Power Subscription Strategy

DEPARTMENT OF ENERGY

Bonneville Power Administration

Power Subscription Strategy

AGENCY: Bonneville Power Administration (BPA), Department of Energy

(DOE).

ACTION: Notice of Record of Decision (ROD).

-----------------------------------------------------------------------

SUMMARY: The Bonneville Power Administration (BPA) has decided to adopt

a Power Subscription Strategy for entering into new power sales

contracts with its Pacific Northwest customers. The Strategy equitably

distributes the

[[Page 150]]

electric power generated by the Federal Columbia River Power System

(FCRPS), within the framework of existing law. The Power Subscription

Strategy addresses the availability of power; describes power products;

lays out strategies for pricing, including risk management; and

discusses contract elements. In proceeding with this Subscription

Strategy, BPA is guided by and committed to the ``Fish and Wildlife

Funding Principles for Bonneville Power Administration Rates and

Contracts'' (Fish and Wildlife Funding Principles) that were announced

by the Vice President of the United States in September 1998. This

decision is a direct application of BPA's earlier decision to use a

Market-Driven approach for participation in the increasingly

competitive electric power market and is consistent with BPA's Business

Plan, the Business Plan Environmental Impact Statement (BP EIS) (DOE/

EIS-0183, June 1995) and the Business Plan Record of Decision (BP ROD)

(August 15, 1995). The complete text of the Power Subscription Strategy

ROD is below in the Supplementary Information section of this Notice.

ADDRESSES: Additional copies of this ROD, and of the BP EIS and the BP

ROD, may be obtained by calling BPA's toll-free document request line:

1-800-622-4520.

FOR FURTHER INFORMATION CONTACT: Katherine Pierce--ECP-4, Bonneville

Power Administration, P.O. Box 3621, Portland, Oregon, 97208-3621,

phone number (503) 230-3962, fax number (503) 230-5699.

SUPPLEMENTARY INFORMATION: In response to a need for sound policy to

guide its business direction under changing market conditions, BPA

explored six alternative plans of action in its BP EIS. The six

alternatives were: Status Quo (No Action), BPA Influence, Market-

Driven, Maximize Financial Returns, Minimal BPA, and Short-Term

Marketing. In the subsequent BP ROD, the BPA Administrator selected the

Market-Driven alternative. Although the Status Quo and the BPA

Influence alternatives were the environmentally preferred alternatives,

the differences in total environmental impacts among alternatives were

relatively small. Other business aspects, including loads and rates,

showed greater variation among the alternatives. The Market-Driven

alternative strikes a balance between marketing and environmental

concerns. It also helps BPA to ensure the financial strength necessary

to maintain a high level of support for public service benefits such as

energy conservation and fish and wildlife mitigation activities.

The BP EIS was intended to support a number of decisions (BP EIS,

section 1.4.2), including the:

Products and services BPA will market,

Rates for BPA products and services to be implemented in

future rate cases,

Strategy BPA will use to administer its fish and wildlife

responsibilities,

Policy direction for BPA's sale of power products to

customers, and,

Contract terms BPA will offer for power sales.

The BP EIS and ROD also documented a decision strategy for

subsequent actions. BPA's Power Subscription Strategy is one of these

subsequent actions and the subject of this tiered ROD (BP EIS, section

1.4.1 and BP ROD, page 1). Tiering subsequent RODs to the BP ROD helps

delineate BPA decisions and provides a logical framework for connecting

broad programmatic or policy level decisions to more specific actions

(see Figure 1--not included in this Notice). BPA reviewed the BP EIS to

ensure that power Subscription was adequately covered within its scope

and that it was appropriate to issue a tiered ROD (BP EIS, section

1.4.2). This tiered ROD, which summarizes and incorporates information

from the BP ROD, clearly demonstrates this decision is within the scope

of the BP EIS and ROD. This ROD describes specific information

applicable to the decision on BPA's Power Subscription Strategy, and

provides a summary of the environmental impacts associated with this

decision with reference to the appropriate sections of the BP EIS and

BP ROD. BPA will also issue an Administrative ROD describing the legal

and policy rationale supporting the administrative decisions made in

the Final Power Subscription Strategy.

Competitiveness in the Electric Utility Industry

BPA supplies about 40 percent of the Pacific Northwest's

electricity and about 75 percent of the region's high-voltage

transmission. Although it is a Federal agency, BPA does not receive tax

money. It must cover all its costs with revenues earned in the market.

From these revenues, BPA funds public benefits, such as fish and

wildlife, conservation, and renewable energy programs. It also uses its

revenues to meet its repayment obligations to the United States

Treasury (Treasury) on the Federal investment in the region's

hydroelectric dams and the transmission lines.

The electric utility industry is increasingly competitive and

dynamic. Four factors have substantially affected BPA's ability to

compete in a fully deregulated wholesale electricity market: market

change, increased nonpower obligations, the potential deterioration of

BPA's cost/price advantage, and lost hydro output. However, BPA must be

able to balance its costs and revenues. The emergence of a competitive

market for power creates supply choices for BPA customers and prevents

BPA from meeting costs simply by raising rates. Expected firm prices

set a power rate level, above which a rate increase would no longer

increase BPA's revenue and cover BPA's costs. This level is defined as

BPA's maximum sustainable revenue (MSR) (BP EIS, sections 1.1, 2.6.1,

and 4.4.1).

Allowing BPA's rates to exceed this level would not be consistent

with sound business principles. It would result in a reduction in BPA's

total revenue and BPA's ability to fund public benefits. Power

Subscription will facilitate BPA's ability to retain customers and

successfully compete in the market for the long term.

