 conditions 
     conflict with FERC's responsibilities under the Federal Power 
     Act. The people who helped make that happen include 
     Representative Randy Tate and Representative Norm Dicks of 
     Washington and Representative Helen Chenoweth of Idaho. The 
     focus now shifts to the Senate, where we again need to 
     explain the need for a final decision-maker to resolve 
     federal-state disputes.
       But Bonneville is the big issue. I think the stakes are 
     large and immediate. If the hemorrhaging of water and money 
     cannot be stopped, the agency is not a viable institution. It 
     is unlikely that federal taxpayers will subsidize the 
     operation, and it is unreasonable to expect Northwest 
     electricity consumers to pay more than the going price for 
     power. If the worst happens, Congress is likely to endorse an 
     asset sale of a failing business. That shouldn't happen, and 
     it doesn't need to happen. But your involvement in preventing 
     it from happening is the essential ingredient.
       It is important to understand a change in relationships 
     that has taken place in the Pacific Northwest in recent 
     years.
       A long-term paternalistic resource planning and acquisition 
     role for BPA is no longer sustainable in an era where 
     planning horizons have shortened to five years and there are 
     literally scores of potential suppliers, some with offerings 
     that cost only \1/2\ of Bonneville's current rates.
       Technology choices have changed. Gas-fired combustion 
     turbines can be ordered and brought on-line in less than a 
     year, supplying power with efficiencies of up to 60 percent 
     and prices lower than new hydro.
       The partnership of BPA and preference customers cannot be 
     the same when federal power costs more than purchases from 
     IOUs.
       Consumer-owned utilities have made payments to BPA over 
     five decades and have built up the significant equity in the 
     system. They have a continuing interest in protecting and 
     enhancing that investment, but like BPA, they must adjust to 
     a world where competitive bidding has replaced sole source 
     suppliers.
       BPA will have a more limited role in providing load growth 
     services to its customers. In the future, this will more 
     likely be the province of utilities, acting alone or in 
     concert to diversify supply and reduce risk.
       You have your responsibility to your user-owners. BPA has 
     its responsibility to taxpayers. But both of you benefit from 
     working together. And that effort needs to take place 
     now.
     

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