[Federal Register Volume 69, Number 138 (Tuesday, July 20, 2004)]
[Notices]
[Pages 43399-43410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16446]



[[Page 43399]]

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DEPARTMENT OF ENERGY

Bonneville Power Administration


Opportunity for Public Comment; Bonneville Power Administration's 
Policy Proposal for Power Supply Role for Fiscal Years 2007-2011

AGENCY: Bonneville Power Administration (BPA), Department of Energy.

ACTION: Notice of Regional Dialogue policy proposal and opportunity for 
public comment.

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SUMMARY: BPA is publishing a policy proposal stating how the agency 
proposes to market power and distribute the costs and benefits of the 
Federal Columbia River Power System (FCRPS) in the Pacific Northwest 
for Fiscal Years (FY) 2007-2011. This proposal is intended to clarify 
BPA's obligation to supply power to its regional power customers and 
guide BPA in developing and establishing its firm power rates in the 
future. Clarifying these issues will create valuable certainty for 
customers over their BPA power supply. Final policy decisions will be 
made by BPA in December 2004 after all public comments have been 
reviewed.

DATES: Public comments will be accepted through September 22, 2004. 
Public meeting dates are included in the SUPPLEMENTARY INFORMATION 
section below.

ADDRESSES: Written comments should be submitted to Bonneville Power 
Administration, P.O. Box 14428, Portland OR 97293-4428. Comments can 
also be sent via e-mail to [email protected] or submitted on-line at 
http://www.bpa.gov/comment. The proposal is also available at http://www.bpa.gov/power/regionaldialogue. Helen Goodwin, Regional Dialogue 
project manager, is the official responsible for the development of the 
Regional Dialogue proposal.

FOR FURTHER INFORMATION CONTACT: Helen Goodwin, Regional Dialogue 
project manager, at (503) 230-3129.

SUPPLEMENTARY INFORMATION:
    Schedule of public meetings:
    1. August 17, 2004, 6 to 8 p.m., Seattle, Wash.--Mountaineers 
Headquarters, Olympus Room, 300 Third Avenue West.
    2. August 19, 2004, 6:30 to 8:30 p.m., Eugene, Ore.--Eugene Water & 
Electric Board, 500 East 4th Avenue.
    3. August 26, 2004, 6 to 8 p.m., Spokane, Wash.--Airport Ramada 
Inn, 8909 Airport Road.
    4. August 31, 2004, 6 to 8 p.m., Boise, Idaho--Boise Centre on the 
Grove, 850 W. Front Street.
    5. September 9, 2004, 6 to 8 p.m., Portland, Ore.--East Portland 
Community Center, 740 SE 106th Avenue.
    6. September 15, 2004, 5 to 7 p.m., Kalispell, Mont.--WestCoast 
Kalispell Center Hotel, 20 North Main Street.
    Any changes or additions to this meeting schedule will be posted on 
BPA's Regional Dialogue Web site at http://www.bpa.gov/power/regionaldialogue.

Table of Contents

I. The Origins of Regional Dialogue
II. Scope of the Proposal
III. Council Recommendations on BPA's Future Role
IV. Link to FY 2007-2011 Strategic Direction
    A. The Report to the Region
    B. Strategic Direction
    C. Customer and Stakeholder Comments on the Agency Vision
V. BPA Loads and Resources FY 2007-2011
VI. An Integrated Strategy for FY 2007-2011
    A. FY 2007-2011 Rights to Lowest-Cost Priority Firm (PF) Rate
    B. Tiered Rates
    C. Term of the Next Rate Period
    D. Service to Publics with Expiring Five-Year Purchase 
Commitments that Do Not Contain Lowest PF Rate Guarantee through FY 
2011
    E. Service to New Publics and Annexed Investor-Owned Utility 
(IOU) Loads
    F. Product Availability
    G. Service to Direct Service Industries (DSIs)
    H. Service to New Large Single Loads (NLSL)
    I. Service to Residential and Small-Farm Consumers of Investor-
Owned Utilities (IOUs)
    J. Conservation Resources
    K. Renewable Resources
    L. Controlling Costs and Consulting with BPA's Stakeholders
VII. Long-Term Issues
    A. Proposed Long-Term Policy: Limiting BPA's Long-Term Load 
Service Obligation at Embedded Cost Rates for Pacific Northwest Firm 
Requirements Loads
    B. Proposed Schedule for Long-Term Issue Resolution
VIII. Risk Analysis
IX. Environmental Analysis
X. Next Steps

I. The Origins of Regional Dialogue

    BPA is engaged in the Regional Dialogue process as part of its 
effort to provide clarity around key issues the agency and region will 
face when the current rate period ends with FY 2006. BPA's immediate 
goal is to decide issues for the FY 2007-2011 period that prepare the 
way for setting rates for the next rate period while assuring that the 
agency's long-term strategic goals and its long-term responsibilities 
to the region are aligned.
    BPA must make and carry out policy decisions that promote the 
development of a cost-effective electric industry infrastructure and 
protect the value of the existing Federal system for the region in the 
long run without shifting risk to U.S. taxpayers.
    These decisions will provide customers greater clarity about their 
Federal power supply so that they can plan effectively for the future 
and make capital investments in long-term electricity infrastructure, 
if they so choose. This process and ongoing efforts within the Western 
Interconnection and the Pacific Northwest to develop resource adequacy 
metrics will provide necessary transparency to the region's load 
serving entities regarding the amount of resources needed to serve 
load. BPA's strategic interest is to improve this clarity soon to avoid 
creating significant risk for the region's ratepayers that would come 
from delaying the development of the necessary infrastructure. Delays 
could create imbalance between supply and demand, which could in turn 
cause excessive price levels and volatility.
    The Regional Dialogue began in April 2002 when a group of BPA's 
Pacific Northwest electric utility customers submitted a ``joint 
customer proposal'' to BPA. This proposal focused on settling the 
outstanding litigation on the Residential Exchange Program Settlement 
Agreement signed in 2000, as well as on determining how to market 
Federal power and distribute the costs and benefits of the FCRPS for 20 
years. Although BPA agreed with substantial portions of the proposal, 
there were also areas of disagreement, such as the methodology and 
magnitude of benefits potentially offered to investor-owned utilities 
(IOUs) for the benefit of their residential and small-farm consumers.
    In June 2002, BPA and the Northwest Power and Conservation Council 
(Council) jointly initiated a public process regarding BPA's marketing 
of Federal power post-2006. In September 2002, several jointly 
sponsored public meetings were held throughout the region for 
interested parties to discuss their proposals and provide new ideas and 
suggestions. BPA and the Council accepted comments and proposals from 
all interested parties. This phase of the Regional Dialogue ended when 
the Council submitted final recommendations on ``The Future Role of 
Bonneville'' to BPA in December 2002.
    In February 2003, faced with a continuing financial crisis, BPA 
announced that it would proceed with a rate-setting process for the 
Safety Net Cost Recovery Adjustment Clause (SN CRAC). Consequently, BPA 
decided that the Regional Dialogue discussions

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should take on a slower, more deliberate pace, focusing only on a 
couple of key items, such as the level of benefits for the residential 
and small-farm consumers of the region's IOUs, until the rate case 
concluded.
    In a June 5, 2003, letter, the governors of the four Pacific 
Northwest states encouraged BPA and the Council to jointly restart the 
Regional Dialogue. In response, BPA and the Council hosted a series of 
informal meetings with customers and interested parties throughout the 
region in the fall of 2003. Shortly thereafter, the Council released a 
set of principles and an issue paper entitled ``Proposed Council 
Principles for the Future Role of the Bonneville Power Administration 
in Power Supply'' for public comment. Following the close of comment in 
December 2003, the Council held several workgroup meetings aimed at 
gathering input from customers and others to help guide its next round 
of recommendations on the future role of BPA in power supply.
    Following conclusion of the workgroup meetings, the Council 
released in April 2004 its draft recommendations on ``The Future Role 
of the Bonneville Power Administration in Power Supply'' and took 
public comment. Those recommendations were finalized and sent to BPA in 
May 2004.
    In February 2004, BPA sent a letter to the region updating BPA's 
plans for resolving Regional Dialogue issues. This letter included a 
plan to present this policy proposal to the region for comment by the 
end of June 2004.

II. Scope of the Proposal

    BPA's current firm power rates expire at the end of FY 2006 while 
nearly all of BPA's regional power sales contracts continue through FY 
2011. BPA believes its first priority in the Regional Dialogue must be 
to resolve policy issues that likely will influence the next rate case 
and which must otherwise be made before 2007. This is the focus of this 
proposal.
    In the February 2004 letter, BPA identified issues that are a 
priority to resolve for the FY 2007-2011 period. While this Regional 
Dialogue proposal focuses primarily on the FY 2007-2011 issues, key 
long-term questions remain unanswered. BPA is committed to resolving 
the long-term issues soon after the conclusion of this current process. 
A proposed process and schedule for resolving these issues is included 
in Section VII.B. BPA is strongly motivated to meet that schedule with 
the greatest degree of regional alignment possible. However, even if 
regional consensus does not emerge, BPA is committed to resolving the 
longer-term issues of who has the obligation to serve. BPA intends to 
make decisions based on the schedule outlined in Section VII.B.

