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|   Reports & papers     Cost Review of the Federal Columbia River Power System        Management Committee Recommendations (DRAFT)
**document CR98-1**
Related link: Final report (CR98-2)
**Introduction**
**I**n 1997, the four Northwest governors asked the Northwest     Power Planning Council (Council) to establish a cost control forum to assist     Bonneville in controlling costs preparatory to a subscription process for     the post-2001 period. The Cost Review has covered planned costs of the     Federal Columbia River Power System (FCRPS), including transmission, with a     focus on projected costs in the 2002-2006 period. The objective has been to     ensure that Bonneville's near and long-term power and transmission costs are     as low as possible, consistent with sound business practices, thereby     enabling full cost recovery with power rates at or below market prices. 

Following are draft recommendations of the Management Committee for     public comment before they are finalized and forwarded to the Bonneville     Administrator for decision and action. The recommendations identify $150     million in reductions to FCRPS agency planned costs for 2002-2006. These     reductions are in addition to substantial cost cutting already undertaken.

The Council and Bonneville assembled a Management Committee for carry out     the Cost Review. The Committee has 11 members, including five "outside"     experts in corporate management and finance, and representatives from the     Council and Bonneville. The management and finance experts bring fresh     business perspectives and the benefit of private-sector experience in     leading large organizations through restructuring, cost cutting and     downsizing. The committee members are:

**Curtis Bostick,***Marco Island, Florida*    Bostick is a personal investment manager who serves on the boards of     numerous organizations, including two electric cooperatives in Florida and     the Mariner Group, which operates nine hotels in the state.

**Joyce Cohen,***Portland, Oregon*    Cohen served as one of Oregon's Council members until December 31, 1997,     when her term expired. 

**Charles Collins,***Seattle, Washington*    Collins is president of Colsper West Corporation and a former member of the     Northwest Power Planning Council. Collins chaired the 1996 Comprehensive     Review of the Northwest Energy System.

**Jim Curtis**,*Portland, Oregon*    Curtis is senior vice president for Bonneville's Business Services. 

**John Etchart,***Helena, Montana*    Etchart is chair of the Northwest Power Planning Council.

**Steve Hickok**, *Portland, Oregon*    Hickok is Acting Chief Operations Officer and senior vice president for     Bonneville's Power Business Line. 

**Mike Kreidler,***Olympia, Washington*    Kreidler is a former member of the United States House of Representatives     and he currently represents western Washington on the Council.

**Robert J. Lane,***Portland, Oregon*    Lane is former president of the corporate banking group at U.S. Bancorp.     Lane was president of West One Bancorp until August 1996.

**Todd Maddock,***Lewiston, Idaho*    Maddock is chair of the Cost Review Management Committee and one of Idaho's     two members on the Council. 

**Rosemary Mattick,***Seattle, Washington*    Mattick is vice president of procurement and supply management for the     Weyerhaeuser Company.

**William Vititoe,***Seattle, Washington*    Vititoe is the retired chairman of Washington Energy Company, a natural gas     utility.

**Public comment**on these recommendations will be taken at hearings     on**February 9**, at 9:30 a.m. in the**Northwest Power Planning Council's Central Office**    851 SW Sixth Avenue, Suite 1100, Portland, Oregon 97204    and on**February 11** at 10 a.m. in the**West Coast Ridpath Hotel**    in Spokane, Washington.

Comment can also be submitted to the Northwest Power Planning Council     through February 20, 1998.    Call the Council's public affairs division for more information:     1-800-452-5161 or 503-222-5161. 

**The Goal**

In July 1998, the Bonneville Power Administration (Bonneville) will begin     a subscription process for selling its core power products, with the     objective of getting new long-term power sales contracts in place for fiscal     year (FY) 2002 through 2006 and beyond. Achieving a very high level of     subscription by Northwest wholesale power customers is a high priority. It     is the most certain way to satisfy obligations to the U.S. Treasury,     third-party bondholders, and fish and wildlife recovery, and retain for the     Northwest substantial long-term benefits of the federal Columbia River Power     System (FCRPS).

The work of the Cost Review Management Committee has been driven by the     objective of achieving a high level of Northwest subscription. Bonneville's     wholesale customers are facing a period of unprecedented uncertainty and     risk. There are new suppliers and increased price competition in the     marketplace. With the onset of retail competition, utilities are uncertain     of their future loads. It is the Committee's view that these utilities are     unlikely to buy power from Bonneville on a long-term basis unless they     perceive Bonneville's price to be very low relative to these risks. Thus,     the Committee believes that the key to a high level of long-term     subscription is for Bonneville to reduce its costs as much as possible     consistent with the Comprehensive Review and sound business practices,     thereby enabling Bonneville to price its core subscription products well     below market price expectations. Bonneville has been working toward a cost     structure that would allow it to compete successfully in a 2 cents market.     The Management Committee has challenged Bonneville and other agencies of the     power system (U.S. Army Corps of Engineers, the Bureau of Reclamation and     the Washington Public Power Supply System) to beat that goal by a     substantial margin. 

The Committee believes that the goal of pricing power well below market     expectations will enable Bonneville to return to its roots ? a focus on its     core missions of marketing and transmitting the firm power output of the     FCRPS for relatively long terms to regional customers, and meeting its     environmental responsibilities. This is a role that is sustainable, both     competitively and politically. While Bonneville will continue short-term     marketing of nonfirm power, the emphasis on long-term firm contracts will     allow Bonneville to reduce staff and expenses associated with many marketing     and related support activities. In this environment, Bonneville will not be     engaged in acquiring additional power resources to meet the load growth of     customers. Nor will it have a large responsibility for the development of     conservation and renewable resources. Staffing and other expenses related to     these activities can be reduced. These directions all are consistent with     the recommendations of the Comprehensive Review of the Northwest Energy     System. 

**Challenges and Opportunities**

Since late 1993, Bonneville has made substantial strides in reengineering     its operations and reducing its planned costs. Indeed, FCRPS financial     results for FY 1997 and reductions to date in Bonneville staffing     demonstrate new, aggressive cost management practices. Bonneville staffing     today is the lowest it has been since 1965. Recent efforts of the Bureau of     Reclamation and the Washington Public Power Supply System (Supply System) to     reduce costs and improve financial margins likewise reflect responsiveness     to the marketplace for wholesale power.

In August and September of 1997, Bonneville completed its annual planning     and budget process. This process covered the remaining four years of the     current rate period (FY 1998-2001) and the initial****five-year     subscription period (FY 2002-2006). A number of cost-cutting actions were     planned beyond those reflected in the 1996 Rate Filing. These actions would     result in average annual expenses in the FY 2002-2006 period that are $89     million lower than the expenses planned to be recovered through Bonneville's     rates for FYs 1997-2001. The results constitute the "cost baselines" that     Bonneville proposed to the Cost Review Management Committee for review and     recommendation last October. Included in the baselines for FYs 2002-2006 are     assumptions that the costs of the Residential Exchange program are     eliminated either statutorily or through the "in lieu" provisions of the     current statute, and that fish and wildlife costs remain stable. The     Management Committee adopted these baselines as it's starting point. 

