Power Allocation Issues

DEPARTMENT OF ENERGY

Western Area Power Administration

Power Allocation Issues

AGENCY: Western Area Power Administration, DOE.

ACTION: Notice of inquiry.

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SUMMARY: The Western Area Power Administration (Western) has completed

its inquiry regarding the impact of electric utility industry

restructuring on Western's power allocation policies. This Federal

Register (FR) notice contains Western's responses to comments on the

issues raised by the inquiry. Contemporaneously, Western is publishing

the final 2004 Power Marketing Plan for the Sierra Nevada Customer

Service Region (SNR) and the final Salt Lake City Area Integrated

Projects (SLCA/IP) Marketing Criteria.

FOR FURTHER INFORMATION CONTACT:

Robert C. Fullerton, Project Manager, Corporate Services Office,

Western Area Power Administration, 1627 Cole Boulevard, PO Box 3402,

Golden, CO 80401-0098, telephone (303) 275-2700, email:

[email protected].

Joel K. Bladow, Regional Manager, Rocky Mountain Region, Western Area

Power Administration, PO Box 3700, Loveland, CO 80539-3003, telephone

(970) 490-7201, email: [email protected].

J. Tyler Carlson, Regional Manager, Desert Southwest Region, Western

Area Power Administration, PO Box 6457, Phoenix, AZ 85005-6457,

telephone (602) 352-2453, email: [email protected].

David Sabo, Customer Service Center Manager, Colorado River Storage

Project, Western Area Power Administration, PO Box 11606, Salt Lake

City, UT 84147-0606, telephone (801) 524-6372, email: [email protected].

Jerry W. Toenyes, Regional Manager, Sierra Nevada Region, Western Area

Power Administration, 114 Parkshore Drive, Folsom, CA 95630-4710,

telephone (916) 353-4418, email: [email protected].

Gerald C. Wegner, Regional Manager, Upper Great Plains Region, Western

Area Power Administration, PO Box 35800, Billings, MT 59107-5800,

telephone (406) 247-7405, email: [email protected].

SUPPLEMENTARY INFORMATION:

Authorities

This public process is being conducted pursuant to the Department

of Energy (DOE) Organization Act (42 U.S.C. 7101, et seq.); the

Reclamation Act of 1902 (43 U.S.C. 371, et seq.), as amended and

supplemented by subsequent enactments, particularly section 9(c) of the

Reclamation Project Act of 1939 (43 U.S.C. 485h(c)); and

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other acts specifically applicable to the projects involved.

Background

Western is a Federal power marketing administration (PMA), charged

with the responsibility of marketing electricity generated by power

plants operated by the Bureau of Reclamation (Reclamation), the Corps

of Engineers, and the International Boundary and Water Commission.

Created in 1977, Western markets on a wholesale basis and transmits

Federal hydroelectric power throughout 1.3 million square miles to more

than 600 customers, including rural electric cooperatives, municipal

utilities, public utility districts, Federal and State agencies,

irrigation districts, and Native American tribes. Western's power

customers, in turn, provide service to millions of consumers in 15

western States.

Western markets power on a project-specific basis. A marketing plan

for each project is developed through a public process, with

opportunity for comment on a marketing proposal before publication of

the final marketing plan in the Federal Register. Reclamation law

governs how Western markets electricity, including the requirement that

Western offer power first to certain nonprofit entities such as rural

electric cooperatives and municipalities.

On December 1, 1998, Western published in the Federal Register a

Notice of Inquiry to explore the impact of electric utility industry

restructuring on Western's power allocation policies (63 FR 66166). A

forum was held in Denver on January 6, 1999, to receive public comment

on this matter, and written comments were accepted from the public

until the end of the 45-day consultation and comment period. In this

Federal Register notice, Western is addressing comments received during

the electric utility industry restructuring inquiry.