III. Council Recommendations on BPA's Future Role

    BPA thoroughly examined the Council's recommendations as it 
developed this proposal. This review showed that BPA's proposal and the 
Council's recommendations differ relatively little where the two 
address the same issues. BPA has intentionally limited the scope of 
this proposal primarily to issues that have to be resolved for FY 2007-
2011. Consequently, issues such as the long-term ``allocation'' of the 
system are not addressed. As already mentioned, BPA agrees with the 
Council over the importance of these long-term issues and proposes a 
schedule for their resolution in Section VII.B.
    Overall, BPA and the Council agree on the overall goals of the 
Regional Dialogue process--resolution of BPA's long-term role in 
providing power to regional customers at the lowest embedded cost-based 
rate, and capturing that role in long-term contracts and rates as soon 
as possible to create a durable solution. This proposal is the first 
step toward meeting these goals.

IV. Link to FY 2007-2011 Strategic Direction

    The financial impacts of the West Coast energy crisis of 2000-2001 
led many utilities to examine their policies and approaches to their 
power supply. BPA is no exception. Over the past year, BPA has invested 
much time and effort in strategic planning. The agency is in the 
process of finalizing its strategic direction with emphasis on FY 2007-
2011.
    This re-examination of BPA's mission and values is, along with 
comments and advice from the Council, customers, and other regional 
stakeholders, informing the agency's approach to the Regional Dialogue 
process.

A. The Report to the Region

    In early 2003, BPA initiated a detailed examination of the events 
that began in 2000 that led to the significant rate increases and 
deterioration of BPA's financial condition. On April 18, 2003, BPA 
released a Report to the Region that included lessons the agency had 
learned, with the intention of translating those lessons into future 
actions.
    Among a number of other lessons, the report noted that the level of 
BPA's costs and risks are driven heavily by the load obligations BPA 
assumes. Meeting those obligations was a large driver of BPA's cost and 
rate levels. The report pointed out that the amount of risk (market 
volatility and uncertainty) to be managed in the region's power system 
has grown substantially in recent years, and the fraction of that risk 
that BPA can absorb has gotten smaller. The report also noted that BPA 
must avoid the need to acquire large amounts of power on short notice 
to meet demand. There were also a number of recommendations for process 
improvement in cost management, decision making, risk analysis, and 
communications that BPA has put into place agency wide and used in 
developing this proposal.
    The Regional Dialogue proposal has been developed specifically with 
those lessons in mind, particularly to resolve the agency's load 
uncertainty as soon as possible and provide customers with the 
certainty they need.

B. Strategic Direction

    The Report to the Region highlighted the need for BPA to have a 
clear and steady strategy and manage to clear objectives. In response, 
the agency devoted a significant amount of time in the last year to 
clarifying its strategic direction.
    BPA's strategic direction establishes the agency's most important 
objectives and the actions that will help it manage to these 
objectives. The strategic direction calls on BPA to advance the Pacific 
Northwest's future leadership in four core values--high reliability, 
low rates consistent with sound business principles, responsible 
environmental stewardship, and clear accountability to the region.
    It should come as no surprise that the subjects to be covered in 
the Regional Dialogue process are well represented in the agency's 
strategic direction, particularly with regard to BPA's role as a low-
cost provider and for clear regional accountability. The strategic 
direction guiding this proposal includes:
    1. Regional Infrastructure Development: BPA policies encourage 
regional actions that ensure adequate, efficient, and reliable 
transmission and power service.
    2. Conservation and Renewables: Development of all cost-effective 
energy efficiency to meet BPA loads, facilitation of regional renewable 
resources, and adoption of cost-effective non-construction alternatives 
to transmission expansion.
    3. Benefits to Residential and Small-Farm Consumers of IOUs: The 
post-2011 benefit that BPA provides to IOUs for their residential and 
small-farm

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consumers is equitable based on the Northwest Power Act.
    4. Rates: BPA's lowest firm power rates to public preference 
customers are consistent with sound business principles, reflect the 
cost of the undiluted Federal Base System (FBS) and are below market 
for comparable products, are predictable, and have low volatility.
    5. Service to Direct Service Industrial Customers (DSIs): Explore a 
post-2006 DSI service option with a known or capped value.
    6. Regional Stakeholder Satisfaction: Customer, constituent, and 
tribal satisfaction, trust, and confidence meet targeted levels.
    7. Management: Collaborative customer/constituent/tribal 
relationships are supported by managing to clear long-term objectives 
with reliable results.
    8. Cost Recovery: Consistent cost recovery over time.
    9. Treasury Payment: BPA will plan to achieve and maintain a 
Treasury payment probability (TPP) that is the equivalent of a 95 
percent probability for a two-year period and 88 percent for a five-
year period. Options for achieving this goal include, but are not 
limited to, Cost Recovery Adjustment Clauses (CRACs) and Planned Net 
Revenue for Risk (PNRR).
    10. Ratepayer and Taxpayer Interests: FCRPS assets are managed to 
protect ratepayer and taxpayer interests for the long-term.
    11. Best Practices: Best practices (with emphasis on cost 
performance and simplicity) are obtained in key systems and processes.
    12. Risk: Risks are managed within acceptable bounds. An additional 
principle guiding the Regional Dialogue is:
    13. Legal Criteria: Approaches or policy options should not require 
legislative change and should minimize legal risk.

C. Customer and Stakeholder Comments on the Agency Vision

    In the spring of 2004, BPA publicly released information about its 
long-term strategic direction as a springboard for discussions with 
customers and other stakeholders. The issues addressed in the strategic 
direction, as mentioned above, serve as the foundation for the Regional 
Dialogue. Account Executives held informal meetings and conversations 
with customers and discussed and recorded their comments. Some 
customers, as well as other constituents, also submitted written 
comments.
    In the process of developing this proposal, BPA analyzed and 
considered 388 comments related to Regional Dialogue issues. Many who 
commented said that allocation of the system is a high priority issue 
and that the appropriate timing is now. They cautioned that discussions 
regarding BPA's long-term obligation to serve at embedded cost rates 
for Pacific Northwest firm requirements loads and related decisions 
would be difficult, and their objections to tiered rates were much more 
frequent than support. Commenters said that any allocation should be 
done before entering into the process to tier power rates.

V. BPA Loads and Resources FY 2007-2011

    In order to match BPA's firm power obligation for FY 2007-2011 to 
its resources, this discussion needs to begin with a clear 
understanding of BPA's current loads and resources.
    For the FY 2007-2011 period, BPA projects that firm power sales 
obligations will exceed firm Federal resources, with the difference 
growing from a deficit of about 15 average megawatts (aMW) in FY 2007 
to about 190 aMW by FY 2011. Although it will have to be carefully 
managed, a deficit of this size does not create the same degree of cost 
and rate risk exposure as that BPA faced in 2000-2001 when the agency 
was preparing to solve the 3,300 aMW deficit it faced for FY 2002-2006. 
Historically, the system has remained in balance either by BPA making 
power purchases or through customer load reductions consistent with 
then-effective contractual terms and conditions. The price of solving 
BPA's 3,300 aMW deficit has been a 50 percent increase in BPA's 
wholesale power rates.
    BPA assesses its loads and resources in its annual Loads and 
Resources Study, or ``Whitebook,'' as well as in the forecasts used to 
set firm power rates. These studies, which are a compilation of load 
and resource projections, provide a synopsis of BPA's loads and 
resources analyses. They share three major interrelated components: (1) 
BPA's Federal system load forecast; (2) BPA's Federal system resource 
forecast; and (3) load and resource balances.
    The Federal system load forecast is the forecast of firm energy 
sales that BPA expects to make during the FY 2007-2011 period. It 
comprises aggregated net requirements sales forecasts for public 
utilities and Federal agencies, DSI customers, IOUs, and other BPA 
contractual obligations.
    The majority of BPA's public utility and Federal agency customers 
have contracts that continue through September 30, 2011. A small number 
of contracts terminate or contain off-ramps as of September 30, 2006. 
For this estimate, BPA assumes public utility sales to Block and Slice/
Block customers will equal their current contractual amounts, including 
step-ups in 2007, and that BPA will continue to serve those loads 
during the FY 2007-2011 period. There are no sales to the DSIs and no 
deliveries of power to the IOUs assumed during the FY 2007-2011 period 
because contracts currently do not call for deliveries to any of these 
customers. In fact, recently signed agreements with the IOUs explicitly 
state that there will not be any power sales for FY 2007-2011.
    The forecast of available generating and contract resources 
includes the output of Federally-owned hydro generation, non-Federally-
owned resources (hydro, thermal, and wind projects), exchange energy 
associated with BPA's existing capacity-for-energy exchanges, power 
purchases, and other BPA hydro-related contracts. Firm hydro resources 
are based on 1937 critical water conditions under the 2000 Biological 
Opinion that was implemented December 20, 2000, and incorporates 
changes associated in hydro regulation 03SN67a and up to 172 aMW of 
hydro improvements by FY 2012. The thermal firm resource is Columbia 
Generating Station. Examples of non-Federally owned resources include 
the Foote Creek 1, 2, and 4, Stateline, Condon, and Klondike Phase 1 
wind projects; Ashland solar; Wauna cogeneration and Cowlitz Falls and 
Dworshak hydro.
    To calculate the BPA load resource balance, BPA compares Federal 
system firm energy loads with Federal system energy outputs for each 
month of the study period years. The results of this comparison yield 
the monthly and annual firm energy surplus or deficit of the Federal 
system.