Customers

BPA sells at the wholesale level to public agencies, other

utilities, and to a few direct service industries (DSIs). Subscription

contracts will be available to BPA's public agency preference

customers, Federal agencies, investor-owned utilities (IOUs) and DSIs.

Preference customers--Public utility districts,

municipalities, and cooperatives to which, by law, BPA must give

preference for Federal power. These customers include utilities without

power generation that rely on BPA for all or nearly all of their

wholesale power needs, and those with generation that meet some of

their load with non-Federal resources.

Federal agency customers--Those Federal agencies in the

Pacific Northwest that buy most of their electricity directly from BPA.

Customers include Fairchild Air Force Base and the U.S. Department of

Energy (DOE), Richland Operations Office.

IOUs--Private, investor-owned utilities. Under the

Residential Exchange Program, as defined by the Pacific Northwest

Electric Power Planning and Conservation Act (Northwest Power Act),

regional IOUs have historically ``sold'' BPA an amount of power equal

to their residential and small farm load at a price equal to their

average system cost. In exchange, BPA has sold them an equal amount of

power at the Priority Firm (PF) Exchange rate.

[[Page 151]]

The benefits of this financial transaction have been passed on to their

residential and small farm customers in the form of lower retail rates.

BPA's Subscription Strategy proposes to offer IOUs a settlement of the

Residential Exchange Program comprised of a sale of power and the

payment of monetary benefits.

DSIs--Large industries, primarily aluminum smelters, that

buy electric power directly from BPA at relatively high voltages.

Under the Power Subscription Strategy, all customers serving

regional firm load are eligible to purchase firm power within the

constraints of existing statutes.

Public Process

As shown in Figure 1 (not included in this Notice), public process

is integral to BPA's decisionmaking. With the changing marketplace for

electric power, there is considerable regional interest in defining how

and to whom the region's Federal power should be sold. The public has

been involved at several levels during the development of BPA's Power

Subscription Strategy. In addition to the public meetings held

specifically on Subscription, BPA sought input from a wide range of

interested and affected groups and individuals. BPA collaborated with

Northwest Tribes, interest groups, Congressional members, DOE, the

Administration, and customers to resolve issues, understand commercial

interests, and develop strong business relationships.

The concept of power Subscription came from the Comprehensive

Review of the Northwest Energy System, which was convened by the

governors of Idaho, Montana, Oregon, and Washington to assist the

Northwest through the transition to competitive electricity markets.

The goal of the review was to develop recommendations for changes in

the region's electric utility industry through an open public process

involving a broad cross-section of regional interests. In December

1996, after over a year of intense study, the Comprehensive Review

Steering Committee released its Final Report.

The Final Report recommended that BPA capture and deliver the low-

cost benefits of the Federal hydropower system to Northwest energy

customers through a subscription-based system. Consistent with the new

competitiveness in the electricity market, the goals for Federal power

marketing were to: align the benefits and risks of access to Federal

power, ensure BPA's repayment of the debt to the Treasury, deliver the

low-cost benefits of the Federal hydropower system to Northwest energy

customers, and retain the long-term benefits of the system for the

region. In early 1997, the Governors' representatives formed a

Transition Board to monitor, guide, and evaluate progress on these

recommendations.

Also in early 1997, BPA and the Pacific Northwest Utilities

Conference Committee (PNUCC) invited 2800 interested parties throughout

the Pacific Northwest to help further define Subscription. The

collaborative effort to design a Subscription process began with a

public kickoff meeting on March 11, 1997. At this meeting, a BPA/

customer design team presented a proposed work plan, including a

description of the environmental coverage for Subscription. An

important element of the work plan was the formation of a Subscription

Work Group. The Work Group, which normally met twice a month (on the

first and third Wednesdays) from March 1997 through September 1998, was

open to the public. On average, 40-45 participants--representing

customers, customer associations, Tribes, state governments, public

interest groups, and BPA--attended. Three subgroups formed to more

intensely pursue the resolution of issues involving business

relationships, products and services, and implementation.

Over the past 18 months, BPA and its customers have discussed and

clarified many Subscription issues. During this time, BPA and the

public confirmed goals, defined issues, developed an implementation

process for offering Subscription, and developed proposed product and

pricing principles.

In addition to the March 1997 kick-off meeting, two other regional

meetings were held specifically to ensure the public understood and had

an opportunity to participate in the Subscription process. One meeting

was held in December 1997 and the other in June 1998. In addition, BPA

conducted a series of meetings around the region. These meetings, which

were part of the public involvement process known as ``Issues '98,''

covered many regional subjects. Issues related to Subscription were key

topics in the discussions at those meetings. The public comment period

for Issues '98 closed June 26, 1998.

Late in the summer of 1998, after considering the efforts of the

Subscription Work Group, public comments on Subscription, and the broad

information from Issues '98, BPA developed a Power Subscription

Strategy Proposal. BPA released its Power Subscription Strategy

Proposal on September 18, 1998. The Proposal, which incorporated the

information received from customers, Tribes, fish and wildlife interest

groups, industries and other constituents, laid out BPA's strategy for

retaining the benefits of the FCRPS for the Pacific Northwest after

2001. The public was invited to participate in two comment meetings:

one in Spokane, Washington, on October 8; the other in Portland,

Oregon, on October 14. The comment period closed October 23, 1998,

although all comments received after that date were considered. To

learn more about the issues addressed in BPA's Subscription Strategy

Proposal, interested parties were also invited to BPA's Columbia River

Power and Benefits Conference on September 29, 1998, in Portland,

Oregon. Over 250 people attended.

