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26-463 PDF 2006

HOW THE FEDERAL POWER MARKETING ADMINISTRATIONS ARE

IMPLEMENTING THE ENERGY POLICY ACT OF 2005 AND AN ASSESSMENT OF THE PROPOSED FISCAL

YEAR 2007 BUDGETS FOR THESE

AGENCIES

OVERSIGHT HEARING

BEFORE THE

SUBCOMMITTEE ON WATER AND POWER

OF THE

COMMITTEE ON RESOURCES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

Wednesday, March 1, 2006

Serial No. 109-41

Printed for the use of the Committee on Resources

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

or

Committee address: http://resourcescommittee.house.gov

(II)

COMMITTEE ON RESOURCES

RICHARD W. POMBO, California, Chairman

NICK J. RAHALL II, West Virginia, Ranking Democrat Member

Don Young, Alaska

Jim Saxton, New Jersey

Elton Gallegly, California

John J. Duncan, Jr., Tennessee

Wayne T. Gilchrest, Maryland

Ken Calvert, California

Barbara Cubin, Wyoming

Vice Chair

George P. Radanovich, California

Walter B. Jones, Jr., North Carolina

Chris Cannon, Utah

John E. Peterson, Pennsylvania

Jim Gibbons, Nevada

Greg Walden, Oregon

Thomas G. Tancredo, Colorado

J.D. Hayworth, Arizona

Jeff Flake, Arizona

Rick Renzi, Arizona

Stevan Pearce, New Mexico

Henry Brown, Jr., South Carolina

Thelma Drake, Virginia

Luis G. Fortun ̃ o, Puerto Rico

Cathy McMorris, Washington

Bobby Jindal, Louisiana

Louie Gohmert, Texas

Marilyn N. Musgrave, Colorado

Vacancy

Dale E. Kildee, Michigan

Eni F.H. Faleomavaega, American Samoa

Neil Abercrombie, Hawaii

Solomon P. Ortiz, Texas

Frank Pallone, Jr., New Jersey

Donna M. Christensen, Virgin Islands

Ron Kind, Wisconsin

Grace F. Napolitano, California

Tom Udall, New Mexico

Rau ́l M. Grijalva, Arizona

Madeleine Z. Bordallo, Guam

Jim Costa, California

Charlie Melancon, Louisiana

Dan Boren, Oklahoma

George Miller, California

Edward J. Markey, Massachusetts

Peter A. DeFazio, Oregon

Jay Inslee, Washington

Mark Udall, Colorado

Dennis Cardoza, California

Stephanie Herseth, South Dakota

Steven J. Ding, Chief of Staff

Lisa Pittman, Chief Counsel

James H. Zoia, Democrat Staff Director

Jeffrey P. Petrich, Democrat Chief Counsel

SUBCOMMITTEE ON WATER AND POWER

GEORGE P. RADANOVICH, California, Chairman

GRACE F. NAPOLITANO, California, Ranking Democrat Member

Ken Calvert, California

Barbara Cubin, Wyoming

Greg Walden, Oregon

Thomas G. Tancredo, Colorado

J.D. Hayworth, Arizona

Stevan Pearce, New Mexico

Cathy McMorris, Washington

Vice Chair

Louie Gohmert, Texas

Vacancy

Richard W. Pombo, California, ex officio

Rau ́l M. Grijalva, Arizona

Jim Costa, California

George Miller, California

Mark Udall, Colorado

Dennis A. Cardoza, California

Vacancy

Vacancy

Nick J. Rahall II, West Virginia, ex officio

(III)

CONTENTS

Page

Hearing held on Wednesday, March 1, 2006 ......................................................... 1

Statement of Members:

Cubin, Hon. Barbara, a Representative in Congress from the State of

Wyoming, Prepared statement of ................................................................ 90

McMorris, Hon. Cathy, a Representative in Congress from the State

of Washington ............................................................................................... 2

Prepared statement of ............................................................................... 4

Napolitano, Hon. Grace F., a Representative in Congress from the State

of California ................................................................................................... 5

Radanovich, Hon. George P., a Representative in Congress from the State

of California ................................................................................................... 1

Prepared statement of ............................................................................... 2

Walden, Hon. Greg, a Representative in Congress from the State of

Oregon ............................................................................................................ 5

Statement of Witnesses:

Borchardt, Charles A., Administrator, Southeastern Power Administration, Elberton, Georgia ................................................................................. 67

Prepared statement of ............................................................................... 68

Deihl, Michael A., Administrator, Southwestern Power Administration,

Tulsa, Oklahoma ........................................................................................... 62

Prepared statement of ............................................................................... 64

Graves, Thomas P., Executive Director, Mid-West Electric Consumers

Association, Wheat Ridge, Colorado ............................................................ 27

Prepared statement of ............................................................................... 29

Hacskaylo, Michael S., Administrator, Western Area Power Administration, Lakewood, Colorado ............................................................................. 58

Prepared statement of ............................................................................... 59

Hosken, Charles, General Manager, Imperial Irrigation District, Imperial,

California ....................................................................................................... 24

Prepared statement of ............................................................................... 25

Langer, Dwight, General Manager, Northern Wasco County People’s

Utility District, The Dalles, Oregon ............................................................ 20

Prepared statement of ............................................................................... 22

McClennan, Mac, Vice President of External Affairs, Tri-State Generation

and Transmission Association, Denver, Colorado ...................................... 10

Prepared statement of ............................................................................... 12

Peterson, Dan, Commissioner, Pend Oreille County Public Utility

District, Newport, Washington .................................................................... 7

Prepared statement of ............................................................................... 8

Pope, James H., General Manager, Northern California Power Agency,

Roseville, California ...................................................................................... 14

Prepared statement of ............................................................................... 16

Wright, Stephen J., Administrator, Bonneville Power Administration,

Portland, Oregon ........................................................................................... 49

Prepared statement of ............................................................................... 51

Additional materials supplied:

Taylor, George B., Jr., Chairman, PMA Structural Changes Committee,

Statement submitted for the record on behalf of the Southeastern

Federal Power Customers, Inc. .................................................................... 90

(1)

OVERSIGHT HEARING ON ‘‘HOW THE FEDERAL POWER MARKETING ADMINISTRATIONS ARE IMPLEMENTING THE ENERGY

POLICY ACT OF 2005 AND AN ASSESSMENT

OF THE PROPOSED FISCAL YEAR 2007

BUDGETS FOR THESE AGENCIES’’

Wednesday, March 1, 2006

U.S. House of Representatives

Subcommittee on Water and Power

Committee on Resources

Washington, D.C.

The Subcommittee met, pursuant to call, at 2:06 p.m. in Room

1324, Longworth House Office Building. Hon. George Radanovich

[Chairman of the Subcommittee] presiding.

Present: Representatives Radanovich, Napolitano, Cubin,

DeFazio, Inslee, McMorris, Musgrave, Pearce, and Walden.

STATEMENT OF THE HONORABLE GEORGE RADANOVICH, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF

CALIFORNIA

Mr. RADANOVICH. Good afternoon. The oversight hearing on the

Subcommittee on Water and Power will come to order.

This Subcommittee is meeting today to hear testimony on the

topic of how far the Federal Power Marketing Administrations are

implementing the Energy Policy Act of 2005, and an assessment of

the proposed Fiscal Year 2007 budgets for these agencies.

Today’s hearing focuses on the value of Federal hydropower generation and transmission to our nation’s communities.

Although Federal power generation seems to decrease every year

due to drought, environmental regulation and other factors, it still

provides an important resource for many communities. In addition,

the Federal transmission infrastructure continues to grow in importance every year. In light of these historic and future values, it

is no surprise that the energy bill signed into law by President

Bush last year acknowledged the future rules of the Federal power

program.

We are joined here today by a host of ‘‘on-the-ground’’ experts

who see the daily impacts of Federal electricity generation and

transmission. They are the eyes and ears of the Federal program

who know firsthand what it takes to keep the lights on and

2

maintain consumer satisfaction. As I have often said, Congress

needs to hear more from these ‘‘outside the Beltway’’ types and

today’s hearing topic is a good example of why.

Because I cannot stay here for today’s hearing, I am going to

hand the gavel over to the Subcommittee’s very able Vice-Chair,

Cathy McMorris. Cathy, whom you know, Cathy knows firsthand

about the value of Federal power in the Pacific Northwest and she

is a proven leader in defending her constituents from the ‘‘inside

the Beltway’’ theoretical ideas of the Office of Management and

Budget.

Cathy, I look forward to working with you in the coming year,

and just happy to have you as my Vice-Chairman, and with that

I want to thank today’s witnesses for their leadership and ask our

new Vice-Chairman to make a few comments. Cathy.

[The prepared statement of Mr. Radanovich follows:]

Statement of The Honorable George P. Radanovich, Chairman,

Subcommittee on Water and Power

Today’s hearing focuses on the value of federal hydropower generation and transmission to our Nation’s communities.

Although federal power generation seems to decrease every year due to drought,

environmental regulation and other factors, it still provides an important resource

for many communities. In addition, the federal transmission infrastructure continues to grow in importance every year. In light of these historic and future values,

it’s no surprise that the energy bill signed into law by President Bush last year acknowledged the future roles of the federal power program.

We are joined here today by a host of ‘‘on-the-ground’’ experts who see the daily

impacts of federal electricity generation and transmission. They are the ‘‘eyes and

ears’’ of the federal program who know firsthand what it takes to keep the lights

on and maintain consumer satisfaction. As I’ve often said, Congress needs to hear

more from these ‘‘outside the Beltway’’ types and today’s hearing topic is a good example of why.

Because I cannot stay for today’s hearing, I am going to hand the gavel over to

the Subcommittee’s very able Vice-Chair, Cathy McMorris. Cathy knows firsthand

about the value of federal power in the Pacific Northwest and she’s a proven leader

in defending her constituents from the ‘‘inside the Beltway’’ theoretical ideas of the

Office of Management and Budget. With that, I thank today’s witnesses for their

leadership and ask our new Vice-Chair to make a few comments.

STATEMENT OF THE HONORABLE CATHY McMORRIS, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF

WASHINGTON

Ms. MCMORRIS [presiding]. Thank you very much, Mr. Chairman. I am really excited to be the Vice-Chair of the Subcommittee

and have the opportunity to serve in this position, and Chair this

meeting today.

Many people unfamiliar with the Federal power program think

of Federal power as a relic of the past or about the days of Franklin D. Roosevelt’s rural electrification program. I can tell you firsthand that Federal power is very much alike and kicking in my district in the greater Pacific Northwest, where 40 percent of electricity sales and 75 percent of the transmission come from the Bonneville Power Administration.

Today’s Federal power program plays a major role in regional

markets. From Metaline Falls, Washington, to Marietta, Georgia,

and from Moorehead, Minnesota, to Waco, Texas, communities and

3

businesses continue to depend on the benefits of low-cost Federal

power.

Last year the Administration knocked on the front door again by

calling for market-based rates. It too failed. This year, a novel back

door approach is being tried to further hamper Bonneville—one

that would circumvent Congress and raise rates in areas already

hard hit by increased rates, and I will fight to make sure this fails

too.

The Administration’s proposal of requiring Bonneville to use surplus revenues to reduce debt sounds good on paper, but it ignores

the reality that debt is already being repaid. It also raises electricity consumer rates by 10 percent by mandating that surplus

revenues can only be used for debt reduction and not rate reduction. This is yet another Washington, D.C. gimmick that will hurt

Northwest consumers and cripple an agency that needs financial

flexibility.

It also hurts businesses like Ponderay Newsprint in my district,

which is already paying $400,000 more for electricity than it did

five years ago. To ask businesses and other end-use consumers to

pay even more should not be the business of the Federal government. I will work with my colleagues to ensure that this proposal

meets the fate of the other ill-conceived measures.

This proposal is even more logic free when you put into context

with the 45 percent rate increase over the past five years brought

on by drought, California market problems and endangered species

requirements.

While no one disagrees with the need to protect endangered fish,

the costs associated with Judge Redden’s summer spills are staggering. In the summer of 2004, Bonneville estimated that it cost

$77 million in foregone generation so that ultimately 20 salmon

could later return to spawn. If you do the math on this mandated

spill, each salmon cost $3.85 million.

Bonneville estimated that last year’s court-mandated spill would

have cost somewhere between $250,000 and $3 million per fish, to

benefit anywhere from 25 to 300 salmon.

I guess that means we are getting better in terms of lowering the

cost—or what I refer to as ‘‘salmon taxes’’—but it is still expensive

salmon either way, especially for the ratepayers who absorb these

costs. It is safe to say that when the lights are in the Pacific Northwest, the salmon meter is literally running.

For this reason, I strongly believe that our ratepayers have a

right to know how much Endangered Species Act compliance is

costing them. I will soon introduce a bill that allows Bonneville and

other PMS as to make their ESA costs more transparent to their

wholesale consumers. Consumers deserve to know what they are

paying for and this bill will do just that.

In conclusion, I am pleased to announce that one of my constituents, Mr. Dan Peterson, of Pend Oreille Public Utility District, will

testify about these rate issues and hydropower relicensing. I welcome you, Dan, and appreciate you traveling all this way to help

educate Congress on these issues.

I also want to welcome Steven Wright, the Administrator of the

Bonneville Power Administration. Steve’s knowledge base and hard

work on behalf of Bonneville and its ratepayers is commendable.

4

Like Chairman Radanovich, I agree that it is important to hear

from witnesses who deal with these issues every day from the real

world and not from the cubicles of OMB. With that, I look forward

to hearing from the witnesses today.

I would now like to recognize the Subcommittee’s distinguished

Ranking Minority Member, Grace Napolitano, for her opening

statement.

[The prepared statement of Ms. McMorris follows:]

Statement of The Honorable Cathy McMorris, Vice-Chair,

Subcommittee on Water and Power

Many people unfamiliar with the federal power program think of federal power

as a relic of the past or about the days of Franklin Delano Roosevelt’s rural electrification program. I can tell you firsthand that federal power is very much alive

and kicking in my district and in the greater Pacific Northwest, where 40 percent

of electricity sales and 75 of the transmission come from the Bonneville Power Administration.

Today’s federal power program plays a major role in regional markets. From

Metaline Falls, Washington to Marietta, Georgia and from Moorehead, Minnesota

to Waco, Texas, communities and businesses continue to depend on the benefits of

low-cost federal power.

Despite this, some in Washington, DC continue their quest to undermine the

PMAs. In the 1990’s, a frontal assault was waged to dissolve the agencies. It failed.

Last year, the Administration knocked on the front door again by calling for ‘‘market-based’’ rates. It too failed. This year, a novel, backdoor approach is being tried

to further hamper Bonneville—one that would circumvent Congress and raise rates

in areas already hit hard by increased rates. And I will fight to make sure this fails

too.

This Administration proposal of requiring Bonneville to use surplus revenues to

reduce debt sounds good on paper, but it ignores the reality that debt is already

being repaid. It also raises electricity consumer rates by 10 percent by mandating

that surplus revenues can only be used for debt reduction and not rate reduction.

This is yet another Washington, DC gimmick that will only hurt Northwest consumers and cripple an agency that needs financial flexibility.

It also hurts businesses, like Ponderay Newsprint in my district, which is already

paying $400,000 more for electricity than it did five years ago. To ask businesses

and other end-use customers to pay yet even more should not be the business of

the federal government. I will work with my colleagues to no end to ensure that

this proposal meets the fate of other ill-conceived measures.

This proposal is even more ‘‘logic free’’ when you put it in context with the 45

percent rate increase over the past five years brought on by drought, California

market problems and endangered species requirements.

While no one disagrees with the need to protect endangered fish, the costs associated with Judge Redden’s summer spills are staggering. In the summer of 2004,

Bonneville estimated that it lost 77 million dollars in foregone generation so that

ultimately 20 salmon could later return to spawn. If you do the math on this mandated spill, each salmon cost 3.85 million dollars. Bonneville estimated that last

year’s court mandated spill would cost somewhere between 250,000 dollars and 3

million dollars per fish, to benefit anywhere from 25 to 300 salmon. I guess that

means we’re getting better in terms of lowering costs—or what I refer to as ‘‘salmon

taxes,’’ but it’s still expensive salmon either way, especially for the ratepayers who

absorb these costs. It’s safe to say that when the lights are on in the Pacific Northwest, the salmon meter is literally running.

For this reason, I strongly believe that our ratepayers have a right to know how

much Endangered Species Act compliance is costing them. I will soon introduce a

bill that allows Bonneville and the other PMAs to make their ESA costs more transparent to their wholesale customers. Consumers deserve to know what they are paying for and this bill will do just that.

In conclusion, I am pleased to announce that one of my constituents, Mr. Dan Peterson, of Pend Oreille Public Utility District, will testify about these rate issues

and hydropower relicensing. I also want to welcome Mr. Steve Wright, the Administrator of the Bonneville Power Administration. Steve’s knowledge base and hard

work on behalf of Bonneville and its ratepayers is commendable. Like Chairman

Radanovich, I agree that it’s important to hear from witnesses who deal with these

5

issues everyday from the real world and not from the cubicles of OMB. With that,

I look forward to hearing from our witnesses today.

STATEMENT OF THE HONORABLE GRACE NAPOLITANO, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF

WASHINGTON

Ms. NAPOLITANO. Thank you, Madam Chairman, and like you, I welcome our witnesses and those individuals that are sitting in the

audience listening, and hopefully being able to shed a lot more

light on this. I do not profess to know much about the power administration,

et cetera, but I can certainly tell you from vantage point in Southern California we have some of the highest rates available to anybody, and it is hard, even though we do have the economy, to be

able to substantiate to the ratepayer the increases wherever they

may be. I think that as we move forward, and I will make this very brief, I certainly want to thank Mr. Hosken from the Imperial Irrigation

District because I have gotten to know them through the committee

process for awhile now because of water, and congratulate you on

your new position. You are literally being dropped in today, I do

not know how many days you have been on the job, but welcome,

and we thank you for agreeing to be here to shed light on the area

that you represent that also impacts the rest of California. I am hoping to listen to a lot more of the comments on the budg- et documents, and I agree with you, Madam Chair, that this administration has been looking for ways of making others pay for

budget deficits, and I think that is wrong. If this administration is

looking to do that, they need to substantiate, and furthermore, we

need to have it aired and have input from all areas before this goes

through, and one of my questions is going to be directed at finding

out where they get their authority. Thank you, Madam Chairman.

Ms. MCMORRIS. Are there any other Members who wish to give opening statements? Mr. Walden.

STATEMENT OF THE HONORABLE GREG WALDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON

Mr. Walden. Thank you, Madam Chairman. I want to express my strong opposition and that of the Northwest Congressional Delegation to the Fiscal Year 2007 budget proposal which I believe will

increase electric rates in our region by nearly a billion dollars and

cost thousands of jobs.

I also continue to be opposed to third-party financing debt reclassification in the Administration’s budget. This has been repeated

from last year’s budget, and was sent to the Hill in legislative form

in June of 2005.

More generally, I want to express my strong dissatisfaction that

the Office of Management and Budget once again inserts provisions

into the budget of the Bonneville Power Administration that are

harmful to the Pacific Northwest without so much as a single word

of consultation or discussion with this Member of Congress or others who represent this region. I do not understand why we have

such a failure at communication.

6

As a small business owner, I fully understand the result in rate

increase of 10 percent, raising power rates by $145 million a year,

cost retail consumers an additional $27 a year, decreases personal

income in the Northwest by $109 million, and could result in the

loss of 1,120 jobs. This economic blow to our region would be entirely unwarranted, and yet destructive.

So Madam Chairman, I look forward to this hearing. I look forward to finding out what we can learn about what the Administration intends and what they plan to do to address the concerns of

those of us from the Northwest who year after year have to fight

these battles in an effort to strengthen our economy, not weaken

it; preserve affordable power for our consumers, not jack up their

rates; and I have to tell you it is getting a little old, Madam Chairman, to have to fight this fight every year, and the latest proposal

is probably the worst I have seen. So I have some questions.

Before I conclude, I want to extend a warm welcome, however,

to the head of the Bonneville Power Administration, Steve Wright,

as well as to Dwight Langer, who is from Wasco County Public

Utility District. He has 34 years in the industry. He started when

he was 7—21 years as—it is an election year, he is a voter.

[Laughter.]

Mr. WALDEN. Twenty-one years as a General Manager. From

1993 to present, he is the General Manager of Northern Wasco

PUD. Prior to that he was with Peru Utilities in Peru, Indiana. He

is a member of the board of trustees of the Northwest Public Power

Association of Vancouver; past member of the Executive Committee

of the Public Power Council of Portland, Oregon; member of the

Oregon PUD Association; member of the American Public Powers

Association; has his B.S. from Indiana State University. So Dwight,

we are delighted you could join us today as well, and all of our panelists, thank you for your testimony you are going to give us. The

insights and counsel are appreciated by all of us.

Thank you, Madam Chair.

Ms. MCMORRIS. Thank you.

Are there any other Members that want to make opening statements?

At this time then I would like to introduce our first panel of witnesses. First, Mr. Dan Peterson. He is Commissioner of Pend

Oreille County Public Utility District in Newport, Washington; Mr.

Mac McClennan, Vice President of External Affairs, Tri-State

Generation and Transmission, Denver, Colorado; Mr. James Pope,

General Manager, Northern California Power Agency, Roseville,

California; Mr. Dwight Langer, General Manager, North Wasco

County Public Utility District, The Dalles, Oregon; Mr. Charlie

Hosken, General Manager, Imperial Irrigation District, Imperial,

California; and Mr. Thomas Graves, Executive Director, Mid-West

Electric Consumers Association, Wheat Ridge, Colorado.

I would like to recognize Dan Peterson then for five minutes, and

all witnesses’ written statements will be submitted for the hearing

record. Please go ahead, Dan.

7

STATEMENT OF DAN PETERSON, PEND OREILLE COUNTY

PUBLIC UTILITY DISTRICT, NEWPORT, WASHINGTON

Mr. PETERSON. Madam Chair, Ranking Member Napolitano, thank you, Members of the Committee, for this opportunity to

speak.

Here I am, a locally elected commissioner of a little utility in the very far back corner of Representative McMorris’s district. Here I

am to add my voice to the loud outcry we have already heard from

throughout the Pacific Northwest Congressional Delegation against

the Fiscal Year 2007 budget proposal that Bonneville Power Administration surplus sales, or secondary revenues be used to repay

Treasury. This proposal, if not withdrawn, will increase rates. Historically, Bonneville’s secondary revenues have been used to stabilize rates.

In a hydro system, dry years follow wet years, and financial flexibility is critical. Quite contrary to the proposal’s claim, sound business practices have allowed these revenues to remain in the region and provide

that stability and flexibility, and at the same time Northwest ratepayers have been faithfully continuing to repay their Federal debt

on time and with interest.

Now, I know that perhaps some of you are thinking rates are so low in the Pacific Northwest, what is the harm in raising them

some?

Well, actually, rates are no longer as low as they once were in the Northwest. They have been rising rapidly as we continue to

pay for the cost of the west coast energy crisis, and as we build

new generation to serve a growing region, that generation is more

expensive.

But even if our rates are among the lowest in the nation, why

raise them arbitrarily and force businesses out of the region, and

possibly overseas? Remember that the Federal hydropower system

was built to attract and keep business and industry in the U.S.

The President in his recent State of the Union Address cited

energy independence and weaning ourselves off foreign oil and

showcasing our renewable resources. Why would that administration want to increase the cost of a large, clean, renewable domestic

resource?

This proposal is not good energy policy. It is not good economic

policy, and it is certainly contrary to a national goal of energy independence.

I will end by mentioning Endangered Species Act reform. Pend

Oreille Public Utility District has recently received a new license

from FERC for our Box Canyon Dam, a 72 megawatt run-of-theriver hydroelectric project on the Pend Oreille River.

We are beginning to implement the numerous mandatory conditions that have been imposed by Federal agencies along with our

license from FERC. We have found ESA-related processes to be inconsistent and lacking in both sound science and common sense.

We understand that Chairwoman McMorris is introducing legislation to encourage Bonneville and the other PMAs to have greater

transparency in regard to ESA-related costs. We certainly support

that, and Madam Chair, we will do all we can to assist you in

advancing that legislation.

8

Thank you very much for this opportunity to speak, and I too do not yet know all there is to know on anything, and so I look forward not only to the remaining witnesses, but to the Committee’s

comments as well as questions. Thank you very much. [The prepared statement of Mr. Peterson follows:]

Statement of Dan Peterson, Commissioner,

Pend Oreille County Public Utility District

Chairman Radanovich, Ranking Member Napolitano, Vice-Chair McMorris, and members of the Subcommittee:

Thank you for the opportunity to testify. I offer the following written comments on behalf of my local utility and my county’s citizens who have elected me Commissioner. As a past President of the Washington Public Utility Districts Association

and current chair of the association’s Legislative Committee, I also speak from a

statewide PUD perspective. And, as a utility member of the region’s Public Power

Council, I support the broader interests of Public Power throughout the Pacific

Northwest.

Pend Oreille County is located in the very northeast corner of Washington State’s Fifth Congressional District, which is represented by Congresswoman McMorris and

shares borders with both Idaho and British Columbia. Our county is nearly 60% federal lands, and that percentage is even higher in our larger northeast region. Five

counties in Representative McMorris’ District have PUDs that provide electric,

water, sewer, and telecommunication services.

Our county of 1400 square miles has 12,000 residents; the Public Utility District serves electricity throughout the County to about 8000 customers. In addition to our

own non-federal hydroelectric resources on the Pend Oreille River, the PUD purchases power from the Bonneville Power Administration (BPA) to supply a large

newsprint plant.

In my testimony, I will address three issues:

1. The Administration’s Fiscal Year 2007 budget proposal regarding BPA’s sur- plus revenues and third-party debt 2. Longer-term federal power matters

3. The Endangered Species Act reform

First, in regard to the Administration’s budget proposal that BPA’s surplus revenues above $500 million be used to repay Treasury:

BPA supplies a quarter of my utility’s total energy needs and is nearly half of

our total energy cost, with an annual BPA bill of approximately $10 million.

Historically BPA surplus revenues have served to stabilize BPA’s wholesale power

rates. The large federal hydropower system in the Northwest is subject to variable

water flow conditions. There are good water years producing surplus revenue, and

there are dry years that may fall short of revenue projections. This proposal would

limit BPA’s flexibility of taking advantage of the good years to deal with the bad

years. Contrary to the budget proposal’s claim, ‘‘sound business practice’’ has allowed surplus revenues to remain in the region and help stabilize rates. At the same

time, our ratepayers have continued to faithfully repay federal debt on time and

with interest.

Moreover, BPA has voluntarily made more than $1.46 billion in early payments

on its federal debt obligation, without raising rates. That made good business sense

for BPA and good economic sense for the region. But what other business would voluntarily increase rates and costs to its customers to pay off debt ahead of schedule,

as the OMB proposes?

Some argue that electricity rates in the Northwest are too low to begin with, and

there is no harm in raising them. But our rates are not as low as they once were.

We have taken a tremendous hit from the Western energy crisis, which we are

still—resentfully—paying off. Also, as a fast-growing region, the Northwest and the

West have had to add new and expensive generation. Some claim that average residential rates of BPA customers have recently moved close to or even above the national average.

History reminds us that the hydropower system was built to attract businesses

and keep industry in the U.S. Even if our region did have the lowest rates in the

nation, why would the Administration artificially raise those rates and force businesses out of the region, possibly overseas?

The Northwest produces much of the cleanest power in the nation. The President

in his recent State of the Union Address stressed energy independence. At a time

when the President is urging our nation to wean itself off foreign oil and showcase

renewable energy, it makes no sense to arbitrarily increase the cost of a large, clean,

9

domestic, hydro resource. This isn’t good energy policy or economic policy, and it is

contrary to the national goal of energy independence. Although the dollar impact of the budget proposal may be relatively small in my utility’s case because we purchase a specialized ‘‘Slice’’ product from BPA, this budget proposal, if implemented, will raise BPA rates. It sets bad precedent, hurts my

neighbor PUDs, and could do unnecessary damage to the Pacific Northwest region. I join the strong bipartisan opposition being expressed by the Northwest congres- sional delegation. With them, I am extremely disappointed that OMB and DOE

have repeatedly ignored the substantive concerns we raise about Bonneville-related

proposals.

On another budget matter, we again oppose the OMB proposal to change the ac- counting treatment of third-party financing arrangements Bonneville has used to finance transmission infrastructure improvements in the Northwest. OMB proposed

this last year, and the Northwest expressed opposition then as well. According to DOE, the main purposes of the surplus revenue proposal described above are to allow more financial flexibility for BPA and to help build more transmission infrastructure. While I agree with those goals, this third-party financing

proposal runs completely counter to that. If third-party arrangements were to count

against Bonneville’s borrowing authority, it would effectively end financing arrangements, such as the successful Shultz-Wautoma electric transmission line project,

which could effectively bring regional transmission investment to a halt and would

lead to dramatic electric rate increases.

The proposal also makes no sense because third-party financial transactions cre- ate no taxpayer liability. The ratepayers of the Pacific Northwest—not the United

States Treasury—secure Non-federal bonds backed by Bonneville, such as those

issued by third parties. Second, with regard to the long-term outlook for the federal power program, I have these thoughts: • Long-term contracts for BPA power are in the best interest of customers and

the federal government. They benefit the federal government because they assure BPA of a continuing revenue stream to repay to the Treasury the investment in the facilities. They benefit customers because they provide resource certainty. Administrative burdens associated with short-term contracts are reduced

for both parties. • Solutions to energy problems are best formed when we develop a consensus on

BPA-related issues in the Northwest before coming to the delegation and to

Congress. Similarly, the region benefits when the delegation develops a bi-partisan position on energy issues and works together to protect our valuable Columbia River system. Over the years, the House Northwest Energy Caucus has

done a terrific job of developing consensus positions on BPA matters. Northwest

consumers are the beneficiaries of those actions.

Third, in regard to the Endangered Species Act:

Pend Oreille PUD recently received a new FERC license for our Box Canyon dam,

a 72-megawatt run-of-the-river project on the Pend Oreille River. We are beginning

to implement the numerous mandatory conditions of various Federal agencies. We

have found ESA related processes to be lacking in consistency and sound science.

The following items detail our experience:

• Local control is lost as decisions are made far away in regional headquarters

or Washington D.C. Stakeholder comments rarely altered draft federal documents in our case. Motives remain suspect because only one small reservoir in

a huge river basin unit was designated as critical habitat. Only our project

area—where a FERC relicensing was ongoing and agencies could benefit from

the financial opportunity—was designated critical habitat.

• Rules are applied inconsistently. Our project area does not have bull trout populations, yet we are being forced to spend millions of dollars for mitigation. Areas

without bull trout are given protected status, while areas with bull trout are

not.