VI. An Integrated Strategy for FY 2007-2011

A. FY 2007-2011 Rights to Lowest-Cost Priority Firm (PF) Rate

    Most current 10-year Subscription contracts with public utility 
customers contain a guarantee that BPA will apply the lowest cost-based 
PF rates throughout the remaining term of the Subscription power sales 
contracts. Three five-year contracts also contain this 10-year 
guarantee.
    Upon review, BPA believes this contractual guarantee is clear. 
Accordingly, even if BPA were to adopt a tiered-rate design during the 
term of

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the existing contracts, BPA would not apply a higher priced PF Tier 2 
rate to the purchases of customers whose contracts contain the rate 
guarantee during the term of the contract.

B. Tiered Rates

    BPA proposes in Section VII.A. a long-term policy to limit its 
sales of firm power to its Pacific Northwest customers' firm 
requirements loads at its embedded cost rates to approximately the firm 
capability of the existing Federal system. Administrator Steve Wright 
suggested in his December 9, 2003, letter to the Council that BPA 
believes tiered rates should be fully explored as a means to achieve 
that goal. In comments to the Council, many customers have voiced 
concerns regarding implementing tiered rates in the rate period 
starting in FY 2007. Most agreed with limiting BPA sales at embedded 
cost, but urged that new long-term contracts defining rights to the 
lowest embedded cost rate be developed before BPA puts tiered rates 
into effect. In its May 2004 recommendations ``The Future Role of the 
Bonneville Power Administration in Power Supply,'' the Council 
acknowledged that tiered rates would be the clearest practical 
indication of how BPA will be carrying out its role in the future. 
However, it went on to say, if BPA defines its role as the Council 
recommends, and if critical issues are resolved in a timeframe 
consistent with the Council's request that new contracts be offered no 
later than October 2007, then the Council would not press for tiered 
rates under the current contracts for the next rate period.
    BPA is obligated to serve customer net requirements, even if that 
request is in excess of what the existing Federal system can supply. 
BPA believes tiered rates in combination with new contracts are a 
necessary part of the long-term solution to limit BPA's sales at 
embedded costs for Pacific Northwest firm requirements loads to the 
existing system. However, BPA also believes it is not critical to 
implement tiered rates in FY 2007, because BPA loads and resources are 
roughly in balance for the FY 2007-2011 period. Accordingly, BPA 
proposes to exclude tiered rates in its FY 2007 initial rate proposal. 
Instead, BPA proposes to explore tiered rates as part of an integrated 
long-term contract and rate solution that would implement the proposed 
long-term policy of limiting BPA sales at embedded cost for Pacific 
Northwest firm requirements loads.

C. Term of the Next Rate Period

    Most of BPA's current power contracts are effective through FY 
2011. BPA's current power rates are effective through September 30, 
2006. In early 2005, BPA will begin rate case workshops in preparation 
for the FY 2007 rate case that will set rates for the next rate period. 
Based in part on suggestions from customers and others, BPA has already 
made a tentative decision to limit the duration of the next rate period 
to less than five years. The primary reason for doing so is to reduce 
the risk inherent in setting rates for longer periods of time, thus 
allowing BPA to set rates lower than otherwise would be the case and to 
reduce the need for rate adjustment mechanisms like the current CRACs. 
BPA is proposing to limit the next rate period to either two or three 
years. Before making a final decision on this, BPA would like to 
consider public comments. The following are some considerations on the 
length of the rate periods:
    Two-year rate period (October 2006-September 2008): A two-year rate 
period would likely result in lower rates, and lessen the need for rate 
adjustment mechanisms due to reduced uncertainty. In Section VII.B., 
BPA proposes a schedule for developing new long-term power contracts, 
with the earliest effective date of those contracts projected at 
October 1, 2008. A two-year rate period would synchronize the start of 
these new contracts with the start of the subsequent rate period, both 
in FY 2009. However, proposing a two-year rate period is not without 
risk. Putting new contracts and new rates in place by FY 2009 will 
require a major effort in a compressed time frame by BPA and its 
customers. The formal rate case to support these new contracts would 
likely need to occur between January and August 2008. A separate rates 
process to define a long-term rate methodology may also be necessary. 
If new contracts are not in place by October 2008, but rates expire on 
that date, BPA would either have to extend then-effective rates or 
conduct a new rate case.
    Three-year rate period (October 2006-September 2009): A three-year 
rate period would enable the Power Business Line's (PBL) rate period to 
coincide with the BPA Transmission Business Line's (TBL) rate period 
starting in October 2009, as requested by some customers and other 
interested parties. It would reduce the risk of not completing long-
term contract negotiations on schedule and having to conduct a new rate 
case or extend rates. If BPA's long-term policy decision and subsequent 
contract negotiations are concluded earlier, BPA would have to replace 
those rates with new rates that reflect the new Regional Dialogue 
contracts.

D. Service to Publics With Expiring Five-Year Purchase Commitments That 
Do Not Contain Lowest PF Rate Guarantee Through FY 2011

    The majority of BPA's public body, cooperative, and Federal agency 
customers signed 10-year Subscription contracts during the 1999-2000 
Subscription period. However, seven public customers entered into five-
year Subscription contracts, representing 307 aMW of load, expiring on 
September 30, 2006.
    BPA assumes that these customers will request either an extension 
of their current contracts through September 30, 2011, or follow-on 
contracts. Three of the seven customers have contracts containing 
language that guarantees service through September 30, 2011, at the 
lowest applicable cost-based power rates provided under the applicable 
PF rate schedule. The remaining five-year customers have informed BPA 
that they would like BPA to offer them the lowest-cost PF rates through 
September 30, 2011. This would provide them with the rate certainty for 
FY 2007-2011 they are seeking.
    Besides the five-year customers described above, four public 
customers signed 10-year contracts that contain five-year options, 
giving them the right to either remove or add load (i.e., PF off-ramp, 
PF on-ramp). These customers seek rate certainty for FY 2007-2011 for 
any purchases they elect to make under their options. The load 
associated with the five-year options is 524 aMW.
    In addition, in 2002, BPA officially extended the United States 
Navy's five-year Subscription contracts for Naval Submarine Base 
Bangor, Naval Station Bremerton, and Naval Radio Station Jim Creek 
through September 30, 2011. Because the window for Subscription closed 
prior to the contract amendments, the Navy's contracts do not contain 
language that guarantees the lowest PF rates for the FY 2007-2011 
period. The Navy has informed BPA that it would like BPA to apply the 
same rate treatment to the Navy that will be applied to the customers 
with five-year purchase commitments that do not contain the lowest PF 
rates guarantee.
    Customers with five-year purchase commitments, as well as the 
United States Navy, are seeking clarity about post-FY 2006 rates, and 
BPA is seeking early load certainty from customers in order to 
facilitate better resource and

