[Federal Register Volume 64, Number 122 (Friday, June 25, 1999)]
[Notices]
[Pages 34433-34464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16019]


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DEPARTMENT OF ENERGY

Western Area Power Administration


Power Allocation Issues

AGENCY: Western Area Power Administration, DOE.

ACTION: Notice of inquiry.

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SUMMARY: The Western Area Power Administration (Western) has completed 
its inquiry regarding the impact of electric utility industry 
restructuring on Western's power allocation policies. This Federal 
Register (FR) notice contains Western's responses to comments on the 
issues raised by the inquiry. Contemporaneously, Western is publishing 
the final 2004 Power Marketing Plan for the Sierra Nevada Customer 
Service Region (SNR) and the final Salt Lake City Area Integrated 
Projects (SLCA/IP) Marketing Criteria.

FOR FURTHER INFORMATION CONTACT:

Robert C. Fullerton, Project Manager, Corporate Services Office, 
Western Area Power Administration, 1627 Cole Boulevard, PO Box 3402, 
Golden, CO 80401-0098, telephone (303) 275-2700, email: 
[email protected].
Joel K. Bladow, Regional Manager, Rocky Mountain Region, Western Area 
Power Administration, PO Box 3700, Loveland, CO 80539-3003, telephone 
(970) 490-7201, email: [email protected].
J. Tyler Carlson, Regional Manager, Desert Southwest Region, Western 
Area Power Administration, PO Box 6457, Phoenix, AZ 85005-6457, 
telephone (602) 352-2453, email: [email protected].
David Sabo, Customer Service Center Manager, Colorado River Storage 
Project, Western Area Power Administration, PO Box 11606, Salt Lake 
City, UT 84147-0606, telephone (801) 524-6372, email: [email protected].
Jerry W. Toenyes, Regional Manager, Sierra Nevada Region, Western Area 
Power Administration, 114 Parkshore Drive, Folsom, CA 95630-4710, 
telephone (916) 353-4418, email: [email protected].
Gerald C. Wegner, Regional Manager, Upper Great Plains Region, Western 
Area Power Administration, PO Box 35800, Billings, MT 59107-5800, 
telephone (406) 247-7405, email: [email protected].

SUPPLEMENTARY INFORMATION:

Authorities

    This public process is being conducted pursuant to the Department 
of Energy (DOE) Organization Act (42 U.S.C. 7101, et seq.); the 
Reclamation Act of 1902 (43 U.S.C. 371, et seq.), as amended and 
supplemented by subsequent enactments, particularly section 9(c) of the 
Reclamation Project Act of 1939 (43 U.S.C. 485h(c)); and

[[Page 34434]]

other acts specifically applicable to the projects involved.

Background

    Western is a Federal power marketing administration (PMA), charged 
with the responsibility of marketing electricity generated by power 
plants operated by the Bureau of Reclamation (Reclamation), the Corps 
of Engineers, and the International Boundary and Water Commission. 
Created in 1977, Western markets on a wholesale basis and transmits 
Federal hydroelectric power throughout 1.3 million square miles to more 
than 600 customers, including rural electric cooperatives, municipal 
utilities, public utility districts, Federal and State agencies, 
irrigation districts, and Native American tribes. Western's power 
customers, in turn, provide service to millions of consumers in 15 
western States.
    Western markets power on a project-specific basis. A marketing plan 
for each project is developed through a public process, with 
opportunity for comment on a marketing proposal before publication of 
the final marketing plan in the Federal Register. Reclamation law 
governs how Western markets electricity, including the requirement that 
Western offer power first to certain nonprofit entities such as rural 
electric cooperatives and municipalities.
    On December 1, 1998, Western published in the Federal Register a 
Notice of Inquiry to explore the impact of electric utility industry 
restructuring on Western's power allocation policies (63 FR 66166). A 
forum was held in Denver on January 6, 1999, to receive public comment 
on this matter, and written comments were accepted from the public 
until the end of the 45-day consultation and comment period. In this 
Federal Register notice, Western is addressing comments received during 
the electric utility industry restructuring inquiry.
    Western received a number of comments on the size of project-
specific resource pools in response to our Notice of Inquiry. Because 
of these comments and expressions of interest in an allocation of 
Federal power from several Indian tribes, Western decided to open an 
additional 30-day comment period focused solely on the issue of the 
size of project-specific resource pools. Informational meetings on 
Western's resource pool size proposals and the requirements for 
receiving an allocation of power were held in Phoenix, Arizona, 
Albuquerque, New Mexico and Folsom, California. Resource pool size 
comments are being addressed in the 2004 marketing plans for the 
Central Valley, Washoe, and Salt Lake City Area Integrated Projects.
    As some comments and responses use certain project names 
interchangeably, some definition is needed in order to avoid confusion. 
Western's 2004 Power Marketing Plan for the Sierra Nevada Customer 
Service Region governs marketing from the Central Valley Project (CVP) 
and the Washoe Project. Western's Salt Lake City Area Integrated 
Projects Marketing Criteria cover power marketing from the Colorado 
River Storage Project (CRSP), the Collbran Project, and the Rio Grande 
Project.

Summary of Western's Response to the Notice of Inquiry

    In response to changes in the utility industry, Western's power 
allocation policies have been altered in a responsible and proactive 
manner. More flexibility has been added to Western's power sales 
contracts, and Western has made significant changes to our marketing 
policies that emphasize customer choice and diminish Western's future 
need for appropriations to purchase power. Western's contracts will 
accommodate, rather than impede, environmentally beneficial changes in 
operations at large Federal dams in the west. Widespread benefit will 
be achieved through power allocations to Native American tribes without 
the need for formation of tribal utilities. Contractual provisions will 
continue to prohibit inappropriate resale of Western's power and assure 
that consumers receive the benefits of cost-based Federal 
hydroelectricity. Although no additional changes to Western's power 
marketing policies will be adopted at this time, Western likely will 
evaluate the impact of electric utility industry restructuring on a 
periodic basis to assure that our policies continue to be responsive to 
public needs.

Legal Analysis

Regulatory Flexibility Analysis

    The Regulatory Flexibility Act of 1980 (5 U.S.C. 601, et seq.) 
requires Federal agencies to perform a regulatory flexibility analysis 
if a final rule is likely to have a significant economic impact on a 
substantial number of small entities and there is a legal requirement 
to issue a general notice of proposed rulemaking. Western has 
determined that this action does not require a regulatory flexibility 
analysis since it is a policy inquiry rather than a rulemaking, and the 
subject of the inquiry involves policies applicable to public property.

Environmental Compliance

    DOE National Environmental Policy Act (NEPA) regulations 
categorically exclude marketing plans from NEPA documentation unless 
they involve new generation, new transmission, or a change in 
operations. Therefore, Western will not conduct further evaluation 
under NEPA as part of this power allocation issues notice of inquiry. 
Considerable environmental evaluation has already occurred under the 
Energy Planning and Management Program (EPAMP) and during project-
specific marketing plan development.

Review Under Paperwork Reduction Act

    As no collection of information will take place as a result of this 
Federal Register notice, no review under the Paperwork Reduction Act of 
1980 (44 U.S.C. 3501, et seq.) is necessary.

Review Under Executive Order 12866

    Western has an exemption from centralized regulatory review under 
Executive Order 12866; accordingly, no clearance of this notice by the 
Office of Management and Budget is required.

Small Business Regulatory Enforcement Fairness Act

    Western has determined that this Federal Register notice is exempt 
from congressional notification requirements under 5 U.S.C. 801 because 
it is a policy inquiry rather than a rulemaking, and the subject of the 
inquiry involves procedures and policies applicable to public property.

Federalism Assessment

    This Federal Register notice will not have substantial direct 
effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. Therefore, in 
accordance with Executive Orders 12612 and 13083, it is determined that 
this notice does not have sufficient federalism implications to warrant 
the preparation of a Federalism Assessment.

Response to Comments on Notice of Inquiry

    Western has received extensive public comment on the impact of 
electric utility industry restructuring on Western's power allocation 
policies. These comments relate to six questions that were posed during 
the public process, which address the impact of State retail 
competition statutes on how we sell electricity. Public comments, and 
Western's responses to those comments, are set forth below and

[[Page 34435]]

organized under each of the six questions.

Question

    1. Should Western's power allocations system, including the term of 
firm power contract renewals, be modified to take into account changes 
in electricity markets that have occurred, and are expected to occur in 
the future, due to the enactment of California Assembly Bill 1890 and 
other State retail competition statutes? If so, please explain what 
modifications would be desirable. If not, please explain why the 
present system should be preserved.

A. Goals of Restructuring

    Comment: The intended goal of electric utility restructuring is to 
promote competition, so as to lower power costs to the consumer. That 
goal is already being met by Western's existing power allocation 
system. Loss of the resource will increase costs to and punish the 
retail consumer, a result that is contrary to the intended results of 
retail competition.
    Response: Lower power cost to consumers is the ultimate goal of 
utility restructuring. Western's power allocations promote yardstick 
competition in the electricity industry and result in lower power costs 
to the consumers served by Western's customers.

B. Federalism

    Comments: Western should give a great deal of deference to 
federalism. Many of the suggested changes in Western's Notice of 
Inquiry would insert Western into State policy determinations. To date, 
the United States Congress has been extremely careful in respecting 
State jurisdiction in matters as extensive and complex as those within 
the power industry. Western should not tread where Congress has chosen 
not to go.
    We appreciate your efforts to assure that the Federal power 
program's policies are contemporaneous with the needs of customers and 
the changes in the industry. However, we do not believe that the six 
issues posed in this inquiry will strengthen the program or increase 
the value of the Federal power resources. We believe these issues 
should be addressed at the State level.
    Response: Issues of retail service, retail rates and consumer 
choice in power supply have been addressed at the State and local 
levels in the past. As Congress has not identified what Federal purpose 
would be served by modification of this historic responsibility, 
Western believes these issues are better addressed at the State level. 
The Clinton Administration's electric utility restructuring bill 
encourages States to take the lead on these issues.
    Comment: Why should the Federal policy on power allocations be 
changed due to State legislative action? State interests should not 
supersede Federal interests.
    Response: As a matter of policy and practicality, Western views the 
establishment of Federal policy through mirroring of State legislative 
or regulatory action as problematic.
    Comment: Western should not interfere with the federalism that has 
served our nation well in accommodating the different needs of each 
region.
    Response: Accommodating regional needs is important to Western. As 
a PMA, our mission is very much regional in nature. Western markets 
power on a project-specific basis, which allows the crafting of 
marketing plans that are responsive to regional needs.
    Comment: We understand that the Clinton Administration supports 
State implementation of electric utility restructuring, and we are 
concerned that Western not impose requirements beyond those required by 
California law.
    Response: Western has no desire to impose requirements beyond those 
required by California law.

C. Policy Diversity

    Comments: Retail access has not been uniformly implemented among 
the States in Western's service territory. Retail access and utility 
restructuring are being addressed to varying degrees on varying 
timetables. Restructuring is an evolutionary process and substantial 
discretion is left to each State to determine how best to serve their 
interests.
    Because of the wide variety of approaches being considered or 
implemented by the various States in which Western currently has 
responsibility for marketing Federal resources, it will be impossible 
for Western to have a uniform or equitable approach in each 
jurisdiction, even setting aside the issue of Federal/State 
relationships.
    The States should mold their restructuring plans around Western 
rather than Western trying to mold their allocation system around each 
State.
    Response: Western agrees that adopting a policy that mirrors 
evolving State action would be difficult.
    Comment: No modification should take place in Western's power 
allocations to satisfy the needs created by California's electric 
deregulation.
    Response: Western does not intend to force California standards on 
customers elsewhere in our service territory.
    Comment: Western should not set national standards for all of its 
projects. The regional nature of Western's projects should be 
recognized.
    Response: Western will continue to market power on a project-
specific basis, in a manner that is sensitive to regional needs.

D. Yardstick Competition or Distortion of Markets?

    Comments: Western's current allocation system should be changed 
because competitive wholesale and retail electricity markets make the 
inherent market distortions caused by PMA power even greater. It is 
patently unfair for the Federal Government to subsidize a few select 
players in a competitive market, to be picking winners and losers among 
electricity suppliers.
    Western's power allocation system should be modified to take into 
account industry changes. Under the current scheme, the Federal 
Government is essentially stacking the deck against private, taxpaying 
utilities and other power generators in favor of subsidized customers 
who provide low cost power to a select few. Because the wholesale 
market today is already competitive, such a stacking of the deck is 
incongruous with the nation's goals as set forth in the Energy Policy 
Act of 1992.
    Response: Marketing of Federal hydropower to nonprofit public 
bodies first is in accordance with law. Although many changes have 
taken place in the utility industry in recent years, the policy of not 
allowing profit to be made on Federal power resources constructed with 
taxpayer dollars remains relevant today.
    All successful competitors in the electricity marketplace have 
certain competitive advantages, including investor-owned utilities. 
Some investor-owned utilities (IOUs) have such attributes as size, 
access to capital, economies of scale, greater customer density, use of 
investment tax credits, access to tax-exempt bonds for purposes such as 
financing pollution control equipment, and favorable tax treatment of 
depreciation. Some jurisdictions allow recovery of stranded costs on 
favorable terms for IOUs.
    Comments: One of the original intents of the Federal power program 
was and still is to provide a yardstick to measure competition and 
provide a counterbalance to private sector interests. At this time of 
restructuring and volatile wholesale prices,

[[Page 34436]]

abandoning that yardstick will leave consumer-owned electric utilities 
and their consumers no means of assessing the conditions of the 
marketplace.
    Equity and a level playing field for all types of utilities clearly 
points to a prompt renewal of CVP and CRSP contracts under the 2004 
marketing plans at high percentage levels.
    Western's allocation policies have helped promote ``yardstick'' 
competition among utility suppliers. Existing allocation policies have 
in large part supported the continued ability of our small municipal 
utility systems to provide competitively priced power to all our 
consumers, not just a few of the larger consumers as we believe will be 
the inevitable result if industry restructuring is mandated at the 
Federal or State level.
    A recommitment to the original purposes of the Federal power 
program will better serve the country and Western's customers. The need 
for a yardstick to measure competition is more important than ever. 
There has yet to be a demonstration that industry restructuring will 
benefit all consumers. Developments in industry restructuring to date 
have only benefited a narrow class of customers-large industrial and 
commercial loads. Small communities and rural areas--Western's customer 
base--may be distinctly disadvantaged by some of the industry changes 
that have been proposed.
    Response: Western's power allocation policies preserve stability 
and competitive balance in the utility business. As small communities 
and rural areas are served by a significant portion of our customer 
base, Western is cautious about changing its policies to the possible 
detriment of consumers in less populated areas.

E. Policy Basis

    Comments: Western would be grossly premature in making changes to 
address nonexistent or moving targets in restructuring. In addition, 
the form of the present California market is undergoing rapid and 
unpredictable changes. To modify the present 2004 marketing plan would 
be a futile exercise.
    Modifying Western's power allocation system based on possible 
developments in State legislatures is conjectural and represents a bad 
model for policy development. There is no reason to change Western's 
power allocation system because of development in the States. State 
actions do not compromise Western's role in the electric utility 
industry, and in fact may make Western's role more important.
    Western should not take into account changes it expects to occur 
because of State statutes allowing retail competition. Some States will 
not adopt statutes and the statutes that are adopted will not be the 
same. Speculation on what the future may hold is not a sound business 
practice.
    Any initiative which results in Western reducing power allocations 
on the speculative assumption that industry restructuring will be 
mandated in our State or that it will be good for all consumers in our 
State simply exacerbates the seriousness of the resource stability 
issue that small municipal utilities are vitally concerned about.
    Response: The scope and pace of changes in the utility industry 
cannot be predicted with certainty. Adopting significant additional 
policy changes today, when the policy debate is fluid and the outcome 
is far from certain, is imprudent.
    Comment: Changing Western's power allocation policies as suggested 
by the question will impede competition and not promote it. The current 
merger mania is being fueled by the debate on industry restructuring. 
Investor-owned utilities realize that maximizing profits in 
restructured markets is dependent on their ability to increase market 
share. Any action by Western that detrimentally impacts the ability of 
small municipal and rural-based systems to survive and continue to 
offer first-rate service at a competitive price will lead to increased 
concentration of electric supply in the hands of a few, larger 
companies. This does not foster competition, it discourages it. 
Confirmation of existing policies and extension of resources will 
promote and preserve competition in electric supply markets.
    Response: Yardstick competition has added value to the electricity 
marketplace. Competition is not served if Western adopts policies that 
undermine the diversity of the industry by accelerating the 
consolidation of power supply.
    Comment: Notwithstanding our belief that Federal law would need to 
be changed, we do not believe the policy changes suggested by these 
questions are prudent on their face. In general, these policies would 
add both instability to and disrupt what is already much uncertainty 
related to the future of power supply resources in a time of 
deregulation.
    Response: Adding instability and disruption to power supply 
resources is not sound policy.
    Comment: Policy decisions on Western's power should not be made in 
a vacuum. Western's policies should be examined in light of other 
Federal actions which affect the electric utility industry.
    Response: Many public power entities do not purchase power from 
Western, so changes in Western's allocation policies have a limited 
impact nationally.
    Comment: The customers who purchase power from the Southeastern 
Power Administration are concerned that DOE would modify the policies 
governing the Federal power program to accommodate nascent changes in 
retail utility markets in a handful of States. We are unaware of any 
evidence that the Federal power program has impeded implementation of 
retail competition.
    Response: Western believes that the sale of cost-based hydropower 
to not-for-profit utilities aids competition in the industry. Far from 
undermining competition, diversity of participation stimulates and 
strengthens the marketplace.
    Comment: The world has changed since the adoption of the Energy 
Planning and Management Program in 1995. Modest changes to the rules 
would meet the need to address retail wheeling.
    Response: Western believes that the changes to its past marketing 
and allocation policies, as set forth in the 2004 marketing plans for 
the CVP, Washoe, and SLCA/IP, are responsive to changes in the utility 
industry.
    Comments: Western's Notice of Inquiry has the appearance of 
searching for a rationale or justification for changing policy.
    We were disappointed to receive the inquiry from Western, as it 
seems to be just another attack on public power cloaked in the shroud 
of industry restructuring. The questions overlook the fact that public 
power and the historical distribution of Western power have fostered 
more competition than will likely occur from restructuring.
    Response: Western agrees that public power and the marketing of 
power by Western have promoted competition in the past, to the benefit 
of consumers.
    Comments: Western should change its allocation policies, as the 
original purpose for preference allocations has changed, and the West 
has been electrified. Restructuring demands changes to the existing 
allocation scheme.
    The PMAs and Tennessee Valley Authority were originally established 
during the Great Depression to speed the delivery of electricity to 
farms and rural areas and to service municipal utilities. Only 11 
percent of rural citizens were receiving the benefits of electric 
service at that time. Virtually no

[[Page 34437]]

competition existed among utilities. At that time, IOUs were unable to 
finance rural electrification because of the lack of available capital 
at affordable rates.
    Cost-based PMA power was reserved first for preference entities, 
with subsidies seen as tools for promoting economic development. 
Economic circumstances in many of these areas have improved 
dramatically and the original reasons for creating such subsidized 
sales of power no longer exist. Rural America is no longer without 
electricity, nor is rural America any poorer than urban America.
    Congress established the current allocation system based on the 
diversity in electric markets, the cost of owning, operating and 
maintaining electric facilities, and the need for the region to access 
affordable electric energy. The basis for that decision is as valid 
today as when the lights first came on. Electric utility restructuring 
will provide little benefit to remote, sparsely populated, and 
economically depressed rural areas. The lack of economic activity, 
which initially served as a vital deterrent to conventional electric 
utility development, is more pervasive today than it was when rural 
areas were first evaluated as potential markets for electric energy.
    Response: Although electrification of rural America has been 
largely accomplished, it is not universal. For example, Western has 
received comments during this public process that thousands of 
residents on the Navajo Reservation in northern Arizona do not have 
electrical service.
    As is the case with every utility in the United States, consumers 
in Western's service territory vary in their prosperity. Many of 
Western's customers serve areas that are economically depressed. 
Allocations of Western power are important to economic development in 
those regions.
    Comment: Western and the other PMAs are in need of an overhaul. 
America's needs are different today than they were at the time historic 
Reclamation laws were enacted. While the burdens of Federal preference 
allocations continue to be shared by all, the benefits appear to flow 
only to a few. At a time when both government and industry are trying 
to do more with less, it is difficult to find the public interest in a 
program where the electricity bills of one select group of citizens are 
subsidized to the exclusion of others. At a time when energy 
conservation has never been more important, it is difficult to find the 
public interest in a scheme where the United States sells electricity 
at below market rates, thereby encouraging inefficient use, waste and 
unnecessary adverse impacts to our country's natural resources. And at 
a time in which the Congress has mandated wholesale competition of 
electricity and functional unbundling of generation and transmission, 
it is difficult to find the public interest in a program that depends 
on vertical integration to support its continuation.
    Response: As a regional PMA, the economic benefit of the power sold 
by Western is enjoyed by entities in the region. This is not a unique 
situation. The economic benefit of other Federal programs is often also 
regional in scope, whether the investment is in military bases, mass 
transit, national parks, or locks and dams that promote commerce on the 
Nation's rivers.
    Western is doing more with less. Our staffing levels have been cut 
25 percent over the last several years in order to assure that our 
power rates remain stable and our goods and services remain marketable. 
Moreover, Western's rates are not subsidized. Western markets cost-
based hydroelectric resources, which are relatively inflation resistant 
as compared to non-hydro generation due to the absence of fuel costs. 
In addition, Western has no responsibility to meet load growth with 
relatively expensive additional power. Western's hydropower resources 
are reasonably priced due to these factors, and not because of 
subsidies.
    Western is proud of its record, and the record of its customers, in 
conservation and renewable resources. According to the annual reports 
from customers pursuant to Western's Integrated Resource Planning (IRP) 
regulations, Western's customers avoided in 1998 the equivalent of over 
555 megawatts (MW) of supply side resource acquisition due to 
investment in demand-side management. Also in 1998, over 1140 MW of 
renewable resources were acquired by customers.
    The Federal power program does not depend on continuation of 
vertical integration. For those customers that embrace separation of 
functions, Western will market its power to the function responsible 
for service to retail consumers. Yardstick competition will continue to 
play an important role in enhancing competition in the marketplace, 
with the goal of lowering rates to all consumers.
    Comment: We are concerned that any significant changes to Western's 
2004 marketing plan may increase uncertainty at a critical time and 
lead to increasing government bureaucracy. Changes to Western's 
existing power allocation system would likely decrease allocations to 
existing customers and cause power rates to consumers served by 
Western's customers to rise. Higher electric rates are contrary to the 
goals of retail competition.
    Response: Western is committed to carrying out its mission in a 
businesslike and cost conscious manner. Creation of a government 
bureaucracy which adds no value to our programs is inappropriate and 
puts upward pressure on Western's rates.