Summary of Key Issues and Concerns

BPA received over 200 separate written comments from Tribes,

States, utilities, industries, interest groups, and citizens. Most of

the comments presented at the two public meetings were followed with

formal written comments. Comments on BPA's Power Subscription Strategy

Proposal totaled almost 600 pages. In general, comments were readily

grouped by customer class or interest group. Many customers expressed

concern over BPA's proposed risk management strategy, especially the

potential level of financial reserves and the use of such reserves.

Similarly, most customer groups also voiced concern about the details

of a Cost Recovery Adjustment Clause (CRAC), including the levels and

disposition of cash reserves. Also, most customers encouraged BPA to

extend the Subscription ``window'' for three to six months beyond the

final rate decisions.

A summary of key issues and concerns by customer class or interest

group follows. The Administrative ROD provides a more detailed

evaluation of comments by issue.

Preference customers--In general, comments received from

preference customers and their associations were supportive of the

Proposal. However, these customers shared common concerns about

preference and sales to other customer classes. Preference customers

were adamant that BPA should avoid taking any actions that would

impinge on their statutory right to preference and priority to Federal

power. In urging BPA to extend the Subscription ``window,'' most of

these customers cited the need to understand the rates before they

could negotiate contracts and take the proposed contracts to their

elected boards for

[[Page 152]]

discussion and final action. Most preference customers were opposed to

tiered rates, noting they are entitled to BPA's lowest cost power.

Most preference customers did not object to BPA selling firm power

to the IOUs in settlement of the Residential Exchange Program as long

as all preference customer requests were met first. In contrast, the

preference customers were not generally supportive of BPA reserving

power for the DSIs. Much expressed concern that BPA might offer to sell

surplus firm power to the DSIs ahead of offering such power to them.

In addition, there were a large number of comments on issues

specific to individual or subgroups of public utilities. For example,

comments from utilities with rural systems focused on BPA's low density

discount (LDD) proposal while those dependent on general transfer

agreements (GTAs) for their BPA service focused their comments on GTA-

related proposals.

Also, some public utilities expressed concern that the range of

costs for fish and wildlife was too high.

IOUs--In general, the IOUs supported BPA's proposal to

sell firm power, in combination with some monetary benefit, to settle

the Residential Exchange Program. They also all urged BPA to make more

power available to them and to offer as broad an array of products as

possible to serve their residential and small farm loads. Some IOUs

noted that residential exchange ``deemer'' balances should not affect

proposed sales to them for residential and small farm customers.

The IOUs asked for greater assurance of rate comparability with the

PF rate. Several asked for lower rates than Priority Firm, citing the

advantage to the Federal system of the proposed flat block loads. The

IOUs were unanimous that BPA is obligated to make final decisions

regarding sales of power to individual IOUs rather than allowing the

state utility commissions to make the final decisions. They also all

pushed for a longer time period for Subscription, citing their

contracting and regulatory processes.

Most of the IOUs supported BPA's proposal to tier rates. This

support was based on the concept that marginal cost rates would prevent

undue growth of the Federal power system. In fact, the IOUs were

unanimous in recommending that BPA not ``grow the system'' by

purchasing power to firm its nonfirm power, or otherwise increasing the

size of the Federal Base System (FBS).

The IOUs commented that either no transmission surcharge should be

considered or a surcharge should only apply to Federal power being

wheeled. Some IOUs recommended that BPA allow delivery of non-Federal

power under applicable GTAs.

DSIs--The most significant issue for the DSIs was whether

or not BPA would have any firm power available to them after serving

preference customers and IOUs. Several of the DSIs were concerned that

BPA might make final power ``allocation'' decisions, which would

eliminate the possibility of power sales to them. They urged BPA to

delay any final Subscription decisions until BPA was actually engaged

in Subscription sales. They suggested BPA could then better judge what

its actual sales to publics and IOUs would be and could better decide

what level of system augmentation purchases were necessary and

affordable. The DSIs also disagreed with BPA over BPA's legal authority

under the Northwest Power Act section 5(b) to sell power to the IOUs

for their residential and small farm customers. They recommended that

BPA rely on the Northwest Power Act's section 5(c) statutory

Residential Exchange program as the primary mechanism to extend

benefits to the residential and small farm customers of IOUs.

The DSIs urged BPA not to declare that the inventory available for

Subscription would be absolutely limited to 6300 average megawatts

(aMW). Rather, they urged BPA to augment, or at least keep open the

possibility of augmentation, the Federal power system and meld the

costs into the existing FBS costs. As regional customers, they also

asserted ``first call'' rights on any surplus Federal power before it

could be sold outside of the region. Some DSIs expressed the view that

BPA should give special policy consideration to the DSIs that had

remained faithful customers during the first years of wholesale power

deregulation.

In addition, some of the DSIs claimed that BPA's proposal to tier

rates was not contemplated by the Northwest Power Act. Moreover, they

noted that if such incremental pricing were to be adopted, it should be

adopted across all classes of customers. Also, the DSIs commented that

the range of fish and wildlife cost alternatives being considered was

too high.

States--The four Pacific Northwest state public utility

commissions (PUCs) submitted joint comments. The PUCs encouraged

greater sales to the IOUs and they recommended the Slice product be

offered to IOUs for residential and small farm customers. The PUCs

encouraged BPA to continue a full separation of power and transmission.

They also suggested using a transmission surcharge only in an extreme

emergency. The states believe BPA's power should reach market rates

before any transmission surcharge is enacted.