• Decisions lack sound scientific basis. We must plan enormously expensive fish

ladders for bull trout, but there are no fish to study to learn their habits and

preferences, and no surrogate species exist. In an ultimate irony, while the federal government mandates our expenditure of millions of dollars for bull trout

restoration, it continues to fund a tribal hatchery for bass, a species that eats

bull trout! Furthermore, bass live in warm water; bull trout thrive in cold

water. Studies establishing historical warm/cold and fast/slow water habitat

conditions have been ignored.

• In general, land and water protection advocates seem to use ESA as a cover for

keeping areas wild and pristine, rather than for actually preserving species.

Listings result in a self-perpetuating, never-ending business. Given the

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questionable presence of an endangered species in our project area, it is terribly

disconcerting when federal agencies appear more interested in dollars than the

actual existence of a species. It feels to me like extortion!

• Costs are not evaluated against human impacts. Our 8000 ratepayers—in a

county where the average annual per capita personal income is barely

$22,000—could face a bill of $50 million or more for ESA related passage, habitat, and lost generation. Will the expense ever provide a real benefit?

We understand that Chairwoman McMorris will be introducing a bill soon that

will provide some transparency on how much BPA and other PMAs spend on ESA

costs. We support this legislation and look forward to helping the chairwoman advance it.

Thank you for this opportunity to submit this written testimony. If I can be of

any further assistance to the committee, I am willing and available.

Ms. MCMORRIS. Thank you very much.

Mr. McClennan.

STATEMENT OF MAC McCLENNAN, VICE PRESIDENT OF

EXTERNAL AFFAIRS, TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, DENVER, COLORADO

Mr. MCCLENNAN. Dan certainly puts a lot of pressure on the rest

of us.

Chairman McMorris, Ranking Member Napolitano, Members of

the Subcommittee on Water and Power, I appreciate the opportunity to testify today.

My name is Mc McClennan. I am the Vice President of External

Affairs at Tri-State, which is a power supply cooperative for nearly

all of the cooperatives in Colorado, Nebraska, Wyoming, and New

Mexico. So Tri-State and its members provide about a million rural

electric consumers in that four-state region with power. To do that,

we are one of the largest customers of Western Area Power Administration, and so your review of their budget and look at it is certainly very important to us.

I would like to emphasize though, however, Tri-State has a very

good longstanding relationship with Western. We have developed

relationships where we work with them to look at their budgets,

future planning expenditures, our issues as we go forward, to be

able to keep the system operating.

However, even having said that we do have issues as it relates

to this year’s 2007 President’s budget, and I am just going to touch

on two of those issues.

In Tri-State’s case, we operate both in the Missouri River Basin

side and we also operate in the Colorado River side, and so we

have distinct set of issues in both of those regions.

Two issues I will just raise on the budget front is in the President’s budget there is a thing called ‘‘Pick-Sloan cost reallocation’’,

which is probably more appropriate for tomorrow, but an issue

called ‘‘security cost’’ which impact us.

With respect to cost reallocation, it is an issue really where the

attempt by the Administration to have power pay for irrigation

costs. Power already in today’s world pays for 85 percent of the irrigation costs in the Pick-Sloan region. What is in the proposed

budget would move another additional $23 million annually to the

power customers. I think that is an unfair movement and a payment that the power customers ought not to pick up.

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On the security cost side, in 2002, the Commissioner of Reclamation, Commissioner Keys indicated that those costs associated with

security really ought to be non-reimbursable.

We agree. Security for the Federal generating and delivery facilities is of national concern and should therefore be funded from

non-reimbursable appropriated funds. However, we continue to see

paying for security costs creep into budget proposals for power

rates.

Tri-State urges this Committee and Congress, as you continue to

review and look at agency budgets both today and tomorrow, to

make sure that as we look at those the development of those proposals ensure a fair allocation and provide some funding certainly

for those people who are picking up the tab, namely, those of us,

the stakeholders.

I want to talk for just a moment as well, while I have a moment,

to talk about the drought. Colorado River Basin is in its sixth year

of consecutive year of drought. It reached its lowest level since

1969 in April of 2005. It is approaching minimum generation pool.

Why do we care? Well, while the hydrology is getting a little bit

better, if in fact we get to minimum general pool there are significant economic consequences for the customers and the members

they serve. There is also a significant consequences for the nonpower programs that are funded by those power revenues.

Our concern is that as we continue to go down this path as the

generation continues to decline at Glen Canyon, we are in a situation where the power users potentially could pick up non-power

programs on the Colorado River. From a public policy standpoint,

these programs really are intended for the benefit of the environment, the benefit of the public, and therefore one of the things as

we continue to move forward and look forward to working with this

committee as the drought, if it continues, is how we work on those

programs to continue to maintain them as we go forward.

The final issue I want to address and it was referenced in the

beginning and it is referenced in the title is this idea of Western’s

implementation or WAPA’s implementation of the Energy Policy

Act.

In our region, WAPA has initiated efforts to upgrade capacity for

the transmission of electricity in our region. We support that.

Western is trying to engage in processes that explore expanding

and expediting the development of transmission capacity in the

inner-mountain west.

Along those lines Tri-State, along with Western, has initiated a

joint transmission project in the eastern plains of Colorado and the

western half of Kansas called the Eastern Plains Transmission

Project. It will include nearly 700 miles of new high-voltage transmission system to relieve existing transmission constraints and to

meet future load growth in the region.

The participation of Western in this project we believe will serve

to enhance the regional system, expedite the permitting of the

project, and provide the opportunity for increased renewable generation development in the West.

We believe this is a prime example of the type of partnerships

that Congress envisioned in the Energy Policy Act passed last year.

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Mr. Chairman, I think it is a great opportunity for us to be able

to move forward.

In closing, I just want to say thank you for holding this hearing today, recognize Congresswoman Musgrave, who is in our district,

Mr. Pearce, Congressman Pearce, who is in it as well, and appreciate their efforts as we move forward. So thank you. [The prepared statement of Mr. McClennan follows:]

Statement of Mac McClennan, Vice President of External Affairs,

Tri-State Generation and Transmission Association, Denver, Colorado

Chairman Radanovich, Ranking Member Napolitano and members of the House Subcommittee on Water and Power, I appreciate the opportunity to appear before

you today representing Tri-State Generation and Transmission Association, Inc. and

to share our views on the Power Marketing Administrations implementation of the

Energy Policy Act of 2005 and the proposed Fiscal Year 2007 budget for these agencies.

My name is Mac McLennan, and I am the Vice President of External Affairs for Tri-State Generation and Transmission Association, a not-for-profit wholesale power

supply cooperative that provides electricity to forty-four member distribution cooperatives in Colorado, Nebraska, Wyoming and New Mexico. As Vice President, I

oversee Tri-State’s government relations, communications and external association

activities. Tri-State is based in Westminster, Colorado, and has facilities and employees throughout the four-state region. Tri-State provides electric service through

our member distribution cooperatives to more than one million electric customers,

primarily located in rural communities. Tri-State is one of the largest customers of

hydroelectricity generated by the Bureau of Reclamation and the Army Corps of Engineers in the interior West and distributed by the Western Area Power Administration (Western) at facilities in the Colorado River Storage Project as well as the Pick

Sloan Missouri Basin Project. I would like to emphasize that Tri-State has had a very positive, long-standing working relationship with Western. We have worked together on joint transmission

projects to improve efficiencies for the benefit of the end-use consumers. We have

worked with other power customers to develop a Memorandum of Understanding

with our federal power partners, Western, the Bureau of Reclamation (USBR) and

the Army Corps of Engineers that provides the opportunity for our input into

planned future expenditures in the federal power program. We appreciate the expertise and professionalism of our federal partners and the combined efforts to keep

the federal facilities operating efficiently and cost effective. As I mentioned earlier, Tri-State receives a power allocation from the Pick Sloan

Missouri Basin Project as well as the Colorado River Storage Project. Tom Graves,

Executive Director of Mid-West Electric Consumers Association, of which Tri-State

is a member, is on the panel testifying today, and we endorse the testimony that

he is presenting. I want to make special emphasis regarding his comments on the

inequity of the proposed Pick Sloan Cost Reallocation in the President’s budget.

Power entities are already paying over 85% of the irrigation costs for Pick Sloan

irrigation and it is unfair to shift an additional $23 million annually to the power

customers. While not contained in this years budget request for Western, Tri-State

supports the concept of Net Zero to provide annual funding for Western, providing

it can be done in a way that provides for appropriate congressional oversight and

customer involvement.

I would like to now turn to some crucial issues for the Colorado River Storage Project (CRSP). They include the ongoing drought and purchased power impacts; the

role of Glen Canyon Dam operations in adaptive management for the Grand Canyon; the operational impacts and costs from environmental processes for the

Aspinall EIS now underway; and federal infrastructure security costs. Tri-State is

a member of the Colorado River Energy Distributors Association (CREDA) which

represents us on CRSP issues.

DROUGHT IN THE COLORADO RIVER BASIN

The Colorado River Basin is in its sixth consecutive year of drought. In the 100

years of record keeping by the Bureau, there have never been six consecutive years

of drought. Lake Powell reached its lowest level since 1969 on April 5, 2005, 144

feet below full pool. It was approaching minimum power generation level. The hydrology has improved since the spring of 2005, but there is still a chance this level

could be reached as soon as 2007. If minimum power generation level is reached,

there will be little CRSP generation available to the CRSP contractors. This will

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have significant economic consequences for the CRSP contractors and the customers

they serve, as well as for a number of other non-power programs that are funded

with CRSP power revenues.

THE UPPER COLORADO BASIN FUND AND DROUGHT IMPACTS

The Basin Fund is a revolving fund maintained by CRSP power revenues. The Basin Fund is the source of CRSP project repayment, including: repayment of the

capital investment with interest, operation, maintenance and replacement expense,

95% of the irrigation investment, and the USBR and Western employee salaries

(about $80 million annually). In addition, the Fund has been the economic source

for other ‘‘non-power’’ programs: • Nearly $18 million for the Colorado River Salinity Control Program; • $179,577,774 for the Glen Canyon Adaptive Management Program; • $40,399,329 for the Upper Colorado River Basin and San Juan Basin Endangered Fish Recovery Programs The programs listed above cost about $20 million per year.

In addition, due to reduced generation levels from the CRSP resource, Western has had to purchase power on the open market to meet its contractual requirements. Last year alone, they spent $50.5 million from the Upper Colorado Basin

Fund for replacement power. In order to maintain a sufficient Basin Fund level, in

October 2001, Western increased the CRSP rate 17%. In October 2003, Western reduced energy deliveries to its customers by 26%. Each customer has had to ‘‘make

up’’ the shortfall on its own. On October 1, 2005, Western increased the CRSP rate

nearly 23%.

NON-POWER RELATED PROGRAMS SHOULD BE FUNDED BY APPROPRIATIONS, NOT CRSP CUSTOMERS

Tri-State is concerned that, when generation is ceased or close to being ceased at Glen Canyon Dam, an effort will be made to require CRSP power users to fund the

non-power programs described above. This would, in effect, be a subsidy from the

electric consumers in six Western states to all the parties that benefit from the Salinity Control, Adaptive Management and Endangered Species Recovery programs

on the river.

Instead, the non-power programs should seek appropriations from Congress to fund activities when the Basin Fund is depleted. Further, the Basin Fund should

be limited to ‘‘the basics,’’ namely, those costs that are mandated by law to be repaid

by the Fund. The Glen Canyon Adaptive Management Program authorizes, but does

not mandate, the use of CRSP power revenues for program funding. The Endangered Fish Recovery Programs legislation requires the Bureau and WAPA to seek

appropriations in times of financial need.

From a public policy standpoint, these programs are intended to benefit the envi- ronment, which is in the public interest, and therefore should be funded by appropriations. Providing appropriations for these programs would assist in maintaining

the Basin Fund’s solvency.

GLEN CANYON DAM/ADAPTIVE MANAGEMENT

In 1989 the Department of Interior initiated an Environmental Impact Statement (EIS) process that produced a Record of Decision (ROD) and was signed by the Secretary of Interior in 1996. It created an alternative dam operating plan that was

intended to permit recovery and long-term sustainability of downstream resources

while limiting hydropower capacity and flexibility only to the extent necessary to

achieve recovery and long ‘‘term sustainability. The Adaptive Management Work

Group (AMWG) was created which is a 23-member stakeholder federal advisory

committee charged with making recommendations to the Secretary of the Interior

regarding dam operations and management actions necessary to achieve the intent

of the EIS/ROD. Of particular note is that science is now finding that pre-ROD assumptions regarding dam operation effects on humpback chub were wrong and that

fluctuating flows (providing load following) may actually benefit the chub by impacting predator populations. In 2000, Congress included language in the appropriations

bill which capped the amount of CRSP power revenues that can be used to fund

this program. In the summer of 2001, experimentation on water flows cost $23 million, funded by CRSP power customers. In November 2004 a high-flow test was initiated with the intent of improving sediment conditions; the cost was nearly $2 million. Since CRSP power revenues are the funding source for this program—and

given ongoing drought impacts—it is imperative that any experimentation enhance

power production. It is now time, after 12 years of monitoring and research, to enhance hydroelectric power production from this renewable resource. Unfortunately,

on February 15, 2006, several environmental groups filed suit in U.S. District Court,

District of Arizona against Interior Secretary Gale Norton and the Bureau of

14

Reclamation to challenge the current management operations and reopen an environmental review. This could significantly impact operations on the Colorado River.

ASPINALL EIS UNDERWAY / BLACK CANYON OF THE GUNNISON

The USBR has begun a scoping and cooperating agency process for an EIS on the operation of the Aspinall Unit of the CRSP. The Aspinall units are on the Gunnison

River a tributary to the upper Colorado River. The effort is to review the impacts

of river flows and make flow recommendations for endangered fish. Tri-State believes the Upper Basin Recovery Program should be the primary focus of recovery

efforts. Complicating the process is ongoing litigation by environmental interests in

an attempt to overturn a memorandum of understanding between the Interior Department and the State of Colorado (April, 2002). Oral arguments will be held in

early March 2006. Tri-State is concerned that these issues clearly overlap and need

to be resolved in tandem, so as to avoid a ‘‘second bite of the apple’’ situation with

regard to Gunnison flows. The EIS will take three to four years.

FEDERAL INFRASTRUCTURE SECURITY COSTS

In April 2002, USBR Commissioner Keys issued a policy statement indicating that the increased security costs for federal dams as a result of the events of Sept.

11, 2001, should be non-reimbursable. Security of these federal generating and delivery facilities is a national concern and should therefore be funded from non-reimbursable, appropriated funds. The FY 2006 Omnibus Appropriations Bill contains

language providing that $10 million of the costs of guards and patrols will be reimbursable, slightly less than half of what USBR requested. The USBR must provide

a report to Congress delineating its proposed allocation and reimbursement methodologies. Tri-State urges this Committee and Congress to continue to review and

work with the agencies on the development of proposals to ensure a fair allocation

and to provide some certainty to the funding stakeholders.

IMPLEMENTING THE ENERGY POLICY ACT

The final issue that I would like address is the implementation of the Energy Pol- icy Act by Western. Western has initiated a process to look at upgrading the capacity for transfer of electricity in Wyoming and Colorado. We support Western’s efforts

to engage in processes that explore expanding and expediting the development of

transmission capacity in the intermountain West. Along those lines, we have initiated a joint transmission project with Western. Tri-State has signed a contract to

partner with Western in a much needed transmission project on the eastern plains

of Colorado and western Kansas referred to as the Eastern Plains Transmission

Project. Over 700 miles of new high-voltage transmission lines are envisioned that

will relieve existing transmission constraints and meet future load growth. The

Eastern Plains Transmission Project will meet the transmission needs of Tri-State

in its development of new baseload power generation in the region as well as provide much needed opportunities for new renewable development in the area. The

participation of Western in this project will serve to enhance the regional system,

expedite the permitting of the project and provide the opportunity for increased generation development. Tri-State appreciates the expertise provided by Western in this

joint venture and believes this is a prime example of the type of partnerships envisioned in the Energy Policy Act passed last year. Mr. Chairman, in closing, I would like to thank you for holding this hearing today and providing Tri-State with the opportunity to express our views on significant

issues affecting us, our member systems and ultimately the end-use consumers.

Ms. MCMORRIS. Thank you.

Mr. Pope.

STATEMENT OF JAMES POPE, GENERAL MANAGER,

NORTHERN CALIFORNIA POWER AGENCY, ROSEVILLE,

CALIFORNIA

Mr. POPE. Thank you, Madam Chairman, and the Members of the Committee. I really appreciate the opportunity to testify here

today on these issues. A little bit about NCPA. It is a joint action agency in Northern California, and our members are pretty diverse. We have BART in

the Bay Area, the Port of Oakland, City of Santa Clara, Palo Alto,

and Alameda in the Silicon Valley, Lodi, Biggs, Gridley, Redding,

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and Turlock Irrigation District in the Central Valley. We are a very

strong dynamic partnership in our joint action agency, and we really want to continue that dialog with Western and with the CVP

customers to forge this partnership between the customers and

Western.

I have six points I would like to cover in my remarks.

First of all, security costs must be allocated properly and close

overseen. NCPA is willing to create a cost-sharing partnership for

reclamation’s post-September 11 security costs. However, it is vitally important that the allocation of these costs per project reflect

the uses of the project and are divided accordingly. The costs must

be quantifiable, and the customers of these projects must provide

adequate cost review and input.

However, we only feel that security costs should be collected for

the national critical infrastructure facilities. Only costs for these facilities should be up for allocation.

The President’s budget removed the $10 million cap on reimbursable security measures which Congress put in place last year. This

cap should be preserved.

Second, the Bureau is seeking to require customers to provide

up-front funding for power share of these costs without adequate

consultation or analysis to determine if this could be properly credited to our bills.

These two issues warrant the Subcommittee’s careful review and

consideration.

My second point, OMB’s interest rate sets a bad precedent and

is just flat bad policy. The Office of Management and Budget’s

agency rate proposal may have a nominal impact on the Central

Valley Project customers, but sets a unsound policy and precedent.

This proposal should be rejected and at a minimum words urge

that this Subcommittee take the necessary steps to prevent OMB

from making further changes in the PMA ratemaking and repayment policies without direct approval of Congress. We think Congress sets policy, not OMB.

My third point, the Folsom Dam bridge replacement is unrelated

to the power generation. There is no benefit from this bridge for

water and power users. As detailed in my testimony, it is important that Congress make clear that no cost for the Folsom Dam replacement bridge be assigned to water and power customers.

Next, CVPIA, the Central Valley Project Improvement Act, review design to effectively implement the Act, and the process includes stakeholder involvement. We have been involved with the

CVPIA Act for 14 years. The water and power customers have

jump-started this process consistent with the legislation. The Department of Interior’s review of the Central Valley Project Improvement Act activities is an appropriate and necessary process required to honor the department’s legal responsibilities and should

continue.

This process has included stakeholder involvement to ensure that

the Act is effectively implemented. This has been a two-year process within the roundtable, and a small subgroup has been working

to develop the areas where we feel that the Act has been

implemented.

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Next, forecast-based operations needed for optimal management

of Federal facilities. In other words, not spilling more water than

needs to be spilled because if you spill water you spill energy. We

recommend that they switch to a forecast-based operations for the

CVP, would provide the same level of flood protection without spilling water that could be used for power production. That needs to

be reviewed.

Ms. MCMORRIS. Mr. Pope. Yes, I need to ask you to summarize

and finish your remarks, and then you can probably make more of

your points in the question and answer period.

Mr. POPE. Thank you. My last remark is that OMB proposal

limit third-party financing for transmission by BPA should be rejected.

I do not think I need to say anymore. Thank you.

[The prepared statement of Mr. Pope follows:]

Statement of James H. Pope, General Manager,

Northern California Power Agency

Introduction

Mr. Chairman, members of the subcommittee, thank you for this opportunity to

testify at today’s hearing. I am James H. Pope, General Manager of the Northern

California Power Agency (NCPA), a joint action agency that serves as the supplemental power supplier for 15 public power systems that purchase power from the

Western Area Power Administration (Western). For our members—municipal utilities, irrigation and special purpose districts, the Bay Area Rapid Transit System,

and a rural electric cooperative—the power they receive from Western is an integral

part of their power supply, and an essential component in providing their communities and consumers with reliable and affordable electricity. Given the importance

of Western to our communities and districts, we commend the subcommittee for providing this important oversight hearing.

Overview

• Western’s third-party transmission activities require close oversight.

• Bureau of Reclamation’s (Reclamation’s) dam security costs must be reviewed,

controlled and properly allocated.

• The Office of Management and Budget’s (OMB’s) ‘‘agency rate’’ proposal appears

to have a nominal rate impact on CVP customers—but sets an unsound policy

precedent.

• No costs for the Folsom Dam replacement bridge should be assigned to power

and water customers.

• The Administration’s request for Western’s ‘‘purchased power and wheeling’’ account should be supported.

• OMB’s initiative to limit third-party financing of Bonneville Power Administration (BPA) transmission should be rejected. BPA and Western should be encouraged to further enhance transmission capability between the Pacific Northwest

and the Pacific Southwest.

• The Department of the Interior’s review of Central Valley Project Improvement

Act (CVPIA) activities should continue.

• The Central Valley Project should switch to Forecast Based Operation.

Background on the Western Area Power Administration and the Central

Valley Project Customers

The federal Central Valley Project (CVP) consists of 11 power plants at federal

multipurpose projects with a combined generating capacity of almost 2,000 MW.

Western also owns almost 900 miles of high-voltage transmission lines that deliver

power from the federal dams to Western’s customers. The costs of the CVP system

are repaid—in full and with interest—by the power customers. In addition, the

power customers pay for significant fish and wildlife measures, and assist in repayment of the irrigation investment. CVP power, on average, meets more than 30%

of NCPA member communities’ and districts’ energy needs.

But this is not a static partnership. Rather, it is one that has grown and evolved:

• CVP customers provided advanced funding for rewinding the generators and replacing the turbine runners at Shasta Dam, a collaborative effort that extended

17

the life of these units, resulted in an efficiency gain of 2%, and produces an additional 98 megawatts of electricity;

• CVP customers, acting through the Transmission Agency of Northern California

(TANC), partnered with Western to construct the California-Oregon Transmission Project, the third major link between California and the Pacific Northwest;

• TANC—comprised of public power systems—played a prominent role in promoting completion of the Path 15 transmission project that relieved congestion

and improved the reliability of the California grid;

• CVP customers provide direct customer financing for important CVP capital and

operational expenditures to ensure that, in light of constrained federal appropriations, the facilities continue to operate reliably, efficiently and cost-effectively, and;

• CVP customers worked collectively to create the Sacramento Municipal Utility

District/Western Area Power Administration Control Area to ensure that Western’s transmission facilities operate efficiently and in compliance with the statutory purposes and obligations of the Central Valley Project.

There is an effective partnership between Western and its customers—and the

Subcommittee on Water and Power has played an important role in fostering that

partnership which has produced many public benefits.

Western Area Power Administration-Related Provisions of the Energy

Policy Act

One of the key Western-related features of the Energy Policy Act of 2005 is the

provision authorizing Western to accept third-party funds to construct transmission

facilities. As noted above, NCPA supports, and has participated in, cooperative arrangements with Western to facilitate transmission construction. Partnering with

Western provides a number of advantages, including the ability to integrate with

Western’s backbone facilities, use of federal eminent domain authority, and Western’s proven track-record of project design and construction.

As we noted during congressional debate of this provision, however, it is important that use of this new authority be used judiciously and appropriately. It is important that this provision neither distract Western from its core mission of operating the federal facilities, nor result in the direct or indirect transfer of costs from

third-party transmission projects to federal power customers.

The Subcommittee on Water and Power should provide careful and consistent oversight of Western’s activities under this provision.

Dam Security Costs Must be Reviewed, Controlled and Properly Allocated

Reclamation has incurred significant expenses in its post-September 11 security

program. Historical precedent argues that these security costs should be fully nonreimbursable (not subject to repayment by CVP customers). Further, the facilities

are on the national critical infrastructure list and, therefore, a small number of citizens should not be responsible for paying for security costs that benefit the entire

nation. However, Reclamation’s May 1, 2005 report to Congress assigned CVP power

customers the obligation to pay for roughly two-thirds of the CVP security costs—

an amount that is not commensurate with the underlying multipurpose project cost

allocation based on the multiple public purposes of these projects.

Congress stipulated in the FY 2006 Energy and Water Development Appropriations Act that only $10 million of the Reclamation’s security costs could be recovered

from water and power customers of the CVP. Reclamation has also been told by the

Congress that it needs to better allocate costs to align with the purpose of the funding, and provide improved cost accountability and transparency.

NCPA is supportive of an appropriate assignment of CVP security costs to power

customers, provided that the costs are quantifiable and reflect a proper allocation,

and that customers are provided appropriate cost review and input. In fact, there

have been positive developments in this regard as Reclamation now appears ready

to adjust cost allocations so that CVP power customers are assigned a percentage

of costs that match the underlying multipurpose cost allocation.

Yet, there are two remaining areas of concern that warrant congressional review:

• The President’s 2007 budget removes the $10 million cost cap on reimbursable

security measures.

• Reclamation seeks to require customers to provide up-front funding for the

power share of these costs. While this mechanism could provide needed customer involvement and oversight, this funding tool is being called upon in this

instance without any customer consultation, nor analysis to determine if the advanced customer funds could be properly credited on their bills. Moreover, the

18

customer funding contracts only allow for funding of direct power operations

and maintenance costs—and not multipurpose activities.

NCPA is willing to create a true cost-sharing partnership for Reclamation’s postSeptember 11 security costs. In order to succeed, this partnership must provide customers with assurance that costs will be legitimate, known and limited. We greatly

appreciate the efforts of Chairman Pombo and Chairman Radanovich to promote a

fair and transparent process, and look forward to continuing to work with this Subcommittee to advance these objectives.

OMB Interest Rate Adjustment Sets Troubling Precedent

The FY 2007 budget stipulates that the Department of Energy will alter its policy

governing interest rates for investments by the federal power marketing administrations (PMAs), including Western. This change will affect only those facilities, such

as the CVP, where the interest rate is not set by law. Under the proposal, new investments will incur an interest charge similar to the rate at which federal corporations borrow funds from the Treasury. The budget claims that this ‘‘agency rate’’

was .4% higher on average than PMA rates from 1997-2005.

OMB claims this change will have a minimal rate impact—and NCPA is still evaluating the rate consequences. However, we are troubled by the precedent of making

significant changes in policy without adequate consultation with and review by Congress. As this Subcommittee knows, over the years OMB—under both Democratic

and Republican Administrations—has attempted to make discriminatory and punitive changes to the rate policies of the federal power marketing agencies. Enabling

major shifts in repayment policies through a simple change in an obscure Department of Energy budget directive could result in significant rate increases for consumers, jeopardize the operations and viability of these important multipurpose

projects, and undermine the essential role of Congress in setting and overseeing the

policies affecting the nation’s water and power resources.

Given the history of numerous assaults on PMA rate setting policies, we believe

such changes should only be made with the express consent of Congress. Ideally,

we would hope Congress would reject this incursion in the repayment policies of the

PMAs. At a minimum, the Subcommittee on Water and Power should take necessary steps to convey its dissatisfaction with this presumptive action, and to prevent OMB from making further changes in PMA ratemaking and repayment policies

without the direct approval of Congress.

Folsom Dam Bridge Replacement

NPCA supports efforts to build a new bridge downstream of Folsom Dam to address traffic congestion created by the closure of the Folsom Dam road for security

purposes. However, because the bridge project will not provide any benefit to power

and water customers, the costs of the bridge should therefore not be assigned to

these customers for repayment. Assigning costs to project purposes where there is

not a direct and corresponding benefit sets an unsound policy precedent that could

undermine cooperation between stakeholder groups, and jeopardize other project investments.

The Subcommittee on Water and Power should carefully monitor this process to

ensure that the federal government’s share of the new bridge remains a non-reimbursable expense.

Purchased Power and Wheeling

Each year, Western and the other PMAs receive a federal appropriation to cover

the costs of purchasing power to ‘‘firm’’ power sales and arrange for transmission.

In the case of the CVP, Western’s purchased power and wheeling (PPW) expenses

have dropped significantly as a result of the post-2004 marketing plan—but the activity remains critical for Western to meet its obligations to some of its smaller California customers, including BART and the Lassen Municipal Utility District. These

PPW appropriations are repaid to the Treasury within the same fiscal year from

revenues collected from PMA customers. In recognition of this fact, Congress adjusted the budget rules so that these appropriations do not ‘‘score’’ as part of the

federal budget. Nonetheless, there are often annual debates over the level of the

PPW account.

This year appears to be an exception to the rule, as the FY 2007 budget includes

the appropriations needed to fully fund for Western’s Purchased Power and Wheeling activities for the coming year.

NCPA is pleased that the FY 2007 budget includes an adequate appropriation for

Western’s PPW activities and urges Congress to support this amount.

19

Third-Party Financing of BPA Transmission Facilities

As the members of this Subcommittee know, California and the Pacific Northwest

are joined at the hip—we are physically integrated, make considerable sales between the regions to take advantage of seasonal diversity, and support each other

to advance system reliability. Consequently, investments in the Northwest transmission grid are important for all of California as well. It is with this in mind that I raise with the Subcommittee

NCPA’s concern regarding with the persistent effort of OMB to limit the ability of

BPA to finance and construct needed transmission.

Unlike Western, BPA has direct borrowing authority from the U.S. Treasury to finance transmission additions and upgrades. Recently, Congress increased that borrowing authority, but directed BPA to seek partnerships with non-federal parties in

order to leverage the limited borrowing authority and include others in the planning

and financing of its facilities. As we have noted, these partnerships have great potential to meet the infrastructure demands of the West—and it is for such purposes

that Congress authorized Western to enter into these types of arrangements. It is, therefore, highly ironic that after directing BPA to pursue third-party financ- ing, and granting Western authority to enter into arrangements with third-parties,

that OMB has proposed to undercut this important tool. In July of last year, OMB

sent legislation to Congress, which it reasserts in the FY 2007 budget, that would

count third-party financings against BPA’s limited borrowing authority—effectively

denying any value in pursuing these arrangements, and leaving BPA in a precarious

position with only sufficient borrowing authority to meet its infrastructure needs

through 2011.

The Subcommittee on Water and Power should take appropriate action to affirmatively reject this treatment of third-party financing of BPA transmission, and encourage BPA and Western to participate in further enhancements to transmission capability between the Pacific Northwest and California.

Review of CVPIA Activities

The Department of Interior’s review of certain activities under the Central Valley

Project Improvement Act (CVPIA) is receiving considerable attention. Let me take

this opportunity to clarify certain facts:

• CVPIA established a Restoration Fund to be used along with federal and state

appropriations to accomplish 33 specific objectives. CVP water and power customers were statutorily obligated to contribute $30 million annually (adjusted

for inflation) to the Restoration Fund.

• Neither the federal nor state financed share of the Restoration Fund has fully

materialized, but to date, CVP water and power contractors have contributed

over $500 million toward the accomplishment of the objectives.

• The CVPIA calls for cutting contributions to the Restoration Fund in half once

the objectives are completed, and Congress expressly anticipated that such action would occur within 10 years of enactment.