[[Page 43403]]

rates planning. In addition, the agency is looking to create parity 
among all public customers by proposing to place the public customers 
with five-year purchase commitments that do not contain the lowest PF 
rates guarantee on equal footing with the 10-year customers from a 
rates perspective. Such alignment will facilitate BPA's move toward 
developing and offering new long-term contracts.
    As a means of achieving the aforementioned goals, BPA proposes to 
offer all of the public customers with expiring five-year contracts 
that do not contain the lowest PF rate guarantee an amendment to extend 
the term of their existing contracts through September 30, 2011, which 
would make them consistent with the other 10-year Subscription 
contracts. The amendment would include language providing the same 
guarantee of the lowest PF rates (except for New Large Single Loads 
(NLSL)) as other customers have. The guarantee of lowest cost-based PF 
rates would also be extended to the United States Navy. In addition, 
BPA proposes to recalculate the firm power load net requirements of 
each of the affected public customers for the FY 2007-2011 period for 
purposes of load and resource planning, rate setting, and contract 
offers. BPA proposes to make such an offer well in advance of BPA's 
next section 7(i) power rate case. Public customers would have a 60- to 
90-day period, specified by BPA, in which to accept BPA's offer. This 
window would close no later than June 30, 2005. This timeframe would 
allow BPA to incorporate the results of the net requirements 
calculation into the FY 2007 initial rates proposal. BPA is also 
proposing the offer be for the same power products and services as the 
customer currently purchases, as addressed in Section VI.F., Product 
Availability. Customers who choose not to accept the offer during this 
time frame may still request a new contract, but they will not be 
eligible to receive the lowest PF rate guarantee. The product choices 
available would be those described in Section VI.F.
    BPA proposes similar action for public customers with expiring 
options for FY 2007-2011. BPA would offer each customer a contract 
amendment to provide an early opportunity to elect to cancel its PF 
off-ramps or on-ramps and add language that guarantees service at the 
lowest PF rates (except for NLSL), consistent with language in other 
current 10-year contracts. BPA would calculate the net requirements of 
those customers, reflect the amount where appropriate in the contract 
amendment, and provide service for the returning off-ramp or on-ramp 
load based on the results of the net requirements calculation. Again, 
customers would have to accept the offer within a 60- to 90-day period 
to be specified by BPA. As with the window for customers with the five-
year contracts, this window would close no later than June 30, 2005.
    If customers do not accept BPA's offer during the prescribed 
timeframe, they would be subject to the applicable rates determined in 
FY 2007, which will include a proposed Targeted Adjustment Charge (TAC) 
or its successor, reflecting the cost and risk entailed in delayed 
certainty about the size of BPA's purchase obligations for the rate 
period starting in FY 2007.
    By calculating the net requirements of customers, particularly 
those with options affecting the second five years, it may be 
reasonable to expect a reduction in the amount of load BPA will be 
obligated to serve during FY 2007-2011. This should reduce the need for 
BPA to acquire firm resources on an annual basis to serve its firm load 
obligations, help prevent adding high costs to the FBS, and help lower 
firm power rates.

E. Service to New Publics and Annexed Investor Owned Utility (IOU) 
Loads

    Selling power to new public utilities is consistent with BPA's 
mandate to encourage the widest possible use of Federal power. Since 
enactment of the Northwest Power Act in 1980, the agency has been 
obligated to sell power to serve the regional firm power requirements 
loads of public bodies (including new public utilities), cooperatives, 
and IOUs net of such entities' non-Federal resources used to serve 
their load. BPA is also authorized to sell power to Federal agencies in 
the region.
    Over the last 20 years, BPA has supplied new public utilities with 
approximately 300 aMW of power. This section addresses the proposed 
conditions under which BPA would propose in its rate case to serve new 
public utilities (public body, cooperative, and Federal agencies) 
between October 1, 2006, and September 30, 2011, at the lowest PF rate. 
In addition, it addresses service to IOU loads annexed by public 
utility customers.
    New Public Utilities: Under law and BPA policy, in order to receive 
service from BPA, entities that form new public utilities must meet 
BPA's Standards for Service criteria and request firm power service 
under section 5(b) of the Northwest Power Act. For purposes of the FY 
2007-2011 period, BPA proposes that in order to receive power at the 
lowest PF rate, new public customers would need to meet these criteria 
prior to June 30, 2005. If these criteria are met, the customer would 
be eligible for future rate treatment comparable to other BPA public 
utility customers.
    Conversely, BPA proposes that new public utilities which meet BPA's 
Standards for Service, and request firm power service from BPA after 
June 30, 2005, will be served at the PF rate plus a charge or rate that 
covers any incremental cost incurred by BPA to serve the new publics. 
The charge would be similar to the current TAC and would be applicable 
for the rate period that begins in FY 2007. Long-term applicability of 
a PF plus incremental cost-based rate to such new public utilities will 
be part of subsequent long-term Regional Dialogue discussions and 
future rate cases.
    Annexed IOU Loads: To the extent an existing public utility 
requests firm power service for load that is annexed from an IOU, BPA 
proposes that the residential and small-farm load proportion receiving 
residential exchange benefits through the IOU will offset any 
applicable incremental cost charge, such as a TAC, in an amount equal 
to its proportionate share of benefits received from the IOU. BPA will 
continue to treat such annexed load as it does today under existing 
contract terms and conditions with its customers.
    BPA has reviewed its contingent Subscription power sales contracts 
and has determined this proposal creates no impact on entities holding 
such contracts because these customers have contractual rights to 
qualify prior to a date certain. This proposal limits BPA's risk 
associated with new public customer loads by assuring that loads to be 
served at the lowest PF rate are known before rate case decisions are 
made. Commitment by a date certain provides earlier certainty about 
BPA's firm power obligation.

F. Product Availability

    BPA is addressing which products it will offer its net requirements 
purchasers in the FY 2007-2011 period, specifically, what products 
customers can purchase in addition to or instead of the products 
currently being purchased in existing power sales contracts. Most BPA 
regional power sales contracts are effective through FY 2011, and the 
rest expire in FY 2006. BPA has also considered whether customers may 
decrease the amount of power they are obligated to purchase from BPA 
during FY 2007-2011.
    To date, issues that are of concern to customers and other parties, 
as well as

[[Page 43404]]

recommendations from the Council, focus on the following three 
questions:
    1. Which products can customers with contracts that expire in FY 
2006 purchase during this period?
    2. Can customers with contracts that expire in FY 2011 switch 
products in FY 2007 or change the allocation of products they currently 
purchase?
    3. Can customers with contracts that expire in either FY 2006 or FY 
2011 acquire and use non-Federal resources to serve their firm loads 
and thereby reduce their net requirements service from BPA in the FY 
2007-2011 period?
    The Council recommends that BPA provide customers the opportunity 
to choose the products that best meet their needs.
    Under existing contracts for service, BPA sells Full Service, 
Partial Service for customers with non-Federal resources, Fixed Blocks, 
and Slice. Partial Service is provided for customers with fixed 
resources and for customers with hydro resources dedicated entirely to 
serve load. BPA's proposal is as follows:
Products for Customers Whose Contracts Expire in FY 2006 or Are New 
Public Customers
    BPA proposes that any customer whose contract expires in FY 2006 
may simply request a contract extension with no product changes under 
the terms described in Section VI.D., above. Any new public customer or 
customer whose contract expires in FY 2006 and who elects to execute a 
new contract may select its choice of any of the following core 
requirement products--Full Requirements Service, Simple Partial 
Requirements Service, Partial Requirements Service with Dedicated 
Resources, and Block Service (with the optional feature of Shaping 
Capacity). The terms of the contract will be consistent with the terms 
described in sections VI.D. and VI.E., above.
    No customers currently have the Complex Partial (Factoring) and 
Block with Factoring products. BPA does not intend to offer either of 
these products in future contracts because of the lack of interest 
shown and the expected complexity of administering and billing the 
products.
Product Switching or Changing the Allocation of Products Currently 
Purchased by Customers With Contracts That Expire in FY 2011
    BPA has received indications that most customers whose contracts 
expire in FY 2011 want to keep their current product selections. 
Therefore, BPA does not see a need to offer contract amendments that 
would allow changes in the power products and services purchased by 10-
year Subscription contract holders. However, a few customers have 
expressed interest in purchasing Slice in FY 2007 or in increasing or 
decreasing the amount of the current Slice contract amount.
    BPA is very reluctant to deny requests to change Slice purchases 
when those requests come from customers who may feel strongly that it 
is in their strategic interest to make such a change. However, after 
extensive review and discussion of the issue, BPA believes it would not 
be prudent to propose a change in FY 2007 in the number of Slice 
customers or the Slice percentage sold. A primary reason for the 
proposal is the major importance placed by BPA and most customers on 
moving promptly to develop new long-term contracts and rates to 
implement the BPA power supply role proposed in this document. BPA is 
concerned that changing Slice elections by customers within existing 
contracts, and dealing with the associated inter-customer equity issues 
and technical issues, would be a complicated undertaking that would 
become a major diversion from the goal of new long-term contracts. The 
schedule proposed in this document creates a customer option to move to 
new contracts in FY 2009. BPA believes that focusing BPA and customer 
effort on meeting the schedule for those new contracts should be a 
higher priority than making adjustments to Slice purchases under 
existing contracts. Additionally, there is ongoing litigation 
pertaining to the annual true-up of the Slice product whose outcome 
will be uncertain for some time. BPA's view is that one outcome of this 
litigation could result in a significant cost shift from Slice 
customers to non-Slice customers. Increasing the amount of Slice 
purchases while such a cost shift risk exists is a significant concern. 
BPA therefore proposes no changes to the number of Slice customers or 
Slice percentage sold in FY 2007.
Customer Acquisition of Additional Non-Federal Resources to Reduce Net 
Requirements by Customers With Contracts That Expire in Either FY 2006 
or FY 2011
    BPA proposes to consider, on a case-by-case basis, requests from 
load-following customers to add non-Federal resources to their existing 
contract declarations. Such action could assist in relieving BPA's 
load-serving obligation post-2006 without increasing costs or risks for 
other customers. BPA will make such a determination at the time a 
customer makes its request.
    For additional information on the products offered, please see 
BPA's Web site http://www.bpa.gov/power/psp/products/catalog.shtml. For 
wind integration, see http://www.bpa.gov/Power/PGC/wind/BPA_Wind_Integration_services.pdf.