The governors' offices strongly supported the positions taken by

the PUCs. In addition, the Office of the Governor of Montana reminded

BPA of Montana's deregulation legislation in encouraging BPA to ensure

the residential and small farm customers of IOUs share in the power

benefits of the Federal system.

Tribes--Several Tribes conveyed their support for the

Tribal Utility proposal, but expressed concern about the relatively

short timeframe for planning and developing a Tribal Utility and about

their lack of resources. Some Tribes also noted their concerns about

the allocation of the benefits of the FCRPS.

Interest groups--Public interest groups were generally

supportive of BPA's proposal. They were largely unsympathetic to the

DSIs plight and urged more power be sold to the IOUs' residential and

small farm customers. Alone among commenters, they asked how BPA would

cope with a major loss of resources. Some encouraged BPA to plan for

the highest cost scenario for fish and wildlife funding; some asked BPA

to drop the lowest cost scenario from consideration. The public

interest groups were universally complimentary of a proposed

conservation and renewable resource rate discount.

BPA also received letters from about 50 citizens--all of whom are

served by Puget Sound Energy in Washington State--urging BPA to make

Federal power available to them even though they are served by an IOU.

Several members of the Washington State Legislature also commented

similarly.

Relationship to Other Processes

Public input on BPA's Power Subscription Strategy Proposal revealed

regional interest in several other key issues, notably future fish and

wildlife funding and the 1999 Power Rate Case, facing BPA and the

region. The tiered ROD strategy (Figure 1--not included in this Notice)

supports the Power Subscription process being conducted simultaneously

with other processes on these key issues. As anticipated in the BP EIS

analysis, BPA has confirmed that prospective customers are not waiting

until 2001 to arrange their 21st century power supply (BP EIS, section

1.1 and BP ROD, page 2). Instead, many are looking for sellers who can

offer them low, stable, long-term rates now. By offering competitively

priced power in a timely fashion, BPA will be able to retain customers

and corresponding

[[Page 153]]

revenue. Without sufficient revenue, BPA would be unable to guarantee

full funding for its many responsibilities, including conservation,

fish and wildlife projects, and renewable energy programs (BP EIS,

section 2.6.1).

BPA's multi-faceted business is complex. To help ensure its

success, BPA decided to embark simultaneously upon independent

processes addressing these key issues. While contract negotiators would

benefit from absolute knowledge of all future program costs and program

negotiators would benefit from absolute knowledge of BPA's future

revenue, the realities of a competitive marketplace often preclude

waiting for such comprehensive information. To carry out its public

responsibilities within a competitive marketplace, BPA must have the

freedom to define the scope of individual business decisions without

having to resolve all of the region's problems at once.

BPA understands the extensive regional interest and concerns

regarding future fish and wildlife funding. The Fish and Wildlife

Funding Principles were announced by Vice President Gore on September

21, 1998. The announcement of the Principles followed a process that

began in November 1997 and continued until early September 1998. This

public process included over 60 meetings with concerned citizens,

Tribes, State and Federal agencies, BPA customers, and public interest

groups. The preamble to the Fish and Wildlife Funding Principles states

that the purpose ``of these principles is to conclude the fish and

wildlife funding process in which BPA has been engaged with various

interests in the region, and provide a set of guidelines for

structuring BPA's Subscription and power rate processes. The principles

are intended to `keep the options open' for future fish and wildlife

decisions that are anticipated to be made in late 1999 on

reconfiguration of the hydrosystem and in early 2000 on the Northwest

Power Planning Council's Fish and Wildlife Program.''

BPA has examined issues, including fish and wildlife funding,

related to fish and wildlife administration under different business

conditions (BP EIS, section 2.4.5). The analysis included a

determination of potential impacts. Therefore, BPA is well prepared to

make separate individual business decisions such as a Power

Subscription Strategy and the 1999 Power Rate Case that complement one

another and are guided by the Fish and Wildlife Funding Principles.

Proceeding with the Power Subscription Strategy is vital to

providing BPA with the financial predictability and stability it needs

to compete in a deregulated wholesale electric marketplace. As

explained in detail in the BP EIS and the System Operation Review (SOR)

EIS (DOE/EIS-0170, February 1995), BPA will serve its contractual

obligations and market power and services with available resources

consistent with the operating constraints that apply to the

hydrosystem. (BP EIS, section 1.5.6 and BP ROD, page 4). Additionally,

the BP EIS details various response strategies designed to address any

financial imbalance due to revenue shortfall as a result of

unanticipated expenditures (BP EIS, section 2.5 and BP ROD, pages 13-

14). In circumstances with unforeseen costs or revenue shortfalls, BPA

could implement one or more of these response strategies to allow the

agency to continue to compete in the electric utility market and

fulfill its statutory responsibilities. The Risk Management Strategy

described in the Power Subscription Strategy is consistent with the

response strategies discussed in the BP EIS.

During the past year, BPA has worked with interest groups, other

agencies, and customers to understand how BPA will address the

uncertainty of future fish and wildlife costs in future rates and

contracts. BPA is committed to meeting the Fish and Wildlife Funding

Principles presented in September 1998. The Subscription process and

the power rate proposal are the major means for meeting BPA's

commitment. BPA believes, based on analyses to date, that the Power

Subscription Strategy carries out the Fish and Wildlife Funding

Principles. This issue is subject to further test in the Power Rate

Case, and adjustments may be made in BPA's implementation methods if

necessary.