F. Western's Role

    Comments: Western has already demonstrated and continues to work to 
adapt both its organization and the renewals it is making on contracts 
for Federal power, recognizing changes in the industry while at the 
same time preserving and respecting its Federally mandated mission.
    Western's marketing policies are keeping pace with industry 
restructuring. The extensive public process utilized by Western to 
develop marketing policy has served its purpose very well.
    We feel that the present 2004 CVP marketing plan is the logical 
evolution of several predecessor marketing plans. With each stage of 
the evolution, the Western system has gained the flexibility which was 
sorely needed.
    Western's marketing plans already have provisions to adapt Western 
to the new marketplace. For example, the CVP 2004 marketing plan offers 
unbundled services and allows customers to choose what they need. The 
marketing plan is optimized for who Western is and the role they play 
in the marketplace.
    Western is already responding to industry changes as a wholesale 
power supplier. By separating its transmission function from its power 
marketing function, posting its surplus transmission on an open access 
same time information system site, and participating on the California 
Independent System Operator (ISO) governing board, Western has 
demonstrated its forward looking approach.
    Electricity restructuring is an evolutionary process that will take 
many years to complete, and the eventual outcome is uncertain. Western 
has taken into account industry restructuring changes in its proposed 
marketing plans, which would sell a significantly different resource 
from what is marketed today.
    Western's power allocation system should be retained in order to 
preserve consistency between the past and the future.
    Response: Continuation of past policies without taking into account 
changes in the utility industry is

[[Page 34438]]

unwise. Western agrees there is risk in predicting the future actions 
of Congress, State legislatures, and regulators. However, there is also 
risk in not adjusting business practices until there is absolute 
certainty.
    Western has taken significant steps to respond to industry changes. 
Even though Western is not under the jurisdiction of FERC for this 
purpose, functional separation of its merchant and reliability 
functions has proceeded. Western is actively involved in the formation 
of independent system operators, and has taken on the roles of security 
coordination in the Rocky Mountain subregion of the Western Systems 
Coordinating Council and schedule coordination in northern California. 
Open access transmission rates and rates for ancillary services have 
been developed. Western has also pursued efficiencies in its operations 
and cut its staffing level and associated costs in order to assure that 
our rates are stable and our power remains marketable. Western is 
committed to being businesslike and responding to the changes in the 
utility industry in a responsible and proactive manner.
    In recent years, Western has added more flexibility to its power 
marketing policies and power sales contracts than has existed in the 
past. Contracts recently signed for the Pick-Sloan Missouri Basin 
Program-Eastern Division and the Loveland Area Projects contain 
withdrawal opportunities at 5 and 10 years to meet the needs of 
potential new customers and other purposes as determined by Western. 
Western also reserved the contractual ability to adjust power 
commitments in response to changes in operations and hydrology. In 
addition, Western has the full flexibility to adjust its power rates 
under the terms of the contracts. Resource pools of up to 6 percent of 
the marketable resource were set aside to meet the needs of new 
customers, including Indian tribes. These changes demonstrate Western's 
commitment to adjusting its marketing policies as changes take place in 
the utility industry.
    Western has also made significant additional changes in the way 
power is marketed in its most recent marketing plans. Under the 2004 
Power Marketing Plan for the SNR, Western will no longer market a 
resource that anticipates significant purchasing of power to meet 
contractual commitments. Instead, Western plans to market the 
hydroelectric resource as a base resource, which can be enhanced by 
custom products (such as firming power and ancillary services) at the 
election of the customer. Similarly, the marketing plan for the SLCA/IP 
will allow the customer to choose whether Western should purchase 
firming power. These changes promote customer choice and will 
significantly impact Western's future need for purchase power 
appropriations.
    Comments: Western appears to be pursuing a course of promoting 
retail wheeling indirectly even though its sister Federal agency, the 
Federal Energy Regulatory Commission, has been prohibited by Congress 
from pursuing this course directly in section 212(h) of the Federal 
Power Act.
    The questions posed by Western appear to be predicated on 
assumptions that it has a broad regulatory and legislative authority 
and that the impacts of its decisions will be limited. Neither 
predicate is accurate. Western's authority is not one of a regulator, 
but of a marketer with limited authority.
    Do not lose sight of Western's limited statutory role. Investor-
owned utilities and marketers would undoubtedly oppose a shift in 
mission from a wholesale supplier to a retail utility.
    Industry changes do not justify a more ``activist'' role for the 
PMAs. A more active role runs counter to the belief that exists in the 
Pacific Northwest, where the four governors engaged in a comprehensive 
regional review of the future role of the Bonneville Power 
Administration (BPA). The regional review rejected the notion of a more 
activist BPA, and made several recommendations to limit the role of 
BPA, including a preclusion of direct retail sales beyond existing 
direct service customers.
    Expanding Western's role to include direct retail sales, rate 
regulatory review of consumer-owned utilities and load profile analysis 
is unnecessary and inconsistent with the desired reduction in the role 
of the PMAs in a competitive marketplace.
    Affirmative answers to the six questions would launch Western into 
activities that vastly exceed its statutory authority. In the past, 
Congress has been clear when it directs an expansion of Western's role 
beyond that of a wholesale supplier (such as the IRP) requirement for 
Western customers. Congress has not directed Western to take on the 
role suggested in the Notice of Inquiry. While BPA has statutory 
responsibilities that are greater than Western's, BPA cannot undertake 
many of the activities contemplated by the Notice. Moreover, the Public 
Power Council would oppose BPA attempting to engage in such activities.
    We believe Western's function is for the benefit of the region it 
serves. Restructuring along the lines of this Notice of Inquiry could 
lead Western to operate outside its boundaries to the detriment of 
existing customers and perhaps even create a situation where Federal 
agency competes with Federal agency. Western's current responsibilities 
for supplying power take into account a number of State and regional 
issues dealing with power, but also extend beyond power delivery to 
other resource issues such as water management and impacts on the 
environment.
    Response: Western is persuaded by these comments, and will not 
change its general role in the manner suggested by the Allocation 
Issues Inquiry. Although Western has broad statutory authority, there 
is no compelling policy rationale for Western to become more activist 
in its role. The goal of the Clinton Administration, which is to have a 
smaller government that works better and costs less, would be undercut 
if Western adopts the wide ranging new responsibilities suggested by 
the Inquiry.
    Comment: Western should not build resources.
    Response: Western has no plans to construct new power resources.
    Comments: Federal power is marketed in accordance with Reclamation 
law. Consequently, the allocation and rate-setting policies of Western 
are not identical to the practices of other electric utilities. Federal 
Reclamation projects were developed not as a means for the generation 
of electricity, but as a means of generating revenues to repay Federal 
investment in these projects, including irrigation assistance.
    Multipurpose Federal project operation is unique as compared to 
other resources that have more flexibility in a competitive power 
market to meet individual loads.
    Response: Western has less flexibility than other participants in 
the competitive marketplace due to the multipurpose nature of the 
resources we market. Western agrees that our role is to market power in 
such a manner as to repay Federal investment.
    Comment: As an agency of the Federal Government, Western is not 
subject to deregulation rules promulgated by the FERC. Nor is Western 
subject to the jurisdiction of State legislatures or public utility 
commissions.
    Response: Although the Clinton Administration's restructuring bill 
would make Western's transmission rates subject to FERC review as a 
matter of law, Western is not a public utility and therefore is not 
presently subject to FERC jurisdiction under section 205 and section 
206 of the Federal Power Act. However, as a transmitting utility,

[[Page 34439]]

Western is subject to sections 211-213 of the Federal Power Act. 
Western is not subject to the jurisdiction of State legislatures or 
public utility commissions.

G. Customer Support, Leadership and Reliance

    Comment: The Natural Resources Defense Council (NRDC) applauds the 
good stewardship example that has been set by northern California 
customers of the Central Valley Project. In our judgment, that record 
justifies both renewal of these customers' contracts and your 
insistence that other customers meet the same high standard in return 
for contract extensions.
    In an increasingly competitive and environmentally constrained 
industry, access to inexpensive power supplies should be limited to 
distribution companies that make convincing commitments to use 
electricity efficiently and to expand inventories of relatively benign 
production. This is precisely what we have seen from the Sacramento 
Municipal Utility District (SMUD), City of Redding Electric Department, 
Silicon Valley Power, City of Palo Alto Department of Utilities, and 
the Northern California Power Agency. These institutions have made 
three overriding commitments: (1) Through 2001 at least, they will 
devote at least 3 percent of retail electric revenues to long-term 
investments in energy efficiency, renewable energy, and low-income 
energy services; (2) after 2001, they will at least match California 
investor-owned utilities' investments in these categories as a fraction 
of retail sales; and (3) they will annually underwrite and publish 
independent experts' reviews of all such investments. Those commitments 
place these northern California institutions in the forefront of public 
power nationally and amply justify a contract extension.
    Response: Western appreciates the support of the SNR 2004 marketing 
plan by NRDC.
    Comment: Central Valley Project customers have paid for substantial 
environmental restoration on the CVP. Moreover, the consumer-owned 
municipal utilities served by the CVP have paid more than $20 million 
to repair and upgrade the Federally owned power generating facilities 
(including the funding of the Shasta temperature control device, the 
Shasta rewind project, and CVP maintenance) to ensure their continued 
reliability and value without the need for Federal appropriations. The 
availability of this resource has been vital to the implementation of 
many cutting edge environmental improvements that currently benefit the 
citizens of California.
    Response: Western agrees that CVP customers have paid for 
substantial environmental restoration and improvement in northern 
California. The 2004 marketing plan provides stability in the 
collection of mitigation funds for the benefit of environmental 
resources in California's Central Valley.
    Comments: The CVP allocation is essential to SMUD's ability to 
continue providing reliable, affordable electricity to its consumers. 
It also makes possible SMUD's leadership role in energy efficiency and 
renewable resource programs. The assurance of CVP allocations has also 
been critical to the implementation of many cutting edge environmental 
improvements that benefit citizens of my congressional district.
    Along with other Northern California Power Agency (NCPA) customers, 
we have made significant commitments to renewable resources that would 
not have been feasible without the CVP contracts. Loss of these 
contracts would make further commitments unlikely as well as jeopardize 
the stability of existing commitments.
    Response: Western's power customers in northern California are 
leaders in the development of energy efficiency and renewable 
resources. Western agrees that renewable resource commitments might be 
adversely impacted if CVP contracts with existing customers did not 
continue.
    Comments: Current CRSP power customers have contributed 
substantially to environmental protection programs and providing 
revenues for the Glen Canyon Monitoring and Research Center (GCMRC). 
Approximately 8-10 percent of CRSP rates fund environmental programs, 
such as the Upper Basin Recovery Implementation Plan and the GCMRC. 
This significant contribution, as well as customer commitments to 
integrated resource plans, demonstrates the commitment of CRSP firm 
power customers to environmental mitigation.
    We could support the extension of SLCA/IP resources to existing 
customers if they were to support such ideas as renewable and energy 
efficiency investments, embracing green marketing to interested retail 
customers, supporting codification of funding commitments for 
mitigating the environmental impacts associated with the operation of 
Federal hydroelectric facilities, and agreeing to provisions that 
ensure that contract extension language will not impede dam 
reoperation.
    Response: Western agrees that a significant portion of CRSP power 
revenues are used for environmental mitigation, monitoring, and 
research, all of which benefit the environment. Over $160 million in 
environmental costs, including purchased power required by experimental 
flows, have been funded by CRSP power customers through 1998. Now that 
operations at Glen Canyon Dam have been permanently changed to benefit 
downstream natural resources, the cost to replace the lost electrical 
power caused by this change is estimated to be in excess of $44 million 
annually, and could approach double that amount. In addition to the 
cost associated with lost electric power, there is a long-term 
monitoring and research program funded by power revenues which is 
anticipated to cost about $7,600,000 annually.
    Capital funding of Upper Colorado River Basin endangered fish 
recovery is expected to cost about $17 million. Research funding for 
these same fish species is expected to cost $6 million per year. These 
costs are funded by CRSP power contractors. Moreover, additional 
purchase power expenses resulting from operational changes at Flaming 
Gorge Dam to benefit these fish are expected to total about $15 million 
over the next 5 years.
    Purchasers of CRSP power have also had a positive record in energy 
efficiency and renewables. In 1998, CRSP customers realized over 
138,000 megawatthours (MWh) in energy savings due to demand-side 
management investment. In excess of 692,000 MWh were generated from 
renewable resources in 1998 due to the investments of CRSP customers.
    In addition, contract language has been developed to assure that 
dam reoperation will not be impeded by the extension of SLCA/IP 
resources. Firm power contracts will flexibly accommodate changes in 
operations, pursuant to the principles set forth in the EPAMP, 10 CFR 
part 905.
    CRSP customers have supported environmental goals in the upper 
Colorado River Basin through significant direct funding and have paid, 
through higher power rates, for the loss of revenues attributable to 
environmentally beneficial changes in dam operations. In addition, 
their support of energy efficiency and renewable resources has been 
significant.
    Comment: Existing customers have done IRP, now the Federal 
government should recognize the quid pro quo.
    Response: Western agrees that existing customers have achieved 
environmental and economic benefits through preparation and 
implementation of integrated resource

[[Page 34440]]

plans as well as historic conservation and renewable energy activities.
    Comment: Federal power allocations are the cornerstone of many 
consumer-owned electric systems. Many entities have acquired their 
entire complement of resources assuming the long-term availability of 
the core hydropower resource. Customers have planned their resource 
portfolios around their Western allocations. Some customers have made 
significant investments in transmission to deliver Western's power.
    Response: Western agrees that economic dislocation would occur if 
resource commitments to existing customers were substantially 
withdrawn. Western and its customers have constructed high-voltage 
transmission to deliver power to existing customers, which could not be 
used for delivery of Federal power if allocation patterns were 
significantly changed.
    Comment: Each resource from which Western allocates power should be 
analyzed separately with due consideration given to original 
participants. The history of purchases and the past level of commitment 
by existing customers need to be recognized.
    Response: Through its project-specific marketing plans, Western 
analyzes how power should best be sold to meet regional needs. The past 
level of commitment is being recognized through the extension of a 
major portion of the resource to existing customers.
    Comment: Western's historical power users have an equitable, if not 
a legal, interest in the hydroelectric systems providing the capacity 
and energy that Western markets. Just as the Bureau of Reclamation's 
water customers earn an equitable interest in the water rights held by 
Reclamation by paying for the irrigation systems, Western's historical 
customers have developed an equitable right to rely on the supply of 
power for which they have paid. Before the DOE attempts to reallocate 
the benefits of the Federal power system according to any of the new 
policies discussed in the Notice of Inquiry, it ought to reallocate 
system costs to reflect the contribution of current power users.
    Response: Western's existing customers have no right to purchase 
power from Western in the absence of a contract. While equity is a 
consideration in the marketing of power by Western, customers have no 
equitable or legal right to purchase power beyond the term of existing 
power sales arrangements. There is no need to reallocate system costs, 
as the new policies suggested in the Notice of Inquiry are not being 
generally adopted by Western.
    Comment: CRSP hydropower is a clean, renewable resource in which we 
invested when coal-fired generation was less expensive, but CRSP 
participation was needed.
    Response: Western recognizes that many customers committed to the 
Federal power program at a time when other alternatives were less 
expensive. This historic support is appreciated.
    Comments: Western's preference customers meet or exceed the goals 
of California's deregulation law and Federal proposals, which address 
reliability issues, independent system operator formation, market power 
issues, environmental mitigation, and open access. Peer review by NRDC 
of our public goods and environmental investments has demonstrated the 
progressive nature of public power in northern California.
    Consumer-owned utilities have provided competition and impetus for 
open transmission access, and continue to be leaders in renewable and 
efficiency accomplishments in the utility industry. It would be 
inappropriate to threaten these worthy achievements by making adverse 
changes to their Western power supply, and thus upset the competitive 
balance that now exists between municipal utilities and other energy 
providers.
    Our power authority continues to be a leader in environmentally 
friendly power generation, with a nationally recognized wind power 
project, a photovoltaic demonstration project and one of the nation's 
cleanest coal-fired power plants.
    Response: Western agrees that many of its customers have been 
leaders in the deregulation of the electric power industry and have 
demonstrated their concern for the environment through action despite 
the increasingly competitive nature of the electricity marketplace.
    Comments: The CVP has been a model to emulate in the utilization of 
the public's natural resources for the public good. The partnership 
between the United States and local entities has been mutually 
beneficial and should be continued. Continued access to the CVP power 
resources is essential to achieving the goals of electric industry 
restructuring--low electric rates for consumers.
    Our water district and customers have worked in partnership with 
Western to promote economic and environmental interests. Any changes to 
the proposed 2004 marketing plan will only increase government costs 
and bureaucracy.
    Response: Partnerships with customers have been invaluable to the 
success of the Federal power program.

H. Small Customer/Rural Impact

    Comments: Under the State restructuring statutes adopted to date, 
there has been no indication that small customers have benefitted other 
than by legislatively mandated rate reductions required in the 
legislation itself, rather than as a consequence of restructuring 
itself. To the contrary, indications are that retail residential and 
small business customers are not being pursued by energy marketers.
    Experience with deregulation in other industries has shown that 
smaller communities and rural areas generally do not share in the 
benefits of deregulation and are often harmed through the loss of 
service providers. This has clearly been the case with the airlines, 
trucking, railroad, and long-haul bus services. Telecommunications is 
another area where urban consumers have enjoyed the benefits of new 
technology before rural areas. Because of their population densities, a 
restructured electric industry may present smaller communities and 
rural areas with the same types of defection by service providers and/
or absence of competitive benefits.
    Every indication to date is that State restructuring has not 
achieved the anticipated benefits. It has instead led to mergers of 
large utilities, the sale of generating assets based on a belief that 
only large utilities can successfully compete in the marketplace, and a 
lack of interest by new energy suppliers in serving retail residential 
and small business markets.
    Response: Part of Western's mission is to provide the economic 
benefits of cost-based Federal hydropower to rural America. Western 
declines to change its policies in a manner that has significant 
adverse impacts on public power customers.

I. FERC Licenses

    Comment: FERC recently renewed the hydroelectric licenses in the 
Feather River Canyon held by investor-owned utilities without any 
competitive process. As a matter of fairness and equity, we would hope 
the customer-owned systems are treated in the same fashion. Renewals of 
the CVP contracts as proposed will help maintain the balance between 
investor and customer owned utilities in the region.
    Response: The renewal of a FERC license appears to be comparable to 
the situation facing Western's existing customers at the end of their 
contracts for the purchase of power from Western.

[[Page 34441]]

The extension of FERC licenses lacks the flexibilities contained in 
Western's 2004 marketing plans, such as the reservation of power for 
new customers.
    Comment: We think it very important to note that the investor-owned 
utilities were granted virtually perpetual FERC licenses in 1986 
through the poorly named ``Ratepayer Protection Act.'' The theory was 
that the savings were being passed on to the ratepayers. In 1998, 
Pacific Gas & Electric Company (PG&E) announced plans to sell off these 
plants for close to $2 billion. PG&E is asking to be allowed to keep 
massive benefits that were supposed to be passed on to ratepayers. At 
the same time, CVP and CRSP customers are being challenged on our use 
of Western power, when we are passing on the benefits to our member-
owners in a nonprofit fashion.
    Response: Hydropower is a very capital-intensive resource that has 
no fuel costs, so it tends to be an economical and desirable resource 
in a utility's resource mix. FERC-licensed hydropower is a low cost 
resource, but its value is not always apparent as it is blended with 
other power resources of the licensee rather than being marketed on a 
stand-alone basis.

