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For questions or comments on this report please contact G. Britt Whitman at ex:54014 or Kristin Walsh at ex: 39510.
EXECUTIVE SUMMARY ? Northwest Smelters Jockey for Favorable Rates ? BC Hydro's Rate Freeze Lingers ? BPA Rates Expected to Rise, California Refunds Doubtful Aluminum Smelters (DSI's) On 1 October 2001 the long-term relationship between DSI's and BPA for preferred rates will end as Bonneville Power Administration's new rate case takes effect. After 2001, DSI's become discretionary customers of Bonneville Power Administration. DSI's have been playing the game of slowly 'migrating' their load to local utilities in 9.9mW annual increments to avoid being subject to Bonneville's New Large Single Load (NLSL) designation and losing their preferred rate status. Now they are beginning to slip quietly back onto BPA's federal system, and officials at Bonneville have been willing partners in attempting to circumvent their own NLSL regulations, which were established in 1980. In an effort to secure existing DSI relationships, BPA is now undertaking a review of its NLSL regulation to provide an exemption for these companies. BPA is opposed by the Public Power Council, the representative of the public utilities in the Pacific Northwest that focuses BPA rate-making, which has sent a letter to the Assistant Secretary of Energy to express its objections to BPA's proposed actions. The PPC was instrumental in raising public awareness earlier this year about the favored status of the DSI's as large industrial customers - they are moving aggressively to block BPA from giving the aluminum smelters any additional favored treatment. The ability of BPA to exempt DSI's from its NLSL regulation will shape the direction of negotiations between aluminum smelters and other power producers in the region. It remains to be seen whether or not the Public Power Council will initiate a legal battle to stop the DSI's from obtaining this special treatment. While moving to maintain positive relationships with the DSI's, BPA is not enthusiastic about giving power back to the smelters because they think they will need all the water they can spare for the fish. BPA has concerns that supplies will be tight again in the fall and early winter - they won't really benefit much, even from normal or better precipitation, until the melt starts next April. BPA wants to buy back power from the smelters for at least a year and probably would not entertain any overtures from smelters until then. About the only possibility for smelters to go back on line would be for them to use the money they're getting from BPA to subsidize power purchases on the spot market. However, there would be a lot of risk in that, and BPA people don't think market prices would enable them to be very profitable, even with the BPA money helping. As of April 1, three smelters should come back on line; NW Aluminum, Goldendale Aluminum, Longville Aluminum ? Alcoa Aluminum There is not much news happening on the negotiating end between Alcoa and BC Hydro right now. Information is still fairly tight-lipped, however, employees of Alcoa's idled Intalco smelter have been shifted to other capital projects in the facility to prepare the plant for an eventual restart. This may indicate the direction of negotiations. ? Kaiser Aluminum As odd man out, Kaiser has little to say in Northwestern energy developments. The company will obviously benefit if Bonneville is able to fight off the public utilities, but they are in such a weak bargaining position right now that they might have to restart operations just to get revenues moving again, though there is no direct evidence to support this view at this time. British Columbia Politics ? BC Government The latest news from British Columbia is that the BC Liberal government is doing quite nicely in implementing its conservative strategy. Public opinion remains quite high, and they have virtually completed all of their campaign promises for the first 90-day period. Even former NDP legislators are surprised at the efficiency with which the government is proceeding. Political strategists are watching the ANWR vote in the US very carefully, not only because it will have a major impact on the natural gas and oil pipeline going through Northern BC, but also because it is illustrating the environment vs. labor fallout. In the recent election, the Green Party of British Columbia performed surprisingly well, garnering around 12% of the vote in any typical race, contributing directly to the downfall of the NDP. Premier Gordon Campbell's core review of BC Government is due by October, and it appears that the process will be primarily a cost-cutting measure. They are moving to reduce expenditures, which for BC Hydro's sake, will include community outreach, student scholarship and any other 'feel good' programs currently being undertaken by Hydro. The real long-term policy planning, however, is expected to take place in January when Campbell's team (Brenda Eaton, the Deputy Premiere; Doug Allen, the Premiere's consultant; and Jack Ebbels, Deputy Energy Minister) works in conjunction with Neufeld to construct BC's long-term energy plan. BC Hydro BC Hydro has formally signed on as a participant in the RTO West regional transmission organization as a filing utility. RTO West is currently being overseen by the Western Governor's Association and developed as allowed by FERC. RTO West will be the oversight entity in the western states and Canada that will manage electricity transmission