The Management Committee recognizes that Bonneville faces significant     challenges and opportunities in achieving further savings; for example:
- System capability has suffered in recent years, in large part due to       aging hydroelectric facilities and inadequate levels of appropriations       funding. Improving productivity will require significant new investments       that must be designed and managed to yield higher production and lower O&M       costs.
- Unlike in a typical business enterprise, control over power production       in the FCRPS resides largely with entities (i.e., Corps of Engineers,       Bureau of Reclamation, Supply System) other than the one responsible for       marketing the products and recovering the costs (Bonneville). Almost half       of the power production O&M costs and virtually all projected capital       investments are managed by entities other than Bonneville. A consolidated,       integrated strategy directed at maximizing FCRPS asset returns (financial       results, and public benefits) for the region is lacking.
- The Supply System has done an exemplary job in reducing its costs and       increasing its production. It now projects that WNP-2 operating costs will       be at or even slightly below expected market prices in the year 2000.       However, beginning in 2002, the plant's costs may begin to increase,       primarily due to a need to purchase fuel as the current inventory is       depleted. These cost increases, as well as any unplanned expenditures,       will need to be managed aggressively to minimize their impact.
- Most FCRPS expenditures for fish and wildlife and public benefit       programs like the residential exchange, conservation, and renewable       resource development, are borne by Bonneville's Power Business Line (PBL),       representing about 20 percent of this business line's expenses.
- Most of Bonneville's financial risks also fall to the PBL. At the same       time, about 57 percent of this business line's expenses are attributable       to relatively fixed debt service and depreciation expenses, due in large       part to 100 percent debt financing of past capital investments.
- Bonneville's corporate functions and overheads generally are less       efficient than "best practices" in other enterprises would indicate is       possible.

**The Recommendations**

Bonneville should undertake extraordinary efforts in its power, corporate     and transmission organizations to reduce the costs of its commercial     operations and constrain the costs of its public benefit programs.     Similarly, other agencies of the FCRPS -- the Corps of Engineers, the Bureau     of Reclamation, and the Supply System -- should act in concert with     Bonneville by taking aggressive action to maximize the value of the FCRPS,     both financial returns and public benefits, by reducing O&M costs and     improving asset productivity.

The Committee's recommendations are summarized in the following table. If     achieved by the FCRPS agencies, the cost reductions identified will provide     a cost structure designed to permit Bonneville to price its core     subscription products well below currently expected market prices.  
**Recommendations****Average Annual Reductions, Total        Reductions****Fiscal Years 2002-2006, ****$ in millions        Power BL Expense Reductions****1.** Further reduce staffing and support costs of power         marketing, scheduling, and generation oversight through efficiency         initiatives and reoriented long-term marketing efforts.14.714.7**2.** End BPA funding for regional conservation market         transformation initiatives post-2001. Although this is contrary to the         specific recommendation of the Comprehensive Review the Committee         believes that Bonneville should not be asked to support activities that         its wholesale competitors are not also obligated to support. This         activity should be funded through state-established public purpose         funding called for by the Comprehensive Review.14.614.6**3.** Reduce projection of legacy conservation contract expenses         to reflect historical under-spending. Do not modify or extend existing         contracts. Reduce associated staffing.4.54.5**4.**Further reduce funding for the NW Power Planning Council         to reflect changes in Bonneville's regional role (i.e., curtailing new         resource acquisition), carrying out the Council role in power         recommended by Comprehensive Review and the continued importance of fish         and wildlife issues. Seek additional funding from other sources for         Council activities that are of regional scope. 1.71.7**5.** Reduce planned expenditures for renewable resource         projects, with no new projects beyond those currently committed.3.33.3**6.** Develop and implement a consolidated, integrated         capital/asset management strategy for federal hydro directed at         maximizing value, including both financial returns and public benefits.         The strategy should encompass the operation and maintenance of the         physical assets, a coordinated investment plan (including new         investment, disinvestment, and asset divestiture components), potential         consolidation of duplicative administrative support services among FCRPS         agencies, and the creation of integrated performance measures.         Performance should be measured explicitly and reported publicly,         accountabilities established, and incentives created to ensure the         overall success of the FCRPS. Estimates at right include a combination         of reduced O&M expenses from the cost baseline and increased revenues         from higher production.Corps: 40.0        
Bureau 8.0Corps 40.0        
Bureau 8.0**7.** Implement a strategy for WNP-2 that combines aggressive         cost management with a flexible response to market conditions and         unforeseen costs. Manage costs to revenues achievable at market prices         (assumed to be 20 mills). Market the output of WNP-2 separately from the         rest of the FCRPS resources unless legal or other issues prevent doing         so. To the extent revenues exceed operating costs, build up the         decommissioning fund. Re-evaluate termination in the event operating         costs are projected to exceed revenues significantly, and consider         termination if uneconomical at market prices. Estimated effect includes         a combination of reduced O&M expense from the cost baseline and         increased revenues.19.019.0**8.** Further reduce corporate overhead costs, including         business services, corporate planning, public affairs, and legal         services costs by 50 percent from 1996 actual levels. Achieve through         adopting "best practices," enterprise software, and outsourcing of         non-core functions where economic. (An estimated $6.7 m of the total         reduction will be capitalized in the Transmission Business Line [TBL]).31.714.5**9.** Obtain legislative changes in the areas of personnel         management and procurement to improve administrative flexibility and         ability to manage internal costs.10.07.0**10.** Further reduce Transmission internal O&M expenses through         improved efficiencies.2.51.5**11.** Conform with Federal Power Act requirements, adjusting         and correcting functionalization (allocation) of costs between Power and         Transmission business lines.0.030.0**12.** Further reduce federal and non-federal debt service         expenses through refinancings, greater reliance on variable rate debt,         and other debt reduction actions.20.020.0**13.**Targeted, but unspecified reductions already included in         Power Baseline.(19.4)(19.4)**TOTAL****150.6****159.4**
In addition, the Transmission Business Line should meet the cost     management objectives in its baseline, in particular:
- Obtain operational efficiencies, tighter control on timing and       prioritization of capital investments to achieve superior performance       compared to the Western States Coordinating Council (WSCC) transmission       providers (top one-third);
- Reduce fully allocated costs of transmission maintenance service per       hour by 20 to 30 percent by 2001; and
- Increase flexibility of cost structure.

Work on Transmission Business Line recommendations has not been     concluded, and the Committee expects to reflect more savings in its final     recommendations. 