• It has now been 13 years, and no meaningful review of programmatic accomplishments has been conducted, and no metric exists to measure program accomplishments.

• NCPA joined with CVP water customers in preparing our own assessment of

the CVPIA accomplishments, and determined that our obligations regarding the

33 objectives have been met.

• The Department of Interior received our analysis and, while it did not choose

to exercise its statutory discretion to reduce Restoration Fund contributions, it

did realize that a rigorous analysis of the program’s status, accomplishments,

goals and objectives was necessary.

• At the direction of the Office of Management and Budget, The Department of

Interior is reviewing the CVPIA Section 3406 objectives as part of the Department’s Program Assessment Rating Tool (PART) process.

• The Department of Interior’s process is both public and open, with broad stakeholder participation.

The Department of Interior is conducting this review with broad stakeholder participation, and we look forward to the establishment of program objectives, milestones, and measurements to allow for effective implementation of the Act.

Forecast Based Operations

The CVP system plays an important role in providing flood control protection to

the Sacramento Valley and beyond. NCPA believes, however, that the CVP can meet

the same or higher level of flood protection by releasing water based on accurate

weather forecasts rather than through overly stringent adherence to rigid operating

rules.

20

Today, the Bureau of Reclamation releases water through the CVP system—at the direction of the Corps of Engineers—to stay within a storage requirement known as

the ‘‘flood control curve.’’ Under this regime, water is released anytime storage exceeds a specific amount—without adequate consideration of what the forecast for additional precipitation might be in the following days. As a result, we have witnessed

instances in which significant water releases are followed by dramatic flow reductions, when a more levelized release schedule would have been possible. These high,

unnecessary water releases necessitate bypassing the dam’s power generating facilities, resulting in a loss of generation and power revenues. Similarly, when the reservoir inflows and rain forecast make it highly likely that flood releases are imminent, then increasing flow up to the power plant, rather than bypassing the generators, would capture more energy. Let me illustrate this situation. On February 3, the Corps of Engineers directed Reclamation to release 30,000 cfs from Shasta due to the emergence of a small

storm. These high releases continued until February 8, at which time the flow rate

was reduced to 16,000 cfs. Then flows were reduced to below 10,000 cfs a few days

later. Since only 16,000 cfs can go through the generators, bypasses were required,

and the value of the energy bypassed totaled approximately $3.5 million. Yet, the

weather forecast unequivocally indicated that we would have clear weather after

that small storm. Consequently, if Reclamation had maintained releases at 16,000

cfs, it would have taken a few more days to get within the flood control curve, but

we would have had the same level of flood protection, and would have avoided a

$3.5 million loss of resource value.

Forecasting has improved to the point where we should be capable of making

sound resource and business decisions for flood control releases through Forecast

Based Operations, rather than through an overly strict interpretation of the flood

control curve, and we would urge the Subcommittee on Water and Power to encourage the Bureau and Corps to take the necessary steps to implement this methodology.

Conclusion

Western remains a vibrant and important player in promoting a reliable, affordable power supply in California and throughout the West. We appreciate the role

of this Subcommittee in maintaining that value, and conducting this important oversight hearing.

Thank you for this opportunity to testify, and I welcome your questions.

Ms. MCMORRIS. OK, very good.

Mr. Langer.

STATEMENT OF DWIGHT LANGER, GENERAL MANAGER,

NORTH WASCO COUNTY PUBLIC UTILITY DISTRICT, THE

DALLAS, OREGON

Mr. LANGER. Madam Chairman, Members of the Committee, it is

my honor and privilege to have this opportunity to share with you

some serious concerns.

My name is Dwight Langer, and I am General Manager of

Northern Wasco County People’s Utility District in The Dallas,

Oregon.

We concur strongly with the President’s statement in the State

of the Union Address that energy drives our economy and national

security. At Northern Wasco it is part of our philosophy that

energy in all its form, but in particular, electric energy is an essential service.

We respectfully would add that adequate supplies of energy at

affordable prices are the prerequisites for a vibrant and healthy

economy, which adds to the foundation for maintaining our nation’s

quality of life and security.

There are provisions in the Administration’s Fiscal Year 2007

budget, unfortunately, that are at cross-purposes with that philosophy. My testimony pertains to the 2007 proposed budget for the

Department of Energy Public Enterprise Fund’s BPA.

21

This proposal would shift the use of revenues for BPA when they

exceed a set amount, and change the rules on BPA debt repayment.

We are alarmed about both the particulars and the public process

concerning the proposed future disposition of revenues from secondary sales, energy sales by the Bonneville Power Administration.

This proposal is unfair, not consistent with prudent ratemaking

processes or sound business practices.

My message today has three themes: BPA rates have been high

and painful the last few years; two, administrator proposals that

increase short-term rates in the Northwest or that diminish the

value of BPA to the region’s customers are unfair and unacceptable, and require congressional review; three, some of BPA’s costs,

such as fish mitigation, are excessive, beyond the agency’s control,

and indicative of a lack of an overall plan that makes economic

sense.

In an analysis by the Northwest Power and Conservation Council, an independent counsel whose members are appointed by the

respective Governors of Washington, Idaho, Oregon, and Montana,

this budget provision to divert secondary sales revenue away from

stabilizing customer rates and involuntarily moving it to debt repayment would have, in part, the following effects:

Revenue collected for Bonneville’s public utility customers would

increase by $145 million average per year; $109 million decrease in

regional personal income; a decrease of 1,120 jobs; additional effects on aluminum and other energy-intensive industries; $18.5

million decrease in Federal personal income tax revenues to the

government.

The entire region shares the council’s concerns. Quite appropriately and importantly, the question becomes who should decide

these issues that affect customers’ pocketbooks.

In the past, BPA has run public processes to develop long-term

financial plans, showing many alternatives and with good public

participation. In this instance, if the Administration wants to

abruptly change standing BPA financial practices, it is imperative

that Congress weigh into this matter and determine what is in the

public interest.

We look to Congress to establish the rules of the road, our treasury obligations of BPA. In this case, it is unwise and unfair for

OMB to change these rules without action of Congress.

While we are not against early debt retirement and increasing

borrowing authority, we need to have an open process that is also

sensitive to the retail rates issue. The best interest of the customers should come first, not last.

Similarly, we need to stand back and objectively examine the rationale for counting BPA’s third-party debt against the agency’s

U.S. Treasury borrowing authority ceiling even if it is expanded by

200 million in Fiscal Year 2007.

I believe to all BPA customers’ credit, we have weathered the

storm of higher rate, attributed to market conditions, supply availability, and excessive costs tied to fish mitigation programs. While

local economies have suffered, our obligations to the U.S. Treasury

have been met in full and on time. We need time to heal and to

reshape our local economies to respond to challenges from abroad

and from other regions. We need long-term contracts with BPA

22

where we don’t have to worry each year about some administrative

initiative in which we are not consulted. We need the ability to continue to be successful.

Therefore, we ask your support for binding language to:

One, prevent OMB from repeatedly suggesting changes in rate- making methodologies and/or the treatment of revenues from the

sale of power and energy by BPA; Two, that you include——

Ms. MCMORRIS. Mr. Langer, will you just summarize?

Mr. LANGER. Yes. That you submit language that would prevent this from happening again. Thank you for this opportunity.

[The prepared statement of Mr. Langer follows:]

Statement of Dwight Langer, General Manager, Northern Wasco County People’s Utility District, The Dalles, Oregon

Mr. Chairman and Members of the Committee, it is my honor and privilege to have this opportunity to share with you some serious concerns concerning current

and proposed federal actions that affect wholesale power rates of the Bonneville

Power Administration.

My name is Dwight Langer and I am General Manager for Northern Wasco Coun- ty People’s Utility District (a municipal electric utility corporation) in The Dalles,

Oregon. The Dalles is in Oregon’s 2nd Congressional District and very ably represented by your colleague, Rep. Greg Walden. My utility’s offices look out on the

beautiful Columbia River and are located 85 miles east of Portland, Oregon. My comments pertain to the Administration’s Fiscal Year 2007 proposed budget for the Department of Energy, Public Enterprise Funds—BPA. We are alarmed

about both the particulars and the public process concerning the proposed future

disposition of revenues from secondary energy sales by the Bonneville Power Administration. This proposal would shift the use of revenues for BPA when they exceed

a set amount. It ‘‘changes the rules’’ on BPA debt repayment. The proposal is unfair

and not consistent with the BPA ratemaking processes or sound business practices.

My message today has three themes 1.) BPA rates have been high and painful the

last few years. 2.) Administrative proposals that increase short term rates in the

Northwest or that diminish the value of BPA to the region’s customers, are unfair

and unacceptable, and require Congressional review. 3.) Some of BPA’s costs, such

as fish mitigation, are excessive, beyond the Agency’s control, and indicative of a

lack of an overall plan that makes economic sense.

Northern Wasco PUD is a Full Requirement customer of BPA. Relying upon BPA

as our exclusive wholesale supplier, we provide electrical services to our retail customers. Any changes in BPA rates for power supply or transmission services are

passed on directly to our customers. The proposal for change due to ‘‘excess secondary revenue’’ has been estimated to cause an increase of 10% in BPA’s wholesale

rates to public power customers. A 10% BPA rate increase forces our utility to increase retail rates by at least half that amount, plus any increases over time reflecting our local operating costs. In summary, what happens to BPA financially finds

its way directly into the pockets of our retail customers. With nearly 9,000 residential customers, the Administration’s proposed budget for BPA would extract nearly

$400,000 per year from residential customers within Northern Wasco’s service territory, as well as the compounding economic effects of reduced income and the impact

on the business decisions of energy-intensive industries.

Northern Wasco PUD did not cause the Northwest energy crisis of 2000—2001,

but we suffered the consequences. The combination of failed deregulation in the

electric industry, higher than anticipated BPA loads, and a Northwest drought resulted in BPA imposing a 46% increase in its base rates on October 1, 2001. BPA

reserves were inadequate to cover higher costs, and as a consequence the Agency

triggered Load Based, Financial Based and Safety Net Cost Recovery Adjustment

Clauses as an increase to the base rate structure. The Agency continues to make

all required payments to the U.S. Treasury, an action which we fully support. However, this was not without severe economic consequences in Oregon, Washington,

Montana and Idaho attributable to higher rates to assure full Treasury payment.

BPA did what it could to cut costs, by $100 million, undertook refinancings, and extension of Columbia Generating Station Debt. We commend their efforts. But they

were not nearly sufficient to fully mitigate high market purchases when the Agency

23

was resource short, and as a result we were really hurt. We stood by the deal,

though, paid the higher rates, and Bonneville made all Treasury debt repayments.

Now we are in a situation—-and this may well be temporary—- where BPA has

secondary resources to sell and market prices are attractive. However, BPA’s wholesale power rates are still 31% above 2001 base rates, and BPA’s initial rate proposal

for FY 07—09 includes an additional increase for next year. Given our current rate

levels, it is inexcusable for OMB to make a determination that funds that would

otherwise be available for rate relief should be siphoned off to pay down BPA debt.

You simply don’t make a double house payment of principal when there is not

enough cash available to feed your family.

In an analysis by the Northwest Power and Conservation Council (NWPCC) [an

independent council whose members are appointed by the respective governor’s of

Washington, Idaho, Oregon and Montana] this provision would have in part the following effects:

• $145 million average increase in the annual cost of power from Bonneville to

its publicly owned utility customers

• $109 million decrease in regional personal income

• decrease in regional jobs by 1,120

• additional effects on aluminum and other energy-intensive industries

• $18.5 million decrease in federal personal income tax revenues

The NWPCC goes on to state and I quote, ‘‘The proposal sets an alarming precedent by administratively imposing a mechanism on BPA that collects funds for national deficit reduction purposes. While the impacts we analyzed are relatively small

in the first years of implementation, it appears that the Administration has the ability to further increase the dollar amounts in future budgets without the need for

authorizing legislation.’’

We share the Council’s concerns. But more importantly, the question becomes who

should decide these issues that affect customers’ pocketbooks? In the past BPA has

run public processes to develop a long-term financial plan, showing many alternatives, and with good public participation. In this instance, if the Administration

wants to abruptly change long standing BPA financial practices, then it is imperative that Congress weigh into this matter and determine what is in the public interest. We look to Congress to establish the ‘‘rules of the road’’ on Treasury obligations

of BPA. In this case, it is unwise and unfair for OMB to change those rules, without

action by Congress.

While we are not against early debt retirement and increasing borrowing authority, we need to have an open process that is also sensitive to the retail rates issue.

Similarly, we need to stand back and objectively examine the rationale for counting

BPA’s third party debt against the Agency’s U.S. Treasury borrowing authority ceiling even if it is expanded by $200 million in FY 2009. Northern Wasco PUD is a

transmission customer of BPA and we recognize the need for the Agency to make

capital intensive investments in infrastructure to preserve and expand our regional

transmission grid. Transmission is our ‘‘highway’’ and absent highways our regional

commerce is significantly impeded.

In addition to discussing the Administration’s budget proposals, I feel the need

to use this opportunity to advise the Subcommittee of one other major variable impacting BPA costs, and consequently our rates. On the surface it seems compelling

to considering BPA as a long-term power supplier, given the value of a hydro system, with no fuel costs, compared to other resources. However, BPA’s fish and wildlife program costs of about $340 million represent 20% of the Priority Firm power

rate. In addition, because of the fish related constraints on power production, BPA

foregoes another $350 million in revenues that could otherwise be used to reduce

rates. Fish and wildlife costs have increased 270% in the last ten years alone. These

are our best estimates, but fish costs are difficult for us to track.

In addition through the Corps of Engineers Columbia River Fish Mitigation

Project there are between $1.5 - $1.6 billion of Congressional appropriations for

projects planned through 2014 which the Agency—through its customers—will have

to pay.

But that isn’t the end of the story. Federal action agencies have been subject to

continued litigation by outside parties claiming that Federal hydro projects are not

doing enough to protect Endangered Species Act stocks. These litigants have been

successful attacking the value of the hydro system, while other critical recovery plan

components, such as harvest, hatcheries, and habitat appear to receive only cursory

examination.

We are concerned that we are rapidly depleting the value of our hydro system in

pursuit of endeavors not based on the best available science, while forcing more expensive resource alternatives to be used that have their own negative environmental

24

consequences. We need an orderly plan, based upon the best available science that

establishes reasonable limits on ESA financial obligations.

In conclusion, I believe that to all BPA customers’ credit, we have weathered the

storm of higher rates attributable to market conditions, supply availability, and excessive costs tied to fish mitigation programs. While local economies have suffered,

our obligations to the U.S. Treasury have been met in full and on time. We need

time to heal and to reshape our local economies to respond to challenges from

abroad, and from other regions. We need new long-term contracts with BPA where

we don’t have to worry each year about some administrative initiative in which we

were not consulted.

At Northern Wasco it is part of our philosophy that energy in all its forms, but

in particular electric energy, is an essential service. We concur strongly with the

President’s statement in the State of the Union address that energy drives our economy and national security. We respectfully would add that adequate supplies of

energy at affordable prices are the prerequisites for a vibrant and healthy economy

which adds to the foundation for maintaining our Nation’s quality of life and security. This budget proposal for BPA unfortunately appears to be at cross purposes

with that philosophy.

Therefore, we ask your support for binding language to (1) prevent OMB from repeatedly suggesting changes in rate making methodologies and/or the treatment of

revenues from the sale of power and energy by the Bonneville Power Administration; (2) that you include (again) language that OMB will not propose to interfere

with the responsibilities of the customers of the Bonneville Power Administration

without consultation with the congressional delegation of the Pacific Northwest; and

(3) that third party financing for infrastructure cannot be scored against the financing limits for BPA.

Thank you for the opportunity to testify. I would be pleased to answer any questions the Members of the Committee may have.

Ms. MCMORRIS. Very good. OK, thank you for being here.

Mr. Hosken.

STATEMENT OF CHARLES HOSKEN, GENERAL MANAGER,

IMPERIAL IRRIGATION DISTRICT, IMPERIAL, CALIFORNIA

Mr. HOSKEN. Madam Chair, and other Members of the Committee, my name is Charlie Hosken. I am the new General Manager of Imperial Irrigation District. IID is a community-owned utility that provides water and electric power to consumers in Southern California.

My purpose here today is to oppose the President’s Fiscal Year

2007 budget proposal to require the Western area, Southeastern,

and Southwestern Power Marketing Administrations to raise the

interest rate they charge for future capital investments.

IID has been in the electric business since 1936, and today

serves more than 130,000 homes, businesses, farms, and industries

in the Imperial Valley and parts of Riverside in San Diego Counties.

IID purchase 32 megawatts of Federal power from the ParkerDavis Project located on the Colorado River below the Hoover Dam.

Although the Parker-Davis allocation is a relatively small part of

our overall resource portfolio, it is one of our lowest cost resources

and is critical to our ability to maintain affordable electric rates.

Today, Western, Southwestern, and Southeastern charge the

treasury yield interest rate on capital investments in power facilities, which reflects their cost of government borrowing.

The President’s Fiscal Year 2007 budget directs that these three

PMAs instead use the higher government corporation rate that entities like Fannie Mae and Ginnie Mae use. Western tells us that

25

this rate will be about half a percentage point higher than the

treasury yield rate.

What the Office of Management and Budget is doing by including

this directive in the budget is to ignore the real cost of borrowing

and use instead a higher proxy cost of borrowing in order to raise

more money from the Federal power customers. This violates the

principles of cost-based pricing and truth-in-borrowing.

OMB recently offered two explanations for its discriminatory

treatment of the interest due on Federal debt for multi-purpose

water projects. By the way, this rationale was not included in the

budget when it was initially sent to Congress.

First, OMB claims that the new power investments at multi-purpose water projects should carry a higher risk premium because

they depend on a revenue stream for repayment. That is actually

nonsense.

Decisions to build multi-purpose projects are integrated decisions. The component parts of these projects are not financed individually. The entire project is conceptualized and financed as one.

Second, OMB argues that because the PMAs can repay the Federal investment on power facilities early, the initial investment is

like a call bond that can be retired early and thus should bear a

higher rate of interest. Again, this is also nonsense.

Any canceled Federal power contract would be replaced immediately by another identical or longer term power sale contract so

the stream of repayment dollars to the treasury would be the same.

We suspect that OMB’s rationale is simply to raise money from

the Federal power customers. OMB is directing these PMAs to

make the interest rate change because it has the power to do so

administratively. IID thinks that this is a bad precedent and bad

policy. We hope Congress will reject the proposal.

Thank you.

[The prepared statement of Mr. Hosken follows:]

Statement of Charles Hosken, General Manager,

Imperial (CA) Irrigation District

Madame Chairman and Members of the Subcommittee, my name is Charles

Hosken and I am the General Manager of the Imperial Irrigation District (IID). IID

is a community-owned utility that provides water and electric power to consumers

in southeastern California.

A. Background on IID

IID was established in 1911 under the California Irrigation District Act. Today,

IID is the largest irrigation district in the nation. It provides irrigation water to the

Imperial Valley, which ranks among the top ten agricultural areas in the country.

Ninety-eight percent of the water that IID transports is used for agriculture in the

Imperial Valley. The remaining two percent is delivered to seven Imperial Valley

cities and to unincorporated residential areas, which treat the water to safe drinking water standards and sell it to their residents.

IID entered into the power business in 1936, when access to electric energy in the

Imperial Valley was very limited and very expensive. Today, IID Energy serves

more than 130,000 homes, businesses and industries in the Imperial Valley and

parts of Riverside and San Diego counties. These areas are experiencing very rapid

growth in electrical demand, with growth rates of nine percent in Riverside County

and six percent in Imperial County. These are among the highest demand increases

in the country.

IID was one of the original contractors for federal power generated from the

Parker-Davis Project and has been a Parker-Davis customer continuously since

1948. The Parker-Davis Project consists of the Parker and Davis Dams located on

the Colorado River below Hoover Dam. The dams are owned and operated by the

26

U.S. Bureau of Reclamation; power generated from the projects is marketed by the

Western Area Power Administration (Western).

IID’s allocation of Parker-Davis power is 32 MW, representing approximately five percent of our resource portfolio. Although the Parker-Davis allocation is a relatively

small part of IID’s total resources, it is one of our lowest cost resources and, as such,

is critical to our ability to maintain affordable electric rates. IID’s allocation of Parker-Davis power plays an important role in our local and regional economy. Unemployment in southeastern California is significantly higher

than the national average and the per capita income of our customers is low. In addition, the extreme temperatures in this part of California result in higher per capita energy use than in other parts of the county. For these reasons, IID pays a great

deal of attention to proposals to change federal power allocation or repayment policies.

I might add here, on a personal note, that until recently I was the General Man- ager of the Chelan County (WA) Public Utility District, which is a customer of the

Bonneville Power Administration. During my tenure at Chelan, I was engaged in

a number of battles with the Office of Management and Budget (OMB) over repayment policies for the power marketing administrations.

B. OMB Announcement of Administration’s Intent to Raise Interest Rate on

Future PMA Investments

The President’s Fiscal Year 2007 budget announces the Administration’s intention to require the Western, Southeastern and Southwestern Power Marketing Administrations (PMAs) to change the interest rate they charge for future capital investments in power-related facilities from the ‘‘Treasury yield’’ rate that these PMAs

currently use to the ‘‘government corporation’’ rate that entities like Fannie Mae

and Ginnie Mae use. This new policy will be applied to new power related investments at projects whose interest rates are not specified in law. According to Western, the impact of the interest rate increase will be about .4 of one percent. This will translate to an increase in costs to the Parker-Davis Project

of about $1.8 million over five years. While the amount of money at stake might

seem small, there are very important principles at stake. Those principles are 1) the

application of cost-based pricing for federal power; and 2) ‘‘truth in borrowing’’ or

‘‘truth in repayment.’’

C. Fallacies with Administration Plan

The foundation of the federal power program is that power is sold at cost-based rates. The real interest cost to the government for a water or power project is the

cost the government incurs when it builds a project. If a government corporation, like Ginnie Mae or Fannie Mae, builds a project, the real interest cost is the government corporation’s interest rate at the time of construction.

On the other hand, if the federal government itself builds a project, such as a water and power project, the real interest cost is the government’s borrowing cost

at the time of construction.

In the case of new capital investments in the Parker-Davis Project and the other federal power projects that will be affected by this interest rate change, the federal

government itself will be the borrower. So, the actual government borrowing rate

should apply—not some ‘‘proxy’’ rate as proposed by the Administration. This change is proposed, apparently, in a scramble for additional revenue. Using the same rationale (‘‘the more cash the better’’) and applying the same justification

for the current proposal, the Administration could just as easily have chosen Wall

Street’s prime rate or the rate credit card companies charge the government on government-issue credit cards.

To justify the interest rate increase, the Administration notes that the Bonneville Power Administration pays the ‘‘government corporation’’ rate on its new investments. While true, the explanation in no way amounts to a justification for the Administration’s proposal. What the Administration failed to say is that the BPA interest rate was part of a package of legislative changes that the Northwest delegation

proposed and enacted almost ten years ago, to restructure BPA’s overall debt to address concerns about cost recovery. No debt restructuring is involved here, so the

BPA example is not relevant. It certainly supplies no rationale for the Administration’s proposal to depart from the principles of cost-based pricing for PMAs and the

federal government’s departure from the principle of ‘‘truth in borrowing.’’

D. Recent OMB Explanations of Change in Administration Policy.

We understand that OMB has recently offered two explanations for its discriminatory treatment of the interest due on federal debt for multi-purpose water projects

which were not included in the budget package sent to Congress. First, it argues

27

1 I would also point out that, in Western’s service area, the OMB proposal would only apply

to the Parker-Davis Project and the Central Valley Project. It would not apply to the Pick-Sloan

Project, to Hoover Dam, to the Colorado River Storage Project or to the Fryingpan-Arkansas

Project.

that the investments should carry a higher risk premium because they depend on

a revenue stream for repayment. Second, OMB argues that since PMAs can repay

power feature investments early, investments which depend on them for repayment

are akin to investments financed through ‘‘call’’ bonds (implying the possibility of

early debt retirement). The Treasury currently does not use ‘‘call’’ bonds, but if did,

OMB argues that Treasury would have to pay a higher interest premium on them.

Thus, OMB argues, power customers should also pay a higher interest rate on investments costs allocated to the power function of multipurpose projects.

Neither argument has anything to do with federal decisions to develop natural resources or the federal government’s borrowing cost at the time multipurpose water

projects were constructed. They advance never-before-heard theories which are odd,

at best, and which read more like after-the-fact attempts to justify the Administration’s announced intention of revenue enhancement rather than justifications for determining the interest rate attributable to reimbursable features of multi-purpose

water projects.

Multi-purpose water projects are fundamental investments in the nation’s infrastructure and natural resources to yield navigation, flood control, irrigation, recreation and power benefits. The decisions to build them are integrated and, once the

benefit-cost ratios of their features are established, there is no separate conceptualizing or financing of their component parts. The benefits they produce, including

electricity, occur no matter what, and the cost-based rates charged for the power

produced removes all market risk of non-sale. Finally, the justification for a higher

risk being attributed to power features because a power contractor’s contract might

be ‘‘called’’ early is nonsensical. Any cancelled power contract would be replaced immediately by another identical or longer-term power sale contract so the stream of

repayment dollars would be identical to the federal government.

E. Recapitulation

What is the rationale for this discriminatory treatment? Essentially, OMB chose

to increase interest rates for the Parker Davis and Central Valley Projects because

it could. 1 The interest rates for the other projects are set by statute, and OMB could

not reach them through an administrative decision.

Recognizing the value of cost-based federal power to consumers, Congress has repeatedly rejected OMB initiatives to change PMA rate-setting policy. This year,

OMB is trying a different tack: proposing administrative changes that will not require Congressional approval. We think this sets a very bad precedent for federal

power rates, and we encourage this body to reject the proposal.

Ms. MCMORRIS. Thank you.

Mr. Graves.

STATEMENT OF THOMAS GRAVES, EXECUTIVE DIRECTOR,

MID-WEST ELECTRIC CONSUMERS ASSOCIATION, WHEAT

RIDGE, COLORADO

Mr. GRAVES. Thank you, Madam Chairman and Members of the

Committee. I am Thomas Graves, Executive Director of the MidWest Electric Consumers Association in Wheat Ridge, Colorado. I

also serve as the Chairman of the National Preference Customer

Committee of the National Rural Electric Cooperative Association.

We certainly appreciate the opportunity to testify before the Subcommittee today on the Federal power program.

Mid-West was founded in 1958 as the regional coalition of

consumer-owned electric utilities in the Missouri River Basin that

purchased hydropower generated at Federal multi-purpose projects

in the basin and marketed by the Western Area Power Administration under the Pick-Sloan Missouri Basin Program.

28

The Administration’s budget request for Fiscal Year 2007 includes three troubling issues to the Federal power program, troubling in substance and troubling in process. They are proposing to

administratively change the interest rate on new Federal power investments. They are proposing to reallocate certain irrigation costs

in the Pick-Sloan Missouri Basin Program, and they are also proposing to administratively change the management of secondary

revenues for the Bonneville Power Administration.

Historically, the interest rates charged on Federal power investment has been the Treasury’s long-term rate yield. The Treasury

provides this data to PMAs every year for the interest rate to be

charged for investment booked in that year. Those investment cost

plus interest are repaid to the Treasury through power rates

charged to Federal power customers.

Now the Administration proposed to charge an agency rate which

they say is the rate charged to governmental corporations. That is

great, except the Federal Power Marketing Administrations are not

government corporations. They do not have the same authorities or

the same responsibilities. They do not have borrowing authority.

The Power Marketing Administrations are Federal agencies

within the Department of Energy and are funded annually by congressional appropriations.

The current practice of using Treasury’s long-term yield rate has

worked well, and it is wrong to assign an interest rate formula for

government corporation to Federal agencies that are in fact not

government corporations.

The proposed reallocation of the Pick-Sloan Missouri Basin irrigation investment is apparently a rehash of a similar proposal in

last year’s budget request. It is quite hard to tell exactly what is

proposed since, again, there is no legislative language or even a detailed explanation of this proposal.

The short explanations in the budget are inconsistent. Once section calls for repayment of construction costs. Another section calls

for repayment of construction and operation costs. It is simply impossible for us to parse this issue until we know exactly what is

being proposed.

The budget request erroneously states that Pick-Sloan power customers have not heretofore been responsible for repaying these

costs. Pick-Sloan customers are responsible for repaying all the

costs of the power investment, joint costs allocated to the power

function and a huge portion of the investment costs related to irrigation. Currently in our rate there is some $727 million related to

irrigation development that is the responsibility of the Federal

power customers under aid to irrigation.

These repayment obligations have been organized under the concept of ultimate development which sets the schedule and timing

for the repayment of these investments.

The budget process remains an inappropriate forum to undertake

a reform of this sort of magnitude. The allocation and repayment

of the Federal investment in Pick-Sloan Missouri Basin program is

extremely complex, and is the result of years of negotiations in the

basin. It cannot be easily undone.

The consequences of tinkering with ultimate development go far

beyond any financial spreadsheet that OMB may be looking at.

29

In the first session of this Congress, a bipartisan delegation of

Members of Congress from the region and from the full committee

here expressed their opposition to this proposal. Those reasons remain valid today.

The Administration also currently plans to implement administratively a change in Bonneville’s repayment practices. This is incorrect. Administrative approaches to changing the Federal power

program we find strongly objectionable. We oppose any attempts to

remove Congress from its historical role in providing oversight and

policy direction for the Federal power program.

The National Rural Electric Cooperative Association recently

adopted a resolution to that effect. A copy is attached to my testimony.

We are well aware of the budget difficulties facing Congress on

the issue of deficits that you confront every day. Deficits force

unenviable choices in curtailing government spending. For the

PMAs, limited budgets and earmarks can mean changes in programs. We think there is a better way to do this.

The annual costs of the Power Marketing Administrations are

turned to the Treasury every year in which they are incurred. The

budget process does not recognize this. We would suggest for the

annual costs of the PMAs a net-zero appropriation that recognizes

this is a not a permanent outlay would assist the Congress in dealing with its responsibilities while maintaining the integrity and reliability of the Federal power program.

Thank you.

[The prepared statement of Mr. Graves follows:]

Statement of Thomas P. Graves, Executive Director,

Mid-West Electric Consumers Association, Wheat Ridge, Colorado

Good afternoon, Mr. Chairman. I am Thomas Graves, Executive Director of the

Mid-West Electric Consumers Association, headquartered in Wheat Ridge, Colorado.

I also serve as chairman of the National Preference Customer Committee of the National Rural Electric Cooperative Association. We appreciate the opportunity to testify today before the House Resources Subcommittee on Water and Power on the

federal power program.