The Power Subscription Strategy Proposal discussed some issues that

will not be finally decided in the Power Subscription Strategy. Most of

these issues will be finally decided in the 1999 Power Rate Case (also

known as a section 7(i) process), although some will be decided in

other forums, such as the Transmission Rate Case, which will be

concluded before October 2001. For example, while the Strategy

documents BPA's intention to implement a discount for conservation and

renewable resources, the final design of that discount will be decided

in the 1999 Power Rate Case. Other issues that will be decided in the

1999 Power Rate Case include the design and application of the CRAC,

which rates apply to which sales, and the design of the LDD.

While BPA's Subscription Strategy does not establish any rates or

rate designs, rate design approaches identified in the Subscription

Strategy will be part of BPA's initial power rate proposal, which is

expected to be published in early 1999. The comments received during

the Subscription public process regarding the various rate-related

issues will be addressed in the power rate case, which includes

extensive opportunities for public involvement.

The final Power Subscription Strategy will provide a framework for

the 1999 Power Rate Case and Subscription contract negotiations. The

Subscription window will remain open 120 days after the Power Rates ROD

is signed by the BPA Administrator, providing relatively certain

information to potential purchasers regarding rates.

Summary of BPA'S Power Subscription Strategy

The Power Subscription Strategy is BPA's decision on equitably

distributing to its customers the electric power generated by the

FCRPS, within the framework of existing law. The Strategy outlines the

overall process for implementing Federal power Subscription and

provides a policy framework for the 1999 Power Rate Case. The Power

Subscription Strategy, which provides a comprehensive description of

BPA's decision, is available as a separate document. The Strategy is

briefly summarized as follows.

The Strategy has four principal goals:

Spread the benefits of the FCRPS as broadly as possible,

with special attention given to the residential and rural customers of

the region;

Avoid rate increases through a creative and businesslike

response to markets and additional aggressive cost reduction;

Allow BPA to fulfill its fish and wildlife obligations

while assuring a high probability of Treasury payment; and

Provide market incentives for the development of

conservation and renewables as part of a broader BPA leadership role in

the regional effort to capture the value of these and other emerging

technologies.

Subscribing to Federal Power. The Subscription window will be open

from February 1, 1999, until 120 days after the ROD for the 1999 Power

Rate Case is signed. BPA and its customers can bilaterally negotiate

and execute power sales contracts at any time during this period. In

determining customers' net requirements eligibility, BPA will apply

criteria that define which entities qualify for service. BPA also will

apply section 9(c) of the Northwest Power Act

[[Page 154]]

and review customer requests for service in light of the extent to

which power, including power previously applied to loads in the region,

has been sold for use outside the region. All contracts will be subject

to the final rates established in the Power Rate Case.

All customers can negotiate during the Subscription window for

power at applicable rates.

Publics--All net requirements load, including load of new

publics and load annexed by publics during the Subscription window, not

currently served by all 5(b)(1)(A) resources and 5(b)(1)(B) generating

resources.

Residential Loads of IOUs--For 2002-2006 BPA intends to

offer at least 1000 aMW of power and 800 aMW of power or financial

benefits. For customers that purchase 10-year contracts, BPA will

provide the 1800 aMW package for the first five-year period, and 2200

aMW for the second five years.

DSIs--BPA expects to be able to serve all DSI load placed

on the agency.

Managing Financial Risk. BPA's pricing of its power

products and services is based, in part, on the agency's risk

management strategy. BPA faces a number of uncertainties, including

future hydro conditions, market prices, operating costs, and fish and

wildlife costs, which could affect how BPA operates and successfully

meets all of its public responsibilities. To ensure BPA recovers all of

its costs, the agency will use a variety of risk management tools.

These tools are described in detail in BPA's Power Subscription

Strategy.

Products and Services. BPA will market three categories of

products:

Core Subscription products--These products are available

to customers who request requirements service to serve load and accept

constraints on their ability to shape their purchases from BPA for any

reason other than following variations in consumer load. These

undelivered products will be offered at BPA's posted rates.

Customized Subscription products--Customized products are

available to customers who request requirements services to serve load

(Core Products) and who want additional flexibility to reshape their

purchases from BPA in order to optimize their resource operations.

These products will have bilaterally negotiated pricing for all

modifications to Core Products and any additional products and services

customers wish to purchase. BPA anticipates that the price for

customized products that differ substantially from the core products

will be negotiated under the Firm Power Products and Services (FPS)

rate schedule.

Non-Subscription products--This category broadly includes

power products and services that BPA might sell to any customer in the

marketplace. These products will have prices negotiated under BPA's FPS

rate schedule within the cost-based cap existing for that rate

schedule. For detailed product descriptions, refer to the BPA Power

Products Catalog available from BPA account executives or on the Power

Business Line Web site.

BPA will also offer another product called Slice of the System. The

Slice of the System is a requirements service and will be offered by a

formula to be developed during the Power Rate Case. The final details

of this product will be developed through an open process that will be

concluded before the end of January 1999. Slice will allow eligible

customers to pay a fixed percentage of BPA's costs in return for a

fixed percentage of the capability of the FCRPS, mapped to net

requirements.

Pricing. BPA intends to propose power rates for the 2002-2006 rate

period that are significantly below market and approximately equal for

all customer groups. Final pricing decisions will be made in the power

rate 7(i) process in 1999.

Subscription sales (i.e., contracts signed during the

Subscription window) to public agency customers will be at the PF rate.

Subscription sales to IOUs and DSIs would be at applicable rates, which

are expected to be approximately equivalent to the PF rate, subject to

a section 7(i) hearing and BPA meeting its statutory rate directives.