For several reasons, it is critical that Bonneville, the Corps, the     Supply System, and the Bureau begin implementing these recommendations and     the cost reductions in the October cost baselines as quickly as possible.     Doing so will demonstrate to customers and other interests the commitment of     Bonneville and the other FCRPS agencies to reducing costs. Implementing some     of the recommendations will entail new investment in systems and up-front     costs to reduce staffing levels that can be paid for in part with near-term     cost savings available from early implementation of the recommendation.     Forging an integrated asset management strategy will take a concerted effort     and is critical to improving the productivity of the FCRPS. Finally,     Bonneville should move quickly to obtain Administration support for     legislation to improve its administrative effectiveness and efficiency.

The Management Committee has not addressed fish and wildlife costs. The     Committee believes there are opportunities for improved efficiencies in the     planning and implementation of fish and wildlife measures on the part of     Bonneville, the Corps, the Bureau, the National Marine Fisheries Service,     the Fish and Wildlife Service, state agencies and the tribes. These     efficiencies should be sought with the same aggressiveness that efficiencies     are being sought elsewhere in the FCRPS. Greater efficiency in these     expenditures can only benefit fish and wildlife.

**The Risks**

Bonneville and the region face many risks in achieving the cost     reductions discussed above. Implementing many of the recommendations will be     difficult and success is not assured. There is no antidote for that, other     than the skill and dedication of the managers and employees of Bonneville     and the other FCRPS agencies. It is essential that these people be given the     statutory authority and other tools necessary to be able to implement the     cost reductions while maintaining the effectiveness of the agencies in     carrying out their core functions.

Bonneville's financial risks are substantial. For the remainder of the     current FY 1997-2001 rate period, hydro and thermal resource costs are the     greatest risks to FCRPS net revenues. Market price risk during this period     is limited due to sales contracts that are largely fixed. Financial risks     are substantially greater post 2001, with added hydro risk, fish recovery     and enhancement cost risk, and market price risk. The magnitude of the risks     can be as much as $200 million or more in a given year. Bonneville can     reduce its risk profile significantly by reducing its power costs and by     creating greater flexibility in its cost structure over time. The cost     baselines and the Committee's recommendations do not include two key     elements of a Bonneville revenue requirement for power: (1) a planned margin     (planned net revenues) for risk and (2) acceleration of repayment, as     recommended by the Comprehensive Review when certain pricing conditions     occur. 

There is a risk that the sense of urgency in the need to reduce costs and     improve productivity is not fully shared throughout the FCRPS agencies.     Bonneville has been forced to confront this need by the realities of the     market. Others have been insulated from those realities to varying degrees.     In particular, the Management Committee concludes that the Corps must be     more aggressive in reducing expenses and improving productivity. The     recommendation for the implementation of an integrated capital/asset     management strategy is essential if the FCRPS is to maximize asset value for     the region.

The Supply System has made great strides in reducing costs and increasing     availability. The Committee can anticipate a viable market for the power     from WNP-2. However, the Supply System must reduce costs further to meet and     sustain its year 2000 cost target, and the Committee has challenged it to     produce further savings. Toward this end, the Committee recommends the     Supply System continue its examination of additional cost reduction measures     and initiatives, including the potential adoption of a twenty-four-month     fuel cycle, improved outage planning, industry benchmarking of "best     practices", and the use of other fuel options. Unforeseen costs, lower than     expected market prices, or performance problems could alter the situation.     Increasing flexibility to deal with such circumstances should be a priority.     The Committee expects that marketing WNP-2 separately from the subscription     product should, depending on market conditions and costs, offer the     opportunity for WNP-2 to generate net operating revenues. Bonneville should     pursue marketing the plant's output at market prices, either as a "2nd     tier" subscription product or outside the subscription process, unless legal     or other issues prevent doing so. If the plant is operated and marketed in a     way that results in the generation of net operating revenues, the     decommissioning fund should be built up to improve flexibility in the event     the plant cannot recover its operating costs in the future. 

Under the Northwest Power Act, Northwest utilities have the right to sell     to Bonneville an amount of power equal to that required to serve their     residential and small farm customers at the their average system costs, and     to receive an equal amount of power at Bonneville's average system cost. In     reality, this has been an accounting transaction. The exchange was intended     as a means of allowing wider access to the benefits of the federal hydro     system. In the past, the exchange has been a major cost to Bonneville, but     it cannot be allowed to be so again in the future. The Comprehensive Review     suggested an alternative way of providing access to the benefits of the     federal system. It recommended that the residential and small farm customers     of exchanging investor owned utilities be given the opportunity of being     served with Bonneville power. Access to that power would be on a priority     basis second only to public agencies. The Committee believes this can meet     the objective of providing wide access to the benefits of federal power. 

The recommendations of the Cost Review will translate into low power     prices only if subsidies and cost transfers inherent in the 1980 Northwest     Power Act and in past Bonneville practices are held in check. At the time     the Act passed, the argument was that these subsidies and cost transfers     were affordable and necessary because Bonneville's costs were so far below     market. The Committee's recommendations, seriously pursued, are designed to     recreate those circumstances, but in a substantially changed market     environment. 

Bonneville now faces competition. Competitive markets mean price     volatility, product innovation and aggressive marketing. Bonneville can     limit its costs and risks appropriately in this environment, only by being     able to price its standard products well below market. Competitive markets     also make discounts and subsidies less effective and less appropriate forms     of public policy. Therefore, achieving the goal of the Cost Review likely     will require a number of policy and legislative changes that the Committee     did not address in detail. Bonneville and other regional entities must take     the necessary steps to eliminate any further costs impacts from subsidies,     discounts, and other cost transfers.

Finally, the Committee would like to conclude with a note of caution. The     Committee realizes there are many calls on Bonneville's funds. But there is     a need for restraint. To the extent the Committee's cost reductions are     absorbed by increased expenditures for other purposes, the value of this     Cost Review will have been significantly diminished. Driving Bonneville's     costs back to or above market levels will discourage subscription and     jeopardize the fundamental goal of securing the long-term economic benefits     of the federal system for the region. It will confirm to potential     subscribers that Bonneville's costs are not manageable. Relying on stranded     cost recovery mechanisms is a high-risk path. If a high level of long-term     subscription is achieved, long-term funding for fish recovery and other     public benefits will be more stable; the US Treasury and other creditors     will be more secure; stranded cost recovery mechanisms will likely be     avoided; and, most importantly, the benefits of the Columbia River Power     System will be retained in the Northwest.  

**Recommendations**

**Recommendation #1:**

**Further reduce staffing and support costs of power marketing,     scheduling, and generation oversight**

Baseline: **$50.0** million/year (2002-06 annual average)
- PBL Staff & Support Costs: $34.0 million/yr.
- Legal & Environmental Support: 3.3 million/yr.
- Other Contracts: 12.7 million/yr.