J. Term of Contract

    Comment: A 20-year contract term is appropriate. Twenty year 
contracts have already been offered from the Pick-Sloan Missouri Basin 
Program-Eastern Division and the Loveland Area Projects. Regional 
equity calls for contract renewal for the remaining Federal hydropower 
projects. Twenty years is shorter than the 30-year contract term for 
the Boulder Canyon Project.
    Response: In addition to the precedent cited in public comments, 
contracts for the sale of Central Valley Project power have variable 
terms, with the longest contract approaching 40 years in length.
    Precedent exists within Western that supports 20-year contract 
terms. Regional equity is served by offering 20-year resource 
extensions to existing customers of the CVP and SLCA/IP.
    Comment: The Southeastern Power Administration recently entered 
into 20-year power contracts. FERC licenses for hydropower generation 
have historically been granted for 30-50 years, a much longer time 
period than what Western is proposing here. We note that the Bonneville 
Power Administration has recently proposed a 20-year term for its post 
2001 contracts.
    Response: Precedent exists outside of Western for 20-year or longer 
power commitments, both for the Southeastern Power Administration and 
FERC licensees. The term of contract for Bonneville Power 
Administration power varies depending on the type of service a customer 
selects.
    Comment: Contract terms under EPAMP, and as described in the 
December 1 Federal Register notice, are sufficiently flexible to 
justify a 20-year contract term. Western has already shown the 
flexibility necessary to accommodate changes in the industry while 
preserving its traditional mission. A 20-year contract term, with some 
flexibility for Western and its customers, would provide an adequate 
and stable environment for power marketing.
    Response: Western's power sales contracts under the proposed 2004 
marketing plans offer more flexibility to Western and its customers 
than in the past.
    Comments: Twenty-year contracts represent a meaningful planning 
horizon and support the customer preparation of substantive integrated 
resource plans. Shortening the contract term would undermine our 
members' ability to do necessary resource planning, including further 
development of renewable resources. Western's Environmental Impact 
Statement (EIS) on EPAMP demonstrated that longer term contracts have a 
positive impact on the environment.
    The proposed 20-year contract term for contract renewals is 
appropriate. Our town has planned its resource portfolio around the CVP 
allocation, and shortening the contract term would undermine our 
ability to perform quality planning, including further development of 
renewable resources. Certainty of the CVP resource has become even more 
crucial as we make the transition into the restructured industry.
    Response: The EPAMP EIS predicted environmental benefits from 
longer term contracts, as customer investments in renewable resources 
and energy efficiency are more likely to occur when a stable foundation 
of Western hydropower exists. Integrated resource planning is enhanced 
when contracts provide a meaningful planning horizon. Many customers 
have planned their resource mix around Western's allocations.
    Comment: Not one of the hosts of compromises and consensuses made 
during the development of the industry's restructuring in California 
included a change in Western's allocation process, nor did they include 
the possibility of Western's contracts being short term. With the 
expectation of long-term contracts, as promised in the EPAMP process, 
many public power utilities participated in and supported the 
restructuring effort.
    Response: Western has no reason to doubt this statement.
    Comment: Western may want to consider shorter terms for future 
contracts, or off ramps at set periods of time, where the option exists 
for portions of the contract to be open for renegotiation.
    Response: Shorter term contracts would increase the amount of 
Western, customer, and public time and resources spent on marketing 
plan development. Given the recent history of lengthy public processes 
in the development of Western's marketing plans, the better policy 
direction is to decrease the time spent on marketing plans.
    Western has built flexibility into its contracts already by 
allowing for resource adjustments in response to changes in power 
operations, hydrology, and project use development, which is typically 
water pumping load. Power can be withdrawn to meet the needs of 
potential new customers for most of Western's projects. Rates can be 
adjusted without limitation. Given this flexibility, Western sees no 
need to enter into contracts with a shorter term.
    Comment: The contract term should be shortened to reflect the new 
marketplace. New entrants to the electricity market and the increased 
ability and desire of customers to choose their own supplier--or be 
their own supplier--means Western should be prepared to keep its 
options open and allow its customers to do the same. Long-term supply 
contracts prevent Western from responding to changing conditions. 
Offering contracts with varying terms may offer the best deal for 
Western and its customers.
    Response: Western's customers have the flexibility to terminate 
purchases from Western when a rate adjustment takes place. This 
preserves customer flexibility. Western has withdrawn power from 
existing customers to meet the needs of new customers, and has reserved 
the right to withdraw additional power for new customers and other 
purposes even after its power sales contracts become effective. In 
addition, Western's power sales contracts already expire on different 
dates, depending on the project from which Western is marketing power. 
CVP and SLCA/IP contracts expire in the year 2004, while Parker-Davis 
Project contracts expire in 2008, Boulder Canyon Project contracts 
expire in 2017, Pick-Sloan Missouri Basin Program-Eastern Division 
contracts expire in the year 2020 and Loveland Area Projects contracts 
expire in the year 2024.

[[Page 34442]]

    Comments: The current allocation system should be changed. The 
development of competitive wholesale and retail electricity markets as 
a result of electric restructuring increases the inherent market 
distortions caused by low-cost hydroelectric power provided by the 
PMAs. We believe that no PMA firm power contract should be longer than 
5 years.
    Since today's electricity market is in flux and is being 
restructured, it makes no sense for the Federal Government, or even any 
business, to sign 20-year contracts. The uncertain size and nature of 
future electric loads have led the private sector to accept contracts 
lasting no more than 5 years. Even if its contracts have withdrawal 
opportunities and rate flexibility, Western should not tie up its 
resources for any period longer than that done by the private sector. 
Protecting the status quo is unresponsive to the new electricity 
industry and the Federal taxpayer.
    Response: Western notes that at least one power marketer has 
identified a competitive advantage in longer term contracts, and has 
run advertising promising peace of mind with a decade of locked-in, 
long-term energy prices. As is the case in the competitive marketplace, 
our customers can choose to enter into long-term arrangements (albeit 
without any guarantee of price from Western) or acquire power from 
others under either long-term or short-term arrangements. Far from 
protecting the status quo, Western is building flexibility into its 
contracts and marketing policies.
    Comments: Lengthy Western contracts would ignore the very 
inequities posed by taxpayer subsidies to select electricity users. 
Those subsidies to Western, which are substantial according to the 
General Accounting Office and the Congressional Budget Office, distort 
the market, discourage efficiency, and waste taxpayer dollars. To 
extend power sales contracts for 20 years would compromise the ability 
of Congress and the administration to reform Western's operations and/
or to spin Western assets off to non-Federal interests.
    We urge you to consider changes in the electric utility industry as 
marketing plans are developed. Congress is actively considering 
legislation that would restructure the industry. Competition in this 
industry is vibrant and expanding. To date, 18 States have approved 
plans for retail competition, and every State is considering these 
issues. In this environment, Western and the other PMAs should not 
enter into long-term contracts that would deprive both Congress and the 
States of the flexibility to shape the emerging competitive electricity 
market.
    Response: Western's rates are not subsidized. Current interest 
rates are charged on new investment, and recovery of costs that are not 
used in the production of power (such as salinity control and 
irrigation assistance) is required in Western's rates. Western's rates 
are reasonable because hydroelectric generation has no fuel costs. As 
the generation marketed by Western has been in service for many years, 
much of the original investment has been repaid. Moreover, Western does 
not have the responsibility to meet load growth through acquisition of 
more expensive additional resources.
    Congress certainly has the ability to consider changes to Western's 
business practices or privatization. However, Western needs to carry 
out its mission and market power in accordance with existing law. 
Waiting for Congress to enact legislation deregulating the electric 
utility industry, let alone dealing with the future of the PMAs, is 
imprudent. There is no way to accurately predict whether and when any 
changes might take place.
    Comment: Operation, maintenance, and repayment of Reclamation 
projects are critical items. Recognizing that power revenues are a 
significant source of revenue, it is imperative that the power 
contracts have a term of sufficient length to assure orderly repayment 
and support appropriate operation and maintenance decisions. An 
adequate time period is required to implement decisions and recover the 
costs associated with major maintenance work that incurs significant 
cost. Otherwise the work is vulnerable without commitments for funding 
and assurance to the power contractor that they will recover their 
investment during the contract period.
    Response: Western agrees that shorter term contracts jeopardize 
customer financing of project operation and maintenance. Without 
customer financing, requests for appropriations will likely increase.
    Comment: The Energy Planning and Management Program established 20 
years as a floor.
    Response: EPAMP established 20-year power sales contracts as a 
precedent, not a floor.
    Comment: Twenty years is too long for tribes to be condemned to 
wait.
    Response: Tribes are not being asked to wait. They can start 
receiving the benefits of cost-based hydroelectric power in 2000 from 
the Pick-Sloan Missouri Basin Program-Eastern Division and in 2004 from 
the Loveland Area Projects, the Salt Lake City Area Integrated 
Projects, and the Central Valley and Washoe Projects. Additional 
resource pool increments will be available for allocation to new 
customers 5 and 10 years into the 20-year contract terms for the Pick-
Sloan Missouri Basin Program-Eastern Division and the Loveland Area 
Projects, and 10 years into the 20-year contract term for the Central 
Valley and Washoe Projects.
    Comment: Adjusting the length of power contracts in an effort to 
affect retail markets may have unintended consequences. Shorter power 
contract terms, which increase the frequency by which customers can 
compare Western's cost-based products with market alternatives, may 
result in marketing volatility that threatens its ability to meet 
Treasury obligations if near or above-market Western rates encourage 
customer flight.
    Response: Western agrees that marketing volatility and risk of 
nonrepayment to the Treasury increases with shorter term contracts.
    Comment: Long-term resource and rate stability is important not 
only to our customers, but also to our ability to meet the 
environmentally important integrated resource planning requirements of 
Western.
    Response: The EPAMP EIS found that long-term contracts are 
beneficial to the environment. Short-term contracts cause customers to 
focus on the uncertainty surrounding the Western resource, rather than 
looking to implementation of cost-effective energy efficiency and 
demand-side management to meet future needs. Short-term contracts could 
be a disincentive to the implementation of environmentally beneficial 
project improvements in support of the Clinton Administration's climate 
control action plan. Twenty-year contracts balance the environmental 
benefits associated with long-term resource certainty against the need 
for flexibility to respond to changing circumstances over time.

K. Legal Issues

    Comment: Until such time as Congress enacts Federal retail 
competition legislation, Western should not change its existing 
policies. The Clinton Administration has not proposed to change 
Western's existing mission in its electric utility industry 
restructuring bill.
    Response: Western's core mission remains unchanged in the absence 
of legislation from Congress.
    Comment: Western's Energy Planning and Management Program has 
already received congressional scrutiny. Some members of Congress 
opposed the contract extension portion of Western's

[[Page 34443]]

program and unsuccessfully attempted to have it legislatively curtailed 
or erased. Therefore, there is no barrier to the extension of resource 
commitments to existing customers in accordance with EPAMP.
    Response: The Energy Policy Act of 1992 contains no congressional 
barrier to the extension of resource commitments to existing customers.
    Comment: Western's allocation policies are far too important to be 
substantially altered--as this Federal Register notice strongly 
suggests--without congressional action. Indeed, much of the policy 
might not be able to be changed without congressional action.
    Response: No policy changes will be made that are not allowed by 
existing law.
    Comment: Western has no authority to compete at the retail level.
    Response: Western has broad legal authority to sell Federal power 
pursuant to statutory and case law. No Federal law prohibits Western 
from selling directly to nonutilities.
    Comment: As the Second Circuit Court of Appeals has held, Congress 
believed that all interests can best be served by giving the local 
entities the right to decide on the ultimate retail distribution of the 
preference power sold to them. This belief was founded in the so-called 
``yardstick competition'' principle, which assumes that if municipal 
entities are supplied with cheap hydropower, their lower competitive 
rates will force the private utilities to reduce their rates, with 
resulting benefits for all. It is not for FERC or the courts to second 
guess that basic determination.
    Response: The cited Second Circuit case interprets the Niagara 
Project Power Act, which gives preference to public bodies and 
nonprofit cooperatives within economic transmission distance of certain 
hydroelectric facilities in the State of New York. In that litigation, 
the court limited the statutory definition of ``public body'' to 
publicly-owned entities capable of selling and distributing power 
directly to consumers.
    Western's marketing authority is broader than that defined by the 
Niagara Project Power Act. Reclamation law allows Western to market to 
municipal utilities, rural electric cooperatives, public corporations 
and agencies, nonprofit organizations, Federal agencies, State 
agencies, and Native American tribes.
    Comment: The legal problems associated with a change from the 
existing power allocation system are numerous. If changes are 
attempted, legal challenges lasting for years will be triggered. As the 
EPAMP and 2004 marketing plan processes have already been ongoing for 
years, there is a need to adopt a lawful marketing plan and allocations 
expeditiously.
    Response: Western's marketing plans will be lawful.
    Comment: Under the Trinity River Division Act of 1955, Congress 
intended to provide the Trinity Public Utilities District a perpetual 
right to certain Western energy. The draft 2004 CVP marketing plan 
contains provisions toward that end, and should be approved.
    Response: The Trinity River Division Act of 1955 provides certain 
rights to preference customers in California's Trinity County. The 2004 
marketing plan for the Central Valley and Washoe Projects will carry 
out the requirements of this law.
    Comment: Congress has not been receptive to fundamental changes to 
the PMAs. For example, Congress recently reaffirmed its ban on studying 
the sale of the power marketing administrations.
    Response: While some members of Congress have proposed the sale of 
the PMAs or significant changes to their missions, many others support 
the continuation of the PMAs and their existing programs.
    Comment: The enactment of California AB 1890 did not, and was 
specifically not meant to, disrupt the long-term contractual 
relationship that California entities have for hydropower. The CVP 
marketing plan was developed at the same time as the California public 
utility commission restructuring plans which were incorporated into AB 
1890. In fact, provisions of AB 1890 specifically provide for the 
delivery of preference power purchased from the Federal PMAs. Retail 
competition is just the most recent in a long line of changes to the 
increasingly competitive electric industry. The present power 
allocation system has been very effective in keeping pace with those 
changes.
    Response: As a Federal entity, Western is not bound by the 
provisions of AB 1890. Western agrees that AB 1890 did not intend to 
impact Western's preexisting power sales contracts for the Central 
Valley Project.
    Comment: California municipal utilities already fully comply with 
the requirements of AB 1890 and have even voluntarily agreed to 
independent verification of their programs. Western should not 
superimpose additional conditions on California public power utilities 
that were not intended when AB 1890 was enacted.
    Response: Western agrees that many public power utilities are 
voluntarily complying with AB 1890. Adding conditions not intended by 
the California State Legislature would not be consistent with the 
policy of the Clinton Administration.

L. Existing Contracts

    Comment: Western should honor existing obligations and contracts. 
Western should assure that the distribution of costs and benefits 
remains equitable and does not inadvertently harm existing contract 
holders. For example, distribution of costs based upon some criteria 
contained in existing contracts but not applicable to new participants 
may require amendments to those contracts, to avoid an inequitable 
distribution of costs.
    Response: Western has every intention of honoring existing 
obligations and contracts. Western also intends to assure that the 
equitable distribution of costs and benefits will continue.
    Comment: A basic element of the State of California's restructuring 
legislation, AB 1890, was that existing contractual relationships, such 
as CVP power contracts, would not be impacted.
    Response: Western agrees that AB 1890 did not intend to impact 
Western's preexisting power sales contracts for the Central Valley 
Project.

M. Need To Complete Process Quickly

    Comments: The 2004 marketing plans should be approved in a timely 
manner. Western has already invested considerable time and effort in 
lengthy public processes and environmental evaluations for the Energy 
Planning and Management Program and the project-specific marketing 
efforts for the Salt Lake City Area Integrated Projects, the Central 
Valley Project, and the Washoe Project. There is no compelling reason 
to undertake another lengthy process prior to approval of the plans.
    Our tribal utility would greatly benefit from an extension of 
Western's resources as quickly as possible.
    Western needs to approve the marketing plans quickly, as it takes 
time to negotiate contracts and acquire replacement resources. The 
contractual process for Pick-Sloan Missouri Basin Program-Eastern 
Division power started in 1995, and is still incomplete.
    CVP customers are eager to sign power contracts, as they need to 
know the status of future resources to make choices on issues such as 
stranded costs, adoption of customer choice, and planning for 
replacement power.

[[Page 34444]]

    Marketing plans should not be held up while the restructuring 
evolution takes place across the several States served by CRSP and CVP 
power. Five years' notice is necessary to allow resource plan 
adjustments if significant changes are planned.
    Swift approval of the 2004 marketing plans and renewal of the 
contracts will ensure that the ``win-win'' relationship between Western 
and its customers will continue. Western's customers need sufficient 
advance notice of power allocations to allow for electric resource 
planning.
    We support the approval of the 2004 marketing plan as a document 
reflecting significant compromise and feel that DOE should recognize 
the long public process conducted in its development.
    Reopening the public process seems not only duplicative but places 
in question the credibility of such processes and perhaps even Western 
itself. It is essential that public processes be respected rather than 
manipulated. Any further review would be redundant and waste the 
taxpayer's money.
    We are extremely disappointed that Western must regress to this 
unnecessary process, as we believe Western adequately addressed 
restructuring in preparing its 2004 power marketing plan. The CVP 2004 
marketing plan is significantly different from the current plan and is 
fully adaptable to the newly restructured utility industry.
    If Western would spend as much time developing new resources or 
resource improvement as it does on public processes, maybe they would 
have something to market without withdrawing from existing, long-served 
preference customers.
    Response: Western agrees that the time has come to finish pending 
marketing plans for the Central Valley, Washoe, and Salt Lake City Area 
Integrated Projects.
    Comments: The delay in approval of Western's 2004 marketing plan is 
resulting in negative impacts to the relationship that Reclamation and 
Western have worked to achieve and maintain with the public power 
industry. Western and Reclamation entered into funding arrangements 
with the long-term firm power customers in order to reduce the level of 
appropriations needed from Congress. Delay of marketing plan approval 
may cause customers to withdraw from funding long-term projects. Power 
customers would also be unwilling to fund long-term capital improvement 
projects if they cannot be assured that they will receive the benefits 
of the improvements. This would negatively impact repayment and the 
overall power marketing function.
    The contract uncertainty created by lack of approval of the CVP 
marketing plan is manifesting itself in customer reluctance to fund 
improvements with payback periods beyond the current contract term. The 
result is lost economic opportunities and lost opportunities to reduce 
greenhouse gas emissions.
    Response: Western does not want to jeopardize customer funding of 
long-term projects beneficial to the operation of power generation.

N. Ability To Compete

    Comments: Hidden in this question is the thought that Western 
should dabble in retail markets and participate in a bidding war. 
Western is not a big enough player to be effective in the retail 
market. Since Western has little, if any, energy to sell in the open 
market to other than preference entities, there should be no change in 
Western's power allocation approach.
    The majority of CRSP wholesale customers are small, rural and often 
Indian communities with marginal economic situations that will add 
nothing to enhance regional competition.
    Response: Western's ability to impact the marketplace is limited 
due to our relatively narrow mission and the size of our resources as 
compared to the size of the electricity marketplace. Western has no 
intent to enter the retail marketplace in a substantial manner.

O. Repayment

    Comments: CRSP power customers are repaying their debt ahead of 
schedule under long-term contracts that were negotiated at a time when 
CRSP power was higher than other sources. A shorter contract term 
increases the risk that the Federal investment will not be repaid on 
time.
    Power revenues repay Federal debt for CRSP hydropower facilities, 
pay for the CRSP power program's annual operation, interest and 
replacement costs, and assist in the repayment of 95 percent of the 
project's irrigation costs.
    CVP power sales have repaid over 70 percent of the Federal debt 
allocated to power so far, and will completely repay the power debt in 
the upcoming contract term, allowing Western to commence repayment of 
Federal debt allocated to irrigation which may otherwise not be repaid. 
Clearly the public interest is best served by renewing this 
partnership, not disturbing it.
    Long-term contracts offer stability and value to both Western and 
its customers. Preference customers have repaid Federal debt ahead of 
schedule, furnished irrigation assistance, adopted and promoted 
environmental programs, and provided up-front funding of O&M expense.
    Response: Western agrees that debt for both the Central Valley 
Project and the Salt Lake City Area Integrated Projects is being repaid 
ahead of schedule. Shorter term contracts increase Western's exposure 
to the volatility of the marketplace and may increase the risk of 
nonrepayment to the Treasury.
    Comments: Given current uncertainties in the electricity 
marketplace, and the tremendous financial exposure to the taxpayers 
that unrepaid investment represents, it is responsible and beneficial 
for the United States to secure the repayment of investment with a 
long-term extension of Western's firm electric service contracts. The 
existing power allocation system works well, and has proven to provide 
a reliable revenue stream that assures repayment of multipurpose water 
projects, including irrigation aid. Do not jeopardize the repayment 
guarantee under existing contracts.
    Western should not pursue a role that would create economic risk 
for the Federal Government (such as becoming a competitive generating 
agency) or would position the Federal Government to compete at retail 
against publicly and privately-owned utilities and other market 
participants.
    The Federal Government also benefits from long-term, 20-year 
contracts by assuring revenues for project repayment with well-
established customers without exposure to the volatility of the 
evolving marketplace.
    Response: Western agrees that long-term contracts mitigate the 
market volatility that would otherwise exist.
    There is no repayment guarantee under existing power sales 
contracts, as customers have the right to opt out whenever a rate 
adjustment occurs. However, few customers have exercised this 
contractual right, due in part to Western's control of costs and 
commitment to rate stability. Although power revenues associated with 
hydroelectric resources vary depending on water availability, power 
sales contract certainty has contributed to relatively steady repayment 
to the Treasury.
    Western believes there are advantages to marketing power to well-
established customers with a positive record for payment of bills in a 
timely manner. Some new participants in the deregulated industry have 
defaulted on

[[Page 34445]]

their obligations. In addition, Western believes that retail customers 
are more likely to switch power suppliers than wholesale customers, 
which would cause fluctuations in the revenue stream that is used to 
repay the multipurpose projects from which Western markets power.