Loads of preference customers that contract for services

too late for inclusion in rate case analysis (i.e., the Power Rate Case

setting rates for the FY 2007-2011 period) will be served at the PF

rate through the end of that rate period, with a targeted adjustment

charge. This targeted adjustment charge will reflect incremental costs,

if such costs are incurred to serve the load. Also, any loads placed on

BPA after the close of the Subscription window will receive this rate

treatment at least through FY 2006.

Option fees have been dropped. Eligible customers who make

long-term commitments to buy power will get a contractual guarantee of

BPA's applicable lowest cost-based rates beyond FY 2006.

BPA will continue the LDD, with minor modifications, in a

manner similar to current practice.

BPA intends to continue existing General Transfer

Agreement (GTA) service to customers for delivery of Federal power

through the 2002-2006 rate period. This service will not be available

to new preference customers or to existing preference customers for

service territory expansions. BPA will attempt to negotiate extensions

through 2006 for GTA agreements that expire during this time. If

unsuccessful in this attempt, BPA will arrange for open access tariff

transmission to replace GTAs for delivery of Federal power to GTA

points of delivery. This delivery will be covered by power rates. The

costs for delivery of non-Federal power to GTA points of delivery will

not be covered by power rates.

BPA has an important role in fostering and promoting the

development of energy conservation and renewable resources in the

Northwest. BPA plans to offer a 0.5 mill per kilowatthour Conservation

and Renewables Rate Discount to utilities that voluntarily implement

measures to develop energy conservation and renewable resources, up to

a total of $30 million per year. The discount will be dollar for

dollar. BPA is also considering whether, if its actual financial

performance turns out to be much better than the rate case plan, to

offer an additional discount for customers who support additional

conservation and renewables activities. The details of how BPA plans to

proceed with the discount in the initial rate proposal will be provided

in the Administrative ROD.

Contract Elements. BPA intends to conduct bilateral negotiations

with each of its customers to develop a contract that establishes the

specific business relationship between that customer and BPA. All

contracts will contain some provisions that are non-negotiable and

consistent across all Subscription contracts.

BPA will provide various incentives for customers to

choose among three-year contracts, five-year contracts, and contracts

longer than five years.

BPA will be willing to negotiate non-requirements surplus

firm power contracts with small rural full service customers that may

be inordinately affected by rate design changes.

Under Subscription contracts, customers bear the risk of

losing load due to retail open access. BPA will offer several means to

mitigate a customer's financial risk due to retail load loss.

BPA will offer load growth coverage to public agency

customers. Utilities whose loads grow due to retail access load gain or

annexations and have contracts before the close of the Subscription

window will be served with requirements power at the PF rate. However,

new large single loads (NLSL)

[[Page 155]]

will be served at the New Resources Firm Power rate. Public agency

requests to BPA for additional service after the Subscription window

closes will be subject to the special price and notice provisions

described in the Pricing section.

A new public utility, which is eligible for service under

BPA's statutes and which forms and contracts for service within the

Subscription window will be offered power at the PF rate for its entire

load obligation, except for NLSLs. New tribal preference utilities,

which are eligible for service under BPA's statutes, will be treated

the same as other new public utilities.

Under current statutory provisions, customers who purchase

for their net firm power requirements load are not able to pool their

power purchases with other customers' purchases. If new legislation

affecting pooling is passed, BPA will consider modifying its contracts.

Environmental Analysis

BPA's BP EIS focused on the relationships of BPA to the market. (BP

EIS, section 2.1). BPA's marketing actions do not have a direct effect

on air, land, and water. Previous environmental studies (e.g., Initial

Northwest Power Act Power Sales Contracts EIS, January 1992; and Final

Environmental Assessment: 1993 Wholesale Power and Transmission Rate

Adjustment, February 1993) showed that environmental impacts are

determined by the responses to BPA's marketing actions, rather than by

the actions themselves. These market responses, discussed in detail in

section 4.2 of the BP EIS, are resource development (including

conservation), resource operation, transmission development and

operation, and consumer behavior. With this knowledge, BPA used market

responses as the foundation for the environmental analysis in section

4.3 of the BP EIS.

These market responses that determine the environmental impacts

also determine whether BPA's costs will exceed the level of maximum

sustainable revenue. If BPA were unable to balance its revenue and

costs, the agency would need to pursue a response strategy. These

response strategies, which are discussed below, fall into three general

categories: increase revenues, reduce spending, and transfer costs. The

ability to utilize response strategies, such as the risk management

tools described in the Power Subscription Strategy, to meet BPA's

financial obligation allows the agency to continue to be competitive in

the market and provide public benefits.

A review of the BP EIS clearly shows that the potential

environmental impacts from BPA's Power Subscription Strategy are

adequately covered. Figure 2 below (not included in this Notice) shows

how the decision to adopt the Power Subscription Strategy affects the

environment.

Potential Air, Land, and Water Effects.

Resource development and operation--Customers' decisions

on whether to buy power from BPA or from other suppliers to serve their

firm loads have potential effects on resource development and

operations. Moreover, resource operations and development are more

likely to have a potential impact on the environment than other market

responses. Even so, resource operations are not expected to change

significantly due to BPA's decision to adopt the Power Subscription

Strategy.