Western received a number of comments on the size of project-

specific resource pools in response to our Notice of Inquiry. Because

of these comments and expressions of interest in an allocation of

Federal power from several Indian tribes, Western decided to open an

additional 30-day comment period focused solely on the issue of the

size of project-specific resource pools. Informational meetings on

Western's resource pool size proposals and the requirements for

receiving an allocation of power were held in Phoenix, Arizona,

Albuquerque, New Mexico and Folsom, California. Resource pool size

comments are being addressed in the 2004 marketing plans for the

Central Valley, Washoe, and Salt Lake City Area Integrated Projects.

As some comments and responses use certain project names

interchangeably, some definition is needed in order to avoid confusion.

Western's 2004 Power Marketing Plan for the Sierra Nevada Customer

Service Region governs marketing from the Central Valley Project (CVP)

and the Washoe Project. Western's Salt Lake City Area Integrated

Projects Marketing Criteria cover power marketing from the Colorado

River Storage Project (CRSP), the Collbran Project, and the Rio Grande

Project.

Summary of Western's Response to the Notice of Inquiry

In response to changes in the utility industry, Western's power

allocation policies have been altered in a responsible and proactive

manner. More flexibility has been added to Western's power sales

contracts, and Western has made significant changes to our marketing

policies that emphasize customer choice and diminish Western's future

need for appropriations to purchase power. Western's contracts will

accommodate, rather than impede, environmentally beneficial changes in

operations at large Federal dams in the west. Widespread benefit will

be achieved through power allocations to Native American tribes without

the need for formation of tribal utilities. Contractual provisions will

continue to prohibit inappropriate resale of Western's power and assure

that consumers receive the benefits of cost-based Federal

hydroelectricity. Although no additional changes to Western's power

marketing policies will be adopted at this time, Western likely will

evaluate the impact of electric utility industry restructuring on a

periodic basis to assure that our policies continue to be responsive to

public needs.

Legal Analysis

Regulatory Flexibility Analysis

The Regulatory Flexibility Act of 1980 (5 U.S.C. 601, et seq.)

requires Federal agencies to perform a regulatory flexibility analysis

if a final rule is likely to have a significant economic impact on a

substantial number of small entities and there is a legal requirement

to issue a general notice of proposed rulemaking. Western has

determined that this action does not require a regulatory flexibility

analysis since it is a policy inquiry rather than a rulemaking, and the

subject of the inquiry involves policies applicable to public property.

Environmental Compliance

DOE National Environmental Policy Act (NEPA) regulations

categorically exclude marketing plans from NEPA documentation unless

they involve new generation, new transmission, or a change in

operations. Therefore, Western will not conduct further evaluation

under NEPA as part of this power allocation issues notice of inquiry.

Considerable environmental evaluation has already occurred under the

Energy Planning and Management Program (EPAMP) and during project-

specific marketing plan development.

Review Under Paperwork Reduction Act

As no collection of information will take place as a result of this

Federal Register notice, no review under the Paperwork Reduction Act of

1980 (44 U.S.C. 3501, et seq.) is necessary.

Review Under Executive Order 12866

Western has an exemption from centralized regulatory review under

Executive Order 12866; accordingly, no clearance of this notice by the

Office of Management and Budget is required.

Small Business Regulatory Enforcement Fairness Act

Western has determined that this Federal Register notice is exempt

from congressional notification requirements under 5 U.S.C. 801 because

it is a policy inquiry rather than a rulemaking, and the subject of the

inquiry involves procedures and policies applicable to public property.

Federalism Assessment

This Federal Register notice will not have substantial direct

effects on the States, on the relationship between the national

government and the States, or on the distribution of power and

responsibilities among the various levels of government. Therefore, in

accordance with Executive Orders 12612 and 13083, it is determined that

this notice does not have sufficient federalism implications to warrant

the preparation of a Federalism Assessment.

Response to Comments on Notice of Inquiry

Western has received extensive public comment on the impact of

electric utility industry restructuring on Western's power allocation

policies. These comments relate to six questions that were posed during

the public process, which address the impact of State retail

competition statutes on how we sell electricity. Public comments, and

Western's responses to those comments, are set forth below and

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organized under each of the six questions.

