But who gets a slice of the pie?

In August the Bonneville Power Administration released its proposed wholesale electric rates for the five-year period from 2002 to 2006. The controversial proposal is subject to five months of scrutiny, including eight public hearings from Sept. 30 through Oct. 14, with adoption of final rates expected early in 2000.

In this era of emerging competitive markets, relatively low-priced federal power is prized by wholesale customers in the BPA's Northwestern U.S. service territory. Eleven large industrial companies - known as direct service industrials, or DSIs - had been haggling with BPA since the start of 1999 over how much electricity they will receive under the new rate plan. The dispute arose because BPA-produced power is predicted to be cheaper than the market rate for electricity. So the industrials are clamoring for as much BPA power as possible - available from about 2.3 cents per kilowatt-hour to 2.45 cents per kilowatt-hour. It is estimated that overall, BPA has about 6,400 megawatts of firm power to sell, but to meet demand would require more than that. So BPA must mete out its power selectively.

Besides having insufficient electricity, another problem for BPA arises because it wants to reward its "loyal" customers with the cheap federal power. In 1995, the last time that BPA had to renegotiate its five-year contracts with large industrial users, lower electric prices in the Northwestern U.S. power markets brought about by increased competition had caused some companies to purchase power elsewhere. The U.S. Department of Energy at that time had required that industrial customers commit at least 80 percent of their load demand to BPA in order to receive the new contract rates.

The customers that left BPA and bought power on the market no longer are eligible to purchase those same large amounts of BPA power. But now, some of those industrial customers are demanding that BPA sign them up again for the same amounts of power they had bought under previous contracts.

Vanalco, a Vancouver, Wash.-based aluminum producer, wants BPA power. But at the last contract renewal, Vanalco chose to buy most of its power from other suppliers. That sin may cost Vanalco dearly. Now that BPA power is once again cheaper, BPA claims that it only wants to serve "loyal" customers and that it is not obligated to provide Vanalco with power. Vanalco disagrees and argues that it deserves more power.

"They kind of shot themselves in the foot back then," argued BPA spokesman Perry Gruber.

In January, Vanalco and seven other companies filed placeholder lawsuits in the Ninth District Court against BPA in case no agreement could be reached. BPA since has negotiated deals with most of parties, who then agreed not to continue with the lawsuits. But Vanalco may press forward.

"We're meeting with lawyers basically every day and trying to decide what to do," said Vanalco spokesman Chuck Reali. He added that "there is a lot of posturing going on." Reali noted that even if Vanalco presses forward with a lawsuit, it likely would not come to trial for almost two years.

The Rate Proposal:

Case by Case Negotiation

BPA's rate proposal was published in the Aug. 13 Federal Register (Vol. 64, No. 156 at 44318). In the proposal, BPA explained that the wholesale electric market has changed since 1996 when it last set rates. In 1996, it appeared that BPA's rates would exceed market prices and BPA was not sure it could sell all its power at rates that would recover costs. By 2002, however, BPA expects its rates to be lower than market prices through cost-cutting measures, careful management and anticipated market price increases. The result is a greater demand than BPA can supply from the Federal Columbia River Power System (FCRPS).

BPA is required by law to sell power at prices that recover all costs. The main cost determinants are the cost of generating power, protecting, mitigating and enhancing fish and wildlife, investing in public purposes and repaying the U.S. Treasury for capital investment in the hydro system.

BPA explained that it must balance competing demands for its low-cost power. Public power agency customers, known as preference customers, have first priority. For that group, BPA proposes to sell power below market rates, with no increase in the average priority firm power rate from BPA's 1996 rates.

BPA also proposes to implement a previously approved Subscription Strategy plan, to offer a combination of power and financial benefits to its regional investor-owned utility wholesale customers for resale to residential and small farm customers.

The Subscription Strategy was approved in December 1998 and provides a marketing policy framework for the electric rate case. It reflects BPA decisions on equitable distribution of the electric power generated by the FCRPS to BPA's customers within the existing law framework. It does not set rates, but does suggest general rate design approaches to consider within the formal rate-making process. The Subscription Strategy provides a method for bilateral negotiations with each customer that reflect the specific business relationship between BPA and that customer. Those contracts are negotiated outside of the rate case. The actual level of service under such contracts is contingent on the availability of power after the close of the subscription window.