BPA's energy resources are overwhelmingly hydropower. The SOR EIS

evaluated various hydro operation scenarios and the requirements

necessary to serve the multiple purposes of the Federal facilities,

including power generation, fisheries, recreation, irrigation,

navigation, and flood control. The resulting decisions about operating

requirements, as documented in the Columbia River System Operation

Review On Selecting An Operating Strategy For The FCRPS ROD (February

21, 1997), defined the power operations and amount of resources

available for all BPA power transactions. However, to assist in fully

understanding the potential range of impacts as a consequence of

fundamental Business Plan decisions, the BP EIS evaluated the possible

effects under two SOR operating strategies covering a wide spectrum of

possible hydro operations (BP EIS, sections 4.4.3 and 4.4.4). It is

important to note that contractual decisions predicated upon the BP EIS

do not influence the SOR analysis or hydro operations. In fact, the

reverse is true: the results from the SOR ROD affect BPA's Power

Subscription Strategy decisions by defining the amount of power

available to BPA from its hydro resources.

Also, whether customers choose BPA or other regional providers to

serve their loads has a minimal effect on environmental impacts from

resource development. The BP EIS showed that the difference between BPA

serving the loads and the rest of the region serving the loads is

relatively minor. Although BPA's share of regional load varied across

alternatives, the differences in total environmental impacts among

alternatives were small (BP EIS, Figure 4.4.5, page 4-117).

The more important factor for determining potential environmental

impacts from resource operations and development is whether the region

will be in an energy resource surplus or deficit situation. Based on

BPA's most recent Pacific Northwest Loads and Resources Study (the

White Book), the region post-2001 is expected to be resource deficit

under a critical water level (the lowest expected water condition based

on historical data) for the hydroelectric system.

Under these conditions all resources in the region will run and

there will be an increased likelihood of needing additional resources.

It is anticipated that much of this need for additional resources will

be met through better water conditions (closer to an average water

year) than critical water. In addition, BPA will promote the

development of conservation and renewable resources in the region. The

region may also rely on existing power resources outside the region or

on the construction of new resources within the region. In any case,

there is likely to be an increase in air emissions. However, any new

resources are expected to be CTs. If these cleaner, more fuel efficient

CTs displace existing thermal generation, the overall air quality

impacts may be lessened (BP EIS, section 4.4.1.4). Section 4.3.1 of the

BP EIS describes the typical environmental impacts from various

generating resources.

Currently BPA does not intend to rely on the long-term acquisition

of the output of new generating resources to meet any increases in its

loads. Instead, BPA plans to use cost-effective power purchases. If

necessary, BPA would consider the long-term acquisition of the output

of new combined cycle combustion turbines (CTs).

In the less likely event that the region is in a surplus situation,

fewer air quality impacts would be expected. New generation would not

be needed and surplus hydro could displace existing thermal generation,

resulting in fewer air emissions. If most existing resources in the

region run, no substantial changes in the current environmental effects

would be expected. The closer the region is to load/resource balance,

however, the greater the likelihood new resources will be constructed.

As discussed above, these new resources would impact air quality.

Transmission development and operation--Little change is

expected in transmission development and operation due to the decision

by BPA to adopt the Power Subscription Strategy. Reliability criteria

and regional

[[Page 156]]

planning would still set the direction for a regional transmission

system (BP EIS, Table 4.2.1, page 4-40.) The potential environmental

impacts of transmission development and operation were described in

section 4.3.2 of the BP EIS. Analysis of transmission system

development and operation across Business Plan alternatives (which

represent a broad range of loads placed on BPA) shows overall

transmission development in the region varying by less than six percent

(BP EIS, section 4.4.3.6).

Consumer behavior--Conservation reinvention, which is

intrinsic to BPA's market-driven approach, included price incentives

for conservation (BP EIS, section 2.2.3). A renewables incentives

module was also analyzed as a variable (BP EIS, section 2.3). The

success of any incentives, such as a rate discount, for conservation or

renewable resources would reduce the region's reliance on or need for

thermal resources. As a result, there would be fewer impacts to air,

land and water. Conservation measures, in and of themselves, have few

environmental impacts (BP EIS, section 4.3.1).

Potential Socioeconomic Effects. Consistent with its market-driven

approach, BPA will remain active in the competitive market, working to

assure its success. BPA must generate enough revenue to pay all of its

costs. If the costs exceed BPA's ability to generate revenues, BPA may

not be able to meet its financial obligations, including repaying the

Treasury and providing public benefits. The BP EIS showed that two

factors dominated BPA's ability to be successful in the market: rates

and terms of service. Under the market-driven approach, BPA focused on

keeping rates low and on meeting customers' needs (BP EIS, section

2.6). The success of BPA's Power Subscription Strategy will be

determined by how well it responds to these same two factors. The

Strategy equitably distributes the benefits of the FCRPS, provides

customers with a variety of choices to meet their needs, and

acknowledges BPA's financial and public benefit responsibilities.

However, BPA faces a number of uncertainties that could affect its

success. The Risk Management Strategy incorporates a set of risk

management tools to manage this risk.

Rates--For BPA to be successful, the Power Subscription

Strategy must offer power products and services at prices that are

acceptable to customers. To the extent BPA is more or less successful,

the agency could be over-subscribed or under-subscribed.

If BPA's cost-based rates for Subscription power are below market,

BPA could sell all the power it has available. BPA would meet this

over-Subscription by making cost-effective power purchases from

existing resources. In the unlikely event that the cost of these power

purchases or customer demands were much higher than expected, BPA could

use a variety of measures, including adjusting the shape of deliveries

and interruption provisions, to ensure the DSIs share in the benefits

of federal power.

Over-Subscription would likely decrease air quality. BPA's power

purchases could cause regional thermal resources to run, resulting in

increased air emissions. In addition, BPA currently sells power to

California, offsetting the operation of some of California's thermal

plants. These plants may be operated, leading to increases in air

emissions in California. If, as expected, the region is deficit, BPA's

purchases could encourage others to develop resources, including

conservation.