Question

1. Should Western's power allocations system, including the term of

firm power contract renewals, be modified to take into account changes

in electricity markets that have occurred, and are expected to occur in

the future, due to the enactment of California Assembly Bill 1890 and

other State retail competition statutes? If so, please explain what

modifications would be desirable. If not, please explain why the

present system should be preserved.

A. Goals of Restructuring

Comment: The intended goal of electric utility restructuring is to

promote competition, so as to lower power costs to the consumer. That

goal is already being met by Western's existing power allocation

system. Loss of the resource will increase costs to and punish the

retail consumer, a result that is contrary to the intended results of

retail competition.

Response: Lower power cost to consumers is the ultimate goal of

utility restructuring. Western's power allocations promote yardstick

competition in the electricity industry and result in lower power costs

to the consumers served by Western's customers.

B. Federalism

Comments: Western should give a great deal of deference to

federalism. Many of the suggested changes in Western's Notice of

Inquiry would insert Western into State policy determinations. To date,

the United States Congress has been extremely careful in respecting

State jurisdiction in matters as extensive and complex as those within

the power industry. Western should not tread where Congress has chosen

not to go.

We appreciate your efforts to assure that the Federal power

program's policies are contemporaneous with the needs of customers and

the changes in the industry. However, we do not believe that the six

issues posed in this inquiry will strengthen the program or increase

the value of the Federal power resources. We believe these issues

should be addressed at the State level.

Response: Issues of retail service, retail rates and consumer

choice in power supply have been addressed at the State and local

levels in the past. As Congress has not identified what Federal purpose

would be served by modification of this historic responsibility,

Western believes these issues are better addressed at the State level.

The Clinton Administration's electric utility restructuring bill

encourages States to take the lead on these issues.

Comment: Why should the Federal policy on power allocations be

changed due to State legislative action? State interests should not

supersede Federal interests.

Response: As a matter of policy and practicality, Western views the

establishment of Federal policy through mirroring of State legislative

or regulatory action as problematic.

Comment: Western should not interfere with the federalism that has

served our nation well in accommodating the different needs of each

region.

Response: Accommodating regional needs is important to Western. As

a PMA, our mission is very much regional in nature. Western markets

power on a project-specific basis, which allows the crafting of

marketing plans that are responsive to regional needs.

Comment: We understand that the Clinton Administration supports

State implementation of electric utility restructuring, and we are

concerned that Western not impose requirements beyond those required by

California law.

Response: Western has no desire to impose requirements beyond those

required by California law.

C. Policy Diversity

Comments: Retail access has not been uniformly implemented among

the States in Western's service territory. Retail access and utility

restructuring are being addressed to varying degrees on varying

timetables. Restructuring is an evolutionary process and substantial

discretion is left to each State to determine how best to serve their

interests.

Because of the wide variety of approaches being considered or

implemented by the various States in which Western currently has

responsibility for marketing Federal resources, it will be impossible

for Western to have a uniform or equitable approach in each

jurisdiction, even setting aside the issue of Federal/State

relationships.

The States should mold their restructuring plans around Western

rather than Western trying to mold their allocation system around each

State.

Response: Western agrees that adopting a policy that mirrors

evolving State action would be difficult.

Comment: No modification should take place in Western's power

allocations to satisfy the needs created by California's electric

deregulation.

Response: Western does not intend to force California standards on

customers elsewhere in our service territory.

Comment: Western should not set national standards for all of its

projects. The regional nature of Western's projects should be

recognized.

Response: Western will continue to market power on a project-

specific basis, in a manner that is sensitive to regional needs.

D. Yardstick Competition or Distortion of Markets?

Comments: Western's current allocation system should be changed

because competitive wholesale and retail electricity markets make the

inherent market distortions caused by PMA power even greater. It is

patently unfair for the Federal Government to subsidize a few select

players in a competitive market, to be picking winners and losers among

electricity suppliers.