Mid-West was founded in 1958 as the regional coalition of consumer-owned electric utilities—rural electric cooperatives, municipal electric utilities, and public

power districts—that purchase hydropower generated at federal multi-purpose

projects operated by the U.S. Army Corps of Engineers and the U.S. Bureau of Reclamation. Mid-West members utilize federal hydropower marketed by the Western

Area Power Administration under the Pick-Sloan Missouri Basin Program in nine

states—Montana, Wyoming, Colorado, North Dakota, South Dakota, Nebraska, Kansas, Minnesota, and Iowa.

The National Preference Customer Committee of the National Rural Electric Cooperative Association is comprised of federal power customers across the country

and their regional associations.

The Administration’s Budget Request for Fiscal Year 2007 includes three troubling proposals relating to the federal power program:

• Changing the interest rate on new federal power investments;

• Reallocating certain irrigation costs in the Pick-Sloan Missouri Basin Program;

and

• Changing the management of secondary revenues of the Bonneville Power Administration.

Historically, the interest charged on federal power investment has been the U.S.

Treasury’s long-term yield rate. Each year, the Treasury provides to the Power Marketing Administrations the interest rate to be charged for investments made in that

year. Those investment costs plus interest are repaid to the Treasury through power

rates charged to federal power customers.

30

Now, the Administration has stated that it intends to change that practice and

charge the ‘‘agency rate,’’ which is the rate charged to governmental corporations.

The difference between this rate and Treasury’s long-term yield rate is described as

‘‘small,’’ averaging about .4 per cent, which would garner about $2-3 million per year

from federal projects where the interest rate is not set by law.

The federal Power Marketing Administrations—Western, Southeastern, and

Southwestern are not government corporations. They do not have borrowing authority or other authorities available to government corporations. The Power Marketing

Administrations are federal agencies within the Department of Energy and are

funded annually by congressional appropriations.

The current practice of using Treasury’s long-term yield rate has worked well for

decades. It is wrong to assign an interest rate formula for a government corporation

to federal agencies that are not government corporations.

The proposed reallocation and acceleration of Pick-Sloan Missouri Basin investment is apparently a rehash of a similar proposal in last year’s Budget Request. It

is hard to tell exactly what is proposed since there is no legislative language or even

a detailed explanation of the proposal.

The short ‘‘explanations’’ that have been offered are inconsistent. One section of

the Budget calls for repayment of vaguely defined construction costs—‘‘Power customers will be responsible for repayment of all construction from which they benefit.’’ (p. 188 Department of Interior: Mandatory Proposal Recover Pick-Sloan Project

Costs). However, Bureau of Reclamation Highlights (BH- 36) calls for ‘‘repayment

of construction and operations costs...’’

The Budget Request erroneously states that Pick-Sloan power customers have not

heretofore been responsible for repaying these costs. Pick-Sloan power customers are

responsible for repaying all the costs of the power investment, joint costs allocated

to the power function, and a huge portion of investment related to irrigation. These

repayment obligations have been organized under the ‘‘ultimate development’’

concept.

Most simply put, the Administration’s Budget Request would destroy the ultimate

development concept that allocates costs among the various project purposes and determines repayment practices.

The budget process remains an inappropriate forum to undertake a reform of that

magnitude. The allocation and repayment of federal investment in the Pick-Sloan

Missouri Basin Program is an extremely complex issue that is the result of years

of negotiations in the basin. It cannot be easily undone. The consequences of tinkering with ultimate development go far beyond any financial spreadsheet.

In the first session of this Congress, a bi-partisan delegation of Members of Congress from the region and from the full committee expressed their opposition to this

proposal. Those reasons are still valid.

The Administration currently plans to implement the change in Bonneville’s repayment practices and imposition of higher interest rates for PMA power-related investment through administrative actions rather than seeking Congressional endorsement and action.

We strongly object to any attempts to remove Congress from its historical role in

providing oversight and policy direction for the federal power program. The National

Rural Electric Cooperative Association passed a resolution at its annual meeting

last month opposing these changes. A copy is attached.

We are well aware of the budget difficulties Congress faces. Deficits force

unenviable choices in curtailing government spending. For the Power Marketing Administrations, limited budgets have been further curtailed by earmarks in construction programs for new work not included in its proposed budgets. Last year, Western had some $6 million earmarked for projects not in the current work plan. Without additional appropriations, that sort of earmarking can wreak havoc with planning PMA construction projects.

Federal power customers have worked diligently to help maintain the reliability

of the federal power systems. The Western Area Power Administration, for example,

has over 17,000 miles of high voltage transmission facilities in fifteen states that

serve all utilities in the region.

In Pick-Sloan, we have established the Western States Power Corporation to provide stop-gap funding for critical projects whose funding is precluded by the deficit

issues confronting Congress. Other regions have established similar financial mechanisms to deal with funding shortfalls. That being said, none is in a position to

shoulder all the funding needs of the PMA’s and federal generating agencies.

Federal power customers are also partnering with the Power Marketing Administrations in ensuring adequate transmission. The recently completed Path 15 in California is but one example of this sort of collaborative relationship. In Pick-Sloan,

31

Tri-State G & T and WAPA are working together to develop much needed transmission through the East Plains Transmission Project.

Mid-West thinks there are approaches to funding the federal power program that

would ensure adequate funding for the Power Marketing Administrations, while

preserving Congress’ role in determining budget levels and oversight. Federal power

customers believe strongly in the role of Congress and the federal power program.

The budgets of the PMA’s can be divided into two major categories—capital investment and annual expenses. Both of these categories are funded through congressional appropriations. Both of these categories repay those costs to the U.S. Treasury.

The annual expenses of the PMA’s—program direction and operations and maintenance—are funded by congressional appropriations each year, but are ‘‘scored’’ as

if they are permanent outlays of money. Those dollars are returned to the U.S.

Treasury by the end of that fiscal year.

So, in reality, the annual costs of the PMAs have no impact on federal deficits.

Sadly, the congressional budget process does not recognize this. As a consequence,

PMA’s find their annual budgets curtailed by appropriations committees’ spending

allocations or reduced by deficit reduction measures.

The current funding practice does not contribute to Congress’ management of federal deficits and threatens the reliability of the federal power program.

Mid-West suggests that a ‘‘net-zero’’ appropriation for the PMA’s annual expenses

recognizes the fact that these costs are not a permanent federal outlay of monies

and helps to ensure that the PMAs will have adequate resources to fulfill their mission. In fact, last year, the Administration included this concept in their Budget Request to Congress. The Federal Energy Regulatory Commission is currently funded

by such a mechanism.

A net-zero appropriation would maintain congressional budget authority. The

PMAs would still submit a budget to Congress. Congress would still set the spending levels for these annual costs, as well as PMAs’ capital programs. Congress would

maintain all of its oversight authorities as well.

Federal power customers wouldn’t have it any other way.

Thank you.

[Attachments submitted for the record by Mr. Graves follow:]

32

33

34

Ms. MCMORRIS. Thank you very much. Really appreciate each

one of you being here today. I wanted to start with a follow-up

question to Mr. Peterson from Pend Oreille PUD, because in the

midst of this proposal from the Administration you are still dealing

with a lot of uncertainty as to the way the Endangered Species Act

is implemented and the impact that it is having on the Pend

Oreille PUD and specifically the Box Canyon Dam project that you

operate.

It is my understanding that in 2001, FERC issued 228 hydro licensing projects and asserted that the average cost of protection,

mitigation, and enhancement (PMEs) dollars nationwide was 212

per kilowatt. The Box Canyon Project PMEs right now are 3,100

per kilowatt.

So I just wanted to ask if you would explain why Box Canyon

has 14 times the national average, and then also just expand a

35

little bit on the impact that it is having on a very small county in

northeastern Washington, a county of 10,000 people, and the largest employer, Ponderay Newsprint. Thanks.

Mr. PETERSON. Well, the short answer is they are so much higher

for us because we are being picked on.

[Laughter.]

Mr. PETERSON. And this is an illustration of the inconsistency

with the application of ESA, and a large river basin in the northeast part of our state known as Unit 22 only one small area was

designated as critical habitat for bull trout. It happens to be our

small reservoir where a FERC licensing proceeding was going on.

It looks like Federal agencies saw money rather than an opportunity to preserve a species. We do not have bull trout populations

in our area. We are designated critical. There are other areas that

have bull trout populations and are not so designated as critical.

Ponderay Newsprint is indeed an important employer, not just in

our county, but in the entire northeast region of the state. It is interesting that the two subjects I testified to come together in their

case. Our own resources, which we serve them with, is being impacted by ESA-related issues in our FERC license.

The Bonneville product that we purchase for them is subject to

influence as Bonneville’s costs go up PMC’s costs go up. In an industry in papermaking where 30 percent of their budget is energy

cost, it is critical that we keep rates low on every front.

Ms. MCMORRIS. Very good. Thank you.

I want to just have each of you briefly—the timer was not working, so we will just try to do it quickly, but I wanted just to have

you talk a little bit about security costs. It seems that most water

and power customers are willing to pay their fair share of 9/11 security costs but they believe that transparency and certainty are

needed.

Has there been any progress on getting more transparency and

certainty on these costs, and how would you guarantee transparency and certainty without undermining national security?

Mr. MCCLENNAN. I am not certain there is a formula. I think

your opening statement, Madam Chairman, was appropriate in

that I think there are costs that the consumers are willing to, or

the customers are willing to bear if you can assure us that they are

actually security costs and that they are for maintaining those provisions as they relate to in our case the power functions.

I think from our perspective it is inappropriate for us to just pick

up the tab for security cost for the entire projects based on either

historical allocations. I think you have to look at what is the value

of those.

I guess the answer to your question is, one, there could certainly

be additional congressional oversight as it relates to the costs associated with this; and then second, I think Congress needs to look

at with the agencies whether or not there is a cap, if you will, or

some funding mechanism that caps the exposure from the consumer side or the customer side because if you simply allow them

to continue to recover costs on security as you continue to go you,

you will just see what happens as we see in other programs. They

just move dollars around.

36

So I think a couple of things that clearly you could look at as you

go forward or the agency look at as you go forward is, one, can you

cap the exposure which the customers are facing; and second, can

you have an allocation of those costs that actually reflect what happens as it relates to those costs or who should bear the cost of

those because having those—I mean, generally what happens at all

of these programs, ESA is a perfect example as well, is because we

have, if you will, that can raise dollars from the program, paying

for the power, we are always looked at as the cash register for each

of these programs, whether it is ESA-related, adaptive management-related, security cost-related or otherwise.

So I think it is important to be able to find some way to cap that,

and then find some way to allocate appropriate fairly to those who

are bearing the burden.

Ms. MCMORRIS. Would anyone else, Mr. Hosken?

Mr. HOSKEN. Madam Chair, the issue of security costs at a Federal dam, they are pretty significant issue. I have experience with

the non-Federal major dam on the Columbia River where we installed state-of-the-art security.

The best thing we did was vet this in the public forum. We had

workshops on it. We made sure the public knew what we were

doing to the extent and scope, and we had a lot of good input, but

basically what we got from a lot of our constituents do not goldplate it. It is to protect the facilities, but really you need to protect

the people working there, but you can do that in a manner where

you do not have to break the bank, and I guess that is the kind

of thing that you can talk about this quite a bit in a public setting,

and get good public input.

The very specific details, well, that is for a different story, but

not overdoing it, and making sure you know what you are trying

to accomplish when you are done because it can be a moving target, and security is like safety in many respects, very important,

but how far do you go with it?

You have to be reasonable and you have to be prudent, and I do

believe in my experience having a good public vetting of these

issues is really where you get the best value. Thank you.

Ms. MCMORRIS. Does anyone else wish to comment? Mr. Pope?

Mr. POPE. Thank you. I second the remarks, but the national

critical infrastructure as set forth in the Nation possibly could be

interjected into the process of transparency and a cap as was stated earlier. It gives you a guideline of what should be covered under

security costs and I do support a transparency and a cap.

Ms. MCMORRIS. OK, Mr. Graves.

Mr. GRAVES. Thank you, Madam Chairman. I think one of the

problem is the Bureau of Reclamation, as I understand it, is allocating their security costs based on the cost/benefit ratios that were

made when they designed these projects as to who is going to pay

for what.

In fact, that is not appropriate because the benefit is different

than the danger of the risk. If we lost a power plant at one of the

Bureau’s dams, that would certainly not be a happy event. It would

not compare to if we lost the dam because then you would be

threatening water supply, irrigation, downstream flooding. All of

37

those are a much more dangerous event than the loss of a single

powerhouse.

So we think the very formula they are using to allocate these

costs is flawed.

Ms. MCMORRIS. OK, thank you.

Ms. Napolitano.

Ms. NAPOLITANO. Thank you, Madam Chairwoman.

Mr. Pope, on page 8 of your statement you state that Congress

expressly anticipated the contributions to the Central Valley

Project Restoration Fund would be cut in half within 10 years of

the date of enactment of the CVPIA.

Where does the source of that statement come from?

Mr. POPE. The source of that statement came from the CVP Improvement Act that was enacted in 1992, and the basis of that was

that the improvements needed to be made, and everyone recognized

that the environment needed to be protected. The idea was the first

10 years we are going to focus on the capital improvements, and

it would move toward more maintenance and operation.

The idea is the 33 projects would be completed, and once complete the would be just operation and maintenance of those

projects, and any capital investment would be completed in 10

years.

We have now been through the process of 14 years, and that it

is time to review the accomplishments in the CVPIA.

Ms. NAPOLITANO. Thank you. And given that, could you provide

this Committee the information of where in the Act this is addressed?

Mr. POPE. Yes.

Ms. NAPOLITANO. You do not have it with you.

Mr. POPE. I do not have it with me.

Ms. NAPOLITANO. But you can submit it to the Committee?

Mr. POPE. I can.

Ms. NAPOLITANO. OK, a follow-up question is your organization

a few months ago asked the Department of Interior to review its

implementation of CVPI Act. In the letter, you signed to Assistant

Secretary Mark Limbaugh, ‘‘The contractors conclude that their responsibilities under Section 3406 are sufficiently complete to satisfy the language of Section 3407[b][2][A].’’

Is it your position then that most of the goals have been accomplished?

Mr. POPE. It is our position that the goals have been accomplished. We have sat down with the Department of Interior and the

Bureau of Reclamation and have agreed to a process to come to an

agreement on what goals are complete and develop a criteria

through a stakeholder process going forward.

In our belief, we feel that the 33 projects are complete, and there

has been reasonable effort toward that completion over the last 14

years.

Ms. NAPOLITANO. Thank you. Then I would ask, I have a couple

of minutes here, to Mr. Hosken. Do you believe that the interest

rate that the Western Area Power Administration now applies to

new investments in Federal power utilities, the so-called Treasury

yield rate, is the right measure of the Federal government’s borrowing costs for new construction?

38

Do you know why the Administration is proposing to change the

interest rate on construction going forward?

Mr. HOSKEN. I do understand the interest rate they are being

charged, and I do believe that the move by OMB is to increase revenues to the Federal government. I believe there is a view that the

power users are able to share that burden when it is spread over

such a large number of constituents that nobody will have that significant of an impact.

That is a major concern for us. It is a major concern that when

is it going to end. Is OMB going to find ways to chip away at us

where they have the ability to do so?

The rates the Federal government pays for capital investment is

the rate we should pay as users of that power.

Ms. NAPOLITANO. And you have testified the amount of money at

stake here is not that large, or large. Why would Imperial then oppose the interest rate change?

Mr. HOSKEN. Imperial Valley is one of the lowest income per capita county areas in the State of California. The last thing we want

to do is add additional cost to already an area that is burdened

with cost structures that they struggle with daily.

We have a large population of folks coming into the country.

They work hard. It is an irrigation district-based area where we

have farming. These folks are living pay check to pay check. The

last thing we ever want to do is add an additional surcharge to

their bill to cover these costs that we do not think are fair or are

appropriate.

Ms. NAPOLITANO. Right, but most of those costs are for agriculture, not necessarily for cities. Most, what is it, 80 percent, 90

percent is ag, and the other—I cannot remember the percentage,

but it is quite small.

Mr. HOSKEN. Yes. Ninety-eight percent of our irrigation water is

used for farms.

Ms. NAPOLITANO. Ninety-eight.

Mr. HOSKEN. But the thing is of the 130,000 electric customers

we have, that is where the impact is really the most. That impact

is on 70 some thousand customers within Imperial County who are

living barely above the poverty level. They cannot afford any additional cost increases, and when you look at the cost of gas to fuel

some of our power plants right now, we are charging a lot more

than we would care to.

We would love to be able to charge less. We are looking aggressively at that, but this is a cost adder that we cannot do anything

about.

Ms. NAPOLITANO. Thank you, Madam Chairwoman.

Ms. MCMORRIS. Ms. Musgrave.

Ms. MUSGRAVE. Thank you very much.

Mr. McClennan, proud to have a couple of Coloradans here

today, and I have a couple of questions for you.

You talked about Tri-State being involved with the joint transmission project with Western Area Power Administration on the

eastern plains of Colorado and into Kansas, and I think you stated

earlier that was about 700 miles of transmission line.

Could you explain Tri-State’s interest in this very extensive

transmission project?

39

Mr. MCCLENNAN. Thank you, Congresswoman.

About a year ago our board made a decision that we need to develop significant infrastructure in our region, which includes Colorado, Wyoming, Nebraska, New Mexico obviously, to meet the load

growth needs. And so as we looked out to do that our board made

a decision to invest in a significant generation assets. But to be

able to do that we needed to get it delivered to places along the

front range and other places in Colorado.

So as a part of that, in what I will call the front range or the

eastern half of Colorado, there are significant transmission constraints to deliver both existing resources as well as future resources. And so we began to move forward with a project.

During the course of that sat down with Western, who has some

significant constraints delivering to its loads as well, and have

worked out now, we hope, a joint transmission project which will

be one of the largest projects developed on the transmission side

certainly in a long time.

So our interest in that project is to deliver what we need in

terms of significant generation to meet our membership needs. I

think certainly Mr. Hacskaylo can testify about Western’s needs on

it, but I think what it also does is provides a tremendous opportunity to increase the backbone and efficiencies at least in the state

and in the region in fact, to increase transmission assets.

So it is one of those areas where I think, if you will, the Federal

government’s role in working with its consumers and customers is

appropriate to have the agency work with us on the development

of the project, have the permitting moved forward, and then be able

to get significant generation assets in place for both the state and

the region.

Ms. MUSGRAVE. Thank you. I wondered also if you could comment on projects that, or wind generation in this area. You know,

it is just an optimum area for that. So what opportunities would

this project provide for the development of new wind generation resources?

Mr. MCCLENNAN. Thank you, Congresswoman.

I think what it does is it creates in an area where there are

transmission constraints, certainly the eastern plains of Colorado

have a significant transmission constraints today, it provides an

opportunity to take advantage of that what you described was the

wind opportunities on the eastern plains. It will create a backbone

system.

Now, I want to be careful here. We are not creating an interstate

highway. This will be a toll road. There will be significant expenses

for people to hop on and hop off of this process. This is certainly

not by any means inexpensive in the transmission world. But what

it does is it creates a backbone that does not currently exist for additional, whether it be biomass, wind. Actually in fact it would be

other fossil-based resources out on the eastern plains that are not

currently—were not currently available to do based on the current

transmission system.

So I think it is a phenomenal opportunity, to answer your specific question about wind, to have a backbone system that they can

utilize from the eastern plains of Colorado.

40

Ms. MUSGRAVE. Thank you for your fast-talking answers. I appreciate it. Thank you.

Ms. MCMORRIS. Very good. Yes, Mr. Walden.

Mr. WALDEN. Thank you, Madam Chair.

Dwight, thanks for being here, and thanks to all our panelists.

Sorry I had to step out for a moment when you testified, but I have

your testimony.

What do you think the financial impact of the current OMB

budget proposal on the customers of the Northern Wasco PUD, of

which I might add I am one? What do you think that is going to

be? How do you look at this impact?

Mr. LANGER. The impact on our customers, Representative Walden, on an annual basis, so my testimony, as you read, for all of

BPA customers is about $145 million a year. To our 8,500 customers, it would be $400,000 additional revenue taken from our

residential customers.

The danger of this proposal, in addition to that, not that——

Mr. WALDEN. Right.

Mr. LANGER.—additional rate increases is not bad enough, but

the precedent that this sort of action makes. If they are going to

take the revenues, which they claim are excess, which is not

excess——

Mr. WALDEN. Right.

Mr. LANGER.—beyond a certain amount. If the bar is set at

$500,000, what is it going to be next year? If it can be administratively changed so it is not only——

Mr. WALDEN. How did they pick 500 million?

Mr. LANGER. Have no idea.

Mr. WALDEN. See, I look at this as like I am paying down a home

mortgage, and for 50 years I have been paying on time with interest. They came in and they said, you know, we are going to refinance you here, which they did what in 1994 or some time.

Mr. LANGER. Yes.

Mr. WALDEN. And we resolved——

Mr. PETERSON. 1996.

Mr. WALDEN. 1996, before I got to the Congress. Resolved all

these past questions about whether ratepayers in the Northwest

are paying their fair share and paying down debt and paying it on

time, resolved all of those

Now I am on this new mortgage plan, and I am making my payments every month. Then at work I get a raise. And now my mortgage company says, hey, that raise you just got, kick it into the

principal here. And I say, wait a minute, I have an agreement with

you on what I owe every month.

I do not care. Kick in the principal. Kick it in.

Am I looking at this right? Is not that——

Mr. LANGER. Yes.

Mr. WALDEN. And I have seen wild swings in the energy market,

so have all of you, and I saw what happened to ratepayers in the

Northwest in an environment that was going to be sort of free of

regulation. We saw what that got us.

Mr. LANGER. Yes.

Mr. WALDEN. And we have never recovered from those rate increases.

41

Mr. LANGER. That is exactly right. We are still recovering, the region, and Bonneville Power Administration and its customers have

done a wonderful job trying to—in managing a tremendous challenge.

Mr. WALDEN. Yes, they have.

Mr. LANGER. California also has experienced the same—is aware

of the same problem.

Mr. WALDEN. But if we get a bad water year and we do not have

the power to flow when we need—the water to flow to make the

power to build, we could eat up those reserves pretty rapidly, could

we not?

Mr. LANGER. Exactly.

Mr. WALDEN. And then what happens?

Mr. LANGER. This proposal looks only at the costs or the revenues. It does not look at what those costs are. In your analogy

about the mortgage company taking the money and putting it toward principal, that was money that you had budgeted to feed your

family.

We have costs in the Northwest that we do not know what the

costs are going to be if there is purchases that need to be made on

the market.

Mr. WALDEN. What if Judge Redden says spill more water, instead of 150 million, it is 300 million out of the system, then what

happens?

Mr. LANGER. None of that is taken into account in this proposal.

Bonneville would have to increase its rates further.

Mr. WALDEN. I do not get it. None of this makes sense to me.

I did not come here to raise peoples’ power rates. I do not know

anybody in this body that did.

Mr. LANGER. No.

Mr. WALDEN. But somewhere between here and downtown somebody has a brilliant idea that says let us keep messing around so

we can make those poor folks in the Northwest pay more, because

that is going to be the outcome here.

Mr. LANGER. That is going to be the outcome, and the

welfare——

Mr. WALDEN. I tell you.

Mr. LANGER.—of the public have to be taken into account first,

not last, and we just do not feel that that is what is happening in

this proposal. It is arbitrary. This does not make sense to take

hard-earned money to pay off low-interest costs, so we have to go

out and borrow money at a higher interest cost.

Mr. WALDEN. Isn’t our interest rate, which is locked in by that

1996 Act, actually above the market interest rate?

Mr. LANGER. From what I understand, the average rate back in

1996, when the refinancing of the Treasury debt, the average rate

went from 3.4 percent up to 7.2 percent, plus there was $100 million premium paid to Treasury for the privilege of——

Mr. WALDEN. You are being charitable.

Mr. LANGER.—to be able to get away from the criticism that we

were not paying——

Mr. WALDEN. Yes, we gave them a bonus payment to get off our

back.

Mr. LANGER. Yes.

42

Mr. WALDEN. In effect. But then everybody agreed this is the set

rate. This is the set balance. Pay it on time or you are going to be

fined.

I am just concerned we are headed down a real slippery slope

here.

Mr. LANGER. This is a terrible slippery slope.

Mr. WALDEN. And from which we could end up missing a payment. Can you imagine the outcry here if we missed a payment?

Mr. LANGER. That is a fear that the Pacific Northwest has

worked very hard to avoid. We have taken great pride at great expense to our customers to keep rates at a level that it would ensure

Treasury payment.

There were three adjustments made to Bonneville’s rates—Loadbased crack, finance-based crack, and a safety-net crack—to ensure

the Treasury is paid on time——

Mr. WALDEN. That we made.

Mr. LANGER.—and in full.

Mr. WALDEN. Yes. I have exceeded my time. Thank you, Madam

Chair, Dwight, and Panel Members, thank you for your testimony.

Ms. MCMORRIS. Mr. Pearce.

Mr. PEARCE. Thank you, Madam Chair.

Mr. Graves, on page 3 you state that the budget request erroneously states that Pick-Sloan power customers have not heretofore

been responsible for repaying these costs.

Can you document a little bit about how you have not been paying those costs all along.

Mr. GRAVES. They are all part of the power repayment study that

the Western Area Power Administration conducts every year. They

are scheduled for payment. They are made. Pick-Sloan is ahead of

time in repaying the capital investment in the program.

Mr. PEARCE. Do you get any answers when you point those

things out to the agency?

Mr. GRAVES. To Western or to?

Mr. PEARCE. To the OMB.

Mr. GRAVES. OMB? OMB does not talk to us.

Mr. PEARCE. I thought they just did not talk to us.

[Laughter.]

Mr. PEARCE. I am glad where it is equal opportunity sitting here.

Mr. Hosken, you declared strong words at one point, nonsense,

and you said it, but then you also put it into print. Do you stand

by those strong words?

Mr. HOSKEN. Yes, I do, sir.

Mr. PEARCE. All right. I suspect we agree on more things that

that, but I think we probably agree on that too.

Mr. Peterson, you had mentioned that the EPA costs appear to

be lacking in sound science and common sense. Have you, as they

try to lump the cost and send them at you, have you gone in and

tried to de-construct any of the lump cost of EPA enforcement?

That is a fairly technical thing.

Mr. PETERSON. As a policymaker, I hoped for a question where

I could say, like you, I depend heavily on staff. We are just beginning to implement the new license, and whether our accounting

processes are going to enable us to segregate that, I do not know.

43

Mr. PEARCE. But you have not gone back upstream? In other

words, the EPA costs are passed down to you from the power association, right?

Mr. PETERSON. From agencies imposing conditions on our license.

Mr. PEARCE. It is not that they are doing things up there and

passing the cost down. It is that they are imposing things——

Mr. PETERSON. It is that we are having to spend money.

Mr. PEARCE.—for your license.

Mr. PETERSON. Exactly.

Mr. PEARCE. What sorts of things? Do you have a couple of examples of some of the things they are imposing on you?

Mr. PETERSON. Well, one of the ironies that I mention in my

written testimony is that we are being asked to spend millions and

millions and millions and more millions of dollars in providing passage and improving habitat for bull trout, an endangered species.

Mr. PEARCE. Sure, and you are the only ones.

Mr. PETERSON. And at the same time those Federal agencies that

are seeking to do that are also funding a tribal bass hatchery on

our reservoir. Bass eat bull trout.

[Laughter.]

Mr. PETERSON. Bass swim in warm water. Bull trout need cold

water. That is where sound science and common sense seem to

come together and both seem to be violated.

Mr. PEARCE. Points well made.

Mr. McClennan, you had mentioned that it appears that they are

trying to get you to pay—get the power companies to pay for the

cost for irrigation. Can you explain that just a little bit?

Mr. MCCLENNAN. Congressman, it is a similar issue to the one

Mr. Graves referred to, is that it is an attempt ultimately to accelerate the repayment of irrigation costs, which are really the obligation of irrigation customers, by the power customers in the proposal.

And so what you end up doing is there is obviously an agreement

that power helps pick up those costs, certain costs for irrigation.

This is really an acceleration of costs that ought to be paid for, at

least initially, by irrigation as those are developed.

Mr. PEARCE. Mr. Langer, we fought back a proposal last year

for—I mean, it was a different technique but the same deal. They

were going to pass increases along to all the small electric co-ops

or whoever buys power, and everybody is going to get an increment, and it is all going to go into the kitty, and everybody is going

to be happy the further upstream you get.

We beat that back last year. Is this just another attempt from

a different direction? In other words, they did not want to come at

it the same way, so they thought we would all be asleep this year.

Is that kind of the——

Mr. LANGER. Yes, sir.

Mr. PEARCE. That would be enough.

[Laughter.]

Mr. LANGER. Trying to do this administratively this time, so it

is the same.

Mr. PEARCE. Yes, it has some of the feel for it that, you know,

those country boys, you know, figures it out last time. Let us get

a little smarter, and the interest, they never look at interest. I do

44

not know. We will go to work on it again this year. I think that

you see the mood of the Committee is to not take it lightly once

again. So we will weigh in on it.

But thank you all for your presentation, and Madam Chair,

thank you, and I hope we have not missed our vote.

Ms. MCMORRIS. We are going to be racing across the street.

We are going to take a quick recess. If you all will just hang

tough. I wanted to ask this panel a couple more questions. So if

you would just be so kind, we will be back with you shortly.

Thanks.

[Recess.]

Ms. MCMORRIS. Call the meeting back to order.

I wanted to go back to Endangered Species Act just to get some

more input. I think we all recognize that drought has been playing

quite a role in the Northwest.

I also wanted to hear what kind of an impact the Endangered

Special Act compliance has played in increasing rates, and if there

is uncertainly, what kind of uncertainty you face in future ESA

cost, and if you feel these costs are being implemented consistently

or not.

So if anyone would like to take a stab at that question. Mr. Pope?

Mr. POPE. I cannot give you a quantification, but anyone—we

have one of our members of the Placer County Water District, who

is facing a hydro relicensing on 2012 or 2013, and they are as worried about having an endless process, and I think if just clarity can

be made on what the endangered species are, how to deal with

them, and some approach so that if you are going to do a relicensing you are not caught in what appears to be a continuous loop

of issues that do not really match each other.

Bass in warm water, and trout in cold water, I mean, it does not

make any sense.

So I think what we are looking for is clarity around today’s Endangered Species Act. I think everybody does not want to do away

with the Act completely, but just bring it up to date so that everybody understands the rules and the standards.

Ms. MCMORRIS. Mr. Langer, you had testified that fish costs are

difficult for us to track. I was wondering if you would just comment

on how much you believe customers understand the impact of Endangered Species Act and its impact on rates, and if they do not,

do you think it would be helpful for the PMAs to transmit this information to you as an estimated percentage of your bill?

Mr. LANGER. Based on a recent survey that was completed as to

what the estimated costs in their bills were, 5 percent of the, or

the majority of the public in the survey felt that their costs included in their retail rates was like 5 percent. In actuality, BPA’s

fish and wildlife costs are $340 million a year, 20 percent of the

priority rate.

In addition, BPA forgoes another $350 million in revenues that

could have otherwise been used to reduce rates. Fish and wildlife

costs have increased 270 percent in the last 10 years.

