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| ! |           | ## Department of Energy    |          |           |   |
| [ |           |                            |          |           |   |
| ] |           | Bonneville Power           |          |           |   |
| ( |           | Administration\            |          |           |   |
| m |           | P.O. Box 3621              |          |           |   |
| e |           |                            |          |           |   |
| d |           | Portland, Oregon           |          |           |   |
| i |           | 97208-3621                 |          |           |   |
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|   | August 1, |                            |          |           |   |
|   | 2000      |                            |          |           |   |
|   |           |                            |          |           |   |
|   | In reply  |                            |          |           |   |
|   | refer to: |                            |          |           |   |
|   | P-6       |                            |          |           |   |
+---+-----------+----------------------------+----------+-----------+---+

To Customers and Interested Parties:

The Bonneville Power Administration (BPA) is currently in the midst of
signing power sales contracts for the Fiscal Year 2002-2006 period. When
signed, these contracts would lock in rates for a 5-year period, leaving
BPA limited flexibility to address major change. Creating 5-year rate
stability has been a fundamental premise of the Subscription Strategy.
However, since the end of BPA\'s 2002-2006 power rate case, the
wholesale electricity market has shown unprecedented volatility and a
dramatic upward trend in prices. I want to be open with you about the
dilemma this presents for BPA and the potential implications for the
latter half of the 2002-2006 rate period.

We have all witnessed the recent price surge. While we cannot define
with certainty all the factors that have caused recent short-term price
volatility, increases in natural gas prices and west coast supply
deficits are driving up BPA's long-term costs of power. Though power
purchases will only make up roughly 20 percent of BPA\'s total power
supply in the next rate period, this increase could have a significant
impact on BPA\'s ability to fulfill its financial obligations. And as
market prices have increased, there has been a corresponding increase in
customers\' desire to place load on BPA. It now appears that the firm
load placed on BPA may be 1,400 average megawatts higher than
anticipated in the rate case, which would require additional major
purchases in the market by BPA.

Given the best information we had during our recently concluded rate
case, we met our goal of an 80 to 88 percent Treasury Payment
Probability (TPP) for the 5-year period. If these higher loads and
prices occur, we estimate our chances of paying Treasury every year in
full for the period 2002-2006 could drop to less than 65 percent. The
difficulties in ensuring Treasury payment, if they were to materialize,
would most likely be in the last 3 years of the 5-year rate period. As
the financial stewards of the Federal Columbia River Power System, we do
not believe a 5-year TPP this low is acceptable.

We don't know for certain how much additional load we will get or how
long the high market prices for 2002-2006 deliveries will be with us.
Our financial situation is presently very sound, though the potential
for problems has clearly grown. In light of these extraordinary
circumstances, it is only prudent to move forward with options that
would provide BPA the flexibility to respond to this situation.

It is important to note that the issues raised here are related to
changes in load and market rates. The fish and wildlife costs that will
fall to BPA as a result of the recently released draft Biological
Opinion were anticipated and are covered in the proposed rates. Recent
fish recovery decisions are not driving this situation.

We made a commitment to Congress and others to maintain a high
probability of paying Treasury. We expect to maintain our proposed rates
for at least the first 2 years of the rate period. However, we need to
explore options that allow sufficient flexibility to deal with problems
that may arise in the latter part of the rate period. One option is to
revise our rate proposal for the 2002-2006 period before those rates are
reviewed by the Federal Energy Regulatory Commission (FERC). Revisions
could include altering the existing, limited Cost Recovery Adjustment
Clause (CRAC) to create more flexibility, and implement similar changes
to the Slice product offering. Another option is to change the
Subscription contracts to allow a public process to revise rates within
the rate period, if needed. Since the financial challenges are more
likely to appear later in the rate period, we lean towards limiting any
change in rates to the last 3 years of the rate period, with no change
to the current proposal for the first 2 years. Further analysis will
help us to decide whether this approach is viable.

Given the significance and seriousness of the potential decisions ahead,
we have decided to continue negotiating contract terms with our
customers, but temporarily suspend signing additional Subscription
contracts for the time being. There may be a need for a corresponding
delay in the deadline for signing Subscription contracts. We are
committed to concluding Subscription as quickly as possible and
providing our customers a competitive, cost-based product.

We will be discussing this with the region to ensure as much input as
possible. We intend to conduct the following process:

  ------------------------------ ----------------------------------------
  August 1-August 22:            Collect interested parties\' thoughts on
                                 appropriate responses.

  August 3                       Distribute a 2 to 3 page description of
                                 alternative BPA responses.

  August 21                      Public meeting on alternative responses
                                 -- Portland Airport Holiday Inn, 10
                                 a.m.-2:30 p.m.

  August 22                      Comments due

  August 25                      Announce what response BPA intends to
                                 implement and how the details will be
                                 defined.
  ------------------------------ ----------------------------------------

As you can tell, this has not been an easy decision to make. But
assuring the financial health of the System is necessary if we hope to
retain its benefits for the Northwest. We ask for your understanding as
we seek to deal with these difficult issues.

Sincerely,

Judith A. Johansen

Administrator and CEO