Western's power allocation system should be modified to take into

account industry changes. Under the current scheme, the Federal

Government is essentially stacking the deck against private, taxpaying

utilities and other power generators in favor of subsidized customers

who provide low cost power to a select few. Because the wholesale

market today is already competitive, such a stacking of the deck is

incongruous with the nation's goals as set forth in the Energy Policy

Act of 1992.

Response: Marketing of Federal hydropower to nonprofit public

bodies first is in accordance with law. Although many changes have

taken place in the utility industry in recent years, the policy of not

allowing profit to be made on Federal power resources constructed with

taxpayer dollars remains relevant today.

All successful competitors in the electricity marketplace have

certain competitive advantages, including investor-owned utilities.

Some investor-owned utilities (IOUs) have such attributes as size,

access to capital, economies of scale, greater customer density, use of

investment tax credits, access to tax-exempt bonds for purposes such as

financing pollution control equipment, and favorable tax treatment of

depreciation. Some jurisdictions allow recovery of stranded costs on

favorable terms for IOUs.

Comments: One of the original intents of the Federal power program

was and still is to provide a yardstick to measure competition and

provide a counterbalance to private sector interests. At this time of

restructuring and volatile wholesale prices,

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abandoning that yardstick will leave consumer-owned electric utilities

and their consumers no means of assessing the conditions of the

marketplace.

Equity and a level playing field for all types of utilities clearly

points to a prompt renewal of CVP and CRSP contracts under the 2004

marketing plans at high percentage levels.

Western's allocation policies have helped promote ``yardstick''

competition among utility suppliers. Existing allocation policies have

in large part supported the continued ability of our small municipal

utility systems to provide competitively priced power to all our

consumers, not just a few of the larger consumers as we believe will be

the inevitable result if industry restructuring is mandated at the

Federal or State level.

A recommitment to the original purposes of the Federal power

program will better serve the country and Western's customers. The need

for a yardstick to measure competition is more important than ever.

There has yet to be a demonstration that industry restructuring will

benefit all consumers. Developments in industry restructuring to date

have only benefited a narrow class of customers-large industrial and

commercial loads. Small communities and rural areas--Western's customer

base--may be distinctly disadvantaged by some of the industry changes

that have been proposed.

Response: Western's power allocation policies preserve stability

and competitive balance in the utility business. As small communities

and rural areas are served by a significant portion of our customer

base, Western is cautious about changing its policies to the possible

detriment of consumers in less populated areas.

E. Policy Basis

Comments: Western would be grossly premature in making changes to

address nonexistent or moving targets in restructuring. In addition,

the form of the present California market is undergoing rapid and

unpredictable changes. To modify the present 2004 marketing plan would

be a futile exercise.

Modifying Western's power allocation system based on possible

developments in State legislatures is conjectural and represents a bad

model for policy development. There is no reason to change Western's

power allocation system because of development in the States. State

actions do not compromise Western's role in the electric utility

industry, and in fact may make Western's role more important.

Western should not take into account changes it expects to occur

because of State statutes allowing retail competition. Some States will

not adopt statutes and the statutes that are adopted will not be the

same. Speculation on what the future may hold is not a sound business

practice.

Any initiative which results in Western reducing power allocations

on the speculative assumption that industry restructuring will be

mandated in our State or that it will be good for all consumers in our

State simply exacerbates the seriousness of the resource stability

issue that small municipal utilities are vitally concerned about.

Response: The scope and pace of changes in the utility industry

cannot be predicted with certainty. Adopting significant additional

policy changes today, when the policy debate is fluid and the outcome

is far from certain, is imprudent.

Comment: Changing Western's power allocation policies as suggested

by the question will impede competition and not promote it. The current

merger mania is being fueled by the debate on industry restructuring.