P. Tribal Issues

    Comment: Tribes are eligible preference customers. Most tribes are 
interested in receiving an allocation of power from Western. A useable 
allocation of Western power makes the difference in accomplishing 
economic development.
    Response: Western agrees that tribes are eligible preference 
entities.
    Comment: Western has a trust responsibility to the Indian tribes 
within its service territory. This is a different and greater 
responsibility than Western has to its current customers. In destroying 
traditional tribal economies, the Federal Government accepted a 
responsibility to assist and allow tribes to create new economies that 
are equal to the standards of living of other Americans.
    Response: Western supports the DOE's Indian policy, which stresses 
the need for a government-to-government, trust-based relationship. The 
key theme throughout the Department's policy is consultation with 
tribal governments so that tribal rights and concerns are considered 
prior to action being taken. Western has met with Indian tribes and 
tribal representatives throughout the Energy Planning and Management 
Program's public process. Western also has met informally on a number 
of occasions with tribes since completion of EPAMP, both in the 
Missouri River Basin and in New Mexico and Arizona. In February of 
1999, Western held informational meetings in Phoenix, Arizona, 
Albuquerque, New Mexico, and Folsom, California, to engage in dialogue 
with Native Americans on Western's power marketing programs. A 30-day 
comment period also took place in February to receive additional public 
input on the size of project-specific resource pools necessary to meet 
the fair share needs of new customers, including Native Americans. An 
informal meeting in Albuquerque in May of 1999 allowed additional 
consultation between Western and the Council of Energy Resource Tribes. 
Western believes that its consultation with tribes has been meaningful 
and substantive, and will continue at a high level in the future.
    Comment: Western must help tribes to become ready, willing, and 
able. Western should help tribes to negotiate to obtain electric 
utility status.
    Response: Western plans to allocate power to tribes and assist the 
tribes in obtaining delivery of the benefits of their allocations. As 
tribes need not form utilities to receive an allocation of power, 
Western is neutral on whether tribes should form utilities to meet 
electricity needs on the reservation. Technical and financial 
assistance to a tribe in support of utility formation may be available 
from the DOE or some other agency of the United States Government.
    Comments: Access to electric service is a major issue for tribes 
and the people living within reservation boundaries. Some reservation 
residents have no electric service, while others have service that is 
high priced and of lower reliability than service off the reservation.
    Western's power allocation system should be modified to take into 
account all regulatory changes, including those which allow Indian 
tribes and others open access to transmission and, therefore, greater 
access to Western's power and the power of others.
    Response: Open transmission access at the wholesale level should 
make it easier for Western's allocations of power to be delivered to 
customers. Western is committed to working with the tribes and 
interested third parties to assure that Native Americans receive the 
benefit of allocations from Western.
    Comment: Tribes are in the process of establishing vehicles for 
making utility choices. These vehicles will sometimes be utilities, and 
should be given full recognition by Western in its policy making and 
power allocations. Even if tribes do not form utilities, Western should 
allocate power directly to Indian tribal governmental loads such as 
government buildings, tribally owned economic activities, and public 
tribal housing and schools.
    Response: Western intends to allocate power to eligible tribes 
whether they form utilities or not.
    Comment: We believe that the historic marketing plans of Western 
are too lengthy, expensive and, therefore, too preclusive for small 
entities such as tribes.
    Response: Under the Administrative Procedure Act, Western seeks 
public involvement and input on its marketing plans. Western agrees 
that its recent public processes have been lengthy. However, we believe 
it important that our processes allow for the involvement of small 
entities such as Native American tribes.
    Comments: We believe the current power allocation program would 
greatly assist our five tribes in attaining an allocation of CRSP power 
and having certainty of that power as a resource in the future once an 
allocation is attained.
    The current program with the specific language provided in the 
final EPAMP regulations, which provides for preference to small Indian 
communities, is more than adequate to assure our Indian communities can 
attain some of this power efficiently. Our tribes believe the contract 
extension policy is a sound business practice because once we receive 
an allocation, we should be able to plan on receiving it for many years 
to come. This would allow small Indian communities to receive a 
tremendous economic benefit.
    Response: Western agrees that a potentially large economic benefit 
can be derived from an allocation of Federal hydropower, especially 
over the term of a 20-year firm-power contract. However, other costs 
associated with the delivery of Western's power could have a 
considerable impact on the size of any benefit, such as the cost of 
transmission service, supplemental power supply, and ancillary 
services.
    Comment: The present power allocation system should be modified 
substantially to recognize the needs of the Indian tribes and its 
agencies the same as that accorded the States, municipalities, 
irrigation or power districts, and Federal entities.
    Response: The 2004 marketing plans provide the same or better 
treatment for tribes as compared to other customers.
    Comment: The history of energy development and use in general and 
Federal hydroelectric development in specific is a history of injustice 
and abuse of power on the part of the Federal Government. Many of the 
Federal dams were built from Indian lands and the resultant economic 
and social benefits from those projects were denied to Indian tribes. 
In many cases, tribes were inadequately compensated for the loss of 
whole communities, valuable farmland and cultural/religious/spiritual 
resources.
    Response: Just compensation for the taking of lands to construct 
Federal dams is not an issue that is appropriately addressed through an 
allocation of power by Western.
    Comment: The tribes request that Western, in performance of its 
trust responsibility, provide tribes with technical assistance to 
ensure the tribes receive the maximum economic benefits of low-cost 
Federally generated hydropower through management agreements with 
distribution utilities.
    Response: To the extent that a tribe does not form a utility, 
Western intends to assist the tribes in obtaining the

[[Page 34446]]

economic benefit of allocations through bill crediting or some other 
appropriate mechanism involving the distribution utility. Western is 
committed to providing an appropriate level of technical assistance to 
tribes.
    Comment: Policy and practice have discouraged tribes from 
developing the institutional, management, and technical capabilities as 
well as the physical infrastructure and financing to access the power.
    Response: Western's allocation of power to tribes, without a 
requirement for utility status, should enable the tribes to access the 
benefits of Federal hydropower more easily. Historic assistance to the 
Navajo Nation by Western has resulted in tribal access to photovoltaic 
power in northern Arizona.
    Comment: It could be argued that the Indian tribes' unused water, 
such as the Navajo Agricultural Products Industry which is 20 years 
behind schedule, is being utilized to generate Federal power over and 
over while it travels down river. While other entities have enjoyed the 
benefits derived from Federal power, Indian tribes and their agencies 
have yet to see equal benefits.
    Response: Rights to the water that passes through turbines at 
Federal hydroelectric facilities are vested in different entities and/
or are reserved for certain in-stream purposes. Possession of water 
rights does not mean a right to hydroelectric power generated by that 
water also exists.
    Comment: A tribal utility could provide tribal government with the 
opportunity and means to use tribal borrowing and bonding status to 
improve utility infrastructure, improving the quality of life on very 
poor reservations. If done in conjunction with systemwide planning, 
tribal infrastructure development could very well reduce physical 
constraints in the transmission systems that would benefit everyone.
    Response: Many of Western's customers have found utility formation 
to be beneficial.
    Comment: We request that Western abide by the preference customer 
status provided to the tribes as described in the Energy Policy Act of 
1992. The tribes would request the ``right of first refusal'' be 
provided to tribes and would remain in effect until the tribes receive 
their fair share of unobligated Western power.
    Response: Western is unaware of any provision in the Energy Policy 
Act of 1992 that confers preference status on tribes. Western's 
treatment of tribes as preference entities is due to our interpretation 
of Reclamation law, taking into account DOE's Indian policy and the 
government-to-government relationship that exists between the 
Department of Energy/Western and tribes. Western believes that it can 
successfully meet the fair share needs of Native Americans without 
adopting a ``right of first refusal'' policy.
    Comments: Issues of transmission and distribution must be addressed 
to allow tribes to access power. It has been Western's past history to 
build transmission to serve its customers. The new regulatory structure 
provides the opportunity to wheel power over existing systems. Tribes 
know they must negotiate with current service providers for access to 
distribution facilities and services. These negotiations can create 
win-win situations that are acceptable and even favorable to both 
parties. The degree by which Western's policies reward cooperation over 
conflict should be the standard by which its policies are judged.
    Our greatest issue is communication and understanding. Tribes could 
be assisted to know how best to access the parties and individuals 
within the industry to make power allocations and utility operations 
workable.
    Response: Western believes that cooperation, communication, and 
understanding are far preferable to conflict in achieving policy goals.

Q. Water Supply

    Comments: Any changes in Western's allocations that are based on 
electricity industry restructuring should impact only distribution 
utilities and not water supply agencies.
    Nothing in the California restructuring plan warrants fundamental 
departure from the 2004 marketing plan, especially with regard to 
service for end-use irrigation pumping loads.
    Program purposes and the statutory intent underlying Pick-Sloan and 
the Flood Control Act have not changed and commitments must continue to 
be honored, particularly in view of the fact that actual irrigation 
development was substantially less than what was promised.
    Western should continue to provide low-cost power to irrigation, 
and should not enter retail markets.
    Response: Western intends to abide by Reclamation law requirements, 
including the requirement that hydroelectric power be reserved first 
for project-use loads. As there is no convincing rationale to do 
otherwise, policies regarding reductions in commitments of power to 
existing customers will be uniform. To the extent irrigators receive 
allocations of power from Western that are not project use in nature, 
they will not be exempt from equitable contribution by existing 
customers to project-specific resource pools.

R. Need for Power

    Comments: Long-term reliability is critical to farmers who raise 
crops. The benefits derived from our power contract with Western have a 
direct impact on the local economy and produce far-reaching benefits, 
such as groundwater improvement, efficient water exchanges, and a 
vibrant local agricultural economy.
    The State of New Mexico is sparsely populated and relatively poor. 
Western's CRSP power means a lot to us. There are a substantial number 
of customers who have contributed to the repayment of Federally-owned 
generation facilities for over 30 years. If those customers had built 
generation plants in the '60s rather than purchased the output of 
Federal facilities built for the primary purpose of irrigation, flood 
control and recreation, these generation facilities would now be paid 
for and competitively priced.
    Resource uncertainty is especially critical in rural areas which 
have limited access to resource opportunities. To deny utilities with 
low customer density access to Federal power would be devastating to 
rural consumers and small businesses who are already paying much higher 
rates for distribution and transmission services than urban customers.
    Share the benefits of cost-based hydropower with the taxpayers by 
extending contracts with the Air Force.
    Significant reductions in or the loss of the CRSP resource would 
necessitate acquiring alternative power supply at dates later than 
prudent from a long-term planning standpoint. The cost of replacement 
power would be passed on directly to the retail consumer.
    Western's allocation of CRSP power to our electrical district is 
integral to the long-term groundwater management plan in Arizona, 
including the goal of reducing groundwater pumping within the State as 
documented in our integrated resource plan. CRSP power is also key in 
maintaining the viability of the Central Arizona Project for future 
generations. The long-term bonding and financing of our canal system is 
also based on the continued economics of preference power.
    Continued access to the CVP resource is necessary to ensure 
affordable future improvements. It would be inappropriate to threaten 
these worthy achievements by making adverse changes to customers' CVP 
power supply, and upset the competitive balance that now exists between

[[Page 34447]]

municipal utilities and other energy providers.
    Western's power allocation is very important to our rural electric 
cooperative in Wyoming, as we have a consumer density of 2.2 consumers 
per mile of line. Our neighboring investor-owned utility has a density 
of 26 consumers per mile of line. For each cooperative customer, more 
than 11 times the facilities are required. Because of the rural nature 
of the area we serve, we are already at a price disadvantage in a 
competitive marketplace.
    Most entities, including the investor owned utilities, continue to 
serve their customer base reliably, efficiently, and at lower rates 
than previously existed. As California emerges from the imposition of 
transition costs after 2002, rates will further decline and customers 
will likely be less inclined to switch providers. Western's customers 
must have an assurance of long term, 20-year contracts to remain in 
this competitive mix.
    Regarding the effect on the University of California, Davis of AB 
1890 and the deregulation of the electric power market in California, 
no clear conclusions can be drawn. The UC Davis campus has joined with 
the other University of California campuses, and the California State 
University system, to contract for purchase on the open market for our 
power requirements not met by Western. This is a short 4-year contract 
with an independent power marketer. While this contract is expected to 
save the campus money compared to the cost of power purchased directly 
through the California Power Exchange, it is more expensive than 
Western's hydropower, and the term of the contract is short. Adoption 
of the proposed 2004 marketing plan will benefit us by protecting our 
cornerstone of Western power, while at the same time, for our remaining 
power needs, allowing the pursuit of future benefits that may come 
available through deregulation of the California electric power market.
    Both the Black and Hispanic Chambers of Commerce for the City of 
Sacramento urge the expeditious approval of the CVP 2004 marketing 
plan. Access to low cost, clean, renewable public power is an essential 
prerequisite for continued economic development and growth of 
communities in northern California.
    With regard to the Ames Research Center, National Aeronautics and 
Space Administration, our allocation needs to be maintained in order to 
minimize the cost of operating two national wind tunnel complexes. 
There is an urgent need for our wind tunnel data, as it enables 
aircraft manufacturers to design transports that can fly with greater 
energy efficiency. Estimates of fuel savings as a result of our 
research are in the hundreds of millions of dollars per year. In 
addition, our research enables American aircraft manufacturers to 
maintain a trade surplus of $15 billion per year.
    Response: These representative comments from existing customers 
demonstrate the widespread need for Western's power.
    Comment: Extending Western contracts would further the discrepancy 
between the preference clause's intent of advancing ``municipal 
purposes'' and the distribution of Western power to some of the 
nation's wealthiest communities. As you know, Western does no means 
testing for the distribution of its low cost and subsidized 
electricity, nor does it provide any preference to public schools or 
other public purposes. Power marketing administrations, if they are to 
continue to exist, need to focus on end users and offer true public 
benefits only to those in need.
    Response: As is the case with any utility, some customers 
purchasing electricity are more affluent than others. The same is true 
for the customers served by a PMA. However, the great majority of 
Western's customers are in genuine need of Western's resources, as 
evidenced by the comments previously set forth. Western already 
allocates power to universities and a variety of State and Federal 
loads. Western's intent to sell power from project-specific resource 
pools to Native American tribes is clear evidence of our intent to 
assure that the benefits of Western's cost-based hydroelectric 
resources are available to economically disadvantaged entities.
    Comment: Today, preference power is being used in ways that 
Congress did not originally intend. For example, power generated from 
facilities owned by the American public is being allocated to provide 
below market electric service to wealthy communities such as Vail, 
Colorado, and Palm Springs, California. Other customers, such as the 
Salt River Project, have formed a for-profit marketing entity whose 
mission is to compete against private, taxpaying, and often highly 
regulated energy companies.
    Response: Western does not market power to Palm Springs. The ski 
resort of Vail is served by Holy Cross Energy, which also has within 
its service territory many rural consumers and small communities that 
do not enjoy economic benefits from ski resorts. Both the Department of 
Energy and the Department of the Interior have formally issued opinions 
finding no violation of law or contract in the efforts by the Salt 
River Project to compete in the rapidly changing utility industry, as 
the Salt River Project is not reselling Federal power.
    Comment: Rather than going to customers based upon their geographic 
location, allocations from the Federal power facilities should be based 
on means testing. Only those who truly cannot afford to pay market 
rates should be the beneficiaries of continued preference allocations. 
This class of citizens obviously includes more than just rural western 
or southern America. Federal preference power should be targeted only 
to State and Federal buildings and facilities where the taxpayer is 
paying the energy bill. We cannot legitimately continue to act as a 
Nation to provide wealthy ranchers and owners of posh ski resorts with 
preference power to the exclusion of poor families located in Toledo, 
Hartford, or St. Paul.
    Response: Congress has by statute authorized Western to sell firm 
power in its 15-State service territory. The other Federal PMAs also 
market power in the territory adjacent to their power and transmission 
resources. Well over half of the country is within the marketing areas 
of the PMAs.
    According to the latest estimates of the United States Census 
Bureau on national income and poverty, the poverty rate in the western 
States is 14.6 percent. Both the Northeast States (12.6 percent poverty 
level) and the Midwest States (10.4 percent poverty level) enjoy higher 
prosperity. Also of interest is the Census Bureau's conclusion, based 
on 1997 data, that 12.6 percent of residences inside metropolitan areas 
are in poverty, while 15.9 percent of residences outside of 
metropolitan areas are below the poverty line. This information 
suggests that the greater need for cost-based Federal power exists in 
the western United States and in rural areas.
    Even if Western had the legal flexibility to sell power to needy 
entities throughout the Nation, the cost of delivering the power would 
erode any cost savings. Acquiring rights over intervening transmission 
systems would be a significant expense. Losses in energy due to 
resistance in the transmission line conductors would also diminish the 
economic benefit.
    Western already markets its power to many State and Federal 
facilities that meet existing allocation criteria. Allocating more 
power to these entities could give them disproportionate

[[Page 34448]]

benefits and cause power resource dislocations for existing customers.

S. Supplemental Suppliers

    Comment: The impacts of any change in policy would fall primarily 
on supplemental suppliers. Western should move cautiously when the 
impact of its decisions may be to undermine or damage contractual 
relationships between its preference customers and their supplemental 
power suppliers.
    Response: Western agrees that the impacts of its policies on 
supplemental suppliers must be taken into account before decisions are 
made.

T. Dam Operations

    Comments: There are a number of aquatic environmental issues 
associated with the operation of the Federal hydroelectric facilities 
that produce SLCA/IP power. The Aspinall unit on the Gunnison River and 
the Flaming Gorge unit on the Green River dramatically affect 
downstream flow conditions and habitat for fish species. We believe the 
Endangered Species Act requires Western to evaluate the effects of 
contract extension on conservation and recovery of listed species. If 
Western believes that, either as a policy or legal matter, the 
extension of SLCA/IP contracts could limit the Bureau of Reclamation's 
discretion in operating facilities like Aspinall and Flaming Gorge, 
Western must prepare a site-specific assessment of the environmental 
impacts of contract extension.
    We are aware that Western contends that DOE regulations 
categorically exclude marketing plans from NEPA documentation unless 
they involve new generation, new transmission, or a change in 
operations. However, we believe the regulations are illegal if their 
effect is to excuse Western from assessing the impact of contract 
extensions that circumscribe the ability of the Bureau to reoperate a 
project.
    We have concerns, legal and otherwise, regarding the relationship 
between contract extensions and programs to recover endangered fish and 
otherwise protect the aquatic environment.
    Response: Under EPAMP, the extension of resources to existing 
customers is based on the marketable resource determined to be 
available at the time future resource extensions begin. If the Bureau 
of Reclamation reoperates power generation facilities such as Flaming 
Gorge and Aspinall before September 30, 2004, that change in operations 
will be reflected in the power commitments to existing customers. In 
addition, Western's contracts allow for changes in our contractual 
commitments attributable to changes in operations after 2004. Given 
this flexibility, there is no need for site-specific assessments of the 
impacts of contract extensions. The extension of firm power commitments 
does not limit the ability of the Bureau of Reclamation to reoperate 
power generation facilities.

U. Integrated Resource Planning

    Comments: If retail competition expands, key resource acquisition 
decisions will shift away from today's utilities and toward private 
generation markets and retail customers. In this environment, the role 
of EPAMP's IRP requirement is unclear. We have heard from a number of 
Western's customers that they are not interested in pursuing IRP given 
the competitive changes in the industry. We are concerned that EPAMP no 
longer represents responsible environmental stewardship in a changing 
utility industry.
    We oppose contract extensions for SLCA/IP power until EPAMP 
regulations are made consistent with the evolving industry structure.
    The State of South Dakota encourages Western to amend EPAMP's IRP 
regulations to allow the most flexible requirements possible.
    IRP no longer makes sense in a retail environment.
    Response: Western's integrated resource planning regulations are 
outside the scope of this notice of inquiry, which deals only with 
power allocation issues. Western intends to start a public process to 
consider revision of our IRP criteria later in 1999.

V. Preference

    Comment: Preference should be examined carefully in a full NEPA 
review considering both the economic and environmental impacts on 
preference and nonpreference customers. Western should mitigate for any 
serious effects and proper mitigation may include eliminating or 
drastically altering preference.
    Response: Preference in the sale of Western's power is mandated by 
law. As Western does not have the authority to eliminate or drastically 
alter preference, a full NEPA review of the issue would not be 
fruitful.
    Comment: As electric restructuring moves forward and the paradigms 
governing electric distribution and financial risk are changed, we must 
consider how the existing Federal system is managed. Equally important 
is how we distribute the benefits of the Federal system. In the 
upcoming year the Congress will be reviewing some of the fundamental 
issues that are raised in allocating Federal power. What were the 
characteristics of the group originally intended to be benefitted by 
defining them as preference customers? Why did one group of Americans 
receive the benefits while others did not? Do the criteria remain the 
same today? Are we still benefitting fundamentally the same people? 
Since the Federal allocation system was designed to benefit a 
particular group, do we need to respond to changes in the larger 
electric utility industry to make sure the same beneficiaries are 
reached? Do the changes in the electric utility industry that have 
occurred since the Federal system was originally established eliminate 
the need for the historic distribution/allocation scheme? And finally, 
if there is going to be a change, how can we best protect the 
legitimate needs of existing PMA customers?
    Response: Western lacks the legislative authority to make 
fundamental changes to preference in the sale of our hydroelectric 
resources. However, allocations are not limited strictly to municipal 
utilities and rural electric cooperatives. Western has allocated power 
and/or transmission rights to such diverse public loads as wildlife 
refuges, universities, and a mass transit system. Native American 
tribes are also treated as preference entities without the need for 
utility status. These allocations to nontraditional customers were made 
while still meeting the needs of existing customers, and contribute to 
the widespread use of Western's resources.