If BPA's rates for Subscription power are higher than what

customers perceive market prices to be, BPA could end up selling less

firm power than it is offering. Consequently, BPA might not be able to

recover its costs for the rate period and could be unable to make its

Treasury payments or meet recovery costs for fish and wildlife. BPA

would likely implement one or more of the financial contingency

measures in the Risk Management Strategy to address such under-

Subscription.

If BPA were under-Subscribed, other regional resources would meet

customers' loads. These thermal resources would have negative air

quality impacts. Under the likely regional deficit for resources,

resource development would be encouraged. Unlike BPA's existing

resources, these new resources (primarily CTs) would have air quality

impacts. To the extent the new CTs displaced older, less efficient

thermal resources, the potential impacts would be less.

Terms of service--BPA also found that the issues raised

during the Power Subscription Strategy public process were focused on

business actions that affect the marketability or desirability of BPA's

power. The Power Subscription Strategy must also offer terms of service

that are attractive to BPA's customers. BPA worked with customers in

developing the Strategy, and was responsive to their concerns. The

Strategy preserves public preference and regional preference, while

assuring that the residential and small farm customers of the region's

IOUs share the benefits of the FCRPS. The Power Subscription Strategy

also recognizes the unique needs of customers and responds to those

needs. A variety of competitively-priced power products and services

are available. In addition, BPA intends to conduct bilateral

negotiations with each of its customers to develop individual

contracts.

To the extent these terms of service are attractive, customers will

choose to buy power from BPA. At the same time, the Strategy must

recognize constituents' concerns. The Power Subscription Strategy

balances the concerns and interests of customers and constituents. The

more successful the Power Subscription Strategy, the more likely BPA

will be able to fulfill all of its financial obligations.

Public benefits--As discussed above, BPA is making a

systematic effort through this Power Subscription Strategy to meet

customer needs and improve business relationships. This will make the

purchase of federal power more attractive to customers, resulting in

reliable and predictable BPA revenues which will provide better

financial stability over time. This success in the market will provide

the financial strength necessary to ensure the public benefits BPA

provides the region. The Power Subscription Strategy provides BPA the

mechanisms to spread the benefits of the FCRPS throughout the region,

fulfill BPA's fish and wildlife obligations, and encourage conservation

and renewables.

Response strategies (Mitigation)--BPA faces a number of

uncertainties that could affect its success: hydro conditions, market

prices, operating costs, and fish and wildlife costs. The Power

Subscription Strategy includes a Risk Management Strategy BPA intends

to use to make sure all of its costs and public responsibilities are

met despite these uncertainties. The BP EIS, acknowledging these same

uncertainties, detailed representative response strategies BPA could

invoke to balance costs and revenues (BP EIS, section 2.5 and BP ROD,

pages 13-14). These response strategies fell into three general

categories: decrease spending, increase revenues, and transfer costs.

The risk management tools in the Power Subscription Strategy are

consistent with the response strategies in the BP EIS. BPA has already

decided (in the BP ROD) to implement as many response strategies, or

equivalents, as necessary to mitigate for cost and revenue imbalance.

Such mitigation enhances BPA's ability to continue to adapt to changing

market conditions and improves BPA's long-term attractiveness as a

power supplier and business

[[Page 157]]

partner and BPA's ability to ultimately continue to provide public

benefits to the region.

Public Availability

This Power Subscription Strategy ROD, which satisfies BPA's

requirements under the National Environmental Policy Act (NEPA), will

be distributed to interested and affected persons and agencies. The ROD

will also be posted on BPA's web-site, which is http://www.bpa.gov/

power/subscription. Copies of BPA's Power Subscription Strategy, the

Business Plan, Business Plan EIS, and the Business Plan ROD and

additional copies of this NEPA ROD are all available from BPA's

Communications Office, P.O. Box 12999, Portland, Oregon 97212. Copies

of these documents may also be obtained by using BPA's nationwide toll-

free document request line, 1-800-622-4520.

Conclusion

After participating in an extensive public process, I have decided

to adopt and implement BPA's Power Subscription Strategy. Consistent

with the decision strategy laid out in BPA's BP EIS, I have examined

that EIS and found that this decision is clearly within its scope. In

making this decision to adopt the Power Subscription Strategy, I have

carefully considered the potential environmental impacts. Further, in

proceeding with the Strategy, BPA is guided by and remains fully

committed to the Fish and Wildlife Funding Principles.

This decision is a direct application of BPA's Market-Driven

approach for participation in the increasingly competitive electric

power market. BPA is offering a variety of power products and pricing

to address customers' needs and make the purchase of federal power more

attractive to customers. BPA will begin bilateral negotiations during

which customers will make federal power purchase commitments and

execute individual contracts.

Implementing the Power Subscription Strategy will result in

reliable and predictable BPA revenues which will provide financial

stability over time to help provide public benefits, avoid stranded

costs and reduce the need to invoke risk management strategies. BPA is

responding to customers' needs while ensuring the financial strength

necessary to produce the public benefits that are of concern to the

people of the Pacific Northwest. Making Power Subscription contracts

available to customers is a prudent business and public agency decision

that reflects the values of the region.

Issued in Portland, Oregon, on December 21, 1998.

J. A. Johansen,

Administrator and Chief Executive Officer.

[FR Doc. 98-34788 Filed 12-31-98; 8:45 am]

BILLING CODE 6450-01-P