Investor-owned utilities realize that maximizing profits in

restructured markets is dependent on their ability to increase market

share. Any action by Western that detrimentally impacts the ability of

small municipal and rural-based systems to survive and continue to

offer first-rate service at a competitive price will lead to increased

concentration of electric supply in the hands of a few, larger

companies. This does not foster competition, it discourages it.

Confirmation of existing policies and extension of resources will

promote and preserve competition in electric supply markets.

Response: Yardstick competition has added value to the electricity

marketplace. Competition is not served if Western adopts policies that

undermine the diversity of the industry by accelerating the

consolidation of power supply.

Comment: Notwithstanding our belief that Federal law would need to

be changed, we do not believe the policy changes suggested by these

questions are prudent on their face. In general, these policies would

add both instability to and disrupt what is already much uncertainty

related to the future of power supply resources in a time of

deregulation.

Response: Adding instability and disruption to power supply

resources is not sound policy.

Comment: Policy decisions on Western's power should not be made in

a vacuum. Western's policies should be examined in light of other

Federal actions which affect the electric utility industry.

Response: Many public power entities do not purchase power from

Western, so changes in Western's allocation policies have a limited

impact nationally.

Comment: The customers who purchase power from the Southeastern

Power Administration are concerned that DOE would modify the policies

governing the Federal power program to accommodate nascent changes in

retail utility markets in a handful of States. We are unaware of any

evidence that the Federal power program has impeded implementation of

retail competition.

Response: Western believes that the sale of cost-based hydropower

to not-for-profit utilities aids competition in the industry. Far from

undermining competition, diversity of participation stimulates and

strengthens the marketplace.

Comment: The world has changed since the adoption of the Energy

Planning and Management Program in 1995. Modest changes to the rules

would meet the need to address retail wheeling.

Response: Western believes that the changes to its past marketing

and allocation policies, as set forth in the 2004 marketing plans for

the CVP, Washoe, and SLCA/IP, are responsive to changes in the utility

industry.

Comments: Western's Notice of Inquiry has the appearance of

searching for a rationale or justification for changing policy.

We were disappointed to receive the inquiry from Western, as it

seems to be just another attack on public power cloaked in the shroud

of industry restructuring. The questions overlook the fact that public

power and the historical distribution of Western power have fostered

more competition than will likely occur from restructuring.

Response: Western agrees that public power and the marketing of

power by Western have promoted competition in the past, to the benefit

of consumers.

Comments: Western should change its allocation policies, as the

original purpose for preference allocations has changed, and the West

has been electrified. Restructuring demands changes to the existing

allocation scheme.

The PMAs and Tennessee Valley Authority were originally established

during the Great Depression to speed the delivery of electricity to

farms and rural areas and to service municipal utilities. Only 11

percent of rural citizens were receiving the benefits of electric

service at that time. Virtually no

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competition existed among utilities. At that time, IOUs were unable to

finance rural electrification because of the lack of available capital

at affordable rates.

Cost-based PMA power was reserved first for preference entities,

with subsidies seen as tools for promoting economic development.

Economic circumstances in many of these areas have improved

dramatically and the original reasons for creating such subsidized

sales of power no longer exist. Rural America is no longer without

electricity, nor is rural America any poorer than urban America.

Congress established the current allocation system based on the

diversity in electric markets, the cost of owning, operating and

maintaining electric facilities, and the need for the region to access

affordable electric energy. The basis for that decision is as valid

today as when the lights first came on. Electric utility restructuring

will provide little benefit to remote, sparsely populated, and

economically depressed rural areas. The lack of economic activity,

which initially served as a vital deterrent to conventional electric

utility development, is more pervasive today than it was when rural

areas were first evaluated as potential markets for electric energy.

Response: Although electrification of rural America has been

largely accomplished, it is not universal. For example, Western has

received comments during this public process that thousands of

residents on the Navajo Reservation in northern Arizona do not have

electrical service.

As is the case with every utility in the United States, consumers

in Western's service territory vary in their prosperity. Many of

Western's customers serve areas that are economically depressed.