Recommendation: **$35.3** million/year (2002-06 annual average)    Annual savings: **$14.7** million/year (2002-06 annual average) 
- PBL Staff & Support Costs: ($12.0) million/yr.
- Legal & Environmental Support: ( $1.2) million/yr.
- Other Contracts: ( $1.5) million/yr.

**Recommendation:**

Reduce by approximately 50 percent the staffing for Power Marketing and     other Power Business Line functions, except staffing for core operations     (Generation Scheduling and Resource Optimization) and Bulk Hub activities     necessary to maximize net revenues from the hydro system in commodity and     spot markets (an overall reduction of about 125 full time employees [FTE],     or about 1/3 of total PBL staffing). Also reduce related staff support costs     (supplies, travel, training, support service contracts, etc.), legal and     environmental services, and technical contracts.

**Rationale:**

The underlying assumption is that as a result of implementing the cost     cutting recommendations, the price of federal power in 2002 and the     foreseeable future thereafter will be significantly lower than market     alternatives, and therefore a less aggressive long-term marketing and     customer relations effort would be necessary. There would continue to be a     need for a core staff to operate the system and buy and sell power to match     resource output with regional loads, even with the longer-term firm load     carrying capability of the system fully subscribed. This core team would not     need the kind of management, market intelligence, product development, and     analytic capability that are currently needed to make the initial     subscription successful. This staff would perform the following basic     services: Duty and Interchange scheduling, generation schedule and short     term operations planning, weather and streamflow forecasting, regional     system operational coordination, sales and purchase of power (trading),     transmission acquisition and scheduling, billing, sales of reserve services     and contract administration. Traditional account servicing would be minimal.

**Implementation:**

Transition to this kind of operation would begin in 2000, if subscription     has achieved very high levels of Northwest commitment to Bonneville's     long-term firm power products. Investment in new technology would begin     earlier, however, and would focus on developing generic marketing tools,     automating risk analyses, automating customer bills, etc. 

**Cost to Implement:**

Prior to 2002, additional unplanned expenditures likely will be needed     for severance packages and new technology investment and implementation. The     amounts are not yet defined.

**Implications:**

This recommendation would change the relationship between Bonneville and     its long-term power customers. Most traditional customer support services     would no longer be provided. Power Marketing would focus on maximizing the     value from the seasonal and monthly changes in the hydro system.

**Risks:**
- Market Conditions and/or Bonneville costs:

If market prices are close to the prices for federal power, either as         a result of low market prices or inability to hold targeted cost levels         (either in 2002 or later), then the Agency likely would lose revenue due         to a lack of competitiveness (estimated risk: $50-150 million/year).         With federal power prices of 18 mills/kWh or less (delivered), this         imposes a minimal risk; with federal prices of 20 mills/kWh or more         (delivered), this risk is substantial.
- Deregulation and Restructuring:

A greatly reduced staff may not be able to respond to the many         upcoming changes in the power business such as new market flexibilities,         scheduling protocols, and new independent system operators (ISOs).         Complex and highly tailored products and support services would not be         offered.
Billing, scheduling and inventory systems will need to be         significantly simplified.
The entire industry must have simplifying technology advances as         Bonneville must interface successfully with many other operators.

- FERC compliance/functional separation:

Developments on this front are forcing increased and sometimes         redundant staffing.
- Statutory obligation:

Northwest customers cannot exercise their statutory right to obligate         Bonneville to provide new resources and expanded service if this         recommendation is to hold.
- Implementation:

There is plenty of time to accomplish the initial subscription, note         the changed operating environment that results from it, and re-focus the         PBL marketing effort accordingly.
- Technology:

If the technology does not lead to anticipated efficiency         improvements, there is a risk that some of the anticipated staff         reductions will not be achieved.
- Operation Analysis

Some market analysis, particularly for purposes of managing river         operations in relation to both fish and excess power, may need to         increase, not decrease, depending on how overall industry restructuring         affects operations of the FCRPS. It is anticipated that fewer analysts         will be required in the future for this function, but this is very         tentative.

**Recommendation #2**

**Eliminate conservation market transformation initiatives post-2001**

Market Transformation:    Baseline: $14.6 million/year (2002-06 annual average)    Recommendation $0.0 million/year    Annual savings: $14.6 million/year

**Recommendation:**

End Bonneville funding for conservation market transformation activities     beginning FY 2002. Work with retail utilities and states to secure funding     for conservation market transformation through state public purpose funds as     recommended by the Comprehensive Review.

**Rationale:**

Bonneville is currently contributing $14.6 million per year to the     operation of the Northwest Energy Efficiency Alliance (Alliance). The     Alliance is a non-profit organization funded by Bonneville on behalf of the     public utilities in the region, and proportionately by the investor-owned     utilities of the region. The purpose of the Alliance is to make targeted     interventions on a regional scale in the markets for promising efficiency     technologies, services or practices. The intent is to transform those     markets ? induce permanent positive changes so that the target efficiency     products can maintain or build market share without further utility support.    

While market transformation is a promising approach to encouraging     conservation in a manner more consistent with competitive markets, it is     inappropriate for Bonneville to be providing funding long term. The     Committee recognizes that, unlike the rest the Comprehensive Review's     conservation recommendations, the Review included provisions for long term     funding of market transformation by Bonneville. This apparently was included     because the Comprehensive Review thought it would be difficult     administratively to get the states or local utilities to support such a     regional effort. However, this cost is not one that is borne by Bonneville's     wholesale competitors. Consequently, this cost can put Bonneville at a     competitive disadvantage. The Committee believes that market transformation,     along with other conservation, is most appropriately supported through the     state public purpose funds called for by the Comprehensive Review. In the     interim, Bonneville should work with other interests to secure such funding.    

**Implementation:**

Notify the Alliance regarding the termination of funding and ensure that     no contractual obligations are incurred that would require funding beyond     2001. Consider legislation removing Bonneville's obligation to encourage     conservation. 

**Risks:**

Bonneville has a statutory responsibility to encourage conservation.     Withdrawal of support for all conservation activities might be challenged     without statutory change.

**Recommendation #3:**

**Reduce projection of legacy conservation contract and staffing     expenses**

Legacy    Baseline: $10.0 million/year (2002-06 annual average)    Recommendation $5.5 million/year    Annual savings: $4.5 million/year

**Recommendation:**

Bonneville funding for conservation "legacy" commitments (conservation     contacts already in place prior to the Comprehensive Review) are estimated     in the cost baseline based on the maximum contract value. Given historical     spending patterns, utilities likely will not spend the maximum contract     amounts. Thus, Bonneville should reduce its projections of future expenses     associated with the existing conservation contracts. The Committee     recommends that Bonneville not extend or modify these existing legacy     contracts.