W. Rates

    Comment: Western's ratesetting must be cost-based. Western lacks 
authority to introduce new rate components or to reinterpret 60 years 
of statutory construction. Western also lacks authority to charge rates 
based on a newly conceived formulation intended to effectuate a 
redistribution of its electricity among electric consumers.
    Response: While ratesetting is outside the scope of the power 
allocation issues inquiry, Western agrees that our firm power rates 
must be cost-based.
    Comments: The real implication of this first question is that 
Western should sell its resources in a short-term fashion to the 
highest bidder.
    We support legislation that mandates a bidding system in which 
preference power is allocated to the highest bidder, or one in which 
the high bid sets the contract price for such power. Under such a 
scheme, the preference customer would be given a right of first refusal 
to purchase the power at high bid, thus preserving traditional 
preference. This approach has the advantage of

[[Page 34449]]

eliminating the inequities now incumbent in Federal power allocations, 
prevents further under recovery of PMA costs, and maximizes revenue to 
the Treasury.
    Western should adopt a tiered, marginal cost rate structure to 
reflect appropriate market rates and eliminate the subsidy inherent in 
the existing system. Offering low rates encourages Western's customers 
to use electricity wastefully and forces other consumers to develop 
excessively expensive supply resources to meet electricity needs.
    We congratulate Western on recognizing the need to consider the 
impact of electric utility industry restructuring on the way Western 
allocates power. A level playing field among all electric suppliers is 
mandatory in an open access retail electric marketplace. All 
competitors should have the opportunity to bid for low-cost power 
allocations. A bid system would lessen the anti-competitive impact of 
PMA power.
    Response: Pursuant to law, Western sets its firm-power rates to 
recover costs. FERC's review of Western's rates is based upon whether 
the rates are the lowest possible consistent with sound business 
principles.
    Western has no leeway to adopt a generic bid-based method for 
marketing firm power, even if a preference customer has the ability to 
buy the power by matching the high bid. If Congress mandates the sale 
of power at market-based rates, Western has the flexibility to comply 
pursuant to the rate adjustment provisions in its firm-power contracts.
    PMA power is not anti-competitive in its impact. Western markets 
cost-based hydroelectric resources, which are relatively inflation 
resistant as compared to non-hydro generation due to the absence of 
fuel costs. In addition, Western has no responsibility to meet load 
growth with relatively expensive additional power. Western's hydropower 
resources are reasonably priced due to these factors, and promote 
yardstick competition.
    Western's customers do not waste electricity. Pursuant to Western's 
integrated resource planning regulations, customers have established an 
impressive record of investment in energy efficiency, demand-side 
management, and renewable resources.
    Comment: Even under existing statutes, Western should re-prioritize 
its allocation of preference power to better reflect competitive market 
principles. Specifically, Western should adopt a system under which 
Federal electricity is auctioned to bidders in the same way as is 
Federal coal, oil, and natural gas. Revenues so garnered could be used 
for worthy purposes in Western's service territory.
    Response: Bidding for Western's firm power to generate revenues in 
excess of those needed for project repayment is not allowed under 
Federal law.
    Comment: Western has a cost problem due to the increasingly 
competitive regional power market and the social costs (e.g., 
environmental costs and irrigation assistance) that have been mandated 
for inclusion in CRSP rates. Western has a finite window within which 
it can contract into the future to protect its congressionally mandated 
repayment mission. Western is ill-equipped because of its role as a 
Government sales agent and its congressionally mandated 
responsibilities to compete in future markets.
    Response: Western will continue to make every effort to assure that 
CRSP power remains marketable.
    Comment: Is it fair for neighbors to pay different rates for their 
electricity because of their race?
    Response: Western's wholesale rates are the same for all long-term 
firm customers. Many different factors influence retail rate levels, 
including the cost of other power, transmission cost, and distribution 
expense.
    Comment: Western should move to unbundle its firm power rate to 
accelerate Western's movement into an open access environment.
    Response: Western has developed rates to implement its open access 
tariff.

X. Delivery Changes

    Comment: Western currently requires concurrence from all affected 
parties before the State of South Dakota is allowed to redistribute 
power from one State load to another. This policy places veto power in 
the hands of supplemental power and transmission suppliers with the 
effect that the State's use of Western power and other power available 
under open transmission access principles is constrained. The present 
policy should be replaced. Western should be willing to move 
allocations upon proof of a legitimate load and adequate billing 
mechanisms. IRP stabilization arguments that benefit supplemental 
suppliers should be rejected in the face of the State's interest in 
wholesale open access consistent with FERC's actions.
    Response: Western's requirement of concurrence by the transmission 
provider and supplemental power supplier is a contractual and policy 
issue that does not conflict with FERC Order No. 888, which preserves 
existing contracts. Western has experienced instances where allocations 
were made, but the allottee was unable to take delivery because 
existing power supply contracts did not allow additional power 
suppliers. Requiring concurrence avoids this situation, and recognizes 
that transmission arrangements also need to be amended when power 
deliveries change. It also avoids conflict with mandated franchise 
service territories, as South Dakota has not yet mandated open access 
for end users. Concurrence has been a policy requirement for over two 
decades, and has yet to have been unreasonably withheld. IRP 
stabilization arguments, based on the premise that load stability 
promotes better resource planning, are secondary to the contractual 
considerations.

Question

    2. To the extent a utility with an allocation of preference power 
loses load due to retail competition, should it receive the same 
allocation as it received previously or should its allocation be 
reduced proportionately?

A. Disincentive to Retail Wheeling

    Comment: Adoption of this policy would discourage retail wheeling, 
as the risk would be a disincentive for a utility to open up its load 
to competition.
    Response: Utilities might see the potential loss of an allocation 
as a disincentive to adopting retail wheeling.

B. Administrative Issues

    Comments: A real time, load based allocation process is complex 
from both a policy and an administrative basis. There is no guarantee 
that the change would lead to an improved outcome.
    Administration of this policy would be time-consuming and costly. 
As retail customers make choices and come and go, Western would be 
required to address daily, weekly, or even monthly load fluctuations 
for the many preference customers who currently receive hydroelectric 
resources from Western.
    What if a retail customer has a business downturn and their power 
usage is reduced by half? How would Western reallocate the power from 
this reduced usage? Would Western reallocate the power if the retail 
customer's business returns to normal at some later date? It seems that 
Western is opening up a can of worms that could have unintended 
consequences.
    Western cannot possibly know whether the lost load is due to a 
temporary problem on the part of the wholesale customer, a problem 
resulting from demographic trends or economic cycles, or whether it is 
a permanent loss

[[Page 34450]]

due to restructuring of the utility industry. At the very least, 
Western should not attempt a reallocation from existing users to new 
customers without developing a record of the factors underlying such a 
move and offering existing contractors the opportunity to review and 
comment on the record.
    Response: Western believes that the administrative complexities of 
adopting such a policy are significant. The policy benefits of 
monitoring load losses and gains, if any, are minor as compared to the 
cost and administrative burden associated with a change in policy as 
suggested by this issue.

C. Increase in Allocation

    Comments: The utility should receive the same allocation. As a 
preference utility does not receive an increase in its allocation if 
its electric load increases, why should there be a loss of allocation 
if load declines? If Western does not strive to achieve a sound and 
balanced basis for adjustment of allocations, it appears that the 
purpose of the suggested change in policy is to find ways to reduce 
allocations to preference customers using State restructuring 
legislation as an excuse.
    Western is a sales agent, not a utility. Western did not increase 
our allocation when our load outgrew the original commitment of Federal 
power, so we were forced to acquire supplemental power elsewhere.
    If energy is freed up as a result of a preference power entity 
allowing retail access in its traditional service territory, then this 
power can be made available on a temporary basis to other preference 
entities as withdrawable power. Since the entity offering retail access 
will remain as the default energy provider, and would be required to 
serve customers returning to its system, a permanent reduction of an 
allocation may not be prudent.
    Response: Western has a finite resource to market. Unless power is 
withdrawn from a customer pursuant to the terms of a firm power 
contract, Western does not have additional electricity to market on a 
firm basis. Western agrees that there are many administrative 
complexities associated with reducing, restoring, and reallocating 
power in the manner suggested by this issue.

D. Local Decision Making

    Comment: The local utility is best positioned to distribute 
Western's power among the remaining customers.
    Response: Public power utilities are well positioned to distribute 
power among consumers. Western's firm-power contracts address this 
responsibility. The most recent provision of Western's general power 
contract provisions states: ``The contractor agrees that the benefits 
of firm electric power or energy supplied under the contract shall be 
made available to its consumers at rates that are established at the 
lowest possible level consistent with sound business principles, and 
that these rates will be established in an open and public manner.''

E. Policy

    Comment: Federal power is only a fraction of the total resource 
needs of Western's customers. Even if significant load is lost, the 
Federal power allocation will still be needed to serve remaining load.
    Response: With only minor exceptions, Western agrees that its power 
only meets a portion of the load of its customers.
    Comments: Allowing preference customers to retain the same 
allocation of preference power would be anti-competitive.
    When a utility with a preference allocation loses load due to 
retail competition, that preference customer's allocation should be 
reduced proportionately and indefinitely.
    It is unclear what Western plans to do with any power withdrawn 
under this proposed policy. If the power is to be redistributed among 
preference entities that have experienced gains in load, this only 
serves to increase the competitiveness of those utilities which are 
already competitive and further weaken those without as competitive a 
resource mix or higher unit costs.
    Response: Western normally serves only a portion of a customer's 
load. As the marginal resource necessary to meet the rest of a 
customer's load is typically higher in cost, it is more appropriate to 
reduce the non-Western resource when load is lost due to retail 
competition.
    Comments: Current policy requires that unused allocations revert 
back to Western for sale to other preference entities, therefore 
preventing the resale of power. Western has built in adequate 
safeguards that limit use of an allocation to the retail load that we 
serve, and Western has retained the requirement that Federal power not 
be sold for resale.
    Western's 2004 marketing plan for the CVP addresses recall of any 
allocation beyond a customer's demand.
    Response: Western agrees with these comments. Currently applicable 
language in Western's firm power sales contracts prohibits the sale for 
resale of Western's power.
    Comment: Customers who choose to leave a utility that has a power 
allocation from Western also have elected to leave their ``share'' of 
Western power to the customers who do not leave.
    Response: Western agrees that this may be the result, depending on 
applicable contractual language.
    Comments: Western should only withdraw power if the customer load 
exceeds the Western allocation. If a contractor loses so much load that 
it cannot use all the Western power it has under contract, it will 
advise Western and reduce its obligation. Otherwise, it will pay for a 
resource it cannot use.
    Customers are prohibited from resale of Western power pursuant to 
contract. As a result, there is no ability for a customer to use 
Western power in excess of its load. Allocations of power in excess of 
a customer's load must be returned to Western for reallocation, 
pursuant to the applicable project-specific marketing plan.
    Response: Western's 2004 marketing plans and contracts will not 
allow for the resale of hydroelectric power if a customer loses load 
and their Western allocation exceeds the remaining load.
    Comment: Should preference distribution customers split away from a 
generation and transmission cooperative, and form new aggregations, 
Western should follow the preference distribution customers upon whose 
load profiles the allocations were originally given.
    Response: When an existing customer merges with another customer, 
or members of a customer want to leave a parent entity such as a 
generation and transmission cooperative, disposition of allocations 
must take place in accordance with applicable marketing plans and 
contractual provisions. Each situation must be addressed on a case-by-
case basis. New contracts executed under the Sierra Nevada Region and 
Salt Lake City Area Integrated Projects 2004 marketing plans will give 
the Administrator the discretion to adjust a customer's power 
allocation in the event the customer merges with another organizational 
entity, acquires or ``spins off'' another utility, joins or withdraws 
from a membership-based organization, or adds members from a membership 
organization.
    Comments: Why would Western want to punish a small customer who has 
no market clout by reducing its allocation of preference power because 
a larger retail customer, by its own choice, decided to receive its 
power and energy from someone else?
    Reducing the Western allocation would be like trying to put out a 
fire by

[[Page 34451]]

throwing gasoline on it. Our cooperative is a perfect example of what 
happens when you lose load. We lost load due to the bankruptcy of our 
largest user, a mining company. We had to raise rates by 32 percent 
early this year to compensate for the loss of fixed cost and revenue. 
Can you imagine what would happen to the remaining consumers if Western 
notified us that because we lost 60 percent of our load, we should lose 
60 percent of our allocation? Western's allocation is the one stable 
foundation we have left.
    Retail competition has not benefitted residential customers in 
States that have opted for retail access. Those customers who leave the 
system are typically larger customers who have the expertise and 
business sophistication to negotiate and bear the risks of arranging 
for power supply service from alternate suppliers. If a small municipal 
customer loses a commercial or industrial load and also loses a share 
of its Federal allocation, it will be a double whammy to residential 
customers who stay on the system.
    Power marketers are interested in achieving market share, and later 
reducing competition to maximize profits. A change in Western's policy 
could accelerate this process by penalizing cooperatives that lose 
load. If large industrial customers with good load factor are removed 
from a local cooperative's customer base, the impact will be 
devastating enough without Western's policy adding more momentum to a 
process that seriously damages remaining customers.
    Loss of any portion of the Western allocation would unfairly 
penalize existing customers and decrease our competitive position in 
the marketplace. Such a policy would also eliminate the very important 
``yardstick'' vehicle which consumers can use in determining their 
power supplier in a competitive marketplace.
    Reducing our allocation if some retail customers choose other 
suppliers could cause a cascading effect and serious economic 
consequences to our community and burden remaining customers.
    To reduce allocations because of retail competition losses could 
initiate a ``death spiral'' for the affected utility and penalize 
remaining customers, mostly residential, rural, and small business in 
nature.
    Response: Western agrees that no policy purpose is served by 
withdrawing allocations from customers that have recently lost load due 
to retail competition.

F. Public Power and Competition

    Comments: Although this question is academic at present, when it 
becomes reality preference power allocations should be reduced 
proportionately. The larger issue is what to do with large public power 
entities that are entering competitive markets and winning new load, 
while at the same time being subsidized by taxpayers through preference 
allocations and favorable tax treatment. Western customers like Salt 
River Project who are competing for and winning new load should have 
their allocations stripped or, at the very least, offset on a megawatt-
for-megawatt basis.
    The more important question is why a utility that receives 
preference power should be allowed to compete for retail load in the 
first place. Western has some of the lowest power costs in the nation. 
Preference utilities receive other Federal preferences, either through 
tax-exempt municipal financing, low interest loan programs, and 
clemency from income taxes. The more likely scenario is that these 
preference utilities will be adding customers, not losing them.
    Response: The Department of Energy has reviewed allegations that 
the Salt River Project inappropriately used Western hydropower to 
enhance its competitive position in seeking new customers. DOE found 
that those allegations had no merit, and that the Salt River Project 
was acting in accordance with the law. The Department of the Interior 
recently issued a similar finding. Under these circumstances, Western 
sees no reason to diminish its hydropower allocations to the Salt River 
Project.
    As Western's customers cannot resell Western's power, they have no 
competitive advantage from a Federal hydropower allocation in the 
utility marketplace.

G. Reason for Load Decline

    Comments: There is little substantive difference between consumers 
who move out of the area or close down a business, and those who decide 
to use a different energy supplier. We see no rational basis to 
penalize loss of load due to retail competition but not loss of load 
for any other reason.
    If a utility receiving preference power from Western loses load due 
to retail competition, or any other reason, the resulting allocation 
amount should be reduced accordingly. To do otherwise would change the 
allocation process to introduce artificial, and probably arbitrary, 
factors necessary to compensate for lost load, rendering the process 
inconsistent. In States that have adopted retail access, preference 
customers have the option to opt in or not participate. Thus, load loss 
is due to the choice of Western's customers. Judgment by Western's 
customers, like any other business enterprise, results in the 
stakeholders being rewarded either positively or negatively.
    This approach is contrary to the manner in which electric utilities 
acquire and maintain commitments for resources that are an essential 
portion of the stability of wholesale power supply.
    The alteration of allocations to accommodate fluctuations in retail 
load would diminish the certainty of a power supply source which many 
preference customers have incorporated into their forecasting for power 
supply.
    What if a customer has undertaken a program to encourage 
conservation at the same time competition has come to its service 
territory? Will Western penalize its customer because load has been 
reduced due to conservation?
    Response: Western's historic allocations to customers have been 
principally based on the load of applicants. Those loads are dynamic 
over time, as some consumers leave and others move to a utility's 
service territory. However, these are not the only factors that 
influence electricity usage. Adoption of conservation and energy 
efficiency measures, changes of service territories between utility 
providers, weather, improvements in industrial processing, fuel 
switching due to price or availability, construction of cogeneration, 
and improvements in distribution system losses all can impact a 
utility's load. Tracing a change in load to a particular cause, such as 
the impact of implementation of retail wheeling, might present some 
difficulties. Western certainly does not want to punish utilities that 
have implemented conservation and energy efficiencies.
    Western has not monitored load growth and adjusted its allocations 
in the past. As loads have grown for certain customers over time, 
Western's allocations became a smaller portion of those customers' 
resource mixes. Other customers have not experienced load growth, or 
the pace of growth has been slower. Western's allocations have not been 
adjusted in response to load changes for a variety of reasons. First, 
resource planning for Western's customers would be disrupted. Second, 
continually adjusting firm power contracts is not a standard practice 
in the utility industry. Third, if load decreases, Western's customers 
adjust their resource mix in a manner that results in the lowest cost 
to the ultimate consumer. As other resources are typically more 
expensive than Western power, consumers are best served if

[[Page 34452]]

other resources are cut first as opposed to Western's hydropower. 
Fourth, Western does not want to increase its budget to monitor load 
changes, as there is no clear policy benefit that would warrant the 
additional cost, which would put upward pressure on our rates.
    Adoption of this policy would fundamentally change the nature of 
the service Western currently provides under firm-power contracts. 
Continuous adjustments to the quantities of power sold by Western would 
convert a very valuable class of service, firm power, to a more 
contingent resource.
    Western does have the ability, when existing contracts expire, to 
consider the percentage of our power that existing customers receive. 
An example is the 2004 marketing plan for the Central Valley and Washoe 
Projects, which has proposed to increase allocations to existing 
customers who enjoy a relatively small allocation of Western power as a 
percentage of load.

H. Stability

    Comment: The threat of reductions in allocations would make it 
difficult for Western's customers to offer stable products and services 
to their consumers on other than a short-term basis. This lack of 
resource and administrative stability would be a significant 
competitive disadvantage for CRSP customers.
    Response: Western agrees with this comment.

I. Tribal Issues

    Comments: If a utility with an allocation of preference power loses 
load due to retail competition, its allocation should be reduced 
proportionately. The resulting savings should go back into the pool for 
reallocation to Indian tribes who have historically enjoyed the least 
benefit from national resources.
    Our tribes request that any Western power that becomes available 
through the power allocation system restructuring process be directed 
to address the inequity of the system to provide tribes with a fair 
share of available power. The tribes request a ``right of first 
refusal'' option be incorporated into the restructuring system.
    Response: For the reasons outlined earlier, Western will not reduce 
allocations to customers, whether Native American or not, who lose load 
specifically due to retail competition. Therefore, there is no power 
available for this reason to allocate to tribes.

J. Unintended Consequences

    Comment: If a utility were to be stripped of its allocation in 
proportion to its loss of load resulting from voluntarily allowing its 
customer-owners retail access, that utility would be tempted to cut 
deals to retain the large customers that competitors would pursue. This 
would tend to distribute the benefits of preference power away from 
small customers. Energy efficiency programs might also suffer if a 
utility were tempted to focus instead on acquiring new load.
    Response: Western agrees that a utility might take steps in 
response to a change in policy that adversely impacts energy efficiency 
investment and small customers.

K. Western's Role

    Comment: This question mischaracterizes Western's function. 
Western's power allocation decisions have not been made on load growth 
or loss analyses. Western is not a utility, it is a marketing agent 
with a finite and declining resource to market. It is in no position to 
accommodate load growth and in even less position to monitor load loss.
    Response: Western agrees that its role is to market power to repay 
the U.S. Treasury for investments financed by taxpayers. Adopting the 
policy suggested by the question would blur Western's focus on its 
primary mission.
    Comment: If Western's decisions with respect to power allocations 
will have the effect of making it more difficult for municipal 
governments to attract new business, the purpose of the municipal 
preference will be entirely thwarted.
    Response: Western has no desire to impede the economic development 
efforts of municipal governments.

Question

    3. Should Western allocate power directly to electricity end-users 
that are preference entities such as publicly-owned schools in States 
or localities that permit retail access? If so, how much power should 
be allocated for this purpose? Alternatively, should Western continue 
to allocate power primarily to its traditional customers such as 
municipal and cooperative utilities and Federal and State agencies?