Allocations of Western power are important to economic development in

those regions.

Comment: Western and the other PMAs are in need of an overhaul.

America's needs are different today than they were at the time historic

Reclamation laws were enacted. While the burdens of Federal preference

allocations continue to be shared by all, the benefits appear to flow

only to a few. At a time when both government and industry are trying

to do more with less, it is difficult to find the public interest in a

program where the electricity bills of one select group of citizens are

subsidized to the exclusion of others. At a time when energy

conservation has never been more important, it is difficult to find the

public interest in a scheme where the United States sells electricity

at below market rates, thereby encouraging inefficient use, waste and

unnecessary adverse impacts to our country's natural resources. And at

a time in which the Congress has mandated wholesale competition of

electricity and functional unbundling of generation and transmission,

it is difficult to find the public interest in a program that depends

on vertical integration to support its continuation.

Response: As a regional PMA, the economic benefit of the power sold

by Western is enjoyed by entities in the region. This is not a unique

situation. The economic benefit of other Federal programs is often also

regional in scope, whether the investment is in military bases, mass

transit, national parks, or locks and dams that promote commerce on the

Nation's rivers.

Western is doing more with less. Our staffing levels have been cut

25 percent over the last several years in order to assure that our

power rates remain stable and our goods and services remain marketable.

Moreover, Western's rates are not subsidized. Western markets cost-

based hydroelectric resources, which are relatively inflation resistant

as compared to non-hydro generation due to the absence of fuel costs.

In addition, Western has no responsibility to meet load growth with

relatively expensive additional power. Western's hydropower resources

are reasonably priced due to these factors, and not because of

subsidies.

Western is proud of its record, and the record of its customers, in

conservation and renewable resources. According to the annual reports

from customers pursuant to Western's Integrated Resource Planning (IRP)

regulations, Western's customers avoided in 1998 the equivalent of over

555 megawatts (MW) of supply side resource acquisition due to

investment in demand-side management. Also in 1998, over 1140 MW of

renewable resources were acquired by customers.

The Federal power program does not depend on continuation of

vertical integration. For those customers that embrace separation of

functions, Western will market its power to the function responsible

for service to retail consumers. Yardstick competition will continue to

play an important role in enhancing competition in the marketplace,

with the goal of lowering rates to all consumers.

Comment: We are concerned that any significant changes to Western's

2004 marketing plan may increase uncertainty at a critical time and

lead to increasing government bureaucracy. Changes to Western's

existing power allocation system would likely decrease allocations to

existing customers and cause power rates to consumers served by

Western's customers to rise. Higher electric rates are contrary to the

goals of retail competition.

Response: Western is committed to carrying out its mission in a

businesslike and cost conscious manner. Creation of a government

bureaucracy which adds no value to our programs is inappropriate and

puts upward pressure on Western's rates.

F. Western's Role

Comments: Western has already demonstrated and continues to work to

adapt both its organization and the renewals it is making on contracts

for Federal power, recognizing changes in the industry while at the

same time preserving and respecting its Federally mandated mission.

Western's marketing policies are keeping pace with industry

restructuring. The extensive public process utilized by Western to

develop marketing policy has served its purpose very well.

We feel that the present 2004 CVP marketing plan is the logical

evolution of several predecessor marketing plans. With each stage of

the evolution, the Western system has gained the flexibility which was

sorely needed.

Western's marketing plans already have provisions to adapt Western

to the new marketplace. For example, the CVP 2004 marketing plan offers

unbundled services and allows customers to choose what they need. The

marketing plan is optimized for who Western is and the role they play

in the marketplace.

Western is already responding to industry changes as a wholesale

power supplier. By separating its transmission function from its power

marketing function, posting its surplus transmission on an open access

same time information system site, and participating on the California

Independent System Operator (ISO) governing board, Western has

demonstrated its forward looking approach.