In addition, through the Corps of Engineer Columbia River Fish

Mitigation Project, there are between 1.5 and 1.6 billion dollars of

congressional appropriations that will be paid back by the agency

through its customers through 2014.

45

With the ongoing litigation, the salmon recovery program in

Judge Redden’s court, it is very unpredictable as to what the future

costs will be.

Now, just as my colleague, Mr. Peterson, testified earlier, common sense seems to have gone out the window, and the best

science. Our customers in the Pacific Northwest have paid over $6

billion in fish and wildlife costs, $4 billion since 1997. All of that

information that has been gained seems to be just ignored and not

put applied to the programs.

The impact on the customers, the impact to our economy, it just,

again, seems to be ignored, and the customers are not aware, and

I think that, though I believe that Bonneville and its customers do

a good job of communicating to the public, we need to do a better

job because clearly they do not understand the impact.

Ms. MCMORRIS. Good. Anyone else? Mr. McClennan?

Mr. MCCLENNAN. Thank you, Madam Chair.

Just a couple of quick comments. In the Colorado River portion

of it, about 16 percent of the direct costs are related to ESA. It does

not include what I will call operational costs, which is lost generation as a result of fish flows and so on.

In terms of putting the program together, we have spent about

$200 million to get an adaptive management program put together,

and this really goes at your issue of what I will say is future uncertainty. You spend all of the dollars, you create a 23-member advisory panel which includes the environmental community, to try to

set up a management program for the last 12 years about how do

you manage the program. You get 12 years into the program,

seems to be because adaptive management needs to have some

changes as you move forward, and now we find ourselves in a situation where two environmental groups have sued the Secretary of

Interior and the Bureau of Reclamation that in fact adaptive management program put in place by those 23 individuals, including

the environmental community, is not working.

So in fact we have to spend another $200 million just to do an

environmental review, and you change the flows again you will face

additional ESA costs when in fact what you thought you would

do—one of the challenges here is the program I am referring to is

held up as the model for how you put an adaptive management

program together. And in fact if the model does not work on the

ESA as you go forward, I am not really certain what does.

Ms. MCMORRIS. Anyone else? Mr. Graves?

Mr. GRAVES. Madam Chairman. On the Missouri River, we are

just wading into the issue of adaptive management relating to the

pallid sturgeon. We also have two endangered bird species on the

river, the least tern and the piping plover.

The problem we have is we have dueling endangered species. The

piping plover and the least tern were first listed prior to the pallid

sturgeon. These days they nest on sandbars below the last dam in

the system, Gavin’s Point. Historically, they would never have

nested there because the historical hydrograph of the Missouri

River is that in June, around the time of the summer solstice,

there is this huge flood that used to come down from the melting

of the mountain snow pack. So there were no birds nesting on

46

those sandbars because there were no sandbars at that time of

year. The dams have created that habitat.

Now, the pallid sturgeon needs a big spring pulse. The pallid

sturgeon also needs hours of daylight, and water temperature. All

of these from the historical information that the USGS and Fish

and Wildlife have presented show this all occurs right around the

summer solstice.

But the adaptive management plan, when it is developed, will

not be able to meet that need of the pallid because they would be

destroying the habitat for the birds that are already there. So our

fear is, beyond the operational constraints which already exist because of the birds, we are gong to be in an adaptive management

process that simply is ignoring some of the basic realities about the

pallid sturgeon and its spawning habits.

Ms. MCMORRIS. OK. Go ahead.

Mr. LANGER. I would like to take this opportunity, Madam Chairman, to recognize the work of Representative Walden, Representative Baird, and Representative Dicks on the ESA salmon recovery

issue. The focus primarily has been with regards to hydro and a

little bit on habitat, and with their regional field forums that they

are having focus is being put on harvest and hatchery that we have

not had before, and the region is very appreciative of this leadership in this area, and feel that there is a great deal of benefit, good

science to be gained from this leadership, and initiative. Thank

you.

Ms. MCMORRIS. Very good. Mr. DeFazio, do you have any questions?

Mr. DEFAZIO. No, I do not.

Ms. MCMORRIS. OK, Ms. Musgrave.

Mr. MUSGRAVE. Thank you, Madam Chair.

If this has been asked, please just let me know while we were

running back and forth, but this question is for Mr. Graves. It is

my understanding that OMB has justified the agency rate increases as a way of mitigating taxpayer risk, and I would like comment on that.

Then I would like to know if there has ever been a default on

any of the loans in question.

Mr. GRAVES. Thank you. Pick-Sloan customers have never defaulted on their repayment obligations paid through their power

rates. Mr. Hacskaylo can speak directly to defaults in the Western

Area Power Administration. I am not aware of any of them.

I am not sure what the risk factor is. The Federal hydropower

in the Missouri River Basin, which includes eastern Colorado, is a

very important resource for cooperatives in the region. It can be on

average 30 percent of their power supply, for some municipalities

it is 100 percent of their power supply.

We take our repayment responsibilities very seriously, which is

why we have always maintained a record on repayment of capital

investment that actually has us ahead of schedule in terms of our

repayment obligations.

Ms. MUSGRAVE. Thank you very much. Thank you, Madam

Chair.

Ms. MCMORRIS. Ms. Cubin.

Ms. CUBIN. Thank you, Madam Chair.

47

I would like to start with Mr. McClennan. You mentioned in your

testimony the memorandum of understanding that was developed

to help facilitate the working relationship with power customers

like Tri-State, or power customers like Tri-State have with WAPA,

the Bureau of Reclamation and the Corps of Engineers.

Could you explain to me how that memorandum was developed

and how it is being implemented?

Mr. MCCLENNAN. Certainly. Thank you, Congresswoman.

It was developed because we keep facing these issues annually

about budget cuts, about agencies not being able to have enough

funds to do annual operations at times, about the customers not

having a sense of where the dollars are actually spent in these programs.

So several years ago a number of the customers sat down with

the agencies and said we need to be able to find a way, and part

of it was being driven by the fact that the agencies were coming

to the customers saying could you help advance funds because we

do not have enough appropriations to carry out our annual activities, in some cases to carry out emergency operations, and otherwise.

So from the customers’ side, you know, we are obviously the largest beneficiaries of these things continuing to be financially solid

and move forward and be operationally sound, and so we said we

would be happy to do that, but we are not doing this in terms of

writing you a blank check. You have to be willing to sit down with

us.

So what happens now is that the process is on a regular basis

we sit down with the agencies and look at their work plans as they

go forward so we have some sense of where they are going to be

spending dollars, what those dollars look like, where does it fit into

the needs and appropriate issues as it relates to the customers.

So to this point it is a relatively, I will say new, last couple of

years option where we have got the agencies, I think, to all sit

down with the customers and figure out where we are going collectively, to be able to meet what really are some budget shortfalls.

They are issues associated with emergencies. They are how do we

keep this system up, but it also provides, if you will, an additional

beyond what Congress does, a check and balance; that if we are

going to put up our dollars to help the Federal agencies move forward, we have some understanding of where they are going.

Ms. CUBIN. So that is working out relatively well?

Mr. MCCLENNAN. It has worked out. I will say that it is not without struggles. Some of the agencies are better than others in terms

of being able to provide information that is helpful to figure out

where you are going. We have a little bit more of a struggle, if you

will, with the generating agencies than we certainly do with WAPA

in this case in terms of the memorandum. Part of it, I assume, is

just the size of their budget, where they are spending dollars and

so on.

So I will say I am cautiously optimistic that we are going to be

able to work through these issues as we go forward, but certainly

it is not without some pain in certain cases.

48

Ms. CUBIN. Thank you. You also expressed in your testimony

your opposition to the Pick-Sloan cost reallocation that is included

in the Administration’s budget?

Mr. MCCLENNAN. Right.

Ms. CUBIN. I was a vocal opponent of this proposal last year, and

I will be again this budget cycle. I would like you to reiterate, if

you would for the record and for me, if the Administration’s PickSloan proposal were to be implemented roughly what cost increase

would my constituents and others in rural communities expect?

What would they expect? Thank you.

Mr. MCCLENNAN. Thank you, Congresswoman.

I have not done the calculation to say if we took it all the way

down to consumers through Tri-State and the member distribution

systems. My understanding is at this point you are somewhere

north of a 10 percent increase to Tri-State that we would then pass

on to our individual members and move forward in terms of the

customers.

So I have not done a calculation that says by member what is

the impact, but the impact coming to us potentially that we would

have to pass on, we have no choice to pass on to the consumers is

near or above 10 percent.

Ms. CUBIN. Well, that is close enough, and that is still unacceptable, so I will continue to do everything I can to see that that does

not happen.

Mr. Graves, good to see you again, and welcome.

In your testimony you discussed Midwest support for a net-zero

approach to PMA appropriations, and you even stated that the current system threatens the reliability of the Federal power program.

However, I have also heard concerns that a net-zero approach

would decrease congressional oversight of PMA operations as well

as hinder customer input.

Could you please explain how you think the net-zero approach

benefits rural customers?

Mr. GRAVES. I would be happy to. Thank you very much.

There are currently, under the current budget process the Western Area Power Administration’s budget can be cut through rescissions that Congress has to invoke dealing with deficits. It can also

be reduced by the fact that each committee, each appropriating

committee has an allocation, and they have to do all of their spending within that allocation.

The annual costs of the PMAs are not permanent outlays of Federal money. They come back by the end of the year, so there is a

net-zero cost to the Treasury.

It absolutely would not reduce congressional oversight. We do not

want that. The Federal power customers are vitally interested in

maintaining Congress’s role. The PMA would still be required to

submit budgets to Congress. The PMA would still be required to

justify that. The Congress would be setting the number that the

PMA would be spending for its annual expenses combined with the

MOU which Mac had mentioned where we sit down with the agencies three or four times a year to go over their costs.

I mean, we really care how much money is being spend because

we are going to pay for it one way or the other. We are going to

pay for it, and we want Congress to have that confidence as well,

49

which is why the budget process in terms of submittals to Congress

and Congress’s role in setting the spending limit does not change.

What changes is the way the revenues are treated because right

now the budget process does not recognize that the annual costs

that are appropriated come back to the Treasury in the same year

that they are appropriated.

Ms. CUBIN. Yes, that is true, but I am going to have to think

about this a little more. I appreciate your answer.

Mr. GRAVES. Sure.

Ms. CUBIN. But I am going to have to think about this a little

more because I can see how it would take more, in my opinion,

more than due diligence for the Congress to have the oversight that

it has now, but I will think that over, but thank you.

Mr. GRAVES. Yes. Well, we appreciate that, and as I said, we are

really exercising due diligence and we certainly encourage Congress to maintain its role in oversight and due diligence in that as

well.

Ms. CUBIN. Thank you.

Mr. GRAVES. Thank you.

Ms. MCMORRIS. OK, thank you everyone again. Really appreciate

you being here, sharing your perspectives, some of your challenges

and your opinion of the Administration’s proposals specifically. So

it has been very helpful. We are going to move to the next panel

at this time.

Mr. Steven Wright—I guess I will wait a minute here.

[Pause.]

Ms. MCMORRIS. OK, just to keep this moving along, I will go

ahead and introduce the next panel. Mr. Steven Wright, Administrator of Bonneville Power Administration; Mr. Michael Hacskaylo,

Administrator, Western Area Power Administration; Mr. Michael

Deihl, Administrator, Southwestern Power Administration; Mr.

Charles Borchardt, Administrator, Southeastern Power Administration.

I am pleased you are all here. Go ahead an start with your

testimony. Mr. Wright, please.

STATEMENT OF STEPHEN J. WRIGHT, ADMINISTRATOR,

BONNEVILLE POWER ADMINISTRATION, PORTLAND, OREGON

Mr. WRIGHT. Thank you very much, Madam Chairman, and

thank you to the Subcommittee for your ongoing attention to these

issues which we think are of national importance.

The critical event in this decade for electric utilities was the west

coast energy crisis, and there are two big things that came out of

that, both for western utilities and for Bonneville specifically.

First, it did tremendous financial damage from which we are still

recovering; and second, it unmasked the fundamental supply and

demand problem in the West that resulted in the tremendous price

volatility and reliability problems that consumers encountered.

I am here today to report on BPA’s substantial progress toward

recovery and implementation of lessons learned from the crisis. On

the financial side, we finished for the third straight year in the

black in 2005. We lost approximately $700 million, you may recall,

in 2001 and 2002. We believe we have righted the financial ship

50

by finishing in the black in 2003 and 2004, and finishing at $126

million in the black last year.

We made our full scheduled annual treasury payment last year

for the twenty-second straight year, and we are well positioned to

do the same in 2006.

In terms of addressing the supply and demand issues, we have

made substantial investments in infrastructure over the last few

years. Since last year’s hearing, we energized the Shultz-Wantoma

line, the third major 500 kv line to be built in the region since

2003. FERC records indicate that ours is the largest transmission

construction program in the country right now. We have completed

further refurbishments of the hydro system, increasing the energy

output of that system, and we have accomplished about 40

megawatts of energy efficiency last year as well.

None of this could have been accomplished without the congressional approval in 2003 of an increase in our borrowing authority.

We greatly appreciate this Committee’s support for that initiative,

and wanted to report to you that it is going well.

Now, to move beyond history into some of our challenges for this

coming year. I want to put those into six categories.

First, long-term power sales contracts. Our current contracts expire in 2011. These contracts define the rights to 40 percent of the

Northwest electricity supply. The neutron tracks that we are working on with customers are being designed to create certainty for

utilities and accountability as to responsibility for serving load

growth. Both are necessary to deploy the large amounts of capital

needed to assure adequate electric infrastructure that will allow

our economy to grow.

Second, salmon restoration. BPA is the primary funder for the

largest environmental restoration program in the world. Our 2004

salmon plan was remanded by the Federal District Court and we

have embarked with states and tribes on an extremely ambitious

effort to, first, define recovery goals; second, define necessary actions across the salmon’s life cycle to achieve recovery; and third,

secure commitments from all the affected parties to move forward

toward recovery.

Our third major challenge, we need to set power rates for 2007

and 2009. Rates need to be adequate to assure BPA can carry out

its mission, and have a high probability that we will cover all costs,

including the treasury repayment. We are also seeking to keep our

rates as low as possible. We believe we have created an exemplary

process for creating transparency and stakeholder involvement in

cost decisions that impact our rates and continue to work closely

with them as we move forward in this rate case.

Fourth major issue is transmission congestion management. Despite our aggressive construction program, we continue to have congestion that threatens both reliability and disrupts commercial

traffic on our system. We are committed to an effort to cost-effectively relief congestion while minimizing impacts on our transmission customers.

Fifth, we continue to make investments in transmission and the

generation system as well as investments in energy efficiency for

the loads we serve. We are committed to continuing our infrastructure investment program.

51

Sixth, we continue our efforts to define a mechanism to our realization of a one utility vision for transmission operations and planning in our region.

Finally, my written testimony explores the many ways that the

Energy Policy Act of 2005 impacts the Bonneville Power Administration. I am going to highlight only one.

We believe the evolution of our industry it was necessary to provide for authority to establish mandatory reliability standards and

an enforcement mechanism. While there has been great trepidation

about the implementation of that provision of the Act, we believe

the FERC is doing a thoughtful and good job of balancing national

standards with accommodations for regional differences that have

been particularly important to the West.

Madam Chair, if I could take one more moment and just address

the President’s budget proposal, and the comments that many of

the members here have made.

Last year’s budget included moving the Bonneville Power Administration and the other Power Marketing Administrations from a

cost-based rate approach ratemaking to market-based rates. The

Administration has sought to learn from last year’s proposal and

has dropped that proposal and has proposed a new alternative.

The new alternative addresses what should happen with extraordinary surplus sales revenues above BPA’s historical record high.

The $500 billion represents the historical record high for surplus

sales revenues.

The Administration believes the proposal in the budget retains

the benefits of these surplus revenues for Northwest ratepayers by

repaying Bonneville’s debt. The proposal extends BPA’s borrowing

authority that is limited by law to make infrastructure investments

as needed.

However, the Administration does recognize there has been a

strong reaction from Bonneville’s customers and from the Northwest Congressional Delegation to this proposal. And while the Administration does intend to move forward with this proposal on a

BPA rate case beginning in July, we are also prepared to work

with the Northwest’s interests, members of the delegation, BPA

customers and others to address the issues that have arisen.

That concludes my testimony, Madam Chairman. I will be available for your questions.

[The prepared statement of Mr. Wright follows:]

Statement of Stephen J. Wright, Administrator,

Bonneville Power Administration, U.S. Department of Energy

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity

to be here today to discuss both the Bonneville Power Administration’s (Bonneville)

implementation of the Energy Policy Act of 2005 and the President’s FY 2007 budget as it relates to Bonneville. The Subcommittee’s attention and support have been

and will continue to be essential as we move ahead.

In my testimony today, I will first share with the Committee how Bonneville is

working to incorporate the provisions of the Energy Policy Act. I will then discuss

Bonneville’s significant successes over the past year and the challenges we are facing for the upcoming year, followed by an overview of the FY 2007 budget and its

proposals.

ENERGY POLICY ACT IMPLEMENTATION

The Energy Policy Act is far-reaching and has the potential to impact energy

issues in the Pacific Northwest for a long time. Bonneville has a long history of

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providing reliable transmission service in the Pacific Northwest and has, since 1996,

filed reciprocity tariffs with the Federal Energy Regulatory Commission (FERC)

that apply transmission terms and conditions to all transmission users on a comparable, nondiscriminatory basis. Bonneville has also been at the forefront of regional and national efforts to strengthen system reliability. While the Energy Policy

Act of 2005 does not single Bonneville out for action in any particular instance, it

will cause changes to Bonneville’s operating environment, and so we are proactively

contributing to its implementation.

Two of the most important provisions potentially affecting Bonneville are Sections

1211 dealing with reliability and 1232 authorizing Bonneville to join a regional

transmission entity.

Section 1211 provides for FERC to designate a single Electric Reliability Organization (ERO) for the United States. This entity will be authorized to propose, for

FERC’s review and approval, mandatory reliability standards that will govern the

practices of all users, owners, and operators of the bulk power system, and to enforce them through a system of sanctions and monetary penalties to be administered

by regional reliability organizations. Bonneville has been actively contributing to the

implementation of this system by working with the North American Electric Reliability Council (NERC), which will apply to FERC for certification as the Electric

Reliability Organization (ERO), and with the Western Electricity Coordinating

Council (WECC), which will seek the enforcement role in the Western Interconnection. The success of complex relationships between FERC and NERC and WECC,

and the generation and transmission operators in the West is absolutely crucial to

the smooth functioning of our part of the Nation’s bulk power system. It is a part

that is physically quite different from the East, so the challenge is to achieve a uniformly high quality of reliability through sometimes different regional means. This

is an extremely complex undertaking and managing this transition is our highest

priority in the coming year. FERC sent encouraging signals in their final rulemaking on Section 1211 by acknowledging and providing for accommodation of regional differences and by allowing NERC and the regional reliability organizations

to create a first approach to specific application of many of the governance and process prescriptions of Section 1211.

Section 1232 authorizes The Secretary of Energy or, upon designation by the Secretary, the Bonneville Power Administration, to make arrangements for Bonneville

to participate in a regional transmission organization under certain conditions. Bonneville is involved with efforts to address transmission functions that could be carried out by a regional transmission entity under a ‘‘one-utility’’ vision for Northwest

transmission where the region’s transmission system would be managed as though

owned by a single utility. Although this is a vision for the Northwest power system

that has guided regional policy making for decades, there is a wide divergence of

opinion within the Northwest regarding the type of transmission organization that

is appropriate for the Region.

An attachment is included with my testimony today that highlights Bonneville’s

approach to several other provisions of the Energy Policy Act. Our actions are designed to support the Administration’s commitment to expand our Nation’s energy

supply by developing a diverse, dependable energy portfolio for the future, and the

critical infrastructure that is necessary to sustain it.

BONNEVILLE’S RECENT SUCCESSES

FY 2005 was marked by another major stride in improving Bonneville’s financial

health while making significant investments in our region’s electric infrastructure.

We exceeded our net revenue targets, earning just over $126 million in modified net

revenues, the highest since the big losses were suffered during the West Coast

energy crisis. The table, which follows, shows a historical comparison of modified

net revenue results. BPA has determined that modified net revenues are a better

representation of the outcomes of normal operations and are more similar to calculations developed as part of the initial rates for the current rate period.

53

For the twenty-second year in a row, Bonneville made its planned repayment to

the Treasury on time and in full.

It was also a year of major milestones in our business. On the transmission side,

we continued our program to shore up the region’s reliability, meeting our target

for completing construction projects on schedule and within budget. The Grand Coulee-Bell 500-kilovolt line in eastern Washington, our largest transmission project in

two decades and one of the largest in the Nation, was energized last December. The

line relieves congestion from east to west and enhances system reliability while increasing capacity to move new generation to consumers.

On the power side, Bonneville conducted a public process called the Power Function Review (PFR) to help determine program funding levels for the next power rate

period, 2007-2009. We completed a short-term Regional Dialogue to address power

sales contract issues relevant through 2011. We also opened up a long-term Regional Dialogue on Bonneville’s power supply role beyond 2011.

We met our 2005 targets for conservation savings and efficiency improvements to

the generating system, achieving 43 megawatts of new conservation and 20

megawatts of additional hydro generation capability.

These and many of our other successes in 2005 were guided by the development

of our long-term Strategic Plan that was completed in early 2004. This Plan laid

out Agency direction through FY 2011 and grew out of the need to set long-term

objectives along with strategies to reach those objectives. Bonneville has now moved

into the implementation phase of this Plan with a focus on Bonneville’s future

power supply role along with infrastructure development, risk management, technological innovation, conservation and renewables, facilitation, and efficiency initiatives—all of which help set the stage for the region’s long-term energy future.

UPCOMING CHALLENGES

Bonneville markets wholesale power and provides other benefits to virtually every

utility in the Pacific Northwest. With current power rates set to expire in 2006, Bonneville is in the midst of its first full-fledged wholesale power rate case in five years.

In addition to the completed Power Function Review, Bonneville is currently initiating a second public review of costs to seek further reductions in order to hold FY

2007-2009 rates down. Bonneville is scheduled to adopt a final proposed rate structure this July that will take effect October 1, 2006.

With existing power contracts due to expire in 2011, Bonneville must establish

clearly its future power supply role and has initiated a long-term Regional Dialogue

that is designed to create more certainty for the region and that should lead to more

investment in electric system infrastructure. We believe increased clarity about how

much power Bonneville will provide beyond 2011, and at what price, is essential to

assuring adequate infrastructure investment by other parties.

Bonneville funds a diverse and comprehensive fish and wildlife program to mitigate impacts of Federal hydropower development on Columbia Basin fish and wildlife. All together, our direct fish and wildlife costs, plus foregone revenues, are expected to average nearly $700 million annually in the FY 2007-2009 period. Litigation, dating back to 1995, continues over the operation of the Federal Columbia

River Power System (FCRPS). Bonneville, the Army Corps of Engineers, the Bureau

of Reclamation, the National Oceanic and Atmospheric Administration, and the

Northwest States and Tribes are all currently collaborating to gain agreement on

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performance objectives, the scientific framework, and the Government’s Proposed

Action. Without such agreement, the stability and predictability of the hydro system

is at great risk.

Bonneville is also focusing internally. We are in the midst of a multi-year, agencywide efficiency program designed to further lower our costs. Implementation of efficiency recommendations is occurring incrementally and has already led to consolidation and centralization of some agency functions, and simplification of operational

processes.

BONNEVILLE’S BUDGET INITIATIVES

Beginning in the President’s Fiscal Year 2007 budget released to Congress and

consistent with sound business practices required under the Federal Columbia River

Transmission System Act of 1974, the budget provides that Bonneville Power Administration will use any surplus power sales (net secondary) revenues it earns in

excess of $500 million per year to make early payments on its federal bond debt to

the U.S. Treasury.

This administrative action will both reduce the federal deficit and provide BPA

with needed financial flexibility to invest back into energy infrastructure and to pay

down debt. BPA will make no additional payments to the Treasury as a result of

this action if surplus revenues do not exceed $500 million in a year.

BPA markets its surplus electricity production to customers both inside and outside the Pacific Northwest. In the last decade, BPA has an average of $457 million

per year in net secondary revenues. BPA will potentially realize record high levels

of surplus revenues due to high wholesale electric prices in the West. The budget

reflects a total of $924 million from FY 2006-2016 from net secondary revenues

greater than $500 million per year.

The President’s budget action would extend the use of Bonneville’s borrowing cap

with the U.S. Treasury by about three years. Absent the President’s Budget, BPA

could have run out of borrowing authority in the year 2011.

It is the Administration’s position that it is sound business practice to use higherthan-historical net secondary revenues to pay down debt, consistent with statutory

priority of payment requirements. The Administration believes this action will help

to provide Bonneville with needed financial flexibility to meet its future energy investment needs, including new transmission capacity, and that long-term power and

transmission customers of Bonneville will benefit from these advance amortization

payments through lower long-term rates than would otherwise be the case.

BPA’s surplus sales revenue lowers power rates today in the Pacific Northwest.

The Budget does not reduce the historic level of regional benefit from such salesit retains the benefit of all surplus sales revenues for BPA ratepayers, but changing

the time frame that such benefits will be realized. This proposal is not expected to

have a rate impact in 2007, but it could prevent rates from being about 5 percent

lower for retail customers than they otherwise would have been in 2008 and 2009,

without this early repayment program. This rate impact will be offset by benefits

in future years.

In addition, the Budget provides that Energy Northwest will refinance a portion

of its debt in the calendar year 2006 and 2007. The additional $382 million freed

up from these future refinancings will be used to pay down BPA federal debt.

The combined effect on the U.S. budget deficit of these two proposals is estimated

to be $1.3 billion. This is an amount that could be borrowed again by Bonneville

in the future under its Congressional borrowing ceiling. This initiative takes advantage of a potential unique opportunity to make a long-term investment in the Pacific

Northwest’s electricity future. We are proceeding with implementation. The expedited rate case is scheduled to begin in July 2006.

FY 2007 BUDGET OVERVIEW

Mr. Chairman, Bonneville is in sound financial condition. Our reserves are at a

level that will assure we can make our full annual payment to the U.S. Treasury

at the end of this fiscal year, despite having been through six straight below-average

water years before this year. Bonneville’s FY 2007 budget projects $2,464 million

for operating expenses, $95 million for Projects Funded in Advance, and $477 million for capital investments. Since its budget is funded by sales of power and transmission services, and proceeds of bond sales to the Treasury, Bonneville has not requested or received annual appropriations since 1974.

Bonneville’s commitment to fish and wildlife mitigation and enhancement is exemplified in its direct program budget of $178 million, capital and expense, for this

purpose in FY 2007.

Bonneville’s full time equivalent (FTE) staff projection included in this budget is

3,000 for FY 2007. Bonneville’s cost management initiatives have brought this

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number down from the higher level we needed during the ramp-up of our infrastructure expansion program.

Bonneville utilizes numerous performance measures linked to its strategic vision

and financial results. The President’s budget performance measures for Bonneville

encompass overall electric hydro availability, transmission reliability, repayment to

the U.S. Treasury and safety. The safety measure includes a Department determined stretch target for FY 2007 of no more than 2.7 for Recordable Accident Frequency Rate.

Bonneville’s budget assumes that the Spectrum Relocation Fund (SRF), established in the Treasury to facilitate the relocation of Federal radio communication

systems, will provide Bonneville, through a non-expenditure transfer from the SRF,

with full budget authority and cash to cover the cost of relocating Bonneville’s 1710-

1755 megahertz radio communication systems. The estimated Bonneville cost of this

relocation is $48.7 million.

The following table provides budget data (dollars in 1,000’s) based on current

services for FY 2005 through FY 2007:

The accompanying notes are an integral part of this table.

Budget estimates included in this budget are subject to change due to rapidly

changing economic and institutional conditions in the evolving competitive electric

utility industry.

Bonneville Bond Amortization/Capital Transfers in this FY 2007 budget reflect,

beginning in FY 2007, advance amortization payments to the United States Treasury on Bonneville’s bond obligations. The advance payments are dependent on an

equivalent amount of assumed net secondary revenues over $500 million and anticipated debt optimization refinancing of ENW obligations, consistent with both the

President’s budget and the sound business practices required under the Federal Columbia River Transmission System Act of 1974. The policy of the President’s budget

regarding use of extraordinary net secondary sales revenues will be implemented

through a Bonneville rate proceeding.

Amounts of such estimated payments to Treasury vary from associated net secondary revenues and debt optimization amounts due to timing of Treasury payments and other factors. Actual associated net secondary revenues and debt optimization effects could vary due to volatility of secondary power markets, stream flow

variability, volatility of financial markets affecting ENW debt optimization, and

other uncertainties.

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BONNEVILLE TREASURY PAYMENTS

Bonneville made its planned payments to the U.S. Treasury on time and in full in FY 2005, for the twenty-second consecutive year. Included in these payments totaling $1,088 million was $313 million in early amortization of our Treasury debt.

Since its creation in 1937, through FY 2005, Bonneville has returned $21.6 billion

to the U.S. Treasury. During FY 2007, we anticipate paying $1,329 million to the

Treasury, of which $878 million will be repayment of principal, $430 million will

be interest, and the balance of $21 million will be applied to the unfunded liability

of the Civil Service Retirement System. In recent years, Bonneville has made amortization payments in excess of those scheduled in its FERC-approved rate filings resulting in a balance of advance repayment. The cumulative amount of advance amortization payments as of the end of

FY 2005 is about $1,460 million.

CONCLUSION

In conclusion, I am pleased to say we have made significant progress in regaining

Bonneville’s financial health since the West Coast energy crisis of 2001-2002, and

we are well on our way to meeting the upcoming challenges facing us today. Bonneville will continue its efforts toward long-term financial stability and its commitment to meeting its overall responsibilities to keep the lights on in the Pacific

Northwest. Bonneville is well positioned as it looks forward.

ATTACHMENT A

Additional Energy Policy Act Provisions Likely to Have a Significant Impact on Northwest Electric Power Issues in Which Bonneville is Actively

Involved

Section 368 provides for the Federal Government to designate ‘‘energy corridors’’

on Federal lands that would be used for electric power transmission lines, and pipelines to transport oil, natural gas, hydrogen, and potentially other fuels. Bonneville

is supporting this effort in the Pacific Northwest. DOE is coordinating the Federal

agencies involved in this issue. Bonneville believes it is important to assure that

safety, security, and electric reliability issues are not created when pipelines are

considered for location in proximity to electric power transmission lines.

Section 1221 provides for the Federal Government to designate ‘‘public interest

corridors’’ for siting of new transmission needed for reliability. Bonneville is actively

involved in supporting DOE’s efforts to identify potential transmission corridors in

the Northwest. Bonneville expects to stay engaged in this effort through its completion.