**Rationale:**

The legacy program is work done in support of existing conservation     acquisition contracts in the region that still are active. Most of     Bonneville's incentive-based legacy contracts terminate on or before 2000,     but the debt service payment streams continue for up to 20 years. More than     250 active contracts exist in FY 1998. These contracts under legacy are     commitments made under Bonneville's earlier resource acquisition program. No     new contracts have been signed or funded since 1994, except for low-income     weatherization. As contracts close out, active management and oversight will     decrease. Associated staffing should be reduced. 

Normally, Bonneville's budget estimates include the maximum amount of the     contracts. Nevertheless, utilities generally under-spend the contracts.     Estimates of under-spending are based on Bonneville's past experience. Based     on Bonneville's estimates, the Committee expects that approximately $4.5M in     savings will accrue from under-spending of these legacy conservation     contracts. 

**Risks:**

The contract estimates are based on the maximum amount of the contract     balances. Bonneville has committed to this maximum amount. If utilities wish     to spend at a higher level within the terms of the existing contract,     Bonneville is committed to pay for the higher level of spending.

**Recommendation #4:**

**Further reduce staffing/funding for Northwest Power Planning Council**

Baseline: $6.2 million (2002-06 annual average) (1995: $8.5 million)    Recommendation: $4.5 million/year (2002-06 annual average)    Annual savings: $1.7 million/year (2002-06 annual average)

**Recommendation:**

Further reduce funding to reflect the changes in Bonneville's role in the     region, and the Council's altered role in power as recommended by the     Comprehensive Review, and the continued importance of fish and wildlife     issues. Targeted reductions and an overall streamlining of the Council will     be required. The recommended reductions reflect a 27 percent reduction from     the 2002-06 baseline and a 47 percent reduction from the 1995 budget.     Accomplishing these levels will require: significant reduction in staffing     in the Power Division; reductions in Administration, Legal and Public     Affairs; reductions in contracting, travel and facilities; probable     consolidation of management responsibilities; significant reductions in     state staffing; and reduction in the number of Council members per state     from two to one. 

Cuts of this magnitude bear the risk of impairing the effectiveness of     the Council. The possibility of additional funding from other sources to     support Council activities of regional scope should be investigated.

**Rationale:**

The Council was created in 1981 as a consequence of the passage of the     Pacific Northwest Electric Power Planning and Conservation Act (the Power     Act). The Council is responsible for the development of long-range regional     power plans to guide the resource acquisitions of Bonneville,****the     development of a program to protect, mitigate and enhance the fish and     wildlife resources of the Columbia Basin, and provide for the participation     and consultation of the states, tribes, interested groups, and the general     public within the region. Council staffing and budgets have been developed     to fulfill these responsibilities and facilitate their implementation.

Looking forward, the continued high importance of fish and wildlife     issues argues for maintaining the necessary capability. For example,     annually the Council plays a key role in assuring accountability by     providing congressionally mandated scientific and policy reviews of     proposals for more than $125 million in Bonneville fish and wildlife     funding. Congress has also asked the Council to carry out reviews to assist     Congress in making decisions on major appropriations decisions. The Council     anticipates further assignments of this nature. The Council is also     spearheading efforts to establish a strong scientific foundation for fish     and wildlife policy in the basin. All three tasks involve significant     assistance from the Council's public affairs, power and legal divisions in     addition to fish and wildlife staff. Reductions in staffing in these areas     must not impair the Council's ability to complete work in these three areas.    

On the power side, the onset of a competitive generation market and the     restricted resource acquisition role for Bonneville means the Council's     planning function should be reduced and reoriented. However, the importance     of Bonneville to the economies of the Northwest states means that     maintaining a capability for continued oversight of Bonneville is required.     In addition, the Comprehensive Review recommended that analytic capability     be maintained to monitor and evaluate the transition to competitive     electricity markets and facilitate the development of conservation and     renewables in those markets. 

Council members can rely to a greater extent on central staff for staff     support. Having two Council members per state reflects Congress and the     states? desire to have broad representation on the Council. In some states,     requirements for geographical representation have been included. This kind     of representation would probably have to be sacrificed in order to achieve     the greater efficiency required by these budget levels. 

**Cost to Implement:**

There may be some near-term investment in information/telecommunications     technology (e.g. video teleconferencing) to facilitate reduced travel     budgets and the need for greater state-central coordination.

**Implications:**

Since the Council was created by Congress and actions of the state     legislatures, federal and state legislation would be necessary to realign     the mission and responsibilities of the Council and, if necessary, change     the representation.

**Risks:**

Necessary legislation may not be passed. Effectiveness of Council may be     impaired.

**Recommendation #5:**

**Renewable resource projects: no new projects beyond those currently     committed**

Baseline: $**23.0** million/year expense (2002-06 annual average)
- $19.7 million/yr. ? currently committed projects (CARES                 wind, Wyoming wind, one geothermal)
- $ 3.1 million/yr. ? potential additional renewable resource                 project
- $ 0.2 million/yr. ? continued solar & wind data collection,                 research
($10.3 
million/yr. Revenues at "green" market prices)                

Recommendation: **$19.7** million/year (2002-06 annual average) 

Annual savings: **$3.3** million/year (2002-06 annual average)
- $ 3.1 million/yr. - Uncommitted Renewable Resource project
- $ 0.2 million/yr. ? renewable resource data collection,                 research

** Recommendation:**

Reduce Bonneville's funding of renewable resources and associated     oversight responsibilities by 2002 in order to be consistent with the     recommendations of the Comprehensive Review. This will reduce renewable     resource research and development and financial support for renewable     generation to just the projects already committed. This also will result in     staff reductions in the Power Business Line and related support costs,     already included in Committee Recommendation #1. 

**Rationale:**

The underlying assumption is that Bonneville's core business strategy     should not include development of new renewable resources or related     research. Therefore, costs associated with new renewables costs should not     be incurred. 

**Implementation:**

Bonneville will not make any new commitments for renewable resource     projects.

**Implications:**

This recommendation could negatively affect the relationship that     Bonneville has with several of its historic constituents, as well as     prospective resource development partners.

**Risks:**

Potential legal challenge to this interpretation of Bonneville's     responsibility under the Act, and loss of support by constituent groups. 

**Recommendation #6:**

**Develop/implement a consolidated/integrated capital/asset management     strategy for the FCRPS, including transmission**

**Corps of Engineers**

Baseline: $116.7 million/year (2002-06 annual average)    Recommendation: $86.7 million/year (2002-06 annual average)    Annual Savings: $30 million/year (2002-06 annual average)

Note: The Management Committee recommends that the Corps of Engineers     increase its operating margins by $40 million, of which $30 million is     assumed to be obtained from operation and maintenance expense reductions and     the remainder from improved revenues as a result of increased project     availability.