G. Service to Direct Service Industries (DSIs)

    DSI Subscription contracts expire September 30, 2006. The original 
1,500 aMW of DSI contracts have been significantly reduced by load buy-
downs, contract terminations, smelter bankruptcies, and other DSI 
financial difficulties. Only half of the original contracts are still 
in effect, and the highest monthly total for power provided under these 
agreements has never exceeded 400 aMW.
    The Council recommended that BPA continue to provide some service 
to the DSIs. The Council suggested ``there may be an opportunity to 
provide a limited amount of power for a limited duration under 
specified terms and conditions. If power is to be made available to 
DSIs, the amount and term should be limited, the cost impact on other 
customers should be minimized, and Bonneville should retain rights to 
interrupt service for purposes of maintaining system stability and 
addressing temporary power supply inadequacy.'' BPA also continues to 
be interested in finding ways to provide limited service to DSI 
customers but recognizes that the agency's ability to affect the 
viability of the aluminum industry in the Pacific Northwest continues 
to be greatly limited by other factors beyond BPA's control. Global 
aluminum markets continue to make Pacific Northwest DSI economics 
appear highly challenging. These global markets and the construction of 
new, efficient, lower-cost smelters elsewhere in the world have pushed 
Pacific Northwest smelters from their former role as base-load plants 
to either swing plants or worse, excess capacity.
    Although BPA has no statutory obligation to serve the DSIs, it 
recognizes that the DSIs have been an important part of the Pacific 
Northwest economy for decades. BPA is committed to exploring DSI 
service options that would result in a known, or capped, cost to other 
Federal power customers. BPA proposes providing up to 500 aMW worth of 
service benefits to DSIs. Under this proposal, any benefits would be 
targeted to DSIs that are creditworthy and have fully met their 
obligations under their Subscription contracts. BPA proposes providing 
these benefits only if such actions actually enable

[[Page 43405]]

aluminum production and maintain Pacific Northwest jobs.
    Within these proposed boundaries, BPA continues to look at a number 
of alternatives for continuing service to the DSIs as explained in the 
following paragraphs.
    Financial Incentive to Operate: BPA is examining offering eligible 
DSI loads a defined and limited financial incentive to operate. This is 
the agency's current preferred approach. This benefit would be paid 
based on each eligible DSI demonstrating that it has used power 
purchased from the market to produce its product. To implement this, 
BPA would need to be assured that the cost impact on its other 
customers would be roughly no greater than if BPA had exercised its 
discretion to serve the DSI customers directly. This approach would 
allow eligible DSIs to make their own operating decisions recognizing 
the availability of the financial credit from BPA. It eliminates the 
direct sale of Federal power to the DSIs and, thereby, the associated 
credit and ``take-or-pay'' issues for all parties.
    Continue Industrial Power (IP) Service: Providing IP power would 
appear not to meet BPA's principle of finding an alternative with a 
known or capped cost because the approach would require augmentation of 
the BPA system at an unknown cost. If, however, the cost could be fixed 
and limited in an acceptable fashion, then this alternative may hold 
promise.
    Surplus Firm Power: BPA has explored ways to serve the DSIs with 
surplus firm power. Efforts to date have not found a product that 
appears to make economic sense for the smelters. The shape of BPA's 
surplus relative to the flat load of the DSIs and the fact that the 
smelters need a steady power supply do not align well. Finding a viable 
surplus product at a sufficiently low price is particularly difficult 
when coupled with the reality that smelter operations incur significant 
costs when they shut down and start up. In addition, getting power to 
DSIs could be challenging since BPA's Pacific Northwest public 
customers have priority access to BPA's low-cost surplus.
    Credit Support for New DSI Generating Resources: The argument that 
is made for credit support from BPA is that it would enable smelters to 
operate without further reliance on power from BPA. With this option as 
well, BPA would need to be assured that the cost impact on its other 
customers would be roughly no greater than if BPA had exercised its 
discretion to serve the DSI customers directly. Credit support could be 
structured to cap and limit BPA cost and risk, though it would carry 
significant market and transactional risk to BPA, up to these limits. 
However, the cost of new resources continues to be much higher than 
what is needed for profitable smelting. Efficient gas-fired combustion 
turbines produce power at prices that appear too high under expected 
future natural gas, alumina, and aluminum market prices.
    BPA is interested in public comment on whether BPA should continue 
to offer service to DSIs and whether the agency's current preferred 
approach is the way to deliver such benefits. BPA is also interested 
and willing to explore other ideas to provide qualifying DSIs benefits 
at a known or capped value that would be roughly no greater than if BPA 
had exercised its discretion to serve the DSI customers directly.

H. Service to New Large Single Loads (NLSL)

    In June 2001, BPA opened a public process on three specific issues 
regarding BPA's NLSL policy. Two of the issues, transferability of 
Contracted For Committed To (CFCT) status and closing of the window for 
applying for CFCT status were subsequently resolved in a BPA record of 
decision (ROD) signed March 27, 2002. A decision on the third issue of 
transferring former DSI load to a preference customer in 9.9 aMW 
increments was postponed. BPA stated that this issue needed more debate 
on a broader scale and that it would be decided within the Regional 
Dialogue process.
    The specific DSI NLSL policy issue raised was ``whether BPA should 
change its NLSL policy to allow current and former DSI customers' 
production load served at BPA's IP rate, or any other rate, to transfer 
and receive power service in 9.9 aMW increments from a public body, 
cooperative, or Federal agency customer with power purchased at BPA's 
PF rate.''
    This issue arose in part because two BPA preference customers with 
DSI plants in their service territories expressed the view that they 
should be able to acquire an additional 9.9 aMW of BPA power per year 
at the PF rate to serve local DSI plant production load. One utility in 
late 1999 began serving 9.9 aMW of DSI plant load by entering into a 
contract with the DSI that limited the amount of utility-provided 
service to 9.9 aMW. (The remainder of the DSI load was served with 
other contract resources.)
    BPA and the utility disagreed on whether the applicable BPA 
wholesale rate was the PF rate or the New Resources (NR) rate. The 
question of which rate applied had no financial consequence prior to 
October 1, 2001, because during the 1996 rate period the PF rate was 
equal to the NR rate. The utility, the DSI involved, and BPA 
subsequently entered into a ``standstill'' agreement pending completion 
of a BPA DSI NLSL policy review that would establish which rate was 
applicable to DSI load transferred to local utility service in 9.9 aMW 
increments.
    BPA proposes to continue its current NLSL policy with regard to a 
DSI transferring service to a local utility in 9.9 aMW increments. Any 
DSI load transferred to local utility service would be a NLSL and 
subject to the NR rate if served with Federal power unless the DSI 
qualifies for the cogeneration and renewables exception described 
below.
    Besides affirming its current NLSL policy with regard to DSIs 
transferring service to a local utility in 9.9 aMW increments, BPA 
proposes to adopt an on-site cogeneration and renewables exception to 
its NLSL policy based on a similar exception contained in the 1981 BPA 
Utility Power Sales Contracts.
    Section 8(e) of the 1981 Utility Power Sales Contracts stated, ``If 
a Consumer of a Purchaser provides a renewable or cogeneration resource 
to serve all or a portion of a load associated with a facility which 
would otherwise be a New Large Single Load, and thereby reduces the 
demand on the Purchaser, that portion of such load on the Purchaser, if 
any, shall not be a New Large Single Load, unless the load or portion 
thereof on the Purchaser is 10 aMW or more; provided, however, that if 
a Consumer sells, displaces or removes a resource or portion thereof 
from service to the Consumer's load at such facility, all such load 
shall be a New Large Single Load. * * *''
    BPA proposes the exception be restricted to renewables and on-site 
cogeneration. Providing this exception would allow former DSI load to 
take a total of 9.9 aMW of service from a local utility at the PF rate 
if the rest of its plant load was served by renewables or on-site 
cogeneration. This may make it economically feasible for some DSI load 
to operate while limiting the amount of former DSI load that could be 
served at a PF rate. It also supports the development of cogeneration 
and renewable resources.