Section 1231 provides FERC authority to require by rule or order that transmitting utilities that are public bodies, like Bonneville, provide their unregulated transmission service at rates comparable to those the utility charges its own generation,

and on terms and conditions that are similarly comparable and not unduly discriminating or preferential. Bonneville believes it already meets these standards and has

been operating this way since 1996. FERC has opened an inquiry regarding revisions to its pro-forma tariff, and Bonneville is actively contributing to that process.

Section 1233(b) assures that load-serving utilities, like Bonneville, will continue

to be entitled to use transmission rights to meet their service obligations. FERC has

recently issued a Notice of Proposed Rulemaking on this issue. Bonneville expects

to comment to FERC on its proposed new rule and participate in this important policy development.

Section 1234 provides that the Secretary of Energy must conduct annual studies

of the procedures used by electric utilities to perform economic dispatch, of possible

revisions to those procedures, and of potential benefits to consumers from improving

such procedures. The Secretary is also directed to recommend appropriate legislative

and regulatory actions with respect to economic dispatch. Bonneville has provided

comment regarding the important differences between thermal and hydro systems

and the need to take these into account when considering economic dispatch.

Section 1286 grants the Federal Energy Regulatory Commission (FERC) refund

authority when a non-jurisdictional utility’s sale of 31 days or less, made through

an organized market in which the rates for the sale are established by a Commission-approved tariff (rather than by contract), violates the tariff or FERC rule. Bonneville actively monitors FERC’s requirements and its own operations to assure it

is not violating the tariff or FERC rule.

Section 1834 instructs the Departments of Energy, Defense and Interior to jointly

conduct a study of the potential for increasing electric power production capability

at federally owned or operated water regulation, storage, and conveyance facilities.

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Bonneville and other Power Marketing Administrations in the Department of

Energy have been working with the U.S. Army Corps of Engineers and the Bureau

of Reclamation on such a study. Results from the study are expected to become

available in early 2007.

Additionally, Bonneville has for several years been funding projects within the hydroelectric investment program that support generation efficiency improvements

within the Federal Columbia River Power System. This has included replacement

of existing turbine runners with higher efficiency ones and development of operational process improvements that have resulted in increased efficiency. The program to date is estimated to have achieved an increase of 87 annual average

megawatts, assuming average water conditions.

Subtitle G of Title XII contains several provisions that deal with electricity market transparency, enforcement and consumer protection. Bonneville is actively following FERC developments in this area. Bonneville is subject to these new rules

and has taken steps to assure that it is in compliance with their requirements. Bonneville believes these new rules are an important tool to address market manipulation that plagued the West Coast market in 2000 and 2001.

Subtitle A of Title I relating to Energy Efficiency contains a number of provisions

that affect Bonneville’s procurement practices. For example, Section 104 provides for

agencies to procure products that meet certain energy standards. In many instances,

Bonneville had implemented procurement policies that meet or exceed the requirements of the Act before its enactment. In other instances, Bonneville may need to

update its practices. For example, Bonneville has had a standard policy to purchase

recycled concrete products, where feasible, for many years, as now required by Section 108. Bonneville is looking into whether these and similar procurement policies

may need to be updated in light of the new Act.

Title VI contains provisions relating to nuclear energy. Through Energy Northwest, Bonneville receives power from Columbia Generating Station, a large nuclear

power plant located in Richland, Washington. Several provisions change various requirements for operators of nuclear facilities. For example, Subtitle D adopts a number of security-related practices for nuclear operators. Bonneville and Energy Northwest either have made appropriate modifications in policy to comply with the Act,

or are in the process of doing so.

The Act contains many provisions encouraging energy efficiency, new technological developments, and renewable resources within the electric power sector of

our economy. Bonneville has been active in these areas for many years. Bonneville

has a very active and successful energy efficiency program which yielded 43 aMW

of new electricity savings in 2005, adding to a total of 900 aMW achieved over the

last 25 years. Bonneville has supported more stringent energy standards for appliances, buildings, and other electric-power-consuming applications for many years.

Bonneville is also an active participant in the Department’s GridWise program

where it is working with the Pacific Northwest National Laboratory and other

Northwest utilities to test devices installed in Northwest home appliances, such as

water heaters and clothes dryers, that detect system problems and automatically respond by shutting the appliance off or on, as appropriate, to respond to system conditions. This is a promising technology that Bonneville believes could pave the way

for cost-effective demand response and a ‘‘smart grid’’ that detects and responds

automatically to system disturbances and related operational problems.

Section 503(a) amends the Energy Policy Act of 1992 to provide that each Power

Marketing Administration (PMA) Administrator shall encourage Indian tribal

energy development by taking such actions as the Administrators determine to be

appropriate, and that an Administrator may provide technical assistance to Indian

tribes seeking to use the high-voltage transmission system for delivery of electric

power. Bonneville is developing long-term contracts and policies that we believe will

encourage resource development by tribes and other resource developers in the Pacific Northwest, and we routinely provide transmission technical assistance to

tribes. Bonneville provides the tribes open, non-discriminatory access pursuant to its

FERC-approved transmission tariff. Bonneville has also assisted tribes in forming

electric distribution utilities to provide retail service to tribal facilities and communities. This section also provides that, within two years of passage of the Act, the

Secretary of Energy is to submit to Congress a report that, among other things, describes tribal use of PMA power and barriers that impede tribal access to and use

of Federal power, including an assessment of opportunities to remove those barriers

and improve the ability of power marketing administrations to deliver Federal

power. We will actively support and contribute to that report.

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Energy Policy Act Provisions that may have a Significant Impact on Northwest Electric Power Issues that Bonneville is Following, but Not Directly

Involved

Section 1303 extends the renewable energy production tax incentive through 2007.

Bonneville is purchasing substantial quantities of wind generation now, but is not

seeking new renewable power purchases at this time. A number of utilities in the

Northwest are pursuing wind acquisition strategies. Bonneville is taking a number

of actions to facilitate these efforts by regional utilities. Bonneville has received and

is processing a number of requests for integration studies, and has also received requests to reserve transmission for many of these projects.

Subtitle F to Title XII contains provisions that repeal the Public Utility Holding

Company Act. Bonneville is following developments in this area because of the potential for utilities in the Pacific Northwest and nearby areas to become involved

in mergers and acquisitions. Currently three Northwest utilities are involved in potential change of ownership: Portland General Electric (which is being sold by Enron

Corporation), PacifiCorp (which is being acquired by Mid-America), and Northwestern (which is being solicited by several potential buyers). A change of ownership

of these utilities could change the approach they have had historically toward investing in new transmission and generation, supporting a regional transmission organization, and working with Bonneville on common issues of interest.

Ms. MCMORRIS. Thank you.

Mr. Hacskaylo.

STATEMENT OF MICHAEL S. HACSKAYLO, ADMINISTRATOR,

WESTERN AREA POWER ADMINISTRATION, LAKEWOOD,

COLORADO

Mr. HACSKAYLO. Thank you, Madam Chair.

I am Mike Hacskaylo, Administrator of the Western Area Power

Administration.

For our Fiscal Year 2007 program, we are proposing a total program of $688 million. That is comprised of $212 million in appropriations, authority to use receipts for purchase power and wheeling of $274 million, and customer advanced funding, net billing and

bill crediting of approximately $200 million.

The Energy Policy Act of 2005 provides additional authorities for

Western Area Power Administration to construct transmission in

partnership with others to eliminate bottlenecks as well as to improve transmission capacity where it is requested.

For example, we are working with the Wyoming Infrastructure

Authority and Trans-Elect, a private company, to eliminate a bottleneck in transmission between southeastern Wyoming and the

front range of Colorado.

We are also a partner with Tri-State Generation and Transmission Association on the eastern plain transmission project

which would construct substantial new transmission, enhance reliability in the area, improve Western’s transmission system, improve the ability of Tri-State to meet its growing loads. We are

doing so in partnership, and we believe it is going to be a good

product for not only the State of Colorado but also for the region.

Finally, with regard to the agency interest rate provision in the

President’s budget, the proposal is to assign agency interest rate to

new obligations beginning in Fiscal Year 2007. The agency interest

rate is the grade at which Federal corporations and Bonneville borrow money from the Treasury.

It would be applicable prospectively to administrative set interest

rates for eight of the 15 projects in which Western markets power

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as well as the Southeastern and Southwestern Power Administration projects. We estimate the rate impacts would be less than 1 percent, and

we have calculated that this agency interest rate is approximately

four-tenths of a percent higher on average than the rates, the yield

rates applied to the Power Marketing Administrations from 1997

to 2005.

That concludes my statement. I will be pleased to respond to any

questions.

[The prepared statement of Mr. Hacskaylo follows:]

Statement of Michael S. Hacskaylo, Administrator, Western Area Power Administration, U.S. Department of Energy

Good afternoon and thank you. Mr. Chairman and members of the Subcommittee, I am pleased to report on the Western Area Power Administration’s (Western) implementation of selected sections of the Energy Policy Act of 2005, and to discuss

our FY 2007 budget request. Western, as one of four power marketing administrations (PMAs) within the De- partment of Energy, markets and delivers electricity primarily generated from hydropower projects located at Federally-owned dams. The transmission systems

owned and operated by the PMAs, as an integral part of the nation’s interconnected

electrical grid, make a significant contribution to ensuring the reliable delivery of

the country’s energy supply. Transmission is central to our mission. Western provides reliable, cost-based

transmission using an integrated 17,000 circuit-mile, high-voltage system, spanning

most of the western half of the United States. While utility regulatory changes and

restructuring efforts capture most of the headlines, Western is pursuing a number

of initiatives to increase transmission capacity and reliability. Our efforts will support continuing utility industry change, evolving regional needs such as increased

interest in renewable resources, and requests from many developers for interconnections to Western’s system. Transmission system modernization is a necessity to support cost effective whole- sale electricity markets. Western has been progressive in making incremental improvements to its facilities to enhance grid reliability. We are well served by our

continuing commitment to improving our business practices, and successful in our

longstanding commitment to jointly plan, develop and finance system enhancements. Robust regional planning processes identifying both economic and reliability

needs of the grid are in place in the West, encouraging partnerships for transmission development. Joint ownership of transmission projects has resulted in a

highly integrated system that has fostered extensive cooperation and economic coordination among transmission partners. Western has existing authority to participate in joint transmission projects, and has done so many times. In 2004, Western constructed the Path 15 Upgrade Project

in central California to relieve a major transmission bottleneck. We are currently

involved in expanding the regional transmission network in eastern Colorado and

western Kansas in a partnership with Tri-State Generation and Transmission Association. Funding for these joint efforts is provided primarily by non-Federal partners. The Energy Policy Act of 2005 expands Western authority to use non-Federal

funding to construct or participate in the construction of new transmission that will

relieve bottlenecks in ‘‘national interest electric transmission corridors,’’ or is necessary to accommodate an actual or projected increase in demand for transmission

capacity.

Through state-of-the-art technology and equipment enhancements, we continue to

improve transmission system capability as well as performance and reliable operation of the Federal system. These enhancements mitigate some constraints without

adding new lines to the grid. We continue to field test high-capacity composite conductors designed to significantly increase the transfer capacity of existing transmission lines in relieving system congestion.

Wind generation and other renewable energy options look promising to Western’s

customers as solutions to increasing energy needs. Wind energy is the world’s fastest-growing energy technology. With the recent passage of the Energy Policy Act of

2005, we expect to see average annual wind capacity expanding at rates exceeding

20 percent. The two-year extension of the Production Tax Credit for renewable resources assures that requests for transmission service and interconnection to Western’s transmission system, mainly from wind generation developers, will continue.

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However, reinforcement and system upgrades will be necessary to meet these requests and maintain grid reliability. Western’s recently-completed Dakotas Wind

Transmission Study (December 2005), authorized and funded by the Energy and

Water Development Appropriations Act of FY 2004, provides the engineering analysis which supports this conclusion.

Transmission system modernization is necessary to provide increased open access

to Western transmission facilities. We have a longstanding practice of allowing third

parties to use available capacity in the Federal transmission system, confirmed

through our initial Open Access Transmission Tariff filing in 1997, and revised as

filed last year to incorporate the Federal Energy Regulatory Commission’s (FERC)

Large Generator Interconnection standards. Western also joined the Midwest Independent System Operator (MISO) as a non-transmission owner in 2005, allowing us

to better represent our load-serving interests in various MISO committees as a voting member.

The Energy Policy Act of 2005 strengthens the industry commitment to transmission system reliability by giving FERC expanded authority to approve and enforce reliability standards. We continue to participate in developing binding reliability standards that are effective in protecting the interconnected electric system.

Western is proud of its reliability record, as we consistently exceed national system

standards set by the North American Electric Reliability Council.

BUDGET HIGHLIGHTS

In the FY 2007 President’s budget, Western continues to disclose all of the funding sources required to accomplish its program. Western’s FY 2007 Construction,

Rehabilitation, Operation and Maintenance (CROM) budget request totals $688.5

million, including $212.2 million from appropriated dollars. The total funding requirement increases $115.6 million from the FY 2006 enacted program of $572.9

million, primarily due to increases in purchase power and wheeling (PPW) caused

by higher prices and increasing ‘‘custom product’’ purchases for the Central Valley

Project customers. The appropriated request decreases $19.5 million from the FY

2006 level of $231.7 million, as greater use of customer advances is assumed.

In addition to the $212.2 million net appropriated funds requested for the CROM

Account, the request assumes $274.9 million in offsetting collections for normal and

drought-related purchase power and wheeling (PPW) requirements, and $3.7 million

in receipts from the Colorado River Dam Fund for Boulder Canyon Project activities.

Also included is $197.7 million from alternative customer financing. Of this, $10.7

million is estimated for requirements in Program Direction and Operation and

Maintenance, $33.9 million for Construction and Rehabilitation activities and $153.1

million for the PPW program.

The appropriated CROM request includes a non-reimbursable contribution of $6.9

million to the Utah Mitigation and Conservation Account.

The use of mandatory offsetting collections from the Spectrum Relocation Fund

(SRF) is not included in Western’s budget amounts. The SRF, established by the

2004 Commercial Spectrum Enhancement Act, will provide non-reimbursable funding for relocating Federal systems from certain spectrum bands to accommodate

commercial use. Western estimates the multi-year costs of relocating its communications systems at $106.7 million.

The following table shows all funding sources for the FY 2007 total Western

program.

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Western’s FY 2007 Program Direction (PD) request of $147.7 million (comprised

of $135.1 million in appropriated funds, customer advances of $9.6 million and $3.0

million in power receipts) provides compensation and related expenses for our workforce to market power as well as plan, design, construct, operate and maintain the

high-voltage interconnected transmission system and associated facilities.

The total PD program increased $4.1 million, or 2.8 percent above the FY 2006

level ($143.7 million), predominantly due to an increase of $6.2 million in salaries

and benefits, a shift of 10 full-time equivalent staff (FTE) from the Colorado River

Basins Power Marketing Fund to support regular operation and maintenance

62

activities and an increase of 5 FTE for various support functions throughout Western. These increases are offset by decreases in support services and other related

expenses of $3.1 million to contain costs in Western’s indirect activities.

Western has established formal workforce planning activities as the foundation

for its Human Capital Management Program to ensure we have ‘‘the right people

in the right place at the right time’’ to sustain its exemplary customer service ethic

and power system reliability record.

Western’s FY 2007 Operation and Maintenance request is $45.7 million, comprised of $43.9 million in appropriated funds, $1.1 million in customer advances and

$0.7 million in power receipts. This is a 3.3 percent decrease from the FY 2006 program, including activities funded directly from the Colorado River Dam Fund and

customer advances. The decrease is primarily attributable to extraordinary needs in

the FY 2006 budget, and/or facility replacement requiring larger efforts, resulting

in projects falling under the Construction and Rehabilitation program.

Western is requesting $60.2 million (comprised of $26.3 million in appropriated

funds and $33.9 million in customer advances) for its FY 2007 Construction and Rehabilitation program for high-priority replacements and upgrades of system equipment and facilities to sustain reliable power deliveries. Although Western’s FY 2007

request is $6.2 million above the FY 2006 level ($54 million), the FY 2007 budget

authority of $26.3 million decreased by 51 percent from FY 2006 ($53.4 million). The

remaining $33.9 million (56 percent of the total program) will require customer-advanced funding for necessary planned upgrades.

During this past year, we weathered what Mother Nature tossed at us, and were

reminded of the value of controlling costs and implementing improvements in how

we do business. While we were fortunate in the West not to have experienced the

devastating impacts of recent hurricanes, the prolonged drought continues to test

our ability to meet our contractual power commitments in a cost effective manner.

The FY 2007 Purchase Power and Wheeling program ($427.9 million) has grown

33.1 percent from FY 2006 ($321.4 million) to further implement the Central Valley

Project’s Post 2004 Marketing Plan, and mitigate drought impacts to hydropower

generation affecting the Pick-Sloan Missouri Basin Program. Program increases are

funded through alternative financing methods. The request for authority to use offsetting PPW collections (receipts) has dropped slightly from $279 million in FY 2006

to $274.9 million in FY 2007, with the program increase in FY 2007 funded through

net billing and reimbursable funding of $148.1 million and $5 million in customer

advances.

Because appropriations are only about 20 percent of Western’s total funding picture, the ability to fund annual PPW expenses with power sales receipts has assisted us in long-term planning for mission critical operations.

Starting in FY 2007, the interest rate for new obligations incurred by Western for

power-related investments will be set at the rate equivalent to what Governmental

corporations pay when borrowing in the market, identified as the agency rate. This

will align interest rates on certain investments with those paid by Bonneville Power

Administration. This new interest rate will apply only to investments whose interest

rates are not set by law. All Western investments currently in service will continue

to retain existing interest rates. This will result in a rate increase of less than 1

percent, beginning in Fiscal Year 2007.

Western is ‘‘getting things done’’ ... regional planning is occurring and transmission lines are being rebuilt as we continue to solve transmission and reliability

issues to facilitate the use and future expansion of the transmission grid in the

West.

Thank you, Mr. Chairman. I would be pleased to answer any questions that you

or the Subcommittee members may have.

Ms. MCMORRIS. Thank you.

Mr. Deihl.

STATEMENT OF MICHAEL A. DEIHL, ADMINISTRATOR,

SOUTHWESTERN POWER ADMINISTRATION, TULSA,

OKLAHOMA

Mr. DEIHL. Thank you, Madam Chairman.

Members of the Committee, I am Mike Deihl, Administrator of

the Southwestern Power Administration, and I appreciate this

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opportunity to present our 2007 budget request and discuss the

implementation of the 2005 Energy Policy Act.

In 2005, Southwestern marketed 6.3 billion kilowatt hours of

Federal hydropower which generated $123 million of revenue, and

therefore we remain on target to repay all the Federal investment.

To date, Southwestern has repaid $587 million or 48 percent of the

$1.2 billion investment.

Southwestern’s 2007 budget request of $31.5 million in appropriations and $3 million in use of receipts for purchase power and

wheeling is a total increase of $1.7 million, or 5.6 percent above

last year’s budget.

Southwestern’s purchase power and wheeling portion of the

budget request is developed assuming average water conditions

with the continuing fund as the backstop funding source in below

normal water conditions. In late 2005, Southwestern activated the

continuing fund due to extreme drought conditions. For the first

four months of this Fiscal Year, 2006, the reservoir system in-flow

averaged only 15 percent of normal, and last month this in-flow

has dropped further to 10 percent of normal.

The amount of water currently stored in the lakes for generation

is only 7 percent above the 75-year all-time low. With low lake levels, high energy prices, and heavily loaded transmission lines, one

might say we have the perfect storm without the rainfall. And as

long as these weather conditions persist, we will continue to utilize

the continuing fund for purchasing power.

The Administration also proposes in this budget that interest

rates paid by Southwestern’s customers on new power-related investments would increase to a rate equivalent to what is called the

agency rate. This agency rate is what governmental corporations

pay when borrowing in the market, and is like the interest changed

when Bonneville Power Administration borrow from the Treasury.

This proposal would apply starting in 2007, but not apply to interest rates set by law.

I also want to report Southwestern continues to provide open access transmission as emphasized in the Administration’s national

energy policy, and we have taken aggressive steps to implement

the new Energy Policy Act. For example, Southwestern has successfully signed an operating contract with the FERC-approved

Southwest Power Pool Regional Transmission Organization. This

contract provides regional use of our Federal transmission system,

provides Power Pool Administration of our open access tariff, and

provides regional reliability services.

Consistent with the Act, Southwestern and Southwest Power

Pool are analyzing future regional transmission expansion needs

and identifying potential national interest to electric transmission

corridors. Southwestern will also be utilizing advanced technology,

composite core, high-temperature conductors, and a planned transmission line upgrade project beginning in 2008.

In keeping with the Act, Southwestern and the other PMAs have

been working with the Bureau of Reclamation, Corps of Engineers

in analyzing and identifying those existing Federal hydropower

plants which could be beneficially upgraded to provide increased

electrical power. Southwestern will continue to be an active particiVerDate 11-MAY-2000 15:07 May 15, 2006 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 J:\DOCS\26463.TXT HRESOUR1 PsN: HRESOUR1
64

pant in our region as additional Energy Policy Act initiatives

progress.

Last year, Madam Chair, I reported to this Committee that

Southwestern shared the Regional Coordinated Black Start Task

Force that developed procedures to restore power during area-wide

outages. These efforts paid off on October 1. Following Hurricane

Rita’s devastation in southeast Texas, Southwestern played an instrumental role of coordinating efforts between various customers

and the Corps of Engineers to use Federal hydroelectric power generated at Sam Rayburn Dam. This emergency power restored vital

public services while repairs were made to the regional grid system. The men and women of the Corps of Engineers at the Sam

Rayburn Project deserve a special recognition for a job well done.

In closing, Madam, I thank you very much, and I will be happy

to answer any questions you or any member of the Committee may

have.

[The prepared statement of Mr. Deihl follows:]

Statement of Michael A. Deihl, Administrator,

Southwestern Power Administration, U.S. Department of Energy

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity

to highlight Southwestern’s efforts to market Federal hydroelectric power in its region and implement the Energy Policy Act of 2005 (EPACT) and to present an overview of Southwestern Power Administration’s (Southwestern) Fiscal Year 2007

budget request.

PROFILE OF SOUTHWESTERN POWER ADMINISTRATION

Southwestern markets and delivers all available Federal hydroelectric power from

24 U.S. Army Corps of Engineers’ (Corps) multi-purpose projects and participates

with other water resource users in an effort to balance diverse interests with power

needs. Southwestern operates and maintains 1,380 miles of high-voltage transmission line, 24 substations, and 47 microwave and very high frequency radio sites.

Southwestern’s Headquarters is in Tulsa, Oklahoma; the Dispatch Center is in

Springfield, Missouri; and power system maintenance crews are based in Jonesboro,

Arkansas; Gore, Oklahoma; and Springfield, Missouri. In Southwestern’s region,

Federal hydropower is distributed to nearly seven million end users in a six-state

area: Arkansas, Kansas, Louisiana, Missouri, Oklahoma, and Texas.

Southwestern’s program goal is to provide the benefits of Federal power to customers by selling and reliably delivering power from Federal multipurpose hydroelectric dams at the lowest cost-based rates possible that produce revenues sufficient

to repay the American taxpayers’ investments allocated to power (principal and interest), as well as operation and maintenance costs of the Southwestern Federal

Power System.

MEETING REQUIREMENTS OF THE ENERGY POLICY ACT OF 2005

In support of the EPACT, the Administration’s National Energy Policy goals, and

transmission open access, Southwestern is participating in the Southwest Power

Pool’s Regional Transmission Organization (SPP RTO), through a contract containing provisions consistent with those set out in the EPACT.

Consistent with the EPACT, the SPP RTO has indicated that it may consider

working with the Department of Energy to seek designating portions of

Southwestern’s Federal transmission system as part of a National interest electric

transmission corridor to serve significant load growth in northwest Arkansas.

Also consistent with EPACT, Southwestern has participated in meetings with the

other PMAs, the Corps, and the Department of Interior Agencies to jointly report

the potential to increase electric power production at federally owned or operated

water regulation, storage, and conveyance facilities.

Southwestern, in coordination with the SPP RTO, is supporting regional electric

reliability through the establishment of a training center at its Dispatch Center in

Springfield, Missouri, to provide its system operators training courses certified by

the North American Electric Reliability Council (NERC) in response to the blackout

of August 2003. Training is also being provided to operating personnel from other

65

utilities on a ‘‘space available’’ basis. Since April 2005, Southwestern has provided

training to over 340 students and awarded over 3,000 Continuing Education units.

REGIONAL COOPERATION AND IMPROVING RELIABILITY

Southwestern has worked with the SPP RTO to identify needed improvements to

the entire regional grid that will improve electric reliability and Southwestern plans

to participate in these improvements and upgrades. Southwestern’s budget forecast

includes approximately $9,000,000 in upgrades to its Federal transmission system

through FY 2010 to address these issues. Demonstrating its support to the region,

Southwestern is represented in many planning and operational committees of the

SPP RTO. Southwestern chaired the Regional Transmission Organization’s Coordinated Blackstart Taskforce and, based on the North American Reliability Council’s

requirements, developed the Blackstart Capability Plan and a Regional Restoration

Plan.

In addition to working with the SPP RTO, Southwestern and a neighboring utility

are in the process of completing a new interconnection to relieve overloads on the

transmission system in northwest Arkansas. Southwestern is also discussing establishing an additional interconnection in southwest Missouri to provide further support to the region.

To promote improved reliability, communication, and system control, Southwestern is replacing its Supervisory Control and Data Acquisition system to provide

monitoring and control of system operations. This upgrade will also provide the ability to improve communications between the Regional Reliability Coordinator and

Southwestern’s staff during emergency conditions.

SYSTEM COORDINATION

Following Hurricane Rita’s devastating landfall in September 2005, Southwestern

utilized the information learned during the development of the Regional Restoration

Plan to help restore power to the people of southeast Texas. Hurricane Rita had

downed hundreds of thousands of trees and numerous power lines in the region and

left thousands of people and businesses in Jasper County and surrounding areas

without electricity and telecommunications. More urgently, a hospital, water treatment plant, police departments, and other critical services were without the power

they needed to respond to the disaster. Southwestern was instrumental in the coordination efforts between various customers and the Corps to use Federal hydroelectric power generated from Sam Rayburn Dam to provide power to these vital

public services while repairs were made to bring power back to this hurricane-ravaged area.

SYSTEM RATES

To ensure repayment of the Federal investment, the Integrated System rates were

adjusted to increase revenues by 7.3 percent ($9,000,000) effective February 1, 2006.

This increase included an adjustment to Southwestern’s purchased power adder rate

component to recover increased costs of energy purchases. In addition, a revenue increase of 12 percent ($302,000) was implemented for the Sam Rayburn Dam project

and a revenue increase of 43.1 percent ($195,000) was implemented for the Robert

D. Willis project, both effective January 1, 2006.

FY 2005 ACCOMPLISHMENTS

• Southwestern marketed approximately 6.3 billion kilowatt-hours of energy and

transmission services that generated revenues of $123 million.

• Southwestern has cumulatively repaid all annual operating costs and approximately 48 percent of the $1.2 billion in capital investments attributable to

Southwestern’s activities. All required capital investment payments have been

made on time.

• Southwestern exceeded the NERC control compliance ratings for power system

operations reliability.

• Southwestern saved 10.7 million barrels of oil, 3.1 million tons of coal, or 65.6

billion cubic feet of gas through hydropower generation, and prevented greenhouse emissions of approximately 5.4 million tons of carbon dioxide, 16,200 tons

of sulfur dioxide, and 12,900 tons of nitrogen oxides.

• Southwestern provided $488 million in economic benefits to the region from the

sale of hydroelectric power.

66

BUDGET HIGHLIGHTS

Southwestern’s FY 2007 budget request provides for maintenance, additions, replacements, and interconnections to assure a dependable and reliable Federal power

system, which is an integral part of the Nation’s electrical grid. Southwestern’s

budget request shows a modest increase, allowing Southwestern to maintain its

aging transmission system while meeting the demands of increased regional power

loads and alleviating power flow constraints. Participation in future transmission

system projects to improve reliability will depend on greater use of non-Federal reimbursable authority for facility improvements, interconnections, and maintenance

required by the security coordinator of the Regional Transmission Organization.

Program Direction

Program Direction provides compensation and all related expenses for 179 Federal

personnel who market, deliver, operate, maintain, and administer the high-voltage

interconnected power system and associated facilities. Southwestern performs critical functions in meeting the challenges of operating and maintaining the Federal

power system to assure reliability, while responding to the growing regional demand

for power and avoiding deterioration of the infrastructure, including planning, designing, and supervising the construction of replacements, upgrades and additions

to the transmission facilities, and marketing power and energy produced to repay

annual expenses and capital investments with interest.

Operations and Maintenance

Operations and Maintenance funds routine repair, maintenance, and improvement of Southwestern’s substations and high-voltage transmission lines, and

assures power is reliably and safely delivered to customers. Southwestern’s facilities, most of which were built some 60 years ago, are routinely evaluated through

a maintenance management information system. The funding level is derived from

variables such as age, risk of failure, life cycle of equipment, and field crew evaluation. Internal and external factors include obsolescence of technology and lack of replacement parts. This budget request reflects Southwestern’s assessment of the

funding required to assure continued reliability of the Federal power system by replacing aging equipment and removing constraints that impede power flows, thus,

meeting the expectations of the National Energy Policy, EPACT, transmission open

access, and the Department of Energy’s Strategic Plan. Southwestern will continue

to use appropriations and alternative financing arrangements, including net billing,

bill crediting, and/or reimbursable authority (customer advances) to fund maintenance and replacements to assure a dependable and reliable Federal power system.

Construction

Construction provides funding for the addition, replacement, and modification of

communication equipment and systems that provide monitoring and control of

power system generation and transmission assets. The funding for FY 2007 will

complete an important communication pathway which will improve reliability in the

region.

67

In December 2004, the Congress passed and the President signed the Commercial Spectrum Enhancement Act, creating the Spectrum Relocation Fund (SRF) to

streamline the relocation of Federal systems from certain spectrum bands to accommodate commercial use. Funds will be made available to Southwestern following the

crediting of auction receipts to the SRF, anticipated in Fiscal Year 2007. Southwestern estimates $6.3 million in relocation costs, as approved by the Office of Management and Budget, and as reported to the Congress by the Department of Commerce in December 2005.

Purchased Power and Wheeling

Purchased Power and Wheeling is based on average hydropower generation under normal operating conditions at pre-Katrina prices with energy banking assumed

available. However, in FY 2006, a significant shift to a post-Katrina pricing regime

and the loss of availability of energy banking arrangements will cause future years’

purchase requirements to increase. Purchase Power and Wheeling will be funded

through use of Federal power receipts and alternative financing arrangements, including net billing, bill crediting, and reimbursable authority or customer advances,

and other operational arrangements with customers.