**Bureau of Reclamation**

Baseline: $50.9 million/year (2002-06 annual average)    Recommendation: $47.9 million/year (2002-06 annual average)    Annual Savings: $3 million (2002-06 annual average)

Note: The Management Committee recommends that the Bureau of Reclamation     increase its operating margins by $8 million, of which $2 to $3 million is     assumed to be obtained from operation and maintenance expense reductions and     the remainder from improved revenues as a result of increased project     availability.

**Recommendation:**

Collaboratively forge and implement a consolidated, integrated     capital/asset management strategy directed at maximizing value, including     both financial returns and public benefits. The strategy should encompass     the operation and maintenance of the FCRPS, including transmission, physical     assets, a coordinated investment plan (including new investment,     disinvestment, and asset divestiture actions), and the creation of     integrated performance measures. Each element would be directed at     maximizing the value (financial returns, public benefits) of the physical     assets. Performance should be measured explicitly and reported publicly.     Accountabilities should be established and incentives created to ensure the     asset management success of the FCRPS.
- Establish a joint committee composed of the Corps, Bureau and       Bonneville to facilitate the development and implementation of this       strategy.
- Benchmark all operations and maintenance aspects of the FCRPS assets,       both power and transmission, against industry practices, and adopt and       implement "best practices" collaboratively.
- Collaboratively investigate prospects for consolidating and       integrating administrative services including accounting and financial       reporting, human resource services, and information technology systems, to       minimize operating costs.
- Rigorously analyze investment, disinvestment, and divestiture       opportunities to maximize asset value.
- Establish common means of defining and measuring "value".

**Rationale:**

As it currently operates, the FCRPS is essentially a single accounting     entity composed of three distinct federal agencies: Bonneville in the     Department of Energy, the Corps of Engineers in the Department of Defense,     and the Bureau of Reclamation in the Department of Interior. Each agency has     its own unique set of multiple (and at times, competing) objectives. Prior     to the onset of competition in the electric power industry, these multiple     objectives were at times inconvenient and possibly awkward, but did not     threaten the basic mission of the participating agencies because Bonneville     enjoyed a substantial cost advantage over alternative sources of power. The     increasingly competitive market for power has changed that equation     dramatically. No longer can each agency pursue its own objectives     independently without threatening the financial health of the entire FCRPS.     The economic margins that once allowed the luxury of some level of strategic     misalignment within the FCRPS no longer are possible. This is true     especially when considering that the agencies having control over the cost     and quality of production are largely separated from the marketing and cost     recovery responsibilities.

It is essential that the FCRPS adapt the business model to its particular     purposes if it is to maximize the value of its assets both for the Pacific     Northwest and for the United States? taxpayers. Survival (long-term cost     recovery) in a competitive marketplace requires it. This calls for a     capital/asset management strategy that is both integrated ? that is,     directed toward value maximization; and consolidated ? that is, involving     all entities in the FCRPS working together toward that end. 

Simply adapting the business model to meet the needs of the FCRPS is not     sufficient to ensure success. A crucial factor for success is to connect the     management of the capital and asset base directly to business strategy. Once     this alignment has been made, creating appropriate incentives along with key     accountabilities is relatively straight-forward.

The participating agencies of the FCRPS must work together to improve     margins. To that end the Corps and Bureau must continue their efforts to     find additional expense reductions and increase availability. The Bureau is     recognized for having undertaken productive efforts to reduce expenses to     date. Therefore, only incremental expense reductions are requested. The     Corps has not demonstrated to the satisfaction of the Management Committee     that it has looked sufficiently for ways to reduce future expenses.     Therefore, larger expense reductions are expected from the Corps. In     addition to these expense reductions, the Corps and Bureau are expected to     provide greater project availability (weighted by generation capacity).

**Implementation:**

A key opportunity for achieving a consolidated, integrated capital/asset     management strategy for the FCRPS would be the establishment of a Joint     Operating Committee. This Committee would develop common objectives for the     purpose of guiding power-related planning, budgeting, operational, and     investment decisions of the FCRPS. These common objectives, criteria, and     controls should take into account constraints imposed by the non-power     purposes of the Federal projects. In addition, the Committee would establish     common controls (i.e., financial and operational reporting mechanisms) and     means of measuring accountability.

The FCRPS should investigate areas where savings could be gained by     consolidating services that currently are provided in triplicate. Given     Bonneville's experience with reductions in the cost of providing shared     services, it appears that the greatest areas for consolidation might be     accounting and financial systems, human resources, and information     technology systems. Such steps should be directed toward eliminating     redundancies and reducing overhead costs, while ensuring that planning,     control and accountability systems support the objective of maximizing asset     value. 

The FCRPS should participate in industry-wide benchmarking studies to     identify "best practices" for both the power and transmission functions. The     work accomplished to date is an excellent start, but all agencies within the     FCRPS should be participating in these studies. The agencies of the FCRPS     should work together in adopting and implementing "best practices".

**Costs to Implement:**

Capital investments may be required to produce the expected increases in     project availability, although adopting "best practices" and potential     benefits from increased coordination should be able to produce improvements.     If capital funds are needed, they may be obtained by reprioritizing existing     capital investments or possibly increasing capital investments. The expected     increases in revenues are stated net of any increase in costs. Also, any     change in the capital investment plan should bring additional savings in     operation and maintenance expenses.

**Risks:**

If long lead times are necessary to obtain these expected savings, they     may not be produced by FY 2002. The expected increases in revenues from     improved availability may not occur if streamflows are inadequate.

**Recommendation #7:**

**WNP-2: Aggressive cost management, flexible response to market     conditions**

Baseline: $172.5 million/year operating expenses (2002-06 annual average)    O&M Expenses: $127.8 million/yr.    Nuclear Fuel: $ 33.8 million/yr.    Capital: $ 4.8 million/yr.    Other: $ 6.1 million/yr.

$153.8 million/yr. Revenues (878 aMw @ 20 mills/kWh)

**Recommended Improvement in Annual Net Operating Revenues**:

About $19 million/year (2002-06 annual average)

**Recommendation:**

1. Subject WNP-2 to a market test: annual reveneus at market price     recover annual operating costs    2. Implement a strategy that combines aggressive cost management with a     flexible response to market conditions and unforeseen costs.

If the plant passes the market test, sell WNP-2 output at market, not     subscription, prices, unless legal or other issues prevent doing so. To the     extent that plant revenues exceed operating expenses, use the net operating     revenues first to build up the decommissioning fund to improve future     financial flexibility.

Reevaluate plant termination in the event that operating costs are     projected to exceed revenues achievable at market prices by more than the     termination costs (i.e., terminate if termination is more economic than     continued operation).

**Rationale:**

WNP-2 should continue to be operated only if it can meet a cost recovery     test based on market prices. Currently, projected operating costs (defined     as all costs except debt service) exceed projected revenues by about $19     million per year. If costs can be managed so it can meet the market test,     the plant should continue to be operated.