I. Service to Residential and Small-Farm Consumers of Investor-Owned 
Utilities (IOUs)

    BPA is obligated to implement its Subscription contracts throughFY 
2011. These contracts implemented BPA's 1998 Power Subscription 
Strategy, which BPA designed to provide an

[[Page 43406]]

equitable distribution of the benefits of the FCRPS throughout the 
region.
    The Subscription contracts require BPA to provide 2,200 aMW of 
power or financial benefits to the residential and small-farm consumers 
of the region's six IOUs during FY 2007-2011. BPA recently signed 
agreements with all six regional IOUs that provide certainty in the 
amount and manner that benefits will be provided to their residential 
and small-farm consumers under their Subscription contracts. These 
agreements provide certainty by defining benefits as financial payments 
and not power deliveries, defining a mark-to-market methodology that 
uses an independent market price forecast in calculating the financial 
benefits; and, establishing a floor of $100 million and a cap of $300 
million per year for these financial benefits.
    BPA expects this approach will successfully implement the 
Subscription contracts. However, these agreements are under legal 
challenge. Since a fundamental goal of this Regional Dialogue proposal 
is clarification of BPA and customer load obligation for the FY 2007-
2011 period, BPA seeks to clarify how it will proceed if the new 
agreements were set aside. Accordingly, in the event a court sets aside 
the new agreements and amendments but leaves the underlying 
Subscription contracts in place, BPA will notify the IOUs that BPA will 
exercise its Subscription contractual right to provide financial 
benefits and not power benefits during FY 2007-2011 under those 
contracts. In such an event, the financial benefits will continue to be 
based on a forecast of the market price of power developed in the BPA 
rate case. If the Subscription contracts are successfully challenged in 
court, the agency will follow the court's instructions in negotiating 
new contracts under the Northwest Power Act.
    As indicated, BPA proposes to provide financial benefits rather 
than physical power to the residential and small-farm consumers of the 
region's IOUs for a number of reasons. BPA hopes that clarifying now 
which entity is responsible for acquiring resources to serve the IOUs' 
load will help spur development of regional infrastructure. This need 
for certainty supports BPA's current decision to exercise its 
contractual right to provide financial benefits rather than physical 
power instead of waiting until October 1, 2005, to make that decision 
as allowed by the Subscription contracts. In addition, BPA is seeking 
to minimize the acquisition of additional amounts of power that could 
result in an increase in the average cost of the existing FBS 
resources. Providing financial benefits eliminates the need and 
associated risk of BPA purchasing power in the market to support power 
deliveries to the region's IOUs. BPA believes this approach will 
continue to provide equitable benefits to the residential and small-
farm consumers of the region's IOUs while balancing the costs to BPA's 
other customers.

J. Conservation Resources

    Conservation has been a core resource for over two decades in the 
Pacific Northwest. BPA's programs have captured savings equivalent to a 
large nuclear power plant; and, consistent with guidance from the 
Council, conservation will remain a major portion of the agency's 
resource portfolio in the future.
    Continued commitment to conservation is consistent with the 
priority outlined in the Northwest Power Act to increase the efficiency 
of all electric energy consumption. Further, BPA's support of 
conservation has been essential to helping maintain the necessary 
regional infrastructure to ensure energy efficiency programs are 
successful.
    While there has been much discussion of how conservation 
development might be regionally structured for the post-2006 time 
frame, BPA has not determined what the specifics will be. Similar to 
the recommendations made by the Council, BPA proposes five principles 
to guide development of the specific elements for conservation. These 
general principles are:
     Use of the Council's plan to identify the agency's share 
of cost-effective conservation. BPA has been working closely with 
Council staff to ensure those targets are a reflection of the true 
cost-effective conservation potential in the region.
     The bulk of the conservation to be achieved is best 
pursued and achieved at the local level. There are some initiatives 
that are best served by regional approaches (e.g., market 
transformation through the Northwest Energy Efficiency Alliance 
(NEEA)). However, the knowledge local utilities have of their consumers 
and their needs reinforces many of the successful energy efficiency 
programs being delivered today.
     To contribute to meeting the financial challenges facing 
the region, BPA will seek to meet its conservation goals at the lowest 
possible cost and lowest possible rate impacts. While only cost-
effective measures and programs are a given, the region can benefit by 
working together to jointly drive down the cost of acquiring those 
resources. For example, Conservation and Renewables Discount (C&RD) 
reporting to date indicates a cost for installed conservation measures 
in the range of $2.2 million per aMW while Conservation Augmentation 
(Con Aug) is averaging about $1.3 million per aMW versus NEEA programs, 
which are costing just under $1 million per aMW. Regarding the C&RD 
conservation costs, the $2.2 million figure excludes the customers' 
low-income expenditures claimed under the program and is an average 
cost reflecting that some utilities are booking conservation measure 
savings at a rate of $4 million per aMW. The wide variance in cost per 
aMW offers a significant opportunity for the region to pursue an 
important cost-saving option.
     BPA funding for local administrative support to plan and 
implement conservation programs has been essential. In the future, this 
support should be retained, with the appropriate level of funding open 
for discussion.
     Financial support for education, outreach, and low-income 
weatherization are important initiatives that complement a complete and 
effective conservation portfolio. However, these types of programs 
often yield no measurable savings or considerably more expensive energy 
savings (e.g., low-income weatherization). These program efforts have 
been successful and should continue to be funded.
    These principles are consistent with Council recommendations. 
However, there is a need for significant detail to be developed before 
these principles can be transformed into a specific program structure 
that best serves the region. BPA envisions some form of collaborative 
planning process in which experienced individuals can develop a fully 
defined proposal for conservation that can then be brought to the 
entire region for consideration. This joint planning process can 
accomplish the blending of appropriate policy guidance with the 
flexibility to ensure conservation can meet the huge variance of 
conditions and needs that exist in the region.
    The C&RD and Con Aug, complemented by regional initiatives such as 
NEEA, may provide a solid foundation for establishing viable program 
elements so the region can be effectively served going forward.
    Finally, as BPA pursues opportunities to reduce long-term costs to 
ratepayers, conservation, as well as other demand side management 
options, will be carefully considered as part of the

[[Page 43407]]

solution to transmission constraints. Conservation can be part of a 
Non-Wires Solution, which will not only provide low-cost power 
resources, but also will reduce or defer the need for transmission 
construction.

K. Renewable Resources

    A key purpose of the Northwest Power Act is to ``encourage, through 
the unique opportunity provided by the FCRPS, the development of 
renewable resources within the Pacific Northwest.'' \1\ In meeting this 
purpose, BPA is to consider cost-effective renewable resources before 
acquiring other conventional resources while fulfilling its obligation 
to serve its customers' regional firm power loads.
---------------------------------------------------------------------------

    \1\ Northwest Power Act, Section 2(1)(B), 94 Stat., 
2679.
---------------------------------------------------------------------------

    In recent years, BPA has supported a range of renewable research 
and development (R&D) activities. BPA currently purchases 198 megawatts 
(MW) of output from new renewable resources to serve regional firm 
power load. Going forward, BPA proposes to engage in an active and 
creative facilitation role with respect to renewable resource 
development. This signals a move away from large-scale renewables 
acquisition toward a greater focus on finding ways to reduce the 
barriers and costs interested customers face in developing and 
acquiring renewables. As an added benefit, BPA believes its 
facilitation role would also help non-BPA customers develop renewable 
resources in the region. This direction is consistent with several of 
BPA's major strategic objectives.
    Facilitation Options: There are many tools available to BPA to help 
facilitate the development of renewable resources in the region. BPA 
proposes to use a combination of these tools and asks for input as to 
which set of tools would best accomplish BPA's facilitation goal, 
within the financial limits described below. The tools BPA sees as 
being available include the following:
    Integration services: BPA recently developed two new wind 
integration services in the spirit of regional facilitation. These 
services, and other intelligent and prudent uses of the flexibility of 
the Federal hydro system, will serve as the centerpiece of a renewable 
resources facilitation effort. BPA also intends to work with regional 
stakeholders to reduce transmission barriers facing renewable 
resources.
    Transmission system improvements: Another option is participation 
in regional efforts to construct strategic transmission lines to foster 
the development of the region's excellent wind resources as well as 
finding ways to make more efficient use of existing transmission 
infrastructure.
    Rate Discount: Approximately 30 customers devoted a portion of 
their C&RD funds to renewables in this rate period. Continuing such a 
rate discount mechanism is another facilitation option.
    Limited Acquisition Role: Temporary acquisition of output from a 
renewable energy project as an ``anchor tenant'' for such projects is 
another facilitation option. However, it should be noted that among 
various options available to help facilitate renewables in the region, 
direct acquisition places the greatest financial demands on BPA and 
would be subject to rigorous financial and risk tests before approval.
    BPA will apply a careful cost-effectiveness screen in considering 
which of the above-mentioned facilitation actions receive the most 
emphasis. The goal is to maximize the ratio of new megawatts installed 
per dollar spent. BPA will also consult with regional stakeholders as 
it considers facilitation options.
    Program Funding: Consistent with its current approach, BPA proposes 
to continue to support its renewables program up to a net cost of $15 
million per year. Calculation of net cost is the actual cost of all 
acquisition of current and any future renewable energy, plus internal 
support costs, less the value of energy produced by the renewable 
resources based on the long-term cost of power from a combined-cycle 
natural gas-fired power plant, and minus Green Tag and green energy 
premium revenues. The costs associated with the $15 million renewables 
fund would be recovered through BPA's firm power rates. In addition to 
the $15 million annual net cost, during the current FY 2002-2006 rate 
period, $6 million per year has been available for renewables 
development through the C&RD program. BPA proposes to continue this 
level of support in addition to the $15 million net cost, though as 
described above, BPA has not concluded whether a C&RD-like mechanism is 
the best vehicle for use of this level of financial support. BPA's 
renewables facilitation activities will be subject to a risk review to 
ensure that they are consistent with the agency's financial objectives.