issues. We are also expecting Alberta to come on board RTO West shortly. With regard to a potential rate hearing, BC Hydro has recently put a freeze on rates in the province that will last until 2003. The word on this move is that it will allow Chairman Bell to generate some political cover as he begins to shave off parts of the business, such as transmission and information technology - focusing BC Hydro's core operations on additional generation, exports/trading, and delivery. The public concern over privatization is that it will cause rates to skyrocket, similar to what happened in California - but Bell has moved to head off these concerns with the rate freeze. As a function of increasing BC Hydro's generation capacity, they are looking very carefully at building on two sites: Site C (hydroelectric dam) and Burrard Thermal. BPA ? Financial Status In what was expected to be a quiet period in rates matters, BPA dropped a bombshell by announcing it was considering triggering the FB CRAC on 1 October. This would increase rates over the 46% LB CRAC rate increase announced earlier -- despite forecasts that such an increase would be unnecessary. What this essentially does is allow BPA to bypass its initial rate case increase of 46%, utilizing a stop-gap measure under federal regulations. BPA cited a number of reasons why it was considering imposing an FB CRAC, including losses trading power this summer, changes in the accounting treatment of some DSI buyouts, and uncertainty whether the California ISO and PX can pay monies owed BPA. BPA did note, however, that it also had more than one hundred million additional dollars in bond refinancing money not accounted in the FB CRAC calculation. If the FB CRAC triggers by any amount, BPA would have the option of "truing up" its calculation of the FB CRAC in March and could change the rates again if BPA's actual financial condition on 30 September differs from what is estimated now, or if BPA changes its accounting assumptions further. BPA representatives suggest strongly that there is a good chance that a rate increase would be announced early and also indicated that the specific number would be much less than the earlier load-based CRAC increase (of about 46%) -- "much less than 20%, and probably much, much less than 20%." The Public Power Council staff has written to and met with Steve Wright, BPA Acting Administrator, in an effort to convince BPA that a FC CRAC is unnecessary. We should know BPA's decision by 31 August. ? FERC Refunds At this time, BPA will not seek refunds in the ongoing FERC proceedings - or submit to the process for purposes of others seeking refunds against BPA-for the following reasons: 1) BPA believes FERC lacks jurisdiction over BPA. 2) The proceedings are so convoluted (and the transactions so complicated) that BPA asserts that there is no realistic hope of unwinding all of the transactions necessary to equitably order refunds. Insofar as other parties collecting against BPA, in some cases BPA was only the remarketing agent acting at the behest of, for example, aluminum smelters. FERC would have to proceed against these third parties, and often that money has already been spent. 3) With respect to claims by the Calif. DWR ($71 million), a similar claim in the separate California FERC proceeding was disallowed on 14 June. It would be incongruous to allow the claim here. In this claim, FERC denied DWR access to refunds in situations where there was a willing buyer and willing seller. 4) Then there are the assorted politics involved. First, BPA believes that the political costs of pursuing refunds outweigh any eventual benefit that might be received. BPA calculates its potential exposure in these refund proceedings at circa $400 million, while it believes its own potential claims could amount to $500 million-thus a potential $100 million net gain. For reasons cited, however, we believe it highly unlikely they will seek refunds. Second, with respect to others seeking refunds against BPA, five NW senators who sit on the Senate Energy Committee would be very upset if FERC allowed California parties to collect against BPA; and FERC to some extent is likely to be responsive to this sentiment. BPA is confident of its legal position in this matter estimating less than a 10% chance of their being forced to submit to FERC in this matter. Of course, if they were forced to submit to FERC jurisdiction, they would cross claim against other parties and seek refunds. Even if BPA received refunds, we do not believe that it would affect the ability of aluminum smelters to come back on-line. We anticipate that on 1 April 2002, three smelters (amounting to between 300-500 MW) will come back on line: Northwest Aluminum & Goldendale Aluminum (230 MW), and Longville Aluminum (100 MW). ? Spill-Related Issues Fish returns for this year have been especially high. If the ocean stays productive for the next few years, as some think it might, the region could have an enormous opportunity to rebuild the salmon and steelhead runs and make huge strides towards success in this area. Behind-the-scenes work continues on the Implementation Plan (on the Biological Opinion on the hydro system), with the region's states and tribes trying to play a stronger role in designing the Columbia River strategy. PPC and Northwest Irrigation Utilities were admitted to the National Wildlife Federation et al v. NMFS lawsuit as defendant interveners, and the court is now making plans to try mediation between the parties.
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