BPA stressed that the Subscription Strategy recognizes that the FCRPS is a regional resource, limited in size and valued by the citizens of the Northwest.

BPA plans to offer an average of approximately 1,800 megawatts of power to the residential and small farm customers of IOUs, while meeting all public power agency net firm load requirements. BPA also expects to serve 1,440 MW of DSI load. That amount has been controversial, because those industrial customers all would like to have more power. BPA said it is responding to viability concerns of BPA's direct service industrial customers - who claim they will be driven out of business without BPA power - by offering power below market prices. In fact, during the last 60 years, BPA lured many industries to the area with promises of low-cost power.

On Sept. 17, regulators in the four Northwestern states agreed to a proposal dividing 1,900 MW of BPA power among six IOUs. Members of the Idaho, Montana, Oregon and Washington commissions OK'd a plan giving Puget Energy the largest allocation - 700 MW of electricity. BPA already had allocated power among public power companies and reached agreement with most of its DSI customers. Once the BPA rates are set, it formally will offer contracts to the individual customers reflecting terms and prices for energy.

Power Politics:

Discriminate Against Problem Firms?

Politicization of the power allocation process extends to judging the worthiness of BPA's potential customers, as evidenced by a Sept. 9 meeting at BPA headquarters in Portland, Ore., attended by U.S. Energy Secretary Bill Richardson. At that meeting, United Steelworkers Association District No. 11 director David Foster advocated that BPA adopt a "corporate good citizenship clause" requiring BPA's industrial customers to demonstrate a good record of environmental, labor and safety standards in order to qualify for continued access to low-cost power.

Foster lamented that steelworkers from Kaiser Aluminum's plants in Tacoma and Spokane had been locked out since Jan. 14 in a labor dispute. According to Foster, Energy Secretary Richardson showed a "clear openness to holding BPA's corporate customers accountable for their conduct as it affects their workers, their communities and the environment."

Foster believes Kaiser should get no low-cost power. "We are confident that Kaiser Aluminum's conduct will disqualify them from receiving the preferred power rates that Bonneville has proposed offering to the rest of the aluminum industry," he said.

Meanwhile, on Sept. 15, Vanalco left open the possibility of future legal action against BPA, by petitioning a federal court to review its proposal for the allocation of electricity.

Not The Last Word: New BPA Oversight?

Energy politics means money, and so on Sept. 17, Oregon Gov. John Kitzhaber called on the governors of Idaho, Montana and Washington to join him in a regional front as well as in creation of a new entity to oversee BPA. The focus of the new entity would be to help restore fish while preventing the U.S. Congress from ending the provision of low-cost power by BPA through privatization. The fish restoration planning now lies with the Northwest Power Planning Council (see sidebar, "We'll Go Quietly, Says NPPC").

"I have been working closely with Gov. Racicot of Montana to develop a set of principles to guide the creation of such a structure," explained Kitzhaber. "The proposal envisions a regional entity that includes appropriate representation of the state and tribal governments of the Columbia Basin, for the federal government and for Canada."

Kitzhaber even hopes the new entity will buy BPA from the federal government. He admitted that a main goal is to preserve the cheap, regional source of electricity.

"We ignore this problem at our own peril," warned Kitzhaber. "Pricing federal power at market would amount to at least a half-billion-dollar annual loss to our region." Kitzhaber hopes to meet with the three other governors as soon as possible, and have a proposal to present to Congress by year-end.

Lori A. Burkhart is a contributing legal editor at Public Utilities Fortnightly.

We'll Go Quietly, Says NPPC

Northwest Power Planning Council supports governors' plan for its own demise.

On Sept. 17, the same day Oregon Gov. John Kitzhaber urged replacement of the NPPC with a new body whose expanded membership would have authority for both environmental restoration and power production, the NPPC released a statement backing the proposal.

"We heartily support strengthening [the council's] regional voice with greater decision-making authority," Todd Maddock, chairman of the NPPC, said in press materials.

Said Maddock, "We agree with the governors that a regional entity with greater authority and responsibility than the Council now enjoys has the best chance of developing and implementing a long-term plan to recover fish and wildlife, comply with the Endangered Species Act and preserve the benefits of the low-cost Columbia River power system for the people of the Northwest."

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