L. Controlling Costs and Consulting With BPA's Stakeholders

    BPA seeks to renew and strengthen its role as a reliable business 
partner with its customers and to maintain the trust and confidence of 
the region's stakeholders. A key feature of this effort is designing 
structures and mechanisms that allow stakeholders to provide input on 
long-term cost control and on revenue requirements and especially 
before starting the FY 2007 rate case. BPA believes these actions 
directly support several of the agency's strategic objectives, 
including:
     Best practices (with emphasis on cost performance and 
simplicity) are obtained in key systems and processes,
     Increased transparency in processes, decisions, and 
performance, and
     Customer, constituent, and tribal satisfaction.
    During the last two years, BPA has responded to customer and 
constituent requests for greater transparency in its finances and 
decisions that affect BPA's ability to control its costs. BPA has 
participated in the customer-organized Customer Collaborative process, 
which was set up to provide greater insights into BPA's financial 
performance, cost drivers, challenges, and controls. BPA also created, 
at the request of customers and constituents, the Power Net Revenue 
Improvement Sounding Board. The Sounding Board is a broad cross section 
of customers and constituents that provided BPA with input on how best 
to achieve $100 million in cost reductions and revenue enhancements 
during FY 2004-2005. BPA has been conducting regular monthly technical 
updates on financial conditions for customer staff.
    Moreover, during the last year, BPA improved its financial 
reporting. These efforts include creation of new standardized financial 
reports and implementation of a new financial disclosure policy.
    BPA proposes to continue the mechanisms described above. Forums 
such as the current Customer Collaborative structure, as an executive-
level customer-led forum, is an effective way for customers to be at 
the table to discuss BPA's financial performance and related issues 
(for example, the effects of debt optimization on the power function or 
of new security cost increases). Likewise, the Power Net Revenue 
Improvement Sounding Board has served well as a means for providing 
leaders of both customers and non-customers better insight and input 
into BPA cost control efforts. The monthly technical financial update 
meetings with customers and constituents have been useful, and BPA is 
willing to continue such forums.
    For the term of existing contracts (through FY 2011), or until new 
contracts go into effect if that is earlier, BPA proposes to continue 
to focus on non-contractual means that promote transparency under BPA's 
financial

[[Page 43408]]

disclosure policy, allow for public input on agency costs and 
demonstrate management of those costs. The additional actions being 
proposed are described below.
    Collaborative Forums: BPA is willing to participate in 
collaborative forums with both customers and non-customers in a 
structured approach similar to the Sounding Board and current Customer 
Collaborative. BPA believes that such forums should include the 
following:
    1. Stated expectations, purpose, membership appointment, 
attendance, procedures, schedules, norms, roles and responsibilities, 
and disclosure requirements.
    2. A focus on both standard routine financial updates and specific 
discussions aimed at understanding cost structure and drivers.
    3. A summary of standardized information each quarter on how the 
effects of risk were factored into decision making.
    4. As desired by the Collaborative participants, discussions aimed 
at understanding and providing individual participant input to specific 
issues BPA faces.
    Financial Reporting with Customer and Constituent Input: BPA 
intends to make further advancements in its external financial 
reporting in order to increase awareness and understanding of BPA's 
financial performance by both experts and laypersons. Such information 
will also be posted on BPA Web sites.
    Business Process Improvement: BPA also expects to develop and 
implement a plan to respond to the recommendations in the Business 
Process Improvement/Benchmarking initiative currently underway. Reports 
communicating BPA's progress against the resulting plan will be made 
available.
    Power Function Review: Beginning in the fall of 2004, BPA plans to 
conduct a regional discussion regarding PBL program budgets and 
expenditures similar to the TBL's Programs in Review process. Toward 
that end, PBL will meet directly with customers and constituents and 
hold workshops as part of a Power Function Review public process. The 
goal of the Power Function Review is to allow for substantial review 
and public comment on PBL program levels prior to the next power rate 
case. Areas to be discussed include program challenges expected over 
the next seven years proposed program capital and expense levels, and 
program drivers.
    Criteria for Public Comment on Cost Issues: In its effort to make 
cost decisions more transparent, BPA believes it is prudent to 
establish criteria by which to assess the need to subject pending 
discretionary BPA decisions that affect power costs to public review 
and comment.
    First as a threshold, the decision or action must be a 
discretionary cost decision within BPA's control, not including short-
term power purchases and associated revenues. It can include 
environmental, policy, or regulatory actions as well as new contracts, 
contract modifications, actions changing BPA's load-serving obligation, 
and BPA power marketing policies.
    BPA will engage customers and other interests to determine specific 
criteria to be used to decide whether a discretionary action BPA is 
contemplating is appropriate for a public review and comment process 
and when BPA will inform the region of non-discretionary decisions. BPA 
believes that the factors below should be considered and addressed:
     Whether the cost action establishes a precedent.
     The effect on BPA, its customers, constituents, and other 
stakeholders.
     Whether and when public support is required for effective 
implementation of the cost action.
     The particular segments of stakeholders that can be 
expected to be interested in the cost action.
     The time available for public review and comment.
     The existence of concurrent public review and comment 
activities on similar or non-discretionary cost actions.

VII. Long-Term Issues

A. Proposed Long-Term Policy: Limiting BPA's Long-Term Load Service 
Obligation at Embedded Cost Rates for Pacific Northwest Firm 
Requirements Loads

    Most of this proposal deals with FY 2007-2011 issues. However, BPA 
is also proposing a long-term policy regarding its load obligations. 
BPA's proposal is to limit its sales of firm power to its Pacific 
Northwest customers' firm requirements loads at its embedded cost rates 
to approximately the firm capability of the existing Federal system. 
BPA is further proposing a policy that firm power service beyond what 
the existing system can supply would be provided at a higher tiered 
rate that would reflect the incremental cost of purchasing power to 
meet those additional loads. BPA proposes to implement this long-term 
policy through new long-term contracts and rates on the proposed 
schedule presented in the next section. As stated in Section VI.B., 
Tiered Rates, BPA does not propose to implement tiered rates in FY 
2007.
    The agency is making this proposal for several key reasons:
     It would help reduce BPA's firm power rates by sharply 
limiting the past practice of acquiring power and melding its costs 
with the lower cost of the existing system, thereby ``diluting'' the 
low-cost existing system with higher-cost purchases.
     Greater assurance is needed that necessary electric 
infrastructure will be developed. Many BPA utility customers and other 
market participants are willing and able to invest in needed electric 
infrastructure, suggesting that the capability exists to supply the 
infrastructure without a continued buy-and-meld role for BPA. But these 
utilities need clarity about their load responsibilities versus BPA's 
if they are to move forward on infrastructure investment. This policy 
will help provide that clarity.
     A closely related benefit is that this policy will help 
utilities ``see'' market price signals as they make decisions about new 
resources, conservation investments, and load additions. This should 
lead to more efficient decision making throughout the regional electric 
industry.
     This policy does not prevent utility customers from 
continuing to rely on BPA to serve all their loads in the future if 
that is what they choose; consistent with BPA's legal requirement to do 
so.
     This policy will increase the certainty that BPA can repay 
the Federal taxpayer's investment in the Federal system by creating a 
higher likelihood that BPA rates stay well below market and fluctuate 
less with the costs of power purchases.
     There is strong support from BPA's utility customers for 
this policy direction. This is important because these utilities would 
be assuming more of the responsibility for new resource development 
over time.
     This policy direction is likewise consistent with the 
recommendations to BPA from the Council in its May 17, 2004, 
recommendations on ``The Future Role of the Bonneville Power 
Administration in Power Supply.''
    By itself, this policy is not enough to accomplish all the benefits 
listed above. It is only one step. For example, fully realizing those 
benefits requires that individual utilities know specifically how much 
power they will receive from BPA at the lowest embedded cost rate, and 
how much they will pay for increments beyond that amount. Creating that 
certainty will require subsequent development of new power contracts 
and rates. The proposed schedule for these additional steps, assuming 
the proposed long-term policy

[[Page 43409]]

decision described here is sustained, is described next.