A. Administrative Issues

    Comments: Making Western a retail provider would change Western's 
business structure. Western would have to organize its workforce to 
deal with hundreds or thousands of customers, with significant start up 
and ongoing costs to Western and its customers.
    Allocating power to thousands of end users, as opposed to the 
current 600 customers Western serves, is not economically warranted or 
practical, and would result in a paperwork nightmare for Western.
    Response: The benefit of a Federal power marketing administration 
gearing up to play a major role in the retail marketplace is unclear. 
The cost of adding staff to carry out this role would be considerable.
    Comments: While direct retail sales by Western may appear to spread 
the benefits of Western power more broadly, most retail customers are 
poorly equipped to handle the vagaries of fluctuating hydropower 
production or sharp reductions in available power due to changes in 
operations of CRSP facilities required by law. Retail service involves 
much more than a simple allocation of power and energy. Load following 
and other intricate ancillary problems of electric service become 
involved.
    Adoption of this policy would be an administrative nightmare. 
Direct retail sales would be less efficient, as retail allottees would 
be required to seek additional power resources, combine those 
resources, and schedule them in the most economical manner. 
Transmission, distribution, metering, reserves, energy imbalance, and 
other services would have to be obtained to deliver electricity. Most 
end-use consumers are not sophisticated enough to provide for such 
services themselves. Alternatively, they would need the services of a 
scheduling agent or an existing utility to provide these services, with 
an increase in cost to the end-use consumer.
    If Western were to serve an end user directly (such as a school), 
what would Western do with the power generated at night when a school 
cannot use it? How would Western meet the school's air conditioning 
load in September during drought years? Such a proposal would likely 
lead to increased profits for those wanting to absorb the excesses, and 
make up for the deficiencies, by dismantling public power.
    Response: Western agrees that allocation of power to end users 
presents a number of complex problems.
    Comment: If Western were to single out its utility customers for 
allocation reductions that would be transferred to end use preference 
entities in States that allow retail access, Western would incur 
increased administrative costs and need to raise rates while reducing 
the benefits of preference power to existing customers.
    Response: Western agrees that one impact of allocating power to 
public

[[Page 34453]]

schools directly could be an increase in costs to existing customers.
    Comment: No new contracts should be written at less than a 100 
kilowatt allocation.
    Response: Minimum allocation amounts are often appropriate, but are 
best determined in project-specific marketing plans.
    Comments: Changing allocation policies also raises the question of 
assuring equity among States. How will Western compare different 
States' programs for retail electric competition? Allocating Federal 
power to customers based on State laws will result in unequal access to 
such resources. Some States have now created quasi-public schools by 
allocating tax moneys to charter schools and private schools. Some 
States have proposed adoption of school voucher programs to allow 
students to use tax dollars to go to the school of their choice. The 
definition of a public school is becoming less clear every year. Every 
educational institution from home schooling to correspondence classes 
that can show Federal or State tax support will want to apply for an 
allotment of Western power.
    Response: Western agrees that it could be difficult to compare the 
different approaches to retail wheeling among the States within our 
service territory and incorporate them into a cohesive overall policy. 
Western also agrees that the definition of a public school is not 
straightforward.

B. Allocation Priorities

    Comment: End-use customers, although previously excluded because of 
a lack of access, should be treated at least on a basis comparable to 
traditional Western customers. An enhanced priority should be 
considered for these customers, since any economic benefits would 
accrue to all segments of the public.
    Response: Western has allocated power to large Federal and State 
installations in the past, as they are public bodies. The economic 
benefits derived by these installations are to the benefit of the 
public. These installations typically take delivery at transmission 
voltage and operate their own system for distributing power to load. 
This approach avoids the complications of delivering Federal power to 
numerous smaller end users and the associated administrative burden.
    Comments: Western should make its allocations based on the nature 
of the end use customer served, and should not be made simply to the 
cooperative or municipal utility. To the extent that Western's power is 
not priced at market rates but instead continues to be subsidized, we 
believe that allocations should only be made to public facilities that 
are supported by taxpayer moneys, such as military bases, State 
universities, hospitals, and prisons.
    Providing power directly to end users such as public schools and 
other Government entities is far more consistent with the spirit and 
intent of the preference clause than providing allocations to wholesale 
customers who use preference power to engage in their own competitive 
efforts.
    Response: Western already allocates power to military bases, State 
universities, hospitals, and prisons. Exclusively serving these 
entities would dislocate existing power supply for cooperatives and 
municipal utilities.
    Comment: Allocations of Pick-Sloan preference power should not be 
distributed to retail competition loads but rather to its current 
contract customers who are not receiving their full allocation from 
Western. Our current allocation would have been larger during the 
original allocation if not for the fact that formation of our municipal 
utility was delayed by years of litigation by the IOU that served our 
city.
    Response: This comment was raised by a customer of the Pick-Sloan 
Missouri Basin Program-Eastern Division. As power from the Pick-Sloan 
has already been allocated and in most cases placed under contract 
through the year 2020, Western has no immediate ability to respond 
positively to this comment. A resource pool increment of up to 20 MW 
will be available from the Eastern Division of Pick-Sloan in the year 
2005. How this power will be distributed will be determined on a 
project-specific basis in a future allocation process.
    Comment: Western should consider widening the eligibility for 
Western power to include retail cooperatives.
    Response: Western will consider any application for Federal power 
in accordance with Reclamation law and project-specific allocation 
criteria.

C. Dilution of Benefits

    Comments: Changing Western from a wholesale provider to a retail 
provider raises the very real risk of diluting this resource to the 
point where it is of no value to the end-user.
    Current policies spread the benefits to end users. Broader 
distribution of Federal resources would further dilute the benefits of 
hydropower. The CRSP annually meets less than 4 percent of the total 
load in the marketing area. The CRSP is increasingly an insignificant 
market factor from a commercial or competitive standpoint. Any broader 
distribution or allocation would simply further dilute the resource.
    Response: Western agrees that this is a concern. However, part of 
Western's responsibility is to distribute power on widespread basis. 
Western needs to consider the needs of new preference entities, as well 
as the continuing reliance of existing customers on the Western 
resource.

D. Duplication of Resources

    Comments: We do not believe that it would be appropriate for 
Western to jump into the retail sales business when selling power to 
preference customers at the wholesale level is a very efficient and 
effective way for Western to carry out its legislative requirements. 
Western should not compete with its customers, who already provide 
benefits of cost-based Federal hydropower to end users.
    If Western were to expand its role into the retail end of the 
industry, the result would be an inefficient duplication of 
distribution, rate making, billing, and ancillary services that would 
most likely more than offset any benefit to Western or the end user of 
the power.
    Response: Western agrees that it is more efficient to continue to 
distribute the benefits of Federal power through its customers. Western 
has no desire to duplicate services already provided by its customers.

E. Favoritism

    Comment: Adoption of this policy would penalize consumers served by 
public power distributing utilities in States that choose not to engage 
in competition, while favoring schools and localities in States that 
permit competition.
    Response: Penalizing consumers served by Western's customers, based 
solely on their State of residence, is not equitable.
    Comment: There should be no favoritism among preference entities.
    Response: Western makes every effort to assure that its power is 
allocated in an equitable manner.

F. Legal

    Comment: Allocating power to end use loads is far beyond the intent 
of the preference laws. Western is a wholesaler of power.
    Response: There is nothing in Reclamation law that prohibits 
Western from allocating power at wholesale to nonutilities, such as 
Federal and State agencies. Congress has recognized this on many 
occasions. For example, in authorizing the California-Oregon 
Transmission project, Congress recognized that Western markets to loads 
such as the Department of Energy

[[Page 34454]]

laboratories in California. Hearings have also been held regarding 
Western's marketing policies. In June of 1994, the Deputy Secretary of 
Energy testified before the House Subcommittee on Oversight and 
Investigations, Committee on Natural Resources, on a variety of 
marketing issues, including the status of Native American tribes as 
preference customers.
    Comment: Western cannot market to publicly owned schools, as they 
are not preference entities. In its post-89 marketing criteria for the 
CRSP, Western interpreted section 9(c) of the Reclamation Project Act 
of 1939 as requiring any new preference entities to have utility 
responsibility.
    Response: The Post-1989 General Power Marketing Criteria for the 
SLCA/IP were published in the Federal Register on February 7, 1986 at 
51 FR 4866. At page 4870 of that notice, Western stated that power 
would be allocated to a State or Federal agency with an ultimate 
consumer type load, to utilities, and to existing contractors that did 
not otherwise qualify for an allocation. Under these project-specific 
criteria, Western allocated power to a number of nonutilities, 
including the University of Utah. However, these criteria represent 
policy specific to SLCA/IP power, which is narrower than the parameters 
of preference law generally. Criteria for marketing to new customers 
after 2004 will be broader than those existing in the 1989-2004 time 
frame, in order to assure that Native American tribes are eligible to 
receive allocations, regardless whether utility status exists.
    Comment: Western is prohibited by law to sell power to nonutility 
customers while there are preference utilities who are willing to 
purchase the power. Western's sales are subject to a statutory 
preference requiring it to sell power to municipal utilities and 
cooperatives.
    Response: Reclamation law requires Western to offer to sell power 
first to preference customers. Among preference customers, Western has 
discretion to whom it sells. Pursuant to law, Western has allocated 
power to State and Federal entities, which are not utilities.
    Comment: The concept of allocating preference power to entities 
such as schools has been firmly rejected as conflicting with the 
promotion of yardstick competition required by Federal preference acts. 
The Second Circuit Court of Appeals has ruled that yardstick 
competition would exist if publicly-owned utilities competed against 
privately-owned utilities in selling of power to ultimate consumers. If 
the ``public body'' used the preference power itself, the privately-
owned utilities would not face any pressure to reduce the prices they 
charge other customers. If preference power were made available to all 
government bodies, whether or not they distributed that power to 
consumers, every town and local library would be entitled to claim a 
direct share. Hydropower would be spread so thin that any competitive 
effect it might have had would be lost. Metropolitan Transportation 
Authority v. FERC. 796 F.2d 584, 592 (2d Cir. 1986).
    Response: This case is based on the Niagara Project Power Act, and 
a FERC license issued to the Power Authority of the State of New York, 
pursuant to that act. Neither the Act, which contains a narrow 
definition of preference entity as compared to Reclamation law, nor the 
terms of the FERC license are applicable to Western.
    Comment: Regardless of electric utility industry restructuring, 
Reclamation has the legal responsibility to deliver irrigation pumping 
power to existing irrigation pump units prior to any other use.
    Response: Western markets Federal power which is surplus to the 
needs of the project, and may not execute contracts which impair the 
efficiency of the project.
    Comment: This issue raises significant questions of the legal 
authority of the PMAs to participate in retail electric markets. 
Reclamation law does not authorize such a result, and the Federal Power 
Act has provided for local jurisdiction over retail markets.
    Response: Western agrees that decisions regarding retail markets 
are local in nature, and that the Federal Power Act only gives FERC 
regulatory authority over wholesale transactions by public utilities in 
interstate commerce.

G. Need for Power

    Comment: In order to promote a competitive open power market, 
Western must explore alternatives to its traditional power allocation 
criteria and select customers. Such alternatives should include Indian 
communities such as Shiprock, Kayenta, Chinle, Tuba City, Window Rock, 
and Ramah on the Navajo Reservation. Allocations of Federal power to 
these communities may enable them to attract and establish economic 
development within their areas. Currently, unemployment among Indian 
communities is the highest in the Nation.
    Response: While Western intends to market power to tribes without 
requiring utility formation, Western does not market electricity to 
municipalities unless they have utility status.

H. Partnership

    Comments: It is unlikely that end use customers would band 
together, as existing customers have, to fund and finance deferred 
maintenance and efficiency improvements such as the new runners at 
Shasta or to lobby for the Shasta Temperature Control Device. Either 
appropriations for maintenance would need to be increased, or 
environmental and economic opportunities would be squandered. Energy 
expenses are a large and important fraction of a Western distribution 
customer's budget, but only account for a small portion of a typical 
end user's budget. Pragmatically, this means that Western is much more 
able to influence and gain attention from distribution customers than 
from end use customers.
    Allocation of power in this manner will undermine existing 
environmental commitments, as hydroelectric power would not be 
available for integration with other renewable resources.
    Response: Western agrees that end users are much less likely to 
have the resources to integrate Federal hydropower with renewable 
resource development. Customer financing of project maintenance and 
improvements is also much more achievable with a smaller number of 
entities, such as has been the case with Western's existing customers.

I. Policy

    Comments: Allocation of power directly to end users such as schools 
would require them to administer a new resource contract and convert 
their prior utility relationship to multiple electric contract 
management. For schools with loads under about 4 MW (all but college 
campuses) the administrative costs would overwhelm the bill reduction. 
Schools in existing preference customer territory would suffer higher 
rates as resources were taken away from their existing utilities to be 
allocated to schools outside of their utilities.
    Our school district is a customer of a Utah municipal utility that 
receives an allocation of CRSP power. The CRSP allocation is an 
integral part of the resource portfolio of our consumer-owned utility 
and is essential to its ability to continue providing reliable, 
affordable electricity to our citizens and businesses. It is of 
paramount importance to our community and local economy that the 
marketing proposal be approved as quickly as possible to provide 
certainty to our utility and to the consumers it serves.

[[Page 34455]]

    Expanding direct access to Western's resources by an ever-widening 
list of end users at the consumer level will become discriminatory, 
litigious, unmanageable, and bad policy.
    Response: Western agrees with these comments. Administrative costs 
would likely offset the bill reduction for small school loads. Schools 
that receive the benefits of Western hydropower would be adversely 
impacted if the communities they serve did not continue to have access 
to Federal electricity.
    Comment: Western's current marketing approach benefits publicly 
owned schools in those communities receiving Western allocations. In 
addition, both the University of California at Davis and the Radiation 
Laboratory at the University of California at Berkeley receive 
allocations. Further allocations to publicly owned schools would be 
unnecessary.
    Response: Western agrees that many schools and universities already 
receive the benefits of power allocations from Western.
    Comment: It is unclear what national policy objective would be 
served by the change in policy suggested by this question. Assuming 
Western has a policy objective in mind, it would be helpful if Western 
would articulate it and seek comment on the goal. It is also unclear 
how present practice does not serve a policy of widespread use of 
Western's hydropower.
    Response: The question was posed to see if further extension of 
widespread use to retail loads was feasible and practicable. Western 
believes that widespread use is being achieved under its present 
allocation practices.
    Comment: Adoption of this policy would favor school districts in 
high power cost States at the expense of school districts in low power 
cost States which have done a good job throughout the years in holding 
rates down and see no need to restructure their electric utility 
industry.
    Response: Western agrees that this might be the result of a change 
in policy.
    Comment: Western should consider giving allocation priority or 
credits to customers that undertake aggressive energy conservation and/
or demand-side management efforts.
    Response: Pursuant to the Energy Planning and Management Program, 
Western has reserved the right to allocate power from project-specific 
resource pools for this purpose. However, decisions on how to allocate 
power from resource pools will be made on a project-specific basis.
    Comment: Western should continue to allocate power to its 
traditional customers so they can continue to serve end users and 
ensure that the benefits of Federal power are broadly and efficiently 
distributed. Public schools get their pro rata share of preference 
power through municipal utilities and cooperatives. Western was created 
to conduct wholesale sales of Federal hydropower, with certain limited 
exceptions for direct Federal loads. Western is not a retail 
distributor and there is no reason to change its role. Western should 
focus on what it does best and not enter the retail market.
    Response: Western's expertise is as a wholesaler of power.
    Comments: Participation by the Federal government in the business 
of producing electricity is no longer warranted. The conditions under 
which the Federal government entered the electricity business due to 
widespread areas of the country being in need of electrification no 
longer exist.
    Should the Federal government remain in the electricity business 
under current law, the question becomes how best to allocate the 
electricity produced at government-owned dams. Western should not be a 
retail marketer of electricity to end-use customers. However, today's 
economic and competitive realities also are against continued power 
allocations to cooperatives and other traditional preference customers 
other than for historic purposes.
    The National Rural Electric Cooperative Association's (NRECA) own 
website proclaims cooperatives to be ``the electric utility industry's 
most powerful, strongest and fastest growing markets with a growth rate 
that is nearly three times that of investor-owned utilities.'' NRECA 
further states that cooperatives ``are affecting retention, expansion 
and growth by offering incentive rates to large consumers of 
electricity.'' Rural electric cooperatives have moved away from their 
purpose of serving sparsely populated rural areas. Cooperatives can 
offer lower incentive rates to large consumers in significant part 
because of allocations of low-priced Western hydroelectric power which 
is not available to their for-profit competitors. Continued 
subsidization of cooperatives by such means is obviously no longer 
required and only will help drive private utilities and marketers from 
the marketplace through subsidization of Western hydropower.
    Response: Only Congress can decide to remove the PMAs from the 
electricity business.
    Comment: The priority should be in developing criteria that assure 
preference allocations only go to those actually deserving.
    Response: Developing an allocation system based solely on who is 
deserving would be difficult, as virtually every customer and potential 
customer that has commented during this process has argued that their 
need is greater than others.
    Comment: How would Western handle States partially covered by the 
marketing plan wherein some retail preference entities would receive 
preference power and others would not because they were outside the 
marketing area?
    Response: Western only markets power within its established 
marketing area. If the suggested policy were adopted, only those retail 
loads within the marketing area would receive an allocation.
    Comment: Western should continue to allocate power to its 
traditional preference entity utilities. There is no indication 
whatsoever in the emerging retail markets, however slowly they are 
emerging, that these nonprofit utilities will not continue to give 
their customers the benefits of this resource.
    Response: Western expects that nonprofit utility customers will 
continue to pass through the benefits of cost-based hydroelectric power 
to consumers. Preference customers were formed by its member-owners for 
just this purpose. Moreover, Western's contracts require that the 
economic benefits of allocations be distributed to consumers.
    Comments: During the collaborative process that led to 
restructuring and customer choice legislation in Montana, all investor-
owned utilities were hostile to the PMAs migrating from a wholesale 
role to one of a retail supplier.
    Allocation of power to retail loads such as public schools would 
set up friction with other power suppliers. The Federal Government 
should not compete with other retail power suppliers.
    Western is a marketer of a finite amount of wholesale power and 
should not enter the retail market. This reality is underlined by the 
uncertainties of hydroelectric generation. Allocations directly to 
retail customers would disrupt local and regional utility markets.
    Response: Past efforts by Western to deliver hydropower to Federal 
agencies, such as Department of Defense installations, have met with 
resistance from existing power suppliers. Based on the comments 
received in this public process, there is little public support for 
Western taking on the role of a competitor for retail load.

[[Page 34456]]

    Comment: It would be virtually impossible for Western to 
selectively serve individual schools throughout California and would be 
a disaster for many existing smaller preference power entities. We 
believe that schools within territory served by investor-owned 
utilities have already received rate decreases and further decreases 
will occur when stranded costs have been recovered.
    Response: Western agrees that the State of California has mandated 
rate decreases to IOU-served electric consumers in the State, and that 
school districts have been among those paying decreased rates. 
California consumers served by IOUs are expected to receive additional 
rate relief once stranded costs have been recouped.
    Comment: As the power supply function of the dams from which 
Western markets power is secondary to the water supply function, market 
pricing and direct access for retail customers cannot be applied to the 
Federal power program.
    Response: Western's mission is not the same as that of a retail 
power marketer or other competitor in serving retail load.
    Comments: If end-users are preference entities, why has Western not 
contracted with them directly in the past? If Western does decide to 
serve end users, an extension of the existing load-based allocation 
methodology should be used. The entity losing the load should be 
allowed to recover a wheeling charge for transmitting the Western power 
over its low-voltage distribution system.
    Our water agency uses Western power to provide water supply to our 
customers. We are an end user of electricity and as such believe that 
Western should continue to make allocations to us and others who are 
similarly situated.
    Direct sales to end users, such as schools, would be inconsistent 
with the longstanding practice of marketing Federal power only to 
public and cooperative wholesale distribution utility customers and 
Federal and State government installations.
    Response: Western has served certain end users in the past, such as 
irrigation districts and Federal and State installations. However, 
Western sells power to all of its customers at wholesale and typically 
delivers power to our customers' distribution systems. If a utility 
loses load due to an allocation by Western, it is appropriate for that 
utility to charge a wheeling fee for transmission of Western power 
utilizing its system to the load receiving the allocation.
    Comment: Western's current nonprofit preference customers are 
better suited to integrate the variability of the hydro resource into a 
resource portfolio to serve end users. Western has already achieved the 
goal of widespread use, as embodied in Reclamation law, by marketing to 
a very diverse set of nonprofit entities.
    Response: Marketing to a diverse group of customers serves 
Western's policy goal of achieving widespread use.
    Comment: There is a high degree of diversity existing in the nature 
and operating characteristics of the rural electric systems owned by 
the customers we serve. Local choice and decision making are important 
in recognizing that diversity.
    Response: Western agrees that its power is already marketed to a 
wide variety of customers in a broad geographic area. Widespread use is 
being achieved without the need for Western to serve retail load 
directly.
    Comment: The proposed withdrawal of 6 percent of existing CVP 
customers' current allocations to provide a resource pool for new 
customers achieves the proper balance of not overburdening the existing 
customers, who have planned their utility around the CVP resource, 
while also providing a meaningful pool for reallocation. This is 
especially true for CVP customers, whose Western allocation will be 
changing from the firm energy supply to receiving only a pro rata share 
of the CVP base resource. In our members' cases, they will be losing 
not only the 6 percent of their capacity, but are also losing about 50 
percent of the energy that is currently being supplied by Western.
    Response: Under the 2004 marketing plans, Western is scaling back 
its role as a provider of power and not increasing it. Western's SNR is 
offering a hydro-based resource unsupplemented by purchase power, with 
firming purchases being made by the customer or by Western only at the 
customer's request. While some purchasing of power will continue for 
the SLCA/IP, the level of purchases is expected to be lower and driven 
by customer choice.
    Comment: BPA's pending subscription proposal for post-2001 power 
sales contemplates sales to regional IOUs with targeted delivery to 
residential and small farm customers. This proposal differs 
substantially from the direct sales suggested Western. First, BPA has 
an express statutory responsibility under the Northwest Power Act to 
deliver benefits to residential and small farm customers of Northwest 
IOUs. Second, BPA would make the sale to the distribution utility 
serving those customers--not to the end user. Third, the sales would 
only take place after the full contract requests of preference 
customers were satisfied. The Public Power Council would oppose direct 
sales to end users by PMAs as contemplated in Western's Notice.
    Response: Western understands that customers of other power 
marketing administrations are concerned about the precedent that would 
be set by an expansion of Western's role in the utility industry.