Separating WNP-2 from the rest of the subscription pool and selling the     output at market prices would allow a lower subscription price for the rest     of the federal system power. The subscription price would be reduced by     about ? mill/kwh for every 2 mills difference between the subscription price     and the market price obtained for the plant's output. 

**Implementation:**

Separate WNP-2 from the federal hydro and sell the output at a higher,     market price, either as a "2nd tier" subscription product or     outside of the subscription process. As part of an evaluation of     termination, if the plant fails to meet the market test, termination costs     and effects on reliability of the federal system must be considered,     particularly if there are significant additional reductions in capability of     the federal hydro system as a result of fish enhancement and mitigation.

**Implications/Risks:**

Subtracting the power produced by WNP-2 from a subscription product sold     significantly below market would exacerbate potential over-subscription.     This could mean that the residential customers of the region's     Investor-Owned Utilities will not get all the benefits of federal power that     they may expect as a result of the Comprehensive Review recommendation on     subscription, unless some alternative allocation scheme is devised. 

There is some risk that WNP-2 will face significant unplanned costs,     either from failure of major pieces of equipment or from increased     regulatory requirements. There also is some risk that market prices will be     significantly lower than currently assumed. In the event of major unplanned     costs, reductions in output or reliability, or a significant reduction in     expected market prices, Bonneville and the Supply System should consider     terminating WNP-2. A termination analysis should take into account the     potential impact on revenues and Bonneville costs during the period,     including termination costs not covered by the decommissioning fund and     costs of any major equipment failure. While the analysis should focus on     implications for federal system reliability, it also must consider effects     on the region as a whole due to load/resource or reserve deficits,     particularly if John Day or Lower Snake Dams (or both) have been or are     expected to be breached or significantly reduced in output for purposes of     fish enhancement and mitigation.

**Recommendation #8**

**Reduce Corporate Overheads**

Baseline ? PBL portion of Corporate Overheads: $15.4 million/year (02-06     annual ave.)    Recommendation ? PBL portion of Corporate: $6.4 million/year (02-06 annual     ave.)    Annual direct PBL savings: $9.0 million/year (02-06 annual ave.)    Annual PBL savings from lower Trans. Costs: $5,5 million/year (02-06     annual ave.)    Total PBL savings from reduced Corporate: $14.5 million/year (02-06 annual     ave.) 

Note: These figures combine both the direct and indirect reductions to     power business line expenses due to corporate overhead savings. The entire     corporate overhead reduction goal is $31.7 million. $9.0 million of these     reductions directly benefit power through reduced corporate overhead     distributions. The remaining $22.7 million reduce transmission expense and     capital costs. These transmission savings result in an indirect PBL     reduction of $5.5 million through lower transmission rates.

**Recommendation:**

Bonneville's goal is to reduce annual corporate expenses by approximately     50 percent from 1996 levels. This goal will be accomplished through several     efforts. The first is the "shared services" review Bonneville currently has     underway. Upon the completion in 1998 of this effort, corporate expense     reductions will be identified as a result of corporate or overhead     efficiencies gained through the redesign of financial, information, and     human resource management systems, adoption of formalized benchmarking     techniques, and implementation of private sector-based "best practices".     Implementation of "Shared Services" review recommendations also will     identify activities that may be more efficiently provided through     outsourcing. 

In addition to the shared services review, Bonneville also is currently     investigating "Enterprise software." While implementation of such software     agency-wide will require substantial investments in the near term, it has     the promise of yielding great long-term savings, which are integral to the     goal of reducing corporate cost by 50 percent.

The Committee recommendations call for reductions (essentially 50     percent, in aggregate) of all corporate overhead areas except for fish and     wildlife recovery and enhancement overhead costs. In keeping with this     recommendation, Bonneville also is reducing other corporate functions not     covered in the shared services review, such as corporate communications,     regional relations, legal services, pollution abatement, and others.

The cost reductions outlined here are shown as reductions to the     overheads charged to the business lines. The allocation of these reductions     to the business lines is assumed to be proportional to the current overhead     distributions.

**Rationale:**

Companies redesign their "shared services" are finding that     infrastructure costs can be reduced substantially by eliminating services,     updating and integrating systems, streamlining processes, and sharing     service delivery to business lines. In addition, companies that have     implemented enterprise software are finding that they can reduce their     information technology costs substantially.

**Implementation Scheme :**

After the shared services studies are complete in July 1998, Bonneville     will proceed to implement study recommendations as quickly as possible, with     a projected one to two years for complete implementation. In addition to     shared services recommendations, Bonneville also will be implementing     Enterprise software, which will result in additional process changes and     subsequent cost reductions. The purchase of Enterprise software should be     completed by July 1998 and implemented by July 2000.

**Cost to Implement:**

Implementation costs for the recommendations identified via the "Shared     Services" review will be identified as a part of each study. These costs     could include the costs associated with possible downsizing (severance     packages, voluntary separation incentives, lost productivity during     implementation). To the extent outsourcing opportunities are identified, the     cost of such outsourcing is assumed to be more than offset by anticipated     staffing and other savings. On the other hand, Enterprise software will     require an up-front investment of up to $90 million over costs currently in     the baseline. It will take approximately 3-5 years to recover this     investment.

**Risks:**
- The cost and implementation time of Enterprise software may be greater       than shown here.
- Reductions to corporate communications and regional relations may       hamper Bonneville's ability to respond quickly and effectively to       customer, constituent, and Executive/ Congressional requests and       inquiries.

**Recommendation #9**

**Obtain legislation to improve administrative effectiveness and     efficiency**

Annual savings due to recommendations (FY 2002-2006 annual averages)    Directly attributed to Power Business Line (PBL): $3.0 million/year    Indirect savings to PBL through reduced transmission rates: $4.0     million/year    Total PBL savings: $7.0 million/year

Note: Cost reductions due to these legislative changes apply to both     business lines within Bonneville. As shown, the direct impact on the PBL     cost baseline is estimated to be $3.0 million. The direct impact on     transmission is estimated to be $7.0 million, of which an estimated $4.0     million will be "passed through" indirectly to PBL through lower     transmission rates.