Southwestern will continue to utilize its Continuing Fund for emergency expenses

associated with purchase power to ensure continuity of electric service and continuous operation of the facilities on an on-going basis to pay for purchase power and

wheeling expenses when necessary to meet contractual obligations for the sale and

delivery of power during periods of below-average hydropower generation. The fund

was activated during Fiscal Year 2005 and again this fiscal year for purchased

power and wheeling expenses during the extended drought we are experiencing in

our region. As of mid-February, inflows are at 10% of median and the available system storage for generation of hydroelectric power is approximately 11% below the

previous 18-year minimum, which is only 8 percent above the 75-year all-time minimum. Pool levels at the reservoirs which supply Southwestern’s hydroelectric generation resources are approximately half full.

Agency Rate Proposal

Starting in FY 2007, the interest rate for new obligations incurred by Southwestern for power-related investments will be set at the rate equivalent to what

Governmental corporations pay when borrowing in the market, identified as the

agency rate. This will align interest rates on certain investments with those paid

by Bonneville Power Administration. This new interest rate will apply only to investments whose interest rates are not set by law. All Southwestern investments

currently in service will continue to retain existing interest rates. This will result

in a rate increase of less than 1 percent, beginning in Fiscal Year 2007.

CONCLUSION

In conclusion, Southwestern’s Fiscal Year 2007 budget request will allow Southwestern to continue operating in a business-like manner and meet the requirements

of the Energy Policy Act of 2005 while supporting the Nation’s energy goals and the

development of the transmission and generation infrastructure. As the demand for

power increases on the Nation’s transmission systems, the need to maintain, replace, and provide for additions and interconnections on the Federal power system

is critical in assuring reliable delivery. Southwestern will continue to examine its

overall business strategy while making the improvements necessary to ensure reliability of the Federal power system.

Mr. Chairman, this concludes my testimony. I would be pleased to address any

questions the Subcommittee may have.

Ms. MCMORRIS. OK, thank you.

Mr. Borchardt.

STATEMENT OF CHARLES A. BORCHARDT, ADMINISTRATOR,

SOUTHEASTERN POWER ADMINISTRATION, ELBERTON,

GEORGIA

Mr. BORCHARDT. Thank you, Madam Chairman and other Members of the Committee.

My name is Charles Borchardt, and I am Administrator of the

Southeastern Power Administration in Elberton, Georgia. I

appreciate the opportunity to appear before the Committee today

68

to discuss the Energy Policy Act of 2005 as well as the Fiscal Year

2007 budget request from Southeastern. Southeastern markets power from 22 multiple-purpose projects operated by the U.S. Army Corps of Engineers and its power is

marketed under the authority of Section 5 of the Flood Control Act

of 1944. It is marketed to public bodies and cooperatives located in

an 11-state area in the Southeast.

Southeastern does not operate or maintain any transmission fa- cilities. The marketing function is achieved through wheeling contracts with utilities in the area. Last fiscal year Southeastern sold

8,730 gigawatt hours of energy, realized total revenues of $220 million. Also in that year Southeastern integrated the John H. Kerr

project into the PJM RTO, and this has proven to be a very satisfactory arrangement for Southeastern and its customers.

Southeastern, along with the other PMAs, the Corps of Engineers, and the Bureau of Reclamation, is currently working on a

study to identify science for potential increased hydropower production at exiting Federal facilities, and this study is a requirement

of Section 1834 of the Energy Policy Act of 2005.

As a result of Southeastern’s encouragement, many of its customers are using a web-based e-government process called Pay.gov

to make their power payments online. Working with the Treasury,

Southeastern has also implemented a paper check conversion process for those customers who still want to pay by check.

This process, once a customer’s check is received, an immediate

electronic deposit or credit is made to Southeastern’s treasury account. These systems significantly improve the cash-flow to the

Treasury.

Under its fiscal year budget request, Southeastern respectfully

requests $5.7 million in appropriations for program direction, and

to finance the purchase power and wheeling program requirements

Southeastern requests the use of $34.4 million in offsetting collections and $13.6 million in alternative financing and net billing arrangements.

Starting in Fiscal Year 2007, as the other administrators have

mentioned, the interest rates for the new obligations related to

power investments will be set at the treasury agency rate, and this

will place in the interest rates on investments related to power production in Southeastern’s area in alignment with the interest costs

paid by, among others, the Bonneville Power Administration and

the governmental corporation.

Madam Chairman, this concludes my remarks, and I will be glad

to answer any questions you and the other members of the Committee may have.

[The prepared statement of Mr. Borchardt follows:]

Statement of Charles A. Borchardt, Administrator,

Southeastern Power Administration, U.S. Department of Energy

Mr. Chairman and members of the Subcommittee, I appreciate this opportunity

to present a written statement on the President’s proposed Fiscal Year 2007 budget

request for the Southeastern Power Administration (Southeastern).

PROFILE OF SOUTHEASTERN POWER ADMINISTRATION

The mission of Southeastern is to market and deliver Federal hydroelectric power

at the lowest possible cost to public bodies and cooperatives in the southeastern

United States in a professional, innovative, customer-oriented manner, while

69

continuing to meet the challenges of an ever-changing electric utility environment

through continuous improvements.

With a staff of 42, Southeastern markets power produced at 22 multiple-purpose

projects operated and maintained by the U.S. Army Corps of Engineers (Corps).

This power is marketed in an 11-state marketing area. Preference in the sale of

power is given to public bodies and cooperatives in accordance with Section 5 of the

Flood Control Act of 1944 (16 U.S.C. 825s).

Southeastern coordinates the operations of the projects using customers’ load

schedules and meets the North American Electric Reliability Council’s control area

criteria while complying with Corps’ operational and environmental requirements.

All of Southeastern’s system operators meet North American Electric Reliability

Council certification standards.

Southeastern does not own or operate any transmission facilities and carries out

its marketing program by using the existing transmission systems of the power utilities in the area. This is accomplished through ‘‘wheeling’’ contracts with area transmission providers that agree to deliver power to preference customers. In turn,

Southeastern agrees to compensate the transmission provider for the wheeling

services.

Rates are formulated to repay all costs of Southeastern, as well as the costs of

the Corps allocated to power. The rates are designed to recover operation and maintenance expenses, interest expense, and purchased power and wheeling expenses

annually. The costs of capital investments are also recovered over a reasonable

number of years.

Starting in FY 2007, the interest rate for new obligations incurred by Southeastern for power-related investments will be set at the rate equivalent to what

Governmental corporations pay when borrowing in the market, identified as the

agency rate. This will align interest rates on certain investments with those paid

by Bonneville Power Administration. This new interest rate will apply only to investments whose interest rates are not set by law. All Southeastern investments

currently in service will continue to retain existing interest rates. This will result

in a rate increase of less than 1 percent, beginning in Fiscal Year 2007

ENERGY POLICY ACT OF 2005

Southeastern is participating in a study to identify the potential for increased hydropower generation from existing Federal facilities. The requirement for this study

is set forth in Section 1834 of the Energy Policy Act of 2005. Southeastern is working with the other power marketing administrations to develop benefit evaluation

criteria related to the study. Representatives from the Corps and the Bureau of Reclamation are also involved in the study.

PROGRAM ACCOMPLISHMENTS

In Fiscal Year 2005, Southeastern sold 8,730 gigawatt-hours of energy, with revenues totaling $220 million.

On May 1, 2005, Southeastern integrated the Kerr Project into the PJM Interconnection L.L.C. regional transmission organization (RTO). Southeastern will participate as a stakeholder as additional transmission owners join RTOs.

Southeastern has used the President’s Management Agenda to become more efficient and effective. We have integrated the principles of the initiatives in the President’s Management Agenda into our organization and have continued working with

the Office of Management and Budget and offices within the Department of Energy

(DOE) to ensure that the performance measures are more focused and useful in

making management decisions. Southeastern has consistently achieved high ratings

on DOE’s quarterly President’s Management Agenda Scorecard process and met the

criteria for annual targets and the Program Assessment and Rating Tool.

Southeastern has many customers utilizing Pay.gov, a web-based e-Government

initiative that allows customers to make payments on-line. Southeastern, in conjunction with the U.S. Treasury, has implemented a paper check conversion process,

which, upon receipt of a customer’s payment, enables an immediate electronic deposit or credit to Southeastern’s Treasury Account. Both of these systems, Pay.gov

and the paper check conversion, significantly improve cash flow to the U.S.

Treasury.

Southeastern has also implemented, through the U.S. Treasury, an on-line secure

payment system for making payments. Southeastern maintains sound physical and

cyber security practices. DOE Orders and National Institute of Standards and

Technology documents provide the basis for protection of the critical infrastructure.

Southeastern’s physical security is enhanced with remote video surveillance

equipment and cyber security is improved by updating internet firewalls to block

70

intruders and secure data transmission. Southeastern meets the standards for physical and cyber security required by DOE regulations and orders.

The Fiscal Year 2007 budget request provides for $5.7 million in appropriations for program direction. The request also provides $34.4 million in offsetting collections and $13.6 million in alternative financing/net billing arrangements to finance

the purchase power and wheeling program requirements. Use of offsetting collections enables Southeastern to operate more like a business by allowing

Southeastern’s revenues to pay for purchase power and wheeling costs rather than

using appropriations. There are no new program starts included in Southeastern’s

Fiscal Year 2007 budget request. Mr. Chairman, this concludes my presentation of Southeastern’s Fiscal Year 2007 budget request and program status. If you or any of the Subcommittee members

have questions, I will be pleased to answer them.

Ms. MCMORRIS. Thank you very much. I understand you have re- cently announced your retirement, and your wife Lola is with you

today, so we want to wish you well on your retirement and thank

you for your service.

Mr. BORCHARDT. Well, thank you very much.

Ms. MCMORRIS. Yes.

Mr. BORCHARDT. I appreciate that.

[Applause.]

Ms. MCMORRIS. OK.

Mr. DEFAZIO. Madam Chair.

Ms. MCMORRIS. Yes, Mr. DeFazio.

Mr. DEFAZIO. If the Chair would entertain a request. I have

questions which go in a detailed manner to the Bonneville Power

Administration’s proposal in ways that I believe the Administrator

cannot answer, which have to do with assumptions made at OMB,

and I understand that a Ms. Sharon Segner of OMB is here monitoring the proceedings, and I would ask that she be seated and

allowed to answer questions regarding the assumptions and some

71

of the underlying bases that she used in coming up with these

proposals.

Mr. WALDEN. If the gentleman would yield——

Mr. DEFAZIO. Yes, sir.

Mr. WALDEN.—I would second that request.

Ms. MCMORRIS. OK.

Ms. SEGNER. I appreciate the offer but I am sorry I am not authorized to answer questions.

Mr. DEFAZIO. Well, Madam Chair, since she is a public employee,

and for some reason she is here, she is the author, and yet she will

not—I am going to ask very factually based questions. They do not

go to policy assumptions. She will not be called on to make political

judgments. She will just be asked to provide some factual

underpinnings for these rather extraordinary proposals that

emerged under her authorship.

So I would assume that she could at least as a public employee

who is here being paid by Federal taxpayers, that she could answer

a few very factual questions. And if she feels I am transgressing

into a political realm or a policy realm, I would certainly defer to

her in that. But these would be very factually based.

Ms. SEGNER. I do appreciate the offer, but I am sorry, I am not

authorized to answer questions today.

Mr. DEFAZIO. Well, I guess I wonder why you are here then if

you cannot answer questions.

Ms. SEGNER. As an observer to the proceedings.

Mr. DEFAZIO. Right, you are like—it is like the old Soviet Union.

We have the government person, and you are the party person who

monitors what they say. And if they transgress, then you try and

put them in the gulag.

So with that, Madam Chair, again, I find this extraordinary, and

I would say it is probably a waste of taxpayer’s money that she is

just sitting here to monitor someone else’s testimony. She could

read the transcripts later.

Ms. MCMORRIS. OK. Well, let the record reflect that the request

was made, and that Ms. Segner declined.

Mr. DEFAZIO. She took the fifth.

Ms. MCMORRIS. OK. Let us see here, do you want to—OK, anyone else have any questions?

Mr. WALDEN. I have questions.

Ms. MCMORRIS. OK.

[Laughter.]

Ms. MCMORRIS. OK, OK, OK, I guess I will start, get back on

track here.

I will start with Mr. Wright, and I guess I am under the impression that what has largely driven this approach by the Administration this year is the fact that we have more rainfall, more expected

revenue from generation of electricity, and wanted to ask if the

proposal includes any recognition of what is going to happen when

we have bad water years, and if the Administration would be willing to allow for transfer of treasury revenues back to BPA during

those bad water years.

Mr. WRIGHT. The President’s budget proposal does not address

specifically what would happen in bad water years, but I would

say, in conversations with the Secretary, we understand that that

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is a significant concern on the part of Northwest constituents and

the Northwest Congressional Delegation, and we are prepared to

address that in discussions, in conversations with all of you to see

if there is something that could be done there.

Ms. MCMORRIS. In the last 10 years has BPA received revenues

from secondary sales in excess of $500 million, and if yes, how have

those revenues been used?

Mr. WRIGHT. The President’s budget proposal addresses net secondary revenues in excess of $500 million, and we believe that if

it has happened, it has happened in only a very small amount.

To the extent that it would have happened, those revenues would

have been used as other net secondary revenues are, and that is

it would have been used to go into Bonneville’s reserves and ultimately would have been reflected in rates, in ratemaking as we go

forward.

Ms. MCMORRIS. To your knowledge, has CBO ever assumed revenues in an incomplete rate case before?

Mr. WRIGHT. I would have to say to my knowledge it has not, but

then again, I am not sure how in depth my knowledge goes there.

Ms. MCMORRIS. I guess I would like to ask all the witnesses to

talk about impacts of Endangered Species Act on driving up cost,

and I wanted to ask if at this present time you take any action to

inform your customers as to Endangered Species Act cost, and if

there is any kind of a line item in their bills.

Mr. HACSKAYLO. The Western Area Power Administration over

the last five fiscal years has averaged about $96 million a year to

comply with Endangered Species Act costs. That is primarily in the

Colorado River Storage Project where we have had to purchase

energy to replace energy generate foregone at Glen Canyon Dam.

We have also paid for portions of the adaptive management program run by the Geological Survey, Fish and Wildlife, and others,

in the Department of the Interior. We have been involved in the

recovery implementation program where power revenues have paid

for some of those costs as well.

We also have costs on the Missouri River that Mr. Graves alluded to with regard to the pallid sturgeon. Those costs are just

starting to come in because of the recovery program there.

In addition, with regard to the Central Valley project in

California, we have costs involved with Endangered Species Act

compliance.

Western does not presently put a line item on its bills to its

wholesale power customers of what these costs are.

Ms. MCMORRIS. OK.

Mr. DEIHL. For Southwestern, currently we have one issue with

ESA and that is the interior least tern, mainly in Oklahoma and

on the Texas/Oklahoma border. It has not resulted in any lost generation but the operational changes affect the release of the water

from a non-peak, or from peak times to non-peak hours, so there

is an impact on the customers as far as the benefits of about a million dollars a year because of the change in the value because the

time of day that the water is released.

As far as direct costs for Southwestern that the customers have

to repay would be approximately, I would say about $100,000 a

year in staff and overhead cost to administer the work related to

73

the Endangered Species Act, plus average energy purchases somewhere between three and four hundred thousand dollars a year, so

roughly about a half a million dollars a year goes into our rate base

as a result of ESA.

We do report quarterly to our customers update status on activities related to ESA, particularly least tern, but we do not have anything on their monthly billing statements at this time that show

a percentage of their bill dedicated to that.

Ms. MCMORRIS. OK, thank you.

Mr. BORCHARDT. For the Southeastern Power Administration, we

have several species of fish, sturgeon and darters, and we have also

have some fresh water mussels that have been identified on the endangered species list. However, the habitat has not been identified,

so consequently we have been very fortunate in not having to incur

any of those types of costs, and consequently we do not have anything on the customers’ bill in that regard.

However, I would say that we and the other PMAs, the Corps

does spill water to enhance low dissolved oxygen and to help with

the put-and-take operation of fisheries downstream, and we have

lost revenues in that regard. It is not exactly endangered species,

but it is that type of operation.

Ms. MCMORRIS. OK, thank you.

Mr. WRIGHT. Madam Chairman, I do not have the numbers at

my fingertip with respect to our ESA costs. We have calculated

that, and I would be happy to provide that as an insert for the

record.

Our customers tend to be more focused on our overall fish and

wildlife mitigation costs, and those costs currently run about $600

million a year if you include both the direct costs and the costs of

changes on hydro system operations.

We do not at this point show that on the wholesale bill. The information though has been provided to customers.

Ms. MCMORRIS. OK, thank you.

Ms. Napolitano.

Ms. NAPOLITANO. Thank you, Madam Chairwoman.

I apologize. I had a speaking engagement at ACWA so I had to

be present.

To Mr. Hacskaylo, your statement on page 10 refers to the proposed use of what you call the agency rate. As justification for this

proposal you say that this will align interest rates on certain investments with those paid by Bonneville Power Administration.

Why is it so important to align the interest rates, and is there

any other reason given to support the Administration’s decision to

make this change?

Plus what legislative authority, and I alluded to that earlier, now

exists that allows the change in the interest rates, and can you provide us with written opinion to the legal counsel that supports the

Administration’s position that no new legislative authority is needed to implement this new policy?

I want to be sure that a copy comes to this Committee to support

that.

Mr. HACSKAYLO. Yes, ma’am, thank you.

With regard to the agency rate, currently Western Area Power

Administration, Southeastern and Southwestern use the treasury

74

yield rate which does recover to the treasury of the cost of borrowing funds.

However, the agency interest rate, the agency rate represents an

additional risk factor which the Administration believes is appropriate given the potential risk somewhere down the road of the

Power Marketing Administrations not being able to make repayment to Treasury because of——

Ms. NAPOLITANO. Excuse me. I am sorry. Explain potential risk.

Mr. HACSKAYLO. Potential risk could be a catastrophic event taking out a power plant, for example, where we would have to purchase additional very expensive energy. There could be some risk

there in terms of not being able to collect revenues from customers

in selling power, and thus not make our treasury payments every

year.

Ms. NAPOLITANO. OK. I am sorry, you were explaining.

Mr. HACSKAYLO. Yes. With regard to the question about a legal,

or the legal authority, I believe the legal authority is within the

Department of Energy Organization Act as well as the Reclamation

Project Act of 1939 for Western Area Power Administration.

Finally, with regard to any sort of legal opinion, I am not aware

of any, but I will be certain to carry your request to the Department of Energy, and if there is such an opinion, we will deal with

that with the Committee at that time.

Ms. NAPOLITANO. I would really appreciate it, and to me the risk

is great if you have had episodes that demand attention to that

type of risk. Have you had any of those things happen?

Mr. HACSKAYLO. No, ma’am.

Ms. NAPOLITANO. Second question. The Bureau of Reclamation’s

budget request includes a proposal to reallocate irrigation costs for

the Pick-Sloan Program, and this is expected to increase power

rates.

Are you familiar with the Bureau’s proposal?

Mr. HACSKAYLO. I am aware of the proposal in the President’s

budget for the Bureau of Reclamation, yes, ma’am.

Ms. NAPOLITANO. Were you consulted on it?

Mr. HACSKAYLO. No, ma’am.

Ms. NAPOLITANO. Can you explain how the proposal might affect

your agency?

Mr. HACSKAYLO. If the reallocation by the Bureau of Reclamation

results in additional costs to power users, those additional costs

will be picked up and paid for in the power rates we charge to the

Pick-Sloan Missouri Basin Program power customers.

Ms. NAPOLITANO. I appreciate that.

I would like to submit some others for the record.

Ms. MCMORRIS. OK.

Ms. NAPOLITANO. Right now, I am trying to formulate in my

mind. Thank you, Madam Chair.

Ms. MCMORRIS. Ms. Musgrave.

Ms. MUSGRAVE. Thank you, Madam Chair.

Mr. Hacskaylo, this question is for you. In your written statement and in the President’s budget proposal the Eastern Plains

Transmission Project is referenced. This will have a huge impact

on my constituents, and I would like you to explain WAPA’s role

in this project.

75

I also would wonder if there are any other requirements from

Congress that you might need to proceed on this project. Then also

I would like to know what criteria does WAPA use to determine its

participation in these types of projects.

Mr. HACSKAYLO. Yes, ma’am.

Western Area Power Administration is a partner with Tri-State

Transmission and Generation Association on the Eastern Plain

Transmission Project. By good coincidence and good planning, TriState has determined that it needs additional generation to meet

its growing load in its multi-state service territory, and Western

Area Power Administration needs additional transmission reenforcement and additional efforts on transmission to enhance the

system reliability in southern and southeastern Colorado.

Working together, working closely with Tri-State, we have come

up with a plan where Western Area Power Administration would

acquire right-of-way. We would do the environmental impact statement for the project. We would design and oversee the construction

of the transmission facilities that would be needed, anywhere between 600 to 800 miles of 340,000-volt transmission lines for this

project over a good five to seven-year period.

With regard to anything additional we might need from the

Congress, we believe we have existing legal authority. We have

existing partnership arrangements and contracts with Tri-State to

get this job done.

You also asked what criteria we use in terms of planning to come

up with a project like this. Western participates in all the planning

processes within the Western Electricity Coordinating Council regional reliability area, which is the western half of the United

States.

We work closely with all utilities to do the planning, to learn

where the transmission needs are, where the transmission bottlenecks are, and how working jointly, working together with other

utilities we can solve those problems so that we can provide open

access to the transmission system and move power from wind generation and other renewable generation as well as other sources of

generation like coal to best meet customer need and keep the cost

as low as to the consumer that we can.

Ms. MUSGRAVE. Thank you, Mr. Hacskaylo, and thank you,

Madam Chairman.

Ms. MCMORRIS. Mr. DeFazio.

Mr. DEFAZIO. Thank you, Madam Chair.

Mr. Wright, as I understand your advocacy of the OMB provisions in the budget here, the theory is that it would be good to prepay debt. Now, I understand prepayment and I make a little prepayment on my mortgage, but at the end I get my house. Do we

get BPA when we are done repaying this debt?

[Laughter.]

Mr. DEFAZIO. A simple answer would suffice, yes or no.

[Laughter.]

Mr. WRIGHT. The Federal government will retain.

Mr. DEFAZIO. OK, all right, thank you.

So then let us maybe go to the other great reasons for prepaying

debt.

76

My understanding is that theoretically this would free up some

of your statutory borrowing authority to construct transmission,

but I seem to remember, and you know, again, since OMB refuses

to testify here, you will have to fill in for them, but did not in the

2003 and 2004 budget OMB advocate that we should have thirdparty financing so that we would not encumber the Federal government with this debt and only the ratepayers would be encumbered

through third-party transactions?

And did you not develop actually a procedure to do that, and did

you not in fact go forward with some third-party financing, and did

not in fact it work out quite well?

Mr. WRIGHT. The 2003 budget did include a request, the President’s budget did include a request for an increase in Bonneville’s

borrowing authority, and associated with that was an encouragement for us to move forward with non-Federal financing.

And of course, Congress did grant the borrowing authority and

we did move forward, and implement non-Federal financing on the

Shultz-Wantoma line, a $125 million line that was built. So yes, we

have actually accomplished some non-Federal financing at this

point.

Mr. DEFAZIO. OK, and so the Federal taxpayers are not on line

there, it did not create any theoretical obligation and/or debt for

the Federal government, correct?

Mr. WRIGHT. Well, there has been concern on the part of the Administration. Certainly the bond covenants as they have been written reflect that the ratepayers are on the hook.

Mr. DEFAZIO. Right.

Mr. WRIGHT. But there has been concern that as a Federal agency Bonneville is incurring a liability, and hence the proposal that

is included in this budget for the Financial Transparency and Accountability Act that would count on——

Mr. DEFAZIO. So there has been some sort of change in OMB’s

positions since 2003-2004 when they wanted us to do this because

they thought it would be great because it was privatizing debt, and

now they do not want us to do that, so now they have come up with

something new.

Let me get into the specifics of this. The assumptions, I am

thinking maybe you could do away with the people in BPA if these

folks are so good at OMB, because I notice here that their assumptions are much more optimistic than yours in the rate case about

so-called surplus revenues. In fact, over a three-year period they

estimate $509 million more than you do.

Now, are you low-balling or they high-balling?

Mr. WRIGHT. The estimates were made at different times.

Mr. DEFAZIO. Oh, I see. OK, good. So do you think then maybe

you ought to revisit all your estimate and jack them up to these

extraordinary levels that OMB assumes? And if so, then maybe you

should in reopening the rate case you would not want to just provide room for them, but you would want to lower our rates because

we are going to have a lot more revenue than you anticipated just

a couple of months ago when you entered into this rate case.

If there is new information out there, if you are going to reopen

the rate case for their proposal, would you not be required at the

same time if their estimates are accurate to include those enhanced

77

revenues in that, and perhaps lower our rates instead of jacking

them up to accommodate their proposals?

Mr. WRIGHT. I would say the good thing about our initial rate

proposal and the President’s budget proposal is they are forecasts

from which the actual impact will only be whatever our secondary

revenues are. So under our initial rate proposal, our rates will reflect whatever our actual secondary revenues are.

Mr. DEFAZIO. Right, because you have authority to do interim

rate increases if you do not realize your goals.

Mr. WRIGHT. Or rate decreases.

Mr. DEFAZIO. Right. OK.

Mr. WRIGHT. And so we actually have set this up——

Mr. DEFAZIO. So you think that their estimates, as I understand,

OMB used some very high estimates for gas, and that exceed now

what is being offered in futures contracts rather considerably for

gas in the western U.S.

Are you optimistic that—I mean, are you pessimistic? Do you

think gas prices—I mean, I am just trying to get a little advice

here. You know, I might go out and get some futures. Are gas

prices going to go up dramatically. Is OMB right or are you right

here?

Mr. WRIGHT. The markets are extremely volatile. I would urge

you, Congressman DeFazio, to not make any investments on the

basis of the advice that I would give you.

Mr. DEFAZIO. Again, I should not——

[Laughter.]

Mr. DEFAZIO. And I probably should not go with OMB’s numbers

and bet on those either. I mean, my predecessor really liked to get

into futures contracts. I was thinking about it.

[Laughter.]

Mr. DEFAZIO. All right, I will not do that. Now, let me understand this new extraordinary process. What is this supplemental

rate case we are going to get into? What is it based on?

I mean, how is it going to work? I mean, I really do not understand it. I mean, I know we have had interim rate cases because

of huge unanticipated events, you know, like Enron and things like

that, or bad water, but this is a proposal by the Administration

where you are going to hold—how do we reopen or have a supplemental rate case based upon their estimates about the future for

power versus your estimates about the future costs of power and/

or the availability and/or sale of surplus power, and the revenues

that might or might not be realized?

This sounds like kind of a ‘‘whooooo’’. You know, this is going to

be kind of a strange procedure here based on—I mean, are they

going to come in and testify at the rate case?

Mr. WRIGHT. Let me say first of all——

Mr. DEFAZIO. I mean, they cannot talk here. Maybe they can talk

there. I do not know where they can talk other than whisper in

peoples’ ears.

Mr. WRIGHT. So first the——

Mr. DEFAZIO. And write things down. You know, I remember Al

Swift. He used to talk about the trolls at OMB. I mean, they are

looking a lot better than in Al’s day, but they always hid under the

bridge and they came out at budget time, and you know, there

78

have been so many proposals to attack BPA over the 20 years I

have been in Congress. This is the most creative because it uses

the inherent powers doctrine to do this administratively, but it is

still nothing but, it seems to me, an availed way to either make the

deficit look smaller because they seem to be very optimistic revenue assumptions and surplus revenue assumptions.

But what are you going to base this new rate case on? Reality

or supposition or wishful thinking or making the deficit look smaller or what?

Mr. WRIGHT. It is important to understand, first of all, we intend

to complete the current rate case. And if the——

Mr. DEFAZIO. But then immediately undertake another supplemental one right here?

Mr. WRIGHT. That is right. So we have not made a decision yet

as to how we will handle secondary revenues. That is a decision

that actually I need to make as part of that rate case, and I am

not going to prejudice that decision here.

Mr. DEFAZIO. No, of course it is an ex-parte contact. I understand.

Mr. WRIGHT. Right.

Mr. DEFAZIO. And you would not be reopening it just because

you are being pushed there, you are reopening it because you just

think there is new things out there that should be considered.

Mr. WRIGHT. So our intent would be to complete this current rate

case, and then to move forward with a separate rate case to implement the President’s proposal, and exactly how that would be implemented I could not answer today because we would need to complete the first rate case to figure out how we are going to deal with

secondary revenues.

There are a variety of issues that would come up in a rate case.

You know, the most typical issues are rate design, who pays. And

you would also have to deal with the kind of questions like on secondary revenues are you making an assumption about what the

secondary revenues will be, or do you just create a mechanism that

says whatever those secondary revenues are if they are above $500

million a payment will be made, and that will be reflected in subsequent rate adjustment clauses. So those are the type of issues that

we would be——

Mr. DEFAZIO. All right, some experts have estimated that the

rate increase to accommodate the proposal of this administration

would be between 6 and 10 percent.

Mr. WRIGHT. So our estimate based on if the secondary revenues

did come in at the levels projected in the President’s budget is that

we would have no change in rates in 2007, but rates would vary

by about 10 percent in 2008 and 2009.

Now, that will change based on whatever the actual secondary

revenues are though, and that was just based on the forecast, and

that forecast was put together in January. The market is different

today than it was in January.

Mr. DEFAZIO. January this year?

Mr. WRIGHT. January of this year, yes.

Mr. DEFAZIO. So OMB’s forecast is based on—no, wait a minute.

The President’s budget came at the end of January too, so what did

they base their forecasts on?

79

Mr. WRIGHT. No, the President’s budget is what I was referring

to.

Mr. DEFAZIO. OK.

Mr. WRIGHT. The President’s budget forecasts.

Mr. DEFAZIO. Sorry. OK, yes. So your information in the rate

case is dated, but by June things will change yet again, and will

you use new forecasts that are impartial or are you obligated to use

in this impartial, quasi-judicial proceeding the forecasts of the Administration, which would by then be six months dated?

Mr. WRIGHT. I would anticipate in any rate case we would use

the most current information that is available.

Mr. DEFAZIO. And would you obtain them from the experts at

OMB or from impartial experts in power marketing and gas pricing

and things like that?

Mr. WRIGHT. Actually, the way our ex-parte rules work Bonneville officials can only conduct conversations off the record with

other officials in the Department of Energy. And so we would not

be conducting off-the-record conversations with other members of

the Administration, including the folks at OMB.

Mr. DEFAZIO. But if OMB talked to these other people who aren’t

bound by your rules at the Department and Energy, and they—as

your bosses tell you, you will assume these assumptions as part of

this, that could happen, right?

I mean, you are not telling me that somehow impartially you are

going to come up with assumptions about the market and use say

neutral experts outside the Administration. You are going to consult with the Administration on what the projections might be

about future gas prices and other pertinent costs that would affect

the power markets?

Mr. WRIGHT. Actually, the way the ex-parte rules work, the

code——

Mr. DEFAZIO. Yes, but you will not be ex-parte on this new process. You will be out of your old process and before you go into the

new process there is no ex-party rules, right?