J. Preference

    Comment: If Western keeps preference, even after NEPA review, it 
should distribute power to eligible preference entities. One of the 
major problems with preference is its arbitrary nature. A school on one 
side of a line may get preference power, while a school on the other 
side does not. Western should market its power to those willing to pay 
market rates for power.
    Response: The boundary between two utilities is no more arbitrary 
than any other boundary, such as that separating a higher tax 
jurisdiction from a lower one. A consumer of electricity on one side of 
the street may have lower rates than a consumer on the other side of 
the street for many reasons other than access to PMA power. Such 
factors as the price of other sources of power, the cost of 
transmission, customer density, access to capital, and strength of 
management can all bear directly on the cost of power.

K. Rates

    Comment: As an alternative, the economic benefits associated with a 
modified bid process should be used to directly subsidize government 
agency end-users.
    Response: Western has no authority to adopt this comment in the 
absence of legislation.

L. Risk

    Comment: Direct allocation to retail customers would likely inject 
more risk into Western's power marketing program.
    Response: Western agrees. In addition to the exposure to market 
volatility and the risk of not obtaining customer funding for project 
maintenance and improvements, marketing of power to retail customers 
would raise the likelihood of delinquent payment of bills. This risk is 
considerably lower when Western markets power to a smaller number of 
established customers with a history of prompt payment.

[[Page 34457]]

M. Source of Power

    Comments: While our irrigation district does not oppose additional 
end users receiving allocations from the resource pool, such 
allocations should not come at the expense of existing long-term CVP 
preference power customers.
    Power allocated to retail consumers should be derived from 
utilities presently serving those consumers.
    Many end users are already served by Western, such as irrigation 
districts, Federal and State agencies, prisons, universities, and 
military installations. If a resource pool is to be formed for 
allocations of power to new end-use customers, such allocations should 
not be at the expense of existing end-use customers.
    Response: Western believes equity is best served by forming 
resource pools through withdrawal of power from existing customers on a 
pro rata basis. These resource pools will be made available to new 
customers, including Native American tribes, on a project-specific 
basis.

Question

    4. In a retail choice environment, what additional steps, if any, 
should Western take to ensure that the full economic benefits of 
preference power are passed through to end-users served by the 
distribution utility that receives a power allocation from Western?

A. Administrative Issues

    Comment: Please do not add additional reporting and oversight 
requirements, which will lead to the creation of an additional and 
unnecessary layer of bureaucracy and expense.
    Response: Western is striving to be as businesslike as possible in 
its activities. Unless an important benefit results, Western has no 
desire to add bureaucracy and associated expense to our agency.

B. Experience and Staffing

    Comments: Western should not attempt to engage in ratesetting or 
rate review by comparing rates among utilities. Such comparisons would 
be enormously time consuming and could easily overwhelm Western's 
staff.
    We do not believe Western has the expertise or the staffing to 
evaluate and compare one preference customer's retail rate structure 
against another's to determine whether either appropriately conveys the 
``full economic benefit'' of preference power to all or even selected 
classes of end users.
    Response: Western agrees that active monitoring of each customer's 
efforts to pass through the benefits of its hydroelectric power would 
not be time well spent. Contractual provisions already require 
customers to provide the benefits of firm power to consumers. If misuse 
of Western's electricity occurs, a breach of contract remedy already 
exists to address the situation.

C. Legal

    Comment: An affirmative answer to this question would interfere 
with States' rights and violate the Tenth Amendment of the United 
States Constitution.
    Response: The Tenth Amendment to the Constitution provides that the 
powers not delegated to the United States by the Constitution nor 
prohibited by it to the States are reserved to the States respectively 
or to the people. Article 4, section 3 of the Constitution provides 
that Congress shall have the power to dispose of and make all needful 
rules and regulations respecting property belonging to the United 
States. The sale of power is the sale of government property, and 
Western has the ability to place conditions on the sale of its power. 
Since Article 4 of the Constitution delegates to the United States the 
power to sell government property, it does not violate the Tenth 
Amendment.
    Comment: Western's statutory mandate is to market power and energy 
``in such manner as to encourage the most widespread use thereof at the 
lowest possible rates to consumers.'' Congress clearly contemplated 
that the focus of Western's marketing efforts should be on low consumer 
cost, and not restructuring incentives or disincentives.
    Response: Western's policy is to market power in such a manner as 
to encourage the most widespread use thereof at the lowest possible 
rates consistent with sound business principles. This policy has its 
origin in the Flood Control Act of 1944, which became law many years 
before legislative consideration of restructuring of the utility 
industry began. However, applicable law does not preclude consideration 
of the impact of restructuring on Western's policies.

D. Policy

    Comments: Current policies spread the benefits to end users. 
Existing customers are nonprofit, and already have every incentive to 
pass the economic benefits of Western's power on to ratepayers. Western 
should not assume the role of traffic cop. Western's goals and the 
goals of existing customers are the same--pass the economic benefits of 
preference power on to end users. Existing contracts restrict the use 
of Western power appropriately, so there is no need to expand the 
provisions of those contracts.
    Western's power cannot be resold pursuant to contract, and 
Western's customers are already nonprofit by definition. There is 
nowhere for economic benefits to go but to the end use customers.
    Our municipal utility is governed by representatives of its 
customers. These customers appreciate the value of the economic benefit 
of preference power and ensure that such value stays within the 
municipal utility's service territory borders.
    Why should the Department of Energy micro-manage local decisions, 
when in the past there has been an excellent history of passing the 
full economic benefits on to end users?
    Western, by contract, already requires its contractors to pass on 
the benefits of CRSP power to consumers. Since these are nonprofit 
entities, it is hard to imagine how they would not do so. Indeed, the 
concept of mandating the pass-through benefits originated at a time 
when private for-profit entities contracted for some of this resource 
because there were insufficient preference entities to do so. In that 
situation, those economic benefits could have been passed on to 
shareholders. That is not now the case.
    Response: Western agrees there is no need for additional steps to 
assure that the economic benefits of preference power are passed 
through to the end user.
    Comments: If a preference entity offers direct access, the amount 
of preference power available to that entity should be capped at the 
entity's native load. The purpose of this is to ensure that preference 
power is not retailed or exchanged for profit.
    Preference power should only serve native load. Otherwise, 
utilities may abuse the system.
    With extended contracts, Western power recipients seeking new 
customers would increase their unfair advantage. At a minimum, Western 
must be far more diligent in ensuring that its preference power 
participants do not use the low-cost Federal electricity to obtain an 
advantage in the competitive marketplace.
    Response: Typically, Western only serves a portion of its 
customers' needs. Safeguards against the inappropriate use of Federal 
hydropower already exist, as Western's contracts forbid the sale for 
resale of Federal power and require that the economic benefits of 
Western's power be distributed to consumers. How a customer markets 
non-Western power

[[Page 34458]]

is not appropriately a concern for Western.
    Comment: Not all public power utilities have the option to opt in 
or out of competition for retail load. Salt River Project was required 
by State law to make retail competition available to 20 percent of its 
load at the end of 1998.
    Response: Legislation on this point varies from State to State.
    Comments: In a deregulated electric industry, the organizational 
structure of the distribution utility should not be a determinative 
factor in disposing of Federal preference power. The distribution 
utility should be treated simply as a poles and wires entity with no 
ability to manipulate the supply side of electric service. It seems 
unfair that existing utilities holding preference power allocations 
could use their Federal preference power to attract new customers in 
ways that do not provide benefits to their existing service territory 
or their current base of retail customers. One potential way to handle 
this issue is to vest the contractual right to preference power in the 
wires or distribution portion of the existing preference utility. In 
effect, this would lock the preference power allocation into the 
preexisting service territory and the current retail customer base even 
in a retail competition environment.
    The government subsidies inherent in sales of preference power can 
distort the operations of markets and give unfair competitive 
advantages to certain recipients of this low cost power. Some 
preference customers are seeking to enter competitive markets, and they 
should not be able to use such subsidized power to gain an unfair 
competitive advantage.
    Response: Western's customers are unable to resell their Federal 
preference power, as existing contractual provisions prevent sale for 
resale of Federal power. Given this existing safeguard, Western sees no 
need to vest the allocation in the distribution portion of a customer's 
system.
    Comments: Our city charter already requires that retail rates must 
be cost-based and approved at an open, public hearing where public 
comment is solicited. Aware citizens are the best safeguard against 
inappropriate distribution of the benefits of Western power.
    Western's requirements under the Energy Planning and Management 
Program assure that the economic benefits of preference power are 
passed through to end users and that end users have the opportunity to 
know how this arrangement benefits them. The requirements for IRP 
involve a public process, which provides additional assurance for end 
users to understand the benefits of the preference allocation process. 
The information provided in a distribution utility's IRP filed with 
Western satisfies the question on the ultimate beneficiary of a 
preference power allocation.
    Response: Western agrees that information provided to the public 
during local rate setting and integrated resource planning efforts 
strongly supports the policy of assuring that the economic benefits of 
Western's power are appropriately distributed.
    Comment: Western should condition its allocations by requiring 
municipal utilities to offer cheaper electricity in poorer parts of 
their service territory.
    Response: Most of Western's customers do not serve wealthy areas. 
However, Western is sensitive to the issue of need for reasonably 
priced power. Western is devoting considerable effort to delivering the 
benefits of its power to Native American tribes in need of lower priced 
electricity.
    Utilities already have programs to assist consumers who cannot 
readily pay their utility bills, such as lifeline rates and assistance 
programs for low-income consumers. The Federal Government already 
addresses this issue through funding of the Low Income Home Energy 
Assistance Program. Conditioning of Western's allocations by requiring 
customers to offer less expensive electricity in poorer areas appears 
to duplicate programs that already exist that serve the same function.
    Comment: State law prohibits discriminatory rate treatment by 
assigning the lowest cost resource to some consumers, but not to 
others.
    Response: Western does not want to implement policy that conflicts 
with State law.
    Comments: Preference distribution utilities should be permitted to 
use Federal power as is most economically useful in benefitting all 
their customers. However, the status quo allocations to current 
preference utilities should be reconsidered to fairly distribute the 
use of Federal power.
    Market conditions should be allowed to establish the sensitive 
equilibrium between power cost and value. The establishment of more 
rules would slow adoption of open access power market principles.
    No additional steps need be taken. The customer assumes 
responsibility for its own destiny when deregulation occurs. Neither 
the regulator nor the distribution utility have an obligation to 
protect the financial integrity of the customer.
    Response: The use of Federal hydropower should not be as unfettered 
as suggested in these comments. Sale for resale of Federal power is 
prohibited under Western policy as reflected in power sales contracts. 
Allowing sale for resale would distort the intent underlying Western's 
allocations. Allowing the resale of Western's power at a profit would 
be totally inappropriate, as it would allow for private gain on a 
taxpayer financed and publicly owned resource.
    Comment: If Western is concerned about additional assurance, ask 
each distribution utility to verify the amount of electric power and 
energy supplied at retail within its area and require that this amount 
is equal to or greater than that delivered by Western to the 
distribution utility.
    Response: Western already has the right under existing contracts to 
ask its customers to demonstrate whether the benefits of cost-based 
hydroelectric power are being passed through to consumers and whether 
resale is occurring.
    Comment: In a retail choice environment, Western must take 
additional steps to ensure that the full economic benefit of preference 
power is passed on to end users. The considerable tax subsidy Western 
receives, price subsidy Western conveys, and environmental costs 
Western exacts on the Sacramento and Colorado Rivers means Western is 
granting excess economic benefits at the expense of taxpayers, other 
electricity users and the Sacramento and Colorado Rivers. Western must 
seize the opportunity and correct its costly practices. Western must 
pursue river flows and dam operations--or removal--to protect the 
environment and restore the well being of those species threatened or 
endangered by the dams. Western must also offer tiered, market-based 
rates to eliminate the unfairness and inefficiency in the current 
system.
    Response: As previously noted, Western's rates are not subsidized. 
Western markets cost-based hydroelectric resources, which are 
relatively inflation resistant as compared to non-hydro generation due 
to the absence of fuel costs. In addition, Western has no 
responsibility to meet load growth with relatively expensive additional 
power. Western's hydropower resources are reasonably priced due to 
these factors, and promote yardstick competition.
    The generating agencies, such as the Bureau of Reclamation and the 
Corps of Engineers, have the responsibility to pursue changes in river 
flows and dam

[[Page 34459]]

operations and to consider dam removal. Western has anticipated the 
possible reoperation of dams which impact threatened and endangered 
species by reserving the right to adjust our marketable resources in 
response to changes in hydroelectric operations. In addition, Western's 
customers have funded millions of dollars in environmental mitigation 
and study expenses.
    Western does not have the legal ability to depart from cost-based 
rates in the manner suggested.
    Comment: For our distribution cooperative, in years where we have a 
positive margin, that margin is allocated to the member-owners and 
placed in the member's capital credit account. The Board of Directors 
annually reviews that account and the financial condition of the 
cooperative to determine the appropriate amount of capital that should 
be returned to the membership.
    Response: This comment demonstrates how the economic benefits of a 
locally-owned public power cooperative are returned to consumers rather 
than flowing to other beneficiaries.
    Comment: The Sierra Nevada Region analyzes each preference 
customer's rates on an ongoing basis and continually stresses the 
requirement that rates be held as low as possible. In addition, Western 
requires an annual update of each entity's integrated resource plan and 
provides valuable feedback on resource utilization and optimization. 
The SNR also conducts several customer meetings annually, where such 
topics as customer rate setting are discussed.
    Response: This comment is accurate. Western's CRSP Customer Service 
Center also provides similar services except that more individual 
customer meetings are held, as opposed to several meetings each year 
with all customers.
    Comment: Western's notice does not explain what is meant by ``full 
economic benefits of preference power.'' Is it Western's goal to ensure 
that the difference between the rate that Western charges and the costs 
of replacement power remains with the end users served by the utility? 
If that is the case, we generally agree that it is appropriate that the 
full economic benefits of preference power should be reserved for 
Western's customers' native load.
    Response: This comment accurately reflects Western's goal.
    Comment: Western should require all successful bidders for 
preference power to pass on to qualified end users (based on income or 
their nature as public institutions) the savings, if any, associated 
with the purchase of Western power as compared to other power supply 
sources.
    Response: Western agrees that the benefits of the hydroelectric 
resources we market should flow to the consumer. This occurs almost by 
definition, as Western's firm power customers are nonprofit and have no 
shareholders.
    Comment: Those customers who qualify as end use preference entities 
should at a minimum be guaranteed a ``most favored'' customer economic 
treatment.
    Response: As no rationale has been advanced in support of this 
comment, Western will not adopt it.
    Comment: Once vertical dis-aggregation occurs, Western must have 
procedures in place to ensure that end users--not distribution 
cooperatives or municipals--receive these allocations.
    Response: Distribution cooperatives and municipal utilities are 
preference entities eligible to purchase power from Western. Should the 
form of these customers change, in response to industry deregulation or 
for other reasons, Western will be able to address issues of who should 
receive the allocation at that time. In the meantime, cooperatives and 
municipal utilities are required by contract to distribute the benefit 
of Western's power to consumers.
    Comment: Western's mission is not one of being a consumer advocate.
    Response: Western is concerned that consumers receive the benefit 
of our allocations.

Question

    5. Should a distribution utility be permitted to transmit the 
economic benefits of preference power exclusively to industrial and/or 
commercial end-users? Conversely, should a distribution utility be 
required to pass on the benefits of preference power exclusively to a 
certain class of customers such as residential or small business?

A. Administrative/Staffing Experience

    Comments: Western does not have the staffing or historic expertise 
to do retail rate design. Rate design issues are complex, controversial 
and disruptive and are best addressed locally and not by the Federal 
Government. Western should not change its role from that of a 
wholesaler of power.
    Adding onerous restrictions and compliance requirements does 
nothing to promote Western's mission and adds additional costs to the 
rates.
    The resources that we purchase from our generation and transmission 
cooperative consist of Western power and as well as other sources of 
power supply. The rate we are charged is a blend. Distribution of the 
benefits of Western hydropower exclusively to a particular class of 
consumers would be complicated by this existing billing practice.
    Response: Western has no broad expertise in the diverse retail rate 
design laws and policies within our 15-State service territory, as our 
role is one of a wholesaler of power. Even if Western wanted to monitor 
retail rate design, there is no guarantee that Congress would provide 
the funding necessary to carry out Western's new role.

B. Discrimination

    Comments: A distribution utility should not be permitted, or 
required, to transmit the economic benefits of preference power 
exclusively to industrial and/or commercial end users. The intent 
underlying preference power was for the benefits to flow equally to all 
the customers served by the entity receiving the allocation. Rural 
communities will not survive in an atmosphere of fragmentation.
    Allocations of Federal power exclusively to a particular customer 
class would conflict with nondiscriminatory rate making principles used 
by consumer-owned utilities.
    Western should not start a class war. Teddy Roosevelt would sit 
upright in his grave if he thought public resources would be devoted to 
big business. No volume discounts should be provided to large 
corporations.
    There does not seem to be any policy basis for discriminating 
between residential, small business, and commercial end users, so long 
as the allocation serves the historic purposes of preference law.
    Western's policy prohibits discrimination among classes. Western's 
existing customers have adhered to the longstanding policy of no 
discrimination.
    Response: Western has no definite policy on retail rate design. Nor 
does Western require that the benefits of an allocation of Federal 
power be provided to one class of consumers at the expense of others. 
Retail rate design is typically done at the local level, in accordance 
with a cost of service study or other State or local policy goal. 
Western sees no need to dictate matters that are best determined at the 
local level.

C. Legal

    Comment: Adoption of the policy suggested by this question 
interferes with States rights and violates the Tenth Amendment.
    Response: For the same reasons set forth in response to a similar 
comment

[[Page 34460]]

on the fourth Notice of Inquiry question, no violation of the Tenth 
Amendment would take place.
    Comment: Western's authorizing statutes grant it no power to review 
the rates of its customers or to identify some consumers as being more 
or less deserving of the benefits of Western's power.
    Response: Applicable policy requires that power be sold at ``the 
lowest possible rates to consumers'' without direction to favor one 
customer class over another. As Western does not believe it to be good 
policy for a Federal agency to get involved in local decision making on 
rate design issues, there is no need to address the question of whether 
Western possesses the legal authority to do so.
    Comment: The Second Circuit Court of Appeals has faced the argument 
that preference power should be furnished to municipal utilities for 
resale to only domestic and rural consumers, not to industrial or 
commercial consumers. The Court ruled that if ``Congress had wanted to 
restrict resale to domestic and rural consumers it could easily have 
done so simply by stating that the power was to be made available to 
public bodies `for resale only' to such consumers.'' The Court also 
held that Congress ``believed that all interests could best be served 
by giving the local entities the right to decide on the ultimate retail 
distribution of the preference power sold to them.'' Port Authority of 
the State of New York v. FERC, 743 F. 2d 93, 104-05 (2d Cir. 1984).
    Response: This case is based on the Niagara Project Power Act, and 
a FERC license issued to the Power Authority of the State of New York, 
pursuant to that act. Neither the Act, which contains a narrow 
definition of preference entity as compared to Reclamation Law, nor the 
terms of the FERC license are applicable to Western.
    Comment: DOE cannot legally impose such restrictions on the end 
user's consumption of power delivered by a preference customer. 
Congress has already spoken to this issue, and determined that 
decisions about how power should be allocated within a preference 
customer's community are local in nature.
    Response: While Western has broad authority to determine the 
conditions under which power will be sold, Western agrees that the 
decision is appropriately local in nature.

D. Local Control

    Comments: Local rates are set in an open public process. Local 
government already addresses the issue of equity between small and 
large customers by its very structure. These institutions have a 
relatively small electorate, easy and direct access to their 
representatives and periodic elections. The effect of this democratic 
structure is that residents tend to have a much larger say in the 
decision-making process of their local utility than a customer of an 
IOU. If an issue arose about rates or cost allocations, residents would 
have to be convinced of the merits of a particular resolution to the 
issue. This is a more considered and responsive way to address the 
implications of the open market.
    One of the benefits of public power is local control. Our utility 
is a relatively new public power entity and our customers have a keen 
memory of how badly they were treated when decisions about their 
services were made remotely. If Western ever elected to get involved in 
this level of detail, the customers our board serves would be 
disadvantaged. Most of those customers could not afford the time and 
expense to travel to Sacramento, much less Denver or Washington, DC, to 
voice their concerns.
    Distribution utilities that receive preference power are governed 
by either elected boards or councils. Rates are currently set pursuant 
to cost-of-service studies, and customer classes are assigned costs on 
this basis. If a distribution utility were to change their rate design 
method, open, public rate hearings must be held as part of the rate 
approval process.
    Since Western is not accountable to local voters, Western should 
not strive to intervene in local decision making. Given a choice, I 
cannot imagine that our residents or business owners would prefer to 
have rates established by a Federal agency.
    Response: Western agrees that retail rate design is appropriately a 
local decision.
    Comment: Western should not become a Federal public utilities 
commission. Federal regulations simply cannot embrace the wide variety 
of local conditions that exist in Western's service territory. Why 
should DOE micro-manage local decisions, when in the past there has 
been an excellent history of passing the full economic benefits on to 
end users? Absent a clear showing of abuse, Western should not involve 
itself in these uniquely local issues.
    Response: It is not good policy for a Federal power wholesaler to 
make decisions on retail rate design.