**Recommendation:**

If Bonneville is to minimize its costs, it must have the internal     administrative flexibilities and efficiencies available to other     participants in the electricity industry. In particular, to optimize the     size, quality, composition, and use of its workforce, Bonneville must     establish flexible, business-like human resource policies and practices ?     currently made difficult or prohibited by government-wide civil service laws     and requirements. 
- Exempt Bonneville -- and potentially the other federal agencies of the       FCRPS -- from certain federal administrative laws in areas such as       procurement and property management, information resources, and real       estate, particularly those laws and procedures that currently have been       lifted by administrative waivers and other actions. Establish new       procedures based on sound business practices, directed toward minimizing       costs.
- Establish among the FCRPS agencies common, efficient procedures for       procurement of equipment and services related to FCRPS electric power       generation and fish and wildlife mitigation facilities. This may be       accomplished through legislation, or by requiring the use of Bonneville's       own procurement procedures. (Savings estimate not yet developed)
- Exempt Bonneville from most Title 5, civil service personnel       management provisions, and require Bonneville to establish human resource       policies and mechanisms based on sound business flexibilities and       practices. These policies would include staffing, compensation, and other       internal administrative tools to better control the size, quality,       composition, and use of the Power, Transmission, and Corporate workforces.       (Annual efficiencies of $3.5 to $6.1 million)

**Rationale:**

Bonneville's status as a federal agency means that it is encumbered by     certain personnel management, procurement, and other administrative     regulations and procedural requirements that create unnecessary cost and     rate pressures. For example, the agency is subject to government-wide civil     service requirements that often are cumbersome, time consuming, and     ineffective, thus adding to administrative costs, impeding downsizing and     staff redeployment objectives, and hampering the ability to use modern     compensation practices. 

In addition, federal requirements such as appropriations laws,     procurement laws and property laws add limitations which are more conducive     to truly governmental entities than to a self-financed agency charged with     operating on a business-like basis in a competitive environment. Examples of     burdensome procurement or property procedures that Bonneville currently must     follow include: a prohibition on the joint ownership of federal and     non-federal transmission facilities, which Congress has encouraged; and,     restrictions on self-representation in litigation and requirements for the     resolution of contractual disputes before the DOE Board of Contract Appeals,     a very lengthy process.

In addition, the current separation of power production and marketing     functions between Bonneville, the Corps and the Bureau result in duplicative     and inefficient procurement processes. Efficiencies in the procurement of     major equipment and maintenance services for federal generation facilities     may be obtained if common, flexible and business-oriented procurement     procedures are used by all three FCRPS federal agencies.

**Implications:**

These recommendations require changes to the statutory authorities of     Bonneville, and in some cases, other FCRPS entities.

**Risks:**

New legislation requires both Executive and Congressional Branch     initiative and approval. The current interest in electrical industry     deregulation may make it either easier or more difficult to obtain this     attention and approval, depending on the priority given to this legislation.     Seeking legislation also may create the opportunity for further changes to     Bonneville's statutory authority not anticipated by this committee. 

**Recommendations #10/11:**

**Federal Power Act (FPA) conformance (cost functionalization) and     reduce transmission overhead costs**

Baseline: $236.9 million/year (2002-06 annual average) ? PBL Transmission     Cost Forecast    Recommendation: $206.9 million/year (2002-06) annual average)    Annual savings - PBL: $30.0 million/year (2002-06) annual average) ? cost     functionalization    $1.5 million/year (2002-06) annual average) ? TBL overheads 

**Recommendation:**

The cost baselines should be consistent with Federal Power Act guidelines     and requirements for functionalizing transmission and power costs. This     recommendation will not reduce Bonneville's total costs, but will have the     effect of reducing the power cost baseline and increasing the transmission     cost baseline. 

Although the $30 million estimate is based on early analysis only, types     of costs currently in the power business baseline that would be     functionalized to transmission include, for example, Corps and Bureau     generation-integration and other transmission costs.

In addition, the Management Committee at this point recommends that the     TBL seek additional internal expense reductions of $2.5 million per year by     reviewing activities such as aircraft, equipment maintenance and     transmission sales staff. $1.5 million of this reduction would benefit power     through reduced transmission rates. The other $1.0 million would benefit     other transmission service purchasers. However, the Committee's work on     recommendations for the TBL has not been concluded, and the Committee     expects to reflect more savings in its final report. 

**Rationale:**

The objective is to ensure Bonneville's power and transmission cost     baselines for FYs 2002-2006 align with industry practices and FERC     regulatory guidelines under the Federal Power Act. Adjustments to cost     baseline projections are recommended accordingly. Inconsistencies originated     with Bonneville's recent reorganization when it functionally unbundled FCRPS     transmission and generation activities and costs. Implementation of FERC's     open access rule and Bonneville's understanding of FPA requirements have     evolved and clarified over the last year. The FCRPS cost baselines generally     assumed that certain cost recovery assignments in the 1996 Transmission     Settlement Agreement would remain in effect after the agreement expires in     2001, although that Agreement set no precedent. 

**Implementation:**

Cost functionalization issues are decided through the rates hearing and     filing process, and will be addressed with parties to the rate case at that     time.

**Cost to Implement:**

The cost of this effort is negligible.

**Implications:**

This recommendation will effectively reduce the cost of transmission for     Bonneville's power customers and could lead to an increase in transmission     costs for other wheeling customers. 

**Recommendation #12:**

**Further reduce federal and non-federal debt service**

Baseline: $963 million/year (2002-06 annual average)    Recommendation: $943 million/year (2002-06 annual average)    Annual savings: $20 million/year (2002-06 annual average)

**Recommendations:**

Increase variable interest rate debt exposure, refinance debt whenever     market interest rates allow prudent savings, and take other debt reduction     actions, such as accelerated repayment and revenue financing for new     investments, in order to restructure Bonneville's total debt portfolio     (federal and non-federal) and reduce long-term debt service expense. These     actions will reduce carrying charges and Bonneville's high level of fixed     costs. 

**Implementation:**

Over the next two to four years, Bonneville will work to secure any     additional prudent variable interest rate debt exposure. In addition,     Bonneville will take action to implement prudent debt reduction strategies     which may include actions such as accelerating the repayment of higher     interest debt and revenue funding a portion of new capital additions.     Bonneville will forge and implement a capital investment strategy that gives     rigorous evaluation to new investment proposals, disinvestment, and asset     divestiture options. See Capital/Asset Management Strategy for FCRPS.

**Cost to Implement:**

Refinancing and financial products transaction costs (included in savings     estimate above) as well as Debt/Investment Management staff and advisor     costs (already reflected in reduced corporate overhead spending     projections).

**Implications and Risks:**

Rising Interest Rates: While variable interest rate debt historically     carries marginally lower interest rates than Bonneville's fixed rate debt,     variable interest rate debt is inherently riskier than fixed rate debt. To     the extent the variable interest rate exposure is "capped", then     Bonneville's exposure could be limited and estimated savings reduced     somewhat. 

Inasmuch as Bonneville's financial reserves are a key means of mitigating     financial risks, any use of cash reserves to accelerate debt or to revenue     finance a portion of new capital additions could reduce the probability of     making annual Treasury payments on time and in full (the same is true of     variable rate interest rate exposure). 

These recommendations could affect Bonneville's rate-making assumptions,     e.g., planned net revenue for risk, in order to ensure adequate rate revenue     to meet scheduled Treasury payments. 

Note: Interest expense projections in this Cost Review do not assume that     repayment will be accelerated from current repayment policy and schedules.     The Comprehensive Review recommended that Bonneville accelerate repayment     when certain pricing conditions occur.

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