Mr. WRIGHT. Yes. In the period before we start the rate case——

Mr. DEFAZIO. Right.

Mr. WRIGHT.—on ex-parte applies.

Mr. DEFAZIO. Right.

Mr. WRIGHT. Once the rate case starts, ex-parte applies to all Department of Energy officials.

Mr. DEFAZIO. OK, but where would you go to obtain the assumptions at that point in time? Would they come from within BPA?

Would you use their assumptions? Would you use some neutral

third-party expert assumptions? I mean, would you commission

some—where would get, I mean, because since there is a half a billion dollars difference between your estimates and their estimates,

if you are going to base a rate case on these differences, where are

you going to get the information and entering into that rate case?

Mr. WRIGHT. Well, without making judgments, because that is a

judgment——

Mr. DEFAZIO. No, not judgment. That is a factual question.

Where do you get them? That is not a judgmental thing. That does

not violate anything. Where will you get them?

80

Mr. WRIGHT. Actually, within the rate case you usually have a

number of parties who make pleadings, and so it actually would be

a judgment I need to make in the rate case as to what forecast I

would use.

Mr. DEFAZIO. So you would let—so people come in and say, I

think this, I think that, I think this, I think that, and you will

choose one?

Mr. WRIGHT. That is the way it is.

Mr. DEFAZIO. OK, and if OMB cannot testify in the rate case, or

can they testify in the rate case?

Mr. WRIGHT. I am unaware of any prohibition.

Mr. DEFAZIO. OK, so they could come in and testify, and you

might just happen to choose their numbers? I mean, it could

happen.

Ms. MCMORRIS. Mr. DeFazio.

Mr. DEFAZIO. Thank you, Madam Chair. Thank you.

[Laughter.]

Ms. MCMORRIS. I appreciate your line of questioning. If we want

to do a second round, we will do.

Mr. Walden.

Mr. WALDEN. I think we ought to do a second, third, and fourth

round myself.

[Laughter.]

Mr. DEFAZIO. I am appreciating more Mr. Borchardt’s position of

retiring soon.

[Laughter.]

Mr. WALDEN. Well, you are not exactly the one we have in mind

to retire.

[Laughter.]

Mr. WALDEN. All right. I have had to step in and out because of

other issues going on in the world, and so I just wanted to ask

point blank, Steve, are you starting a new rate case to implement

this proposal in the budget?

Mr. WRIGHT. So the intention of the Administration is that we

would initiate a new rate case in July.

Mr. WALDEN. July.

Mr. WRIGHT. After the completion of——

Mr. WALDEN. You did say that.

Mr. WRIGHT.—the completion of the current rate case.

Mr. WALDEN. And you have and the Administration has the authority to engage in that without consulting Congress?

Mr. WRIGHT. We believe we have that authority.

Mr. WALDEN. OK. So absent us acting, the Administration could

move forward in July with a new rate case?

Mr. WRIGHT. Yes, sir, we believe that.

Mr. WALDEN. Do you think FERC would have to approve any

revision of EPA’s rate-setting methodology consistent with the

Northwest Power Act of 1980, to certify that they represent, and

I quote, ‘‘the lowest possible rates for consumers consistent with

sound business principles?’’

Mr. WRIGHT. The standard for FERC, excuse me, for Bonneville

to establish rates, as low as possible rates consistent with sound

business principles, I would need to check for the FERC standard

for review. I just cannot pull it up off the top of my head.

81

Mr. WALDEN. It sounds very similar, lowest possible rates for

consumers consistent with sound business principles.

Mr. WRIGHT. That certainly does sound very similar.

Mr. WALDEN. Because I guess some of us would say that you

might be able to make the argument for a different business principle out there by changing how all this is structured, although I

would question whether it is sound or not. But the threat to higher

rates, which you have testified to here, would certainly not meet

the test of the first provision, would it?

Mr. WRIGHT. I would say that it would not meet the test of lowest possible rates, but the test is a combination of the two, lowest

possible rates consistent with sound business principle, and the administrator is frequently challenged with trying to find the balance

between those two.

Mr. WALDEN. Are you aware of the fact that the standard statutorily settled repayment period for Federal investment, such as the

Columbia River System, is 50 years?

Moreover, are you aware of the fact this proposals runs contrary

to the legal opinions of past administrations as articulated in the

1983 letter and memorandum of Reagan Administration, Energy

Secretary Don Hodel who wrote, and I quote, ‘‘That it is our belief

that Congress would have to approve any of the amortization period on existing projects.’’?

Mr. WRIGHT. I am familiar with those. I would have to say I do

not believe the President’s budget proposal is inconsistent with

that.

Mr. WALDEN. If I pay down my home mortgage by paying an additional interest—oh, I guess we are not paying down the principal,

are we? We are not advance paying principal under the Administration’s proposal?

Mr. WRIGHT. We could be advance paying principal.

Mr. WALDEN. Would that be a subject of your rate case and how

the money is allocated, or does the surplus——

Mr. WRIGHT. Yes.

Mr. WALDEN.—money is envisioned at OMB simply flow to the

Treasury deficit reduction or other expenditure?

Mr. WRIGHT. It does not flow just as deficit reduction. It flows

as a repayment of Bonneville’s debt.

Mr. WALDEN. OK, so that would shorten the amortization schedule perhaps if I am paying down principal, I pay off my home mortgage quicker, do I not?

Mr. WRIGHT. It could do that, but recall that the period—by the

way, the 50-year period is associated with generation assets. It is

different periods for different assets.

Mr. WALDEN. OK.

Mr. WRIGHT. It is 20 years for conservation, 35 years for transmission, et cetera.

The way repayment policy works there is no requirement that we

wait until the last possible moment to repay. There is a regularly

scheduled set of payments, and in fact projects can be paid off in

advance of the absolute due date, and in fact frequently are. So

this, I do not believe, would be inconsistent with the previous

repayment policy.

82

Mr. WALDEN. We obviously have some concerns about the formula used by OMB to come up with their projections regarding

projected future revenues, and we think there are some issues with

gas pricing and everything else.

That aside, if you are prepaying and use the $500 million to prepay or to whatever, that all works if you have a good water year

and you have reserves. What happens in the reverse? What happens if you have a bad year? Do you get any credit for having paid

in advance?

Mr. WRIGHT. The President’s budget proposal does not address

that issue specifically, and what the Secretary has said is that that

is an issue that is worthy of further discussion with the Northwest

Congressional Delegation, Bonneville customers, and others that

have an interest here.

Mr. WALDEN. Because my concern is you go down this path and

it appears we will have to pass something this time, I agree with

my colleague, you have been most creative this time. Of course,

that also means somehow they have to pass the budget around

here. Let me just put that marker down.

Mr. WRIGHT. Yes.

Mr. WALDEN. Because some of these proposals are a bit harebrained, and some of us are getting real tired of them, and I am

just going to lay that down right here right now, and I think you

have done a good job managing Bonneville during some really

tough times, but I do not understand this notion of every year we

get a new poison pill we are supposed to swallow that is going to

adversely affect the Northwest region and its ratepayers, and an

economy gets rattled all the time by different things involving the

Federal government. We are fighting a lot of battles right now, and

this is the latest.

So I am just concerned we are headed down a real slippery slope

here. This year it may be $500 million. Next year, the next administration or this one comes back and says, well, $400 million, and

the next one says, well, what is wrong with $200 million or $300

million or no million, and then you miss a treasury payment, and

they say, ‘‘Ah-ha, so you cannot even make your treasury payments.’’ This is serious stuff in our region. You know that, and I

think you hear it from both sides of the aisle, and I hope our

friends at OMB hear it, and hear it clearly.

Ms. MCMORRIS. Mr. Inslee.

Mr. INSLEE. Thank you. I would like to start by trying to follow

my parents’ admonition to say something positive, so I want to get

that done, and I want to thank you, thank you, Mr. Wright, for

working, to try to work on our transmission issues, to get our windpower projects fully realized, and I appreciate your efforts to solve

those problems so we can really get that resource fully maximized,

and I appreciate your efforts in that regard.

But I do want to turn now to this vexing proposal that there are

only two people in the Pacific Northwest who believe this really is

sound business judgment. They are both heavily sedated and in

custody right now.

[Laughter.]

Mr. INSLEE. And I think it is fairly obvious that none of us share

the view that if you shove this down the throats—not a few—if the

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Administration shoves this down the throats of ratepayers in the

Pacific Northwest, it really will have been adding insult to injury.

What I mean by that is, just so you will know why we feel so

strongly about this, I remember a conversation I had with the Vice

President during the Enron debacle, and we went and met with

him on a bipartisan basis, and we pleaded with him to do something to deal with this through FERC—this enormous theft that

was obviously going on across the Pacific Northwest.

I remember showing him that 30 percent of the generators were

shut off at the time we were having these brown-outs, and told him

that obviously someone was gaming the system. It was quite obvious to any objective observer.

We asked him to take some action, and I remember he looked

right at me and said, you know what your problem is, you just do

not understand economics. And I was tempted to say that I actually do understand economics. I just do not understand people killing us, and that is what this Administration is trying to do again.

I think anyone that understands economics understands it is not

in the Pacific Northwest’s benefit to go on this schedule that is

going to increase dramatically these rates when we experience this

in the Enron debacle in part due to this Administration’s failure to

act.

If this was ever, and I do not believe it would be, but it was ever

sound business judgment, it is not after we have suffered the deprivations of Enrons at the hands of this Administration, which has

now turned around and try to shove this increase down our throat

from 6 to 10 percent plus, which is going to cost, according to the

best estimates I have from the Northwest Power and Conservation

Council, 1,120 jobs in the next two years. It is a job killer.

So you have an unenviable job trying to sell this lemon to us, and

I do not think you are going to success, and to our benefit. But I

just have a question. Why should we in the Northwest, whose fates

are dependent on this, if in fact the law is that we receive the lowest rates consistent with sound business judgments, why should all

of us in Northwest, this sort of elected board of directors of the

Northwest and a bipartisan basis, defer to an Administration who

let us suffer so grievously during the Enron debacle, and let them

decide what sound business judgment is?

Do you not think it would be healthy for Congress to make that

decision if indeed we are going to change this repayment situation,

not only from a scope of fairness but for the relationship of BPA

with the Pacific Northwest, which I know you have tried to keep

and have done an admirable job of having good working relationships with, do you not think it would be wise to report back to the

Administration that this is going to severely impact the working relationship of the Administration and BPA with the Northwest and

it is not worth a candle to keep this fight going?

Mr. WRIGHT. Sir, if I could say that I think the Secretary has

heard very clearly the reaction of the Northwest members of the

congressional delegation, and as well as Bonneville customers and

others, and the Secretary has committed to further discussions

with all of you to address the issues and concerns that you have.

Mr. INSLEE. Well, I hope that you will deliver that message with

great force, and I just want to tell you that there are such lingering

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hard feelings about this Administration leaving us hang out to dry

during this Enron debacle.

You know, it is interesting, Mr. Cheney said, I did not understand economics. Today is Ken Lay is on trial, and we understand

economics, that it is not sound business judgment for our community to expose itself to these rate increases under these economic

conditions. So I just hope that you will be forceful and deliver that

message, and I want to reiterate my personal appreciation for your

efforts to do this job as well as you could today. I do not think you

should volunteer for it, but thank you.

Mr. WRIGHT. Mr. Inslee, I can also commit to you that I will certainly report back to all the folks at the department that are engaged in this issue about what we heard here today.

Ms. MCMORRIS. Any further questions? Mr. DeFazio? Yes, go

ahead, Mr. DeFazio.

Mr. DEFAZIO. Thank you, Madam Chair. You were most generous in the last round. I promise not to carry on quite as long. No,

no, I can deliver here.

Again, this fairly extraordinary process, this new ratemaking,

what would be this year’s budget makes—as my colleague pointed

out, assumes over $500 million—what would preclude you from

being required to go and have another ratemaking next February

2, after we have next year’s budget which says $200 million? Would

there be a statutory prohibition on again reopening the rates?

I mean, if you can reopen them in June after you have just set

them based on these assumptions, I assume you could reopen them

again, right? Is there a limit on how many times you could be

asked to reopen and/or supplement the rates?

Mr. WRIGHT. We believe we have the authority to implement this

proposal and consequently implement it at different levels. Having

said that, the Secretary has heard very clearly the concerns that

you and others have raised here, and would like to be clear that

we are offering a dialog to see if there are ways that we could address that concern, so-called slippery slope concern.

Mr. DEFAZIO. Well, we will look forward to whatever proposals

there are that might stem that slippery slope concern, and I just

want to go back to, is there any guarantee here, I mean, let us just

say that BPA’s experts were right in the assumptions they made

in the current rate case, and we prepay $30 million of debt one

year and the other years we would not prepay any. But you are

saying there would be an 2007-2008 rate impact of 10 percent.

Where would that money go? We have a guaranteed rate impact

but we do not have a guarantee prepayment and/or loosening up,

you know, freeing up borrowing authority to go out and construct

transmission. How would that benefit the Northwest ratepayers to

pay 10 percent more but not get the theoretical benefit of possibly,

or theoretically going out and doing some more transmission reenforcement or congestion management or whatever?

Mr. WRIGHT. If the President’s budget proposal moves forward

and we continue with the proposal that we have in our initial rate

proposals as to how we would structure rates, and if in fact the secondary revenues turn out more like what is in our initial rate proposal, the $30 million over three years, there will not be an impact

of 10 percent.

85

My expectation is that the most likely scenario and the way that

we calculated the rates is that it assumed that whatever the actual

impact is will flow through to rates. And so if there is a very small

or no payment to the Treasury, then there would be a very small

or no impact on the rates.

Mr. DEFAZIO. But you base in part your rate proposals on a very

high probability of meeting your mandatory statutory treasury obligations as renegotiated and legislated back—I was the House author and Mark Hatfield was the Senate sponsor, and so I am quite

familiar with the terms of that, but you predicate on a high probability for that.

If they are assuming—you know, essentially their assumption

say there will be a floor of $500 million a year available, right, because they are assuming over $500 million. So $500 million would

then have to get cranked into your rate case, all right, which is

higher than you have currently assumed.

How is that going to spill through into the rates? Does that mean

maybe then you would lower the rates? And if you lowered the

rates, but then we did not reach their optimistic levels of surplus

sales of $500 million, then you would have to do one of those interim crack things or whatever they are called, the interim rate increase.

Mr. WRIGHT. That is exactly right. First of all——

Mr. DEFAZIO. They are kind of messing with the process here

that is not elegant to begin with, and we are creating a whole new

level of uncertainty.

I guess the key is going to be where you get the assumptions,

and I know you cannot exactly answer that, but in reopening this

where are you going to get the assumptions? So if OMB can testify

and/or they can put their assumptions forward, I guess I could

come and put my assumptions forward, and then you and your

quasi-judicial hat are going to have to make a decision, but I cannot fire you and the Administration can. So it is a tough place to

be in.

Mr. WRIGHT. This job usually is.

Mr. DEFAZIO. Yes, and you have done a very good job, and we

would hate to lose you over something that does not go to the core

mission of BPA, which is not to somehow make the Federal deficit

look smaller, but to meet its obligations to the Federal treasury

first and foremost, and then secondarily, to meet its statutory obligations to the ratepayers of the Pacific Northwest.

Mr. WRIGHT. Mr. DeFazio, if I could clarify one thing, I think.

I cannot tell you today how the rates will actually work because,

again, that would be prejudicing a decision in a rate case, and we

have not even entered into that rate case. But our assumption in

doing the analysis was that the amount of revenue that would flow

would be dependent on what our secondary revenues would be and

the actual rates would be dependent upon what the amount of review was that flowed across.

So if in fact our secondary revenues are low, then there would

be low to no rate impact. It is not that we would set the rates in

this new rate case and they would be fixed, our assumption was

that they would be variable rates as we are currently proposing in

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this rate case, and they will reflect what the actual secondary revenues are.

Mr. DEFAZIO. Right, but if there is a higher assumption that underpins their assumption that you are going to have more surplus

sales, but that also spills through into thermal generation, which

you have to acquire, and so then they are also predicting the

weather here, right, three years out?

Mr. WRIGHT. Well, at least under the initial rate proposal we

have tried to take all of that out of the equation and make our actual revenues less dependent on a forecast——

Mr. DEFAZIO. Right.

Mr. WRIGHT.—because we have been not all that good at forecasting, to be honest.

Mr. DEFAZIO. Right.

Mr. WRIGHT. And so we have a lot to learn.

Mr. DEFAZIO. But now we have found someone who thinks they

are better at it.

Well, thank you for your indulgence, Madam Chair. If they dump

you over this, I think the State Department could use you. You

have done a great job here today, and very diplomatic. Thank you.

Mr. DEFAZIO. Sir.

[Laughter.]

Mr. RADANOVICH [presiding]. No sweat. I cut my hair while you

were looking the other way.

[Laughter.]

Mr. RADANOVICH. I used the same barber you used too.

[Laughter.]

Mr. RADANOVICH. I did not like them until I came and saw it on

you. I am thinking about growing a mustache next.

Mr. Deihl, tell me a little bit about the challenges of transmission, the increasing of transmission capacity.

Mr. DEIHL. The Southwester region, we work very closely with

the Southwest Power Pool Regional Transmission Organization,

which has been recognized by FERC. We have an operating contract with them. We look at planning for a regional perspective

with the power pool. We have several projects on the drawing

board underway to increase some transmission in some heavily

congested areas. We have a transformer job that we are going to

do some cost-sharing with them to eliminate a constraint.

We also do some interconnection work with several different local

entities, one being Energy. Our biggest area right now we are looking is northern Arkansas, southern Missouri area, heavily congested, and we do have quite a bit on the books planned into the

future to relieve that, working with Southwest Power Pool

Mr. RADANOVICH. What would drive most of your increases in

transmission, update lines or increased population or both?

Mr. DEIHL. In the area I am talking about in the southeastern

part of Missouri, northeastern Arkansas is population growth in

that area, Branson area

Mr. RADANOVICH. Springdale, my daughter lives there and we

have two grandkids. My wife goes, and if the lights go out, I mean,

you know, you just have to answer these questions at home, domestic tranquility.

[Laughter.]

87

Mr. DEIHL. If you give me her address——

Mr. RADANOVICH. You bet.

Mr. DEIHL.—I will put that on our priority list

Mr. RADANOVICH. Mr. Deihl, I appreciate your effort there, and

it is one reason we are asking about.

What about the energy bill, Mr. Hacskaylo, did—let me see, you

are Western, are you not? Yes, Western, Southwester. You got

more authority to partner with third parties on transmission.

How are you using that? In other words, what are we doing with

some of the increased authority?

Mr. HACSKAYLO. What we are doing, Mr. Chairman, is working

with utilities in our service territory in joint planning, determine

where additional transmission is necessary. One good example

which may well fall under the Section 1222 authority you are talking about is with the Wyoming Infrastructure Authority, and

TransElec, to build transmission from southeastern Wyoming to

the front range of Colorado, to eliminate a transmission bottleneck

and provide more access for wind generation in Wyoming to be

moved into to the front range of Colorado. That is just one of the

projects we are working on.

Another one, because of a request for increased transfer capability, increased transmission capacity from a project, a natural gas

fire power plant in northern Mexico that would move power into

southern Arizona called the San Luis Rio Colorado Project. Again,

examples of requests from merchant developers to use capacity in

our system, and if it is not there this authority will provide us the

legal authority to build additional transmission

Mr. RADANOVICH. You are talking about wind generation. Are

you doing any other renewable biomass? Anything else, solar?

Mr. HACSKAYLO. Merchant developers are looking at other

sources than wind. Biomass, as you say. The solar industry seems

to be coming along quite well with new development of thinner

solar panels which will be much more’ reliable and produce more

energy.

As those projects become moved into the planning stage, those

developers that they were want to interconnection with Western’s

system work with us in terms of planning to determine how much

capacity we might have available, and so they can move their product onto our lines and we can move them to load.

Mr. RADANOVICH. Some of the renewables, what are the—I am

getting a little bit off the subject here, but if you do not mind, we

are having discussions in our district right now, but what are some

of the cost basis per kw? What are we looking at, just approximately?

Mr. HACSKAYLO. Oh, gee.

Mr. RADANOVICH. Say for biomass.

Mr. HACSKAYLO. Biomass, I do not know. I do know that wind

is roughly in the three to four cents range. Solar, as I understand,

is more expensive than that. Biomass, Western has very little experience moving biomass generation just because there has not been

that development in our surface territory in enough quantity to

move it onto the wholesale, high voltage transmission system

Mr. RADANOVICH. I mean, I will ask the broader question so that

anyone can answer, but if we wanted to reach and grab a number

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or a percent of power transition into renewables within the next 10

years, what is a reasonable amount for you all, not for the whole

U.S., but for you all? What percent could we reasonable accommodate? I will ask that question for all four of you, just throw a number out.

Mr. HACSKAYLO. For Western Area Power Administration, we

will accommodate under the FERC open access transmission tariff

any requests for generation we have from any source. So we look

really to the source of the generation

Mr. RADANOVICH. OK, but I am just saying what is a practical,

can we get 20 percent within the next 10 years?

Mr. HACSKAYLO. My best guess is that would be a stretch goal,

but it is certainly—there is certainly public demand for this renewable generation, and that goes a long way toward ameliorating cost

concerns on the part of the public.

Mr. RADANOVICH. Are any of you doing any biomass at all?

Mr. HACSKAYLO. Western is not. We do not do generation.

Mr. RADANOVICH. I mean, but are you familiar with any projects

that are trying to feed into the system in your areas? I am trying

to broaden beyond my own back yard here.

Mr. HACSKAYLO. Not within Western surface territory. Again, the

biomass that I am aware of are very small demonstration plants,

not large-scale that would actually need to use high-voltage transmission

Mr. RADANOVICH. OK.

Mr. DEIHL. And for Southwestern, we are in the same situations.

Primarily wind generation right now, Oklahoma, we have I think

it is about 150 megawatts of wind generation in the state, and

there is some developing projects in Missouri, but we do not have

any experience either in the biomass area yet.

Mr. RADANOVICH. OK. I was sitting watching the earlier panel,

and having not gotten to hear your testimony, maybe you said

something, but OMB keeps talking about the agency rate on this

reimbursement of the interest. They say that is necessary to stop

defaults.

Have there been defaults? Talk a little bit about that if you do

not mind, Mr. Wright. Do you know of any defaults to the system?

Mr. WRIGHT. Sir, I am not familiar with any defaults although

I would just offer that the agency rate proposal does not apply to

Bonneville, and applies to the other Power Marketing Administrations.

Mr. RADANOVICH. Mr. Hacskaylo?

Mr. HACSKAYLO. No, sir, not for Western.

Mr. DEIHL. No defaults for Southwestern

Mr. RADANOVICH. Well, it is all down to just you, Mr. Borchardt.

Mr. BORCHARDT. Yes. We do not really—we are not aware of any

defaults that we have had in Southeastern. I would say though

that when Katrina came, and a lot of our customers down in southern Mississippi, we could not deliver power to them. Some of them

just did not exist, and some of them had their infrastructure totaled.

We were very fortunate in that we did generate and we had

other customers take that load, but I think that is one of the things

that may be of concern here by the Administration.

89

Mr. RADANOVICH. You think it is a valid concern?

Mr. BORCHARDT. I do not know

Mr. RADANOVICH. And a broader basis? I know we got the specifics that could train them.

Mr. BORCHARDT. I just could not say

Mr. RADANOVICH. It is just among us friends. I am not going to

tell them down——

Mr. BORCHARDT. I understand.

[Laughter.]

Mr. BORCHARDT. That camera there does not have any film in it

or anything?

Mr. RADANOVICH. No, sir, they do not.

[Laughter.]

Mr. RADANOVICH. Trust me.

[Laughter.]

Mr. BORCHARDT. But I think that is of some concern, everybody

is seeing what has happened in New Orleans and some of the other

areas, and I think that is a concern that may have jangled a nerve.

Mr. RADANOVICH. You think you have troubles. I am asking for

appropriations, those have all been zeroed out watching this hearing here.

Mr. BORCHARDT. Sorry about that.

[Laughter.]

Mr. RADANOVICH. Well, we have to wrestle through the difficult

challenges of rate-type budgets and how to work with it, but I will

tell you the cost shifting that sometimes I see is not one that I

have been willing to support at any level, and we will go ahead and

we will ask the appropriate questions on this particular budget

round, and see, and if any of the other panel, I think we are pretty

unanimous, but if any of you would like to dissuade me from that,

well, feel free to do that after the meeting.

Ms. Napolitano, you have been very gracious. Any closing

thoughts?

Ms. NAPOLITANO. Mr. Chairman, all I can say is that we are

united and you hear it loud and clear from not only the Chair and

the Ranking Member, myself, but also from both sides of the aisle

of the unjust way of doing—the proposals that are being put forth,

I think the Administration needs to either reassess and reenergize

what they are trying to do and make it more justifiable, because

it certainly does not look justifiable to anybody. And if it needs

tweaking, whether it is legislatively or through the budget process,

then so be it because that is where it is going to go. Thank you,

Mr. Chair

Mr. RADANOVICH. Thank you very much.

If there are no other comments or questions from Committee

members, you have five days to update your testimony or many

any changes.

With that, the Committee stands adjourned.

[Whereupon, at 5:00 p.m., the Subcommittee was adjourned.]

[Additional statements submitted for the record follow:]

[The prepared statement of Mrs. Cubin follows:]

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Statement of The Honorable Barbara Cubin, a Representative in Congress from the State of Wyoming

Mr. Chairman:

The west is blessed with an abundance of natural resources that help meet our

nation’s energy needs. However, while there continues to be a strong focus in Congress and industry to develop those resources, there has not, in my opinion, been

an adequately equal focus on assuring that our interstate transmission system also

continues to grow and evolve to meet the electricity demands of our nation. The four Power Marketing Administrations play a vital role in developing the power transmission framework for our nation. I hope in today’s hearing we will hear

about how PMAs are utilizing new authorities granted under the Energy Policy Act

to expand and improve grid reliability, increase utility coordination and make general infrastructure improvements.

I know we will also spend some time today discussing particular aspects of the Fiscal Year 2007 budget request. While I am pleased that this year’s request did

not include last year’s misguided ‘‘market-based rates’’ proposal, there are several

proposals—some administrative—that power users in my home State of Wyoming

have expressed concerns about.

More specifically, I am interested to hear why the Pick-Sloan cost reallocation was once again included in the Administration’s budget request after Congress rejected

it in no uncertain terms last year. I would also appreciate learning more about the

proposed administrative change PMAs are expected to make to their borrowing

rates on federal power investment. Just because an agency has been given a particular authority does not necessarily mean its implementation is the best approach. Thank you, Mr. Chairman for calling this oversight hearing on such an important topic to my constituents and I yield back the balance of my time.

[A statement submitted for the record by George Taylor follows:]

Statement submitted for the record by George B. Taylor, Jr., Chairman, PMA Structural Changes Committee, on behalf of the Southeastern

Federal Power Customers, Inc.

Thank you for the opportunity to submit a statement for the record regarding the March 1, 2006 hearing on the Administration’s Fiscal Year (‘‘FY’’) 2007 budget recommendations for the Southeastern Power Administration (‘‘SEPA’’), which serves

our membership, and the other Power Marketing Administrations (‘‘PMAs’’). Southeastern Federal Power Customers Inc. (‘‘SeFPC’’) represents the interests of cooperative and municipal systems serving more than 6 million customers in Alabama,

Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina and

Virginia.

The SeFPC has significant concerns with a proposal contained in the Administration’s FY 2007 budget. Specifically, our members are concerned about an Administration proposal to impose administratively a higher level interest rate on new investment allocated to hydropower production. This proposal would raise rates with

no apparent benefit to the hydropower customer; it is simply a back-door tax on the

ultimate consumers of power marketed by SEPA. The Administration’s alleged rationale simply ignores the statutory regime under which the PMAs like SEPA

operate.

The proposal to increase interest rates to the agency rate level has emerged with

virtually no public discussion. The hearing on March 1, 2006 provided the first opportunity to review fully the implications of the Administration’s proposal. Nonetheless, the magnitude of the change proposed and the precedent that could result from

it suggest that Congress should provide much more active oversight over the Corps’

activities. Indeed, we have questions about the Office of Management and Budget’s

(‘‘OMB’’) decision to make the changes administratively without any input from

Congress or customers of SEPA and the other PMAs.

Rate-Making Authorities

The PMAs are the rate-making agencies charged with marketing electricity from

Federal hydroelectric facilities operated by the U.S. Army Corps of Engineers

(‘‘Corps’’) and the Bureau of Reclamation (‘‘Bureau’’). In the Southeast, when the

Corps makes an investment in a hydro-electric facility, SEPA must recover the cost

of that investment in the rates charged to its customers. For a half century, the

PMAs have set interest rates either following explicit instructions from Congress or

by charging a rate that collects the Federal Government’s cost of appropriated

dollars.

91

Now, the Administration’s budget seeks to increase the interest rate charged on

all new investments at projects whose interest rate is not set by law. This agency

rate is higher than the yield rate, which is the current interest rate paid by SEPA.

This agency rate reflects the interest cost to loan needed funds to government corporations. However, SEPA, the Southwestern Power Administration (‘‘SWPA’’) and

Western Area Power Administration (‘‘WAPA’’) are not government corporations and

do not borrow funds from the U.S. Treasury. Their rates are set to recover the appropriations established by Congress for the investment in the hydro-electric facilities and for costs to operate these projects.

We understand that the Administration has suggested that the government corporation rate is more appropriate for the PMAs because of the risk of default. This

argument simply ignores the statutory authority under which the PMAs operate and

long-standing history of repaying the federal investment in these projects. SEPA

must collect all of the costs of generating hydropower at federal facilities in the

Southeast.

By law (the Flood Control Act of 1944), SEPA must recover all of the costs of producing power. Rate schedules are developed by SEPA after a notice and comment

period and submitted to the Secretary of the Department of Energy for further review and implementation on an interim basis. Once the Secretary approves the

rates on an interim basis, the Federal Energy Regulatory Commission (‘‘FERC’’) has

the responsibility to confirm on a final basis the rate schedule developed by SEPA.

SEPA, the Secretary of the Department of Energy and FERC must set a rate that

by law recovers the federal taxpayer’s investment in the Federal Power Program.

If an existing rate is insufficient to meet repayment obligations, SEPA must file a

new rate and include appropriate increases to ensure all repayment obligations are

met. In other words, there is a multi-layered review process and legal obligation

that ensures that the PMAs will not default on outstanding obligations.

With no real threat to PMA defaults on outstanding debt, the Subcommittee is

left with little substantive reason why the interest rate on new investment should

be increased. As the proposed change will only serve as a revenue enhancement

measure and provide no additional benefits for PMA customers, the members of the

SeFPC wholeheartedly encourage the members of the Water and Power Subcommittee and full Resources Committee to stop the Administration from

implementing this budget proposal.

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