E. Policy

    Comment: Western is in no position to allocate benefits or force a 
distribution utility to allocate benefits among customer classes. Each 
distribution utility has a varied mix of customer classes and economic 
situations. Each of them has different statutory mandates as creatures 
of the States in which they were created. Western is ill-equipped to 
compile and absorb the nuances of State law in 15 States concerning 
local government and electric cooperative mandates. To the extent that 
adoption of any change in Western policy would interfere with State and 
local mandates, Western does not have the authority to do so and should 
not seek it.
    Response: The design of retail rates is appropriately determined at 
the local level. The diversity and complexity of State and local 
standards and policy on this issue would make the establishment of a 
cohesive Federal policy difficult.
    Comments: Western should ensure that the full economic benefits of 
preference power are passed to residential and small business. In a 
competitive market, these two classes of customers will not have the 
expertise to locate and arrange for delivery of least cost power.
    Preference should remain as originally designated, for the primary 
use of residential and small business consumers.
    The benefits of Federal power should be passed on to residences and 
small businesses by the distribution utility. Traditionally, 
distribution utilities have melded their low-cost Federal power with 
other sources and most times, through rate structures, the big power 
users received most of the benefits.
    The economic benefits of preference power should be enjoyed by all 
customer classes equally based on the cost to provide service to the 
customer.
    The distribution utility should not slight or reward any class of 
customers. Preference power benefits should be shared and shared alike 
throughout the customer classes.
    Rate structures vary from cooperative to cooperative, and reflect 
what is appropriate for that cooperative and that community. A 
centralized, one-size-fits-all approach from Western, however well 
intentioned, is a poor substitute for a deliberative democratic 
approach exercised by locally elected officials.
    Response: Rate design is appropriately a local choice.
    Comment: An underlying concern appears to be that Federal power 
creates a competitive advantage for its consumer-owned recipients. 
However,

[[Page 34461]]

many of Western's customers, due to their size or location, pose no 
competitive threat to other market participants.
    Response: Western agrees.
    Comment: Western should only require distribution utilities to show 
the economic benefit of preference power as well as other sources of 
power in their retail rate making criteria.
    Response: Western's contracts contain language dealing with the 
distribution of the benefits of Western's power. Under current standard 
language in Western's contracts, the customer ``agrees that the 
benefits of firm electric power or energy supplied under the contract 
shall be made available to its consumers at rates that are established 
at the lowest possible level consistent with sound business principles, 
and that these rates will be established in an open and public manner. 
The Contractor further agrees that it will identify the costs of firm 
electric power or energy supplied under the contract and power from 
other sources to its consumers upon request. The Contractor will 
demonstrate compliance with the requirements of this provision to 
Western upon request.''
    Comment: The purpose of the preference law is to provide power for 
public purposes and to help provide economic development for under 
served populations. Each preference customer should be required to show 
Western how it is carrying out the historic preference power mission in 
order to be eligible for an allocation.
    Response: As our customers are already carrying out the purposes of 
preference law, Western sees no reason to adopt a litmus test for its 
customers as a condition for receipt of an allocation. If a customer is 
not acting in accordance with law or contractual provisions, Western 
has the remedy to address the situation.
    Comment: Federal intervention is not necessary because of market 
pressure to prevent ``cost shifting'' among customer classes.
    Response: Competition in the marketplace could well influence rate 
design decisions made by local utilities.
    Comment: The Energy Policy Act clearly set forth a Federal intent 
to functionally separate generation from distribution. As a result, 
cooperative or municipal systems should no longer be the recipients of 
Federal preference allocations or involved in determining how Federal 
benefits from power sales are allocated to the end use customer.
    Response: The Energy Policy Act opened up the regulated 
transmission grid to wholesale access, but did not mandate functional 
separation or modify preference law. Some unregulated entities (such as 
Western) have proceeded with separation of merchant and reliability 
functions because it serves their policy goals. However, public power 
utilities are not subject to any requirement to separate their 
functions unless Congress amends existing law.
    Even if public power utilities were to separate functions, as a 
matter of law or local policy choice, there is no reason why this would 
impact continued purchase of power from Western. The negotiation of 
contracts and administration of the sale of power would be the 
responsibility of employees within the customer's function responsible 
for sales to retail consumers.
    Comments: Preference should be altered precisely because it creates 
a nonsensical distinction among different groups of Americans. The 
decision to confer preference benefits on one class of customers rather 
than another is arbitrary and inappropriate for a government agency. 
Western should no longer stand against more than 200 years of economic 
research clearly demonstrating that the public is best served by free 
markets.
    We support the extension of CVP resources to existing customers 
notwithstanding our general skepticism about electricity prices that 
fail to internalize key economic and environmental costs. In 
electricity markets, decades of empirical evidence indicate that price 
signals are not the only nor necessarily the most effective way to 
elicit long-term societal benefits.
    Response: Selling power generated from public assets to consumer-
owned public entities is neither arbitrary nor nonsensical. The 
statement about 200 years of economic research is unsupported by any 
specific citations, so Western cannot evaluate the merit of any such 
research. Western agrees that societal benefits may not be addressed 
appropriately by the marketplace.

F. Western's Role

    Comments: Western's involvement in designating retail customer 
recipients could give it regulatory authority that is not warranted. 
The basic purpose of retail access is to allow decisions to be made at 
the local and consumer level, not to create a Federal template.
    AB 1890 recognized that retail rate making for nonprofit utilities 
is best left to the local governing body that answers to its own 
citizens. This is not the time nor is there reason to replace the 
efficiency and responsiveness of local control with the inefficient 
command and control of the Federal Government.
    Response: The better policy is to retain retail rate design at the 
local level, where State and local issues can be best addressed.

Question

    6. Should a distribution utility be required to offer retail access 
to its distribution customers as a condition of receiving a preference 
power allocation in the future?

A. California Law

    Comments: Such a policy would be inconsistent with AB 1890 that 
establishes industry deregulation in the State of California. AB 1890 
allows the retail access decision to be made at the local level. 
Northern California customers are complying with this State law.
    California restructuring legislation encouraged consumer-owned 
utilities to offer retail access, but left the decision up to the local 
governing body that is elected by those very same consumers. 
Intervention by the Federal Government on this matter would undermine 
the democratic process.
    AB 1890 adequately addresses retail access in California and the 
Federal Government should not attempt to usurp the retail competition 
already in place. We strongly oppose Western's intervention into our 
municipal utility's prerogatives under California State law.
    Response: The policy of the Clinton Administration, as reflected in 
the Administration's proposed electric utility restructuring 
legislation, allows each State and unregulated utility to opt out of 
retail competition. Western will not adopt a policy that is 
inconsistent with this proposed legislation.

B. Direct/Indirect

    Comment: Imposing such a condition attempts to accomplish 
indirectly what cannot be achieved directly under existing law. 
Congress has not forced retail choice on States directly.
    Response: The Clinton Administration has proposed legislation to 
deal with this situation that preserves State and unregulated utility 
choice. Western will not require retail competition indirectly as a 
condition of its power sales contracts.
    Comment: As a matter of State law, some preference customers will 
not be able to impose a retail competition plan in order to obtain an 
allocation.
    Response: Western recognizes that some of its customers cannot 
legally adopt retail access as a matter of State law. Attempting to 
require such a policy as a condition of Western's power sales contracts 
would place some customers in an untenable position.

[[Page 34462]]

C. Equity

    Comment: A retail access mandate for customers now seeking a 
contract extension is discriminatory, because it violates the precedent 
set in the Pick-Sloan renewals and would apply currently only to 
customers of the Colorado River Storage Project and the Central Valley 
Project.
    Response: Western often implements new policies in a staged manner, 
as its marketing plans and contracts are effective for different time 
periods.

D. Legal

    Comment: This restriction would be a violation of existing Federal 
law and is beyond the reach of Western absent congressional 
authorization. It would also interfere with decision making by both 
State and local policy makers. For example, Montana law allows 
cooperatives the option to decide whether to ``opt in.'' Adoption of 
this policy by Western would undermine the policy choice made by the 
State of Montana.
    Response: While Western has broad authority to determine the 
conditions under which power will be sold, Western agrees that the 
decision to embrace retail wheeling has historically been local in 
nature. Western's policies should neither force retail wheeling in 
States that have rejected it nor impede the adoption of retail wheeling 
in jurisdictions that have embraced it.
    Comments: Do not set up a conflict between Federal law and 
California law. This would be the epitome of big brotherism. An 
affirmative answer to this question would interfere with States' rights 
and violate the Tenth Amendment to the United States Constitution.
    In some instances, any attempt to force a Federal retail access 
template on Western customers would be unconstitutional as a violation 
of the Tenth Amendment to the United States Constitution. In 
particular, Western cannot interfere with the governmental mission of 
its customers as defined in State laws and constitutions.
    Response: For the same reasons set forth in response to a similar 
comment on the fourth Notice of Inquiry question, no violation of the 
Tenth Amendment would take place.
    Comment: Such a requirement would be inconsistent with the intent 
of California's AB 1890 and with the current Administration policy of 
flexible mandate.
    Response: Western agrees with this comment.
    Comment: Imposition of such a requirement would constitute a 
``taking'' of property that would result in a liability for 
compensation by the Federal Government.
    Response: There is no entitlement to Federal power in the absence 
of a contract. Since the sale of power is a sale of government 
property, no taking will occur.
    Comment: The Energy Policy Act of 1992 makes it clear that the U.S. 
Congress did not intend for retail issues to be dealt with at the 
Federal level. The FERC was denied jurisdiction over transmission 
access at the retail level in favor of State jurisdiction. There has 
been no significant indication that the Congress has changed its mind. 
Moreover, legislation drafted by the DOE and introduced in the 105th 
Congress would continue the State's dominant role in retail access 
considerations. Western does not now have, and probably will not get, 
authority to attempt to leverage retail access.
    Congress has given local entities ``the right to decide on the 
ultimate retail distribution of the preference power sold to them.''
    Response: FERC has limited jurisdiction to order retail wheeling 
under the Energy Policy Act of 1992. The policy of the Clinton 
Administration, as reflected in the Administration's proposed electric 
utility restructuring legislation, allows each State and unregulated 
utility to opt out of retail competition. Western will not adopt a 
policy that is inconsistent with this proposed legislation.

E. Local Control

    Comment: Let communities decide whether, when, and how they will 
manage direct access. Our municipal utility is planning to open up 
direct access because it is good for the community. Each community 
faces a similar choice, and they will act in the best interests of 
those they serve.
    Response: The policy of the Clinton Administration, as reflected in 
the Administration's proposed electric utility restructuring 
legislation, allows each State and unregulated utility to opt out of 
retail competition. Western will not adopt a policy that is 
inconsistent with this proposed legislation.

F. Policy

    Comment: There is no logical nexus between Federal power 
allocations and retail access. The Congress has not determined that 
retail access is a sine qua non of electric utility industry 
restructuring.
    Response: Congress has not established such a nexus.
    Comment: Federal intervention in local access matters as a 
condition of receiving a power allocation would not be beneficial. 
Federal intrusion into decision making aspects of retail access 
determinations smacks of Federal social central planning, which Western 
and DOE should not promote. Intervention by the Federal Government on 
this matter, especially on a piecemeal basis through a marketing plan 
of a limited Federal resource, would be totally inappropriate.
    Response: A comprehensive approach to this issue is preferable to a 
piecemeal approach.
    Comment: The elected governing body of a distribution utility 
receiving an allocation from Western may decide that it is in the best 
interests of its customers to not offer retail access until some time 
in the future, or not at all. The newly formed markets for power are 
still immature and it may be some time before truly competitive markets 
are accessible to all customers. In our case, the decision will be made 
in an open, public forum where retail customers can voice their opinion 
to an elected city council. If the city council decides that it is in 
the best interests of a city's customers for it to remain a full 
service public power utility, the customers of this utility should not 
be penalized by not being eligible for future power allocations.
    Response: The decision to open up markets to retail competition is 
best made locally. Western's policies should neither force retail 
wheeling in States that have rejected it nor impede the adoption of 
retail wheeling in jurisdictions that have embraced it.
    Comment: Adoption of this policy would have unintended 
consequences, such as migration of power out of States that decline to 
adopt retail access. Preference customers in States that do not permit 
retail access could lose their preference power, even if those 
customers are using their allocations to service the types of end users 
that the Notice indicates should be receiving the full economic benefit 
of preference power.
    Response: Western agrees that the effect of the policy suggested by 
the question could cause power to migrate to customers in States that 
have adopted retail access.
    Comment: Whether retail access is good or bad remains to be seen. 
We believe that in the final analysis it will depend on the size and 
location of the end user. Western's power allocations should neither 
help nor hurt retail access. The draft 2004 CVP marketing plan provides 
enough flexibility for the benefits of CVP power to be realized,

[[Page 34463]]

regardless how retail wheeling evolves. We urge Western to rise above 
those who seek to destroy public power, or who seek to restructure the 
electric industry so that profits can be made off the public's 
resources.
    Response: The policy of the Clinton Administration, as reflected in 
the Administration's proposed electric utility restructuring 
legislation, allows each State and unregulated utility to opt out of 
retail competition. Western will not adopt a policy that is 
inconsistent with this proposed legislation.
    Comment: The impact of adoption of this proposed change in policy 
would impact supplemental suppliers much more than Western or Western's 
preference customers.
    Response: Western needs to be aware of the impact of its policies 
on supplemental suppliers.
    Comments: There are many legitimate reasons why retail competition 
might not be adopted by a State, including a concern that losers are 
likely to be residential, low income, senior citizens and other small 
users. Market power concerns and availability of reliable power supply 
also may cause a State to reject retail competition. These legitimate 
concerns should not be held hostage by a threat of losing a Federal 
power allocation.
    There is no evidence that small customers have benefitted from 
retail wheeling. We don't understand why Western would want to force 
retail access where it is not allowed to the potential detriment of our 
small customers.
    Response: The policy of the Clinton Administration, as reflected in 
the Administration's proposed electric utility restructuring 
legislation, allows each State and unregulated utility to opt out of 
retail competition. Western will not adopt a policy that is 
inconsistent with this proposed legislation.
    Comments: Mandating retail access by preference customers now 
seeking a contract extension is inconsistent with the restructuring 
policy of the Clinton Administration, which advocates a flexible 
mandate for States and nonregulated utilities. Western should not force 
retail wheeling in States that have rejected it.
    This should only be done by an act of Congress which would mandate 
retail access. What logic would there be to force retail access if 
neither the State nor Federal law requires such action?
    Response: Western agrees that the question suggests an approach 
that goes further than the Clinton Administration's policy.
    Comment: Regulation by independent commission or elected body has 
been a widely accepted substitute for regulation by market forces in 
the electricity business for nearly 100 years. Although there are 
experiments being conducted in a very limited number of States and 
locales concerning the reintroduction of the market as a form of 
regulation, the wisdom of this approach is far from proven.
    Response: Although open access to high voltage transmission and 
competition in the sale of wholesale power are prevalent, Western 
agrees that many States have not extended these policies to retail 
load.
    Comment: It is the stated policy of the Clinton Administration that 
customers should be allowed to benefit from the ability to choose their 
own electricity supplier, but also permit States and unregulated 
utilities to opt out of the competition mandate if they find that 
consumers would be better served by an alternative policy. Western 
should engage in the same balancing act. Customers that operate in 
States where there is no barrier under State law to retail competition 
should be required to open up their systems to retail competition as a 
condition of receiving future allocations. End users of preference 
power should see their rates remain the same or go down as a result of 
competition.
    Response: Adoption of this comment would not be akin to engaging in 
the same balancing act as the stated policy of the Clinton 
Administration. The Administration's policy allows States and 
unregulated utilities the freedom to choose, while this comment asks 
Western to deny that right to unregulated utilities within States that 
adopt retail wheeling for regulated utilities. It is more appropriate 
for the individual States, and not Western, to consider whether public 
power utilities should lose their historic right to make decisions 
locally.
    Comments: Distribution utilities serving Indian reservations should 
be required to offer retail access to it customers within the 
reservation as a condition of receiving a preference power allocation 
in the future. Western must not allow the tribes to become landlocked 
or to be held hostage by others who may have adverse interests to those 
of a tribe.
    A distribution utility should be required to offer retail access to 
its distribution customers as a condition of receiving a preference 
power allocation in the future. We believe this requirement will 
encourage open access for retail distribution customers the same as the 
transmission and generation customers under the FERC rule. The Navajo 
Agricultural Products Industry has tried unsuccessfully to have its 
distribution utility wheel other power to its sprinkler irrigation 
equipment and a proposed food processing plant. The argument used to 
discourage open access is that the State of New Mexico legislature has 
not enacted an open access law similar to AB 1890.
    Response: Western plans to allocate power to tribes from project-
specific resource pools. If the tribe already is or plans to become a 
utility, transmission will be available under wholesale transmission 
access principles. Should the tribe choose not to form a utility, 
Western is committed to providing the benefits of Federal hydropower to 
the tribes through other means. This could include retail wheeling 
where the distribution utility offers this service, or alternatives 
such as bill crediting when retail access is unavailable. Western has 
adequate flexibility to deliver the benefits of Federal hydropower to 
tribes without mandating retail access as a contractual condition for 
existing customers. In addition, adoption of this policy would be 
incomplete in its scope in States that have not adopted retail 
wheeling, as it would provide no benefits to tribes served by entities 
that are not Western customers.
    Comment: Wherever a utility receiving preference power seeks to 
sell retail power to new customers in service territories and 
communities presently being served by other utilities, that utility 
should be required to offer retail access to its distribution 
customers.
    Response: The policy of the Clinton Administration, as reflected in 
the Administration's proposed electric utility restructuring 
legislation, allows each State and unregulated utility to opt out of 
retail competition. Western will not adopt a policy that is 
inconsistent with this proposed legislation.
    Comment: The opening of retail access for preference customers is 
far more complex than suggested by this question. The reasons why no 
municipalities have joined the California ISO are (1) existing tax 
exemptions on already existing bonds could be jeopardized, and (2) 
municipalities would receive little or no credit for turning over to 
the ISO transmission assets that are not directly connected to their 
load centers, such as the municipal interest in the California-Oregon 
transmission system. A municipal utility joining the California ISO 
could be risking great damage to their system. This is not an outcome 
to be furthered by Western as the price for an allocation of preference 
power.
    Response: The complexities of this issue must be taken into 
account.

[[Page 34464]]

    Comment: Western should attempt to maintain comparability with 
regulated utilities in the area.
    Response: This is a role more properly exercised by the States.
    Comment: We believe that customers with distribution systems should 
be encouraged to share their facilities with other customers whenever 
it is mutually beneficial.
    Response: Western agrees.
    Comment: All distribution entities, including cooperative and 
municipal utilities, must be required to offer retail access, whether 
they receive an allocation of preference power or not. We must begin to 
view the industry not in a way that asks which entity gets what 
preference, but rather in terms that power supply has been mandated to 
be a competitive enterprise while distribution ought to remain a 
regulated monopoly.
    Response: Western has no ability to accomplish this suggestion. 
Only Congress or State legislatures have the power to adopt a broad 
policy of widespread applicability.
    Comment: If Western only made allocations to distribution utilities 
that offer retail access, it would speed the adoption of retail access 
and free up some allocations from distribution utilities who chose to 
forego their Western allocations rather than provide retail access. 
However, making Western allocation renewal conditional on distribution 
utilities' offers of retail access would only offer a level playing 
field if FERC hydro license holders nationwide were also stripped of 
their licenses if they did not offer direct access by 2005.
    Response: Western understands this issue of equity in implementing 
retail access.
    Comment: This question suggests that Western allocations ought to 
be held as ransom for retail access. Our utility began offering retail 
access to all customers in January of 1998. Our access is not 
restricted by competitive transmission charges or similar charges 
imposed virtually every time retail access has been offered or 
contemplated by IOUs. To date, not one of our customers has switched 
suppliers. Our customers are small and sparsely distributed. Those 
seeking to gain by providing retail access and attacking public power 
know they cannot profit by providing our customers a better deal than 
we provide.
    Response: Western believes this comment demonstrates that small 
rural consumers may not benefit from adoption of retail access.

G. States

    Comment: The issue of retail access has always been one for the 
States to decide. If the decision of the State is to be overridden, the 
entity that must do so is Congress, not Western.
    Response: Western agrees that it should not act inconsistently with 
the decision making of States.
    Comment: A vast majority of the States located within Western's 
marketing area have not yet elected to proceed with restructuring. 
Congress has adopted no legislation encouraging, much less mandating, 
restructuring of the utility business. The only Federal activity to 
date has been by FERC, an independent regulatory agency whose authority 
to order restructuring of the wholesale electric energy market is 
currently under legal challenge.
    Response: Western agrees.
    Comment: Requiring a retail access mandate assumes retail access is 
good for all consumers. This is not true, as 23 State Public Utility 
Commissions wrote to Congress recently urging retail access not be 
mandated because they believe retail rates in their States would 
increase significantly as a result. What about States like Idaho/Oregon 
that already have low rates and want to keep it that way by rejecting 
retail wheeling?
    Response: States that already enjoy low cost power may be cautious 
about adopting retail access laws that might place upward pressure on 
local power rates.

H. Western's Role

    Comment: The Public Power Council opposes any effort to expand the 
authority of the PMAs and encroach on the local decision-making 
authority of PMA customers. In the Northwest, the local autonomy of 
consumer-owned utilities is appropriately respected. BPA does not 
regulate customer rates or rate design. Similarly, BPA does not micro-
manage the conservation activities of its customers--activities that 
are required by contract. We are particularly concerned that the Notice 
contemplates tying contract allocations to implementation of retail 
competition. This proposal runs counter to the ``flexible mandate'' 
endorsed by the Clinton Administration that respects the local autonomy 
of consumer-owned utilities.
    Response: Western agrees that the local autonomy of consumer-owned 
utilities must be respected.

    Dated: June 10, 1999.
Michael S. Hacskaylo,
Administrator.
[FR Doc. 99-16019 Filed 6-24-99; 8:45 am]
BILLING CODE 6450-01-P