B. Proposed Schedule for Long-Term Issue Resolution

    Although this proposal focuses primarily on resolving issues for 
the FY 2007-2011, BPA and the region have a strategic interest in 
resolving a number of key long-term issues. BPA is strongly inclined 
towards 20-year contracts assuming we can reach agreement on reasonable 
terms. This interest centers on providing BPA customers certainty over 
load service obligations and enabling customers and the market to 
respond with the necessary electric industry infrastructure 
investments. Other key strategic interests include general market 
stability, BPA risk management, and long-term assurance of funding to 
repay the United States Treasury. BPA's interest in resolving those 
long-term issues is shared by most BPA customers and with the Council.
    To become effective, almost all the decisions must be captured in 
new long-term contracts and rates. There is a range of opinion within 
the region on what commitments and decisions can be made in contracts 
versus those that can be made in rates. BPA's view is that customers 
and BPA must work together to develop a logically-linked set of new 
contracts and rates, and that neither by itself will be sufficient to 
accomplish the long-term goals. This split between contracts and rates 
must be discussed and decided.
    With respect to rates, BPA wishes to discuss with customers the 
merits of establishing a long-term rate methodology to accompany the 
contract. Another key question is when to execute new contracts and 
when to begin performance of the contracts. A key constraint is most 
customers have existing contracts that run through FY 2011. Many 
customers may be willing to sign new contracts well before FY 2011, but 
only so long as performance does not begin until their existing 
contract expires. BPA is also willing to explore other ideas to reach a 
goal of providing certainty to customers such as the option of offering 
contract amendments that would include a more limited list of issues, 
while providing customers with the load service certainty they are 
seeking.
    Why BPA Believes These Issues Need To Be Addressed Now: It is in 
the strategic interest of BPA, BPA's customers, and the region as a 
whole to encourage regional actions that ensure adequate, efficient, 
and reliable transmission and power service. Waiting until near FY 2012 
to create the clarity of obligations to develop resources would create 
a significant risk of waiting too long to create the necessary 
infrastructure. It would also create a longer period of risk to the 
region of losing the Federal system benefits and increase the risk that 
the taxpayers' investment in the Federal system would not be repaid in 
a timely fashion. Although executing contracts within the next few 
years to replace the current Subscription contracts carries significant 
risk, BPA is convinced that it is more risky to delay the necessary 
decisions. Nothing short of new contracts and rates will create 
sufficient clarity for individual utilities about their resource 
development obligations so that they can act with confidence on those 
obligations to develop the necessary electric infrastructure.
    Next Steps: Given the complexity of developing new 20-year 
contracts, BPA needs to create a policy ``blueprint'' as soon as 
possible to guide development of new contracts and rates. The scope of 
this policy ``blueprint'' would be all the major policy issues needing 
resolution. Ideally, BPA's decisions on the issues will be informed by 
the broadest possible regional agreement. To that end, BPA intends to 
engage very actively with its customers, other stakeholders, and the 
Council to help achieve that agreement.
    However, BPA has been encouraged by customers and the Council to 
establish and meet decision making deadlines and not defer decisions in 
hopes more time will yield consensus. Accordingly, after considering 
comment on the draft schedule below, BPA intends to establish a 
schedule and then make decisions on that schedule. The policy 
``blueprint'' will also include a step for ensuring compliance with the 
National Environmental Policy Act (NEPA).
    Proposed Schedule: BPA intends to begin now to operate on the 
schedule outlined below, subject to change based on public comment. The 
Council recommended a schedule that had new contracts offered in 
October 2007. This schedule has contracts offered almost a year earlier 
than that. This schedule is ambitious, but BPA agrees with the 
perspective of the Council and many customers that the region has a 
core interest in the earliest practical completion of this process.

      Proposed Schedule for Achieving Long-Term Contracts and Rates
------------------------------------------------------------------------
                 Milestone                              Date
------------------------------------------------------------------------
BPA Administrator Issues Long-Term          July 2005.
 Regional Dialogue Proposal for Public
 Review and Comment.
BPA Administrator Signs Long-Term Regional  January 2006.
 Dialogue Policy.
New Contracts Offered.....................  December 2006.
Contract Signature Deadline...............  April 2007.
Earliest Contract Effective Date..........  October 2008.
------------------------------------------------------------------------

    This proposed schedule does not include rates decisions, which are 
a key component, because BPA wishes to have further discussion of the 
concept of a long-term methodology rate case. The final schedule will 
include rates milestones.
    Challenges in Achieving Our Goal: BPA understands that achieving 
this schedule will be challenging. Challenges that both customers and 
the agency will have to manage include:
    1. Ability of BPA, customers and other interests to find a solution 
to provide long-term benefits to residential and small-farm consumers 
to IOUs.
    2. Ability to structure long-term contracts to protect taxpayer and 
ratepayer interests.
    3. Managing changes to existing products and other contract terms 
and conditions that will allow meeting an aggressive schedule.
    4. Managing the interaction of all power-related issues with the 
evolution of transmission issues including the TBL rate case and Grid 
West.
    5. Developing regional resource adequacy metrics/standards to 
provide clarity and mechanisms to assure the development of needed 
electrical infrastructure.
    6. Ability of customers and other interests to invest the necessary 
time, especially in view of the concurrent activity on BPA's FY 2007 
power rate case and a variety of other issues.
    7. Ensuring BPA and customers can administer new 20-year contracts 
for several years concurrent with contracts of customers who choose to 
retain their existing Subscription contracts through 2011.
    8. Willingness of customers to sign new 20-year contracts before 
the supporting rate case concludes.

VIII. Risk Analysis

    BPA undertook an analysis of risks associated with this proposal. 
The analysis identified the most potentially significant risks to be 
centered on load

[[Page 43410]]

uncertainty and load placement and the absence of any effective ways to 
manage them given the statutory obligation to serve in the Northwest 
Power Act.
    The amount and type of risks BPA takes in the area of load 
placement are central to development of the Regional Dialogue proposal. 
Augmentation, with its potential to leave BPA short in a volatile 
market, can and has led to significant rate increases. BPA's strategic 
direction, on the other hand, is heavily weighted toward stabilizing 
rates through a combination of better cost controls, risk management, 
and maintenance of key financial indicators such as Treasury Payment 
Probability (TPP). BPA found the primary areas of load uncertainty and 
potential risk concern to be service to new publics and service to the 
DSIs.

IX. Environmental Analysis

    BPA staff is in the process of conducting a review under NEPA and 
its implementing regulations of the potential environmental effects of 
this proposal. As part of this review, BPA is evaluating how the 
proposal fits within BPA's Business Plan Final Environmental Impact 
Statement, DOE/EIS-0183, June 1995 (Business Plan EIS).
    The Business Plan EIS evaluates the environmental impacts of a 
range of BPA business policy alternatives. This range includes BPA 
Influence, Market-Driven BPA, Maximize BPA Financial Returns, Minimal 
BPA Marketing, and Short-Term Marketing alternatives. The EIS also 
contains various policy ``modules'' for key issues such as rate design, 
DSI service, and conservation and renewables. These modules can be used 
to vary the alternatives. The alternatives are compared in terms of 
market responses, and the market responses are then used to determine 
potential environmental impacts. In addition, the Business Plan EIS 
identifies representative response strategies that could be implemented 
to address revenue shortfalls.
    In August 1995, the BPA Administrator issued a ROD (Business Plan 
ROD) that adopted the Market-Driven Alternative from the Business Plan 
EIS. This alternative was selected because, among other reasons, it is 
the alternative that best allows BPA on balance to: (1) Recover costs 
through rates; (2) achieve strategic business objectives; (3) 
competitively market BPA's products and services; (4) continue to meet 
BPA's legal mandates; (5) meet legal mandates and contractual 
obligations; and (6) establish rates that are easy to understand and 
administer, stable, and fair.
    An initial review of the Regional Dialogue proposal indicates that 
its potential environmental effects have been largely evaluated in the 
Business Plan EIS and that it would be consistent with relevant aspects 
of the Market-Driven alternative identified above. The proposal 
generally continues many of the business decisions and approaches taken 
by BPA in recent years that already have NEPA coverage, either through 
the Business Plan EIS itself or through subsequent RODs tiered to the 
Business Plan and ROD. For those areas in which the proposal may vary 
from current business decisions and approaches, the range of 
alternatives in the Business Plan EIS appears to provide coverage. 
Furthermore, implementation of this policy would be consistent with the 
response strategies identified in the Business Plan EIS and adopted in 
the Business Plan ROD. If further review confirms these consistencies, 
BPA likely would tier its policy decision under NEPA to the Business 
Plan EIS and ROD. All necessary NEPA review and documentation for this 
proposal would be completed prior to or concurrently with the 
Administrator's final ROD for this proposal.

X. Next Steps

    The BPA Administrator intends to make final policy decisions for 
this part of the Regional Dialogue and sign a ROD in December 2004. 
Updated information will continue to be posted on BPA's Regional 
Dialogue Web site at: http://www.bpa.gov/power/regionaldialogue.

    Issued in Portland, Oregon on July 7, 2004.
Stephen J. Wright,
Administrator and Chief Executive Officer, Bonneville Power 
Administration.
[FR Doc. 04-16446 Filed 7-19-04; 8:45 am]
BILLING CODE 6450-01-P