Electricity restructuring is an evolutionary process that will take

many years to complete, and the eventual outcome is uncertain. Western

has taken into account industry restructuring changes in its proposed

marketing plans, which would sell a significantly different resource

from what is marketed today.

Western's power allocation system should be retained in order to

preserve consistency between the past and the future.

Response: Continuation of past policies without taking into account

changes in the utility industry is

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unwise. Western agrees there is risk in predicting the future actions

of Congress, State legislatures, and regulators. However, there is also

risk in not adjusting business practices until there is absolute

certainty.

Western has taken significant steps to respond to industry changes.

Even though Western is not under the jurisdiction of FERC for this

purpose, functional separation of its merchant and reliability

functions has proceeded. Western is actively involved in the formation

of independent system operators, and has taken on the roles of security

coordination in the Rocky Mountain subregion of the Western Systems

Coordinating Council and schedule coordination in northern California.

Open access transmission rates and rates for ancillary services have

been developed. Western has also pursued efficiencies in its operations

and cut its staffing level and associated costs in order to assure that

our rates are stable and our power remains marketable. Western is

committed to being businesslike and responding to the changes in the

utility industry in a responsible and proactive manner.

In recent years, Western has added more flexibility to its power

marketing policies and power sales contracts than has existed in the

past. Contracts recently signed for the Pick-Sloan Missouri Basin

Program-Eastern Division and the Loveland Area Projects contain

withdrawal opportunities at 5 and 10 years to meet the needs of

potential new customers and other purposes as determined by Western.

Western also reserved the contractual ability to adjust power

commitments in response to changes in operations and hydrology. In

addition, Western has the full flexibility to adjust its power rates

under the terms of the contracts. Resource pools of up to 6 percent of

the marketable resource were set aside to meet the needs of new

customers, including Indian tribes. These changes demonstrate Western's

commitment to adjusting its marketing policies as changes take place in

the utility industry.

Western has also made significant additional changes in the way

power is marketed in its most recent marketing plans. Under the 2004

Power Marketing Plan for the SNR, Western will no longer market a

resource that anticipates significant purchasing of power to meet

contractual commitments. Instead, Western plans to market the

hydroelectric resource as a base resource, which can be enhanced by

custom products (such as firming power and ancillary services) at the

election of the customer. Similarly, the marketing plan for the SLCA/IP

will allow the customer to choose whether Western should purchase

firming power. These changes promote customer choice and will

significantly impact Western's future need for purchase power

appropriations.

Comments: Western appears to be pursuing a course of promoting

retail wheeling indirectly even though its sister Federal agency, the

Federal Energy Regulatory Commission, has been prohibited by Congress

from pursuing this course directly in section 212(h) of the Federal

Power Act.

The questions posed by Western appear to be predicated on

assumptions that it has a broad regulatory and legislative authority

and that the impacts of its decisions will be limited. Neither

predicate is accurate. Western's authority is not one of a regulator,

but of a marketer with limited authority.

Do not lose sight of Western's limited statutory role. Investor-

owned utilities and marketers would undoubtedly oppose a shift in

mission from a wholesale supplier to a retail utility.

Industry changes do not justify a more ``activist'' role for the

PMAs. A more active role runs counter to the belief that exists in the

Pacific Northwest, where the four governors engaged in a comprehensive

regional review of the future role of the Bonneville Power

Administration (BPA). The regional review rejected the notion of a more

activist BPA, and made several recommendations to limit the role of

BPA, including a preclusion of direct retail sales beyond existing

direct service customers.

Expanding Western's role to include direct retail sales, rate

regulatory review of consumer-owned utilities and load profile analysis

is unnecessary and inconsistent with the desired reduction in the role

of the PMAs in a competitive marketplace.

Affirmative answers to the six questions would launch Western into

activities that vastly exceed its statutory authority. In the past,

Congress has been clear when it directs an expansion of Western's role

beyond that of a wholesale supplier (such as the IRP) requirement for

Western customers. Congress has not directed Western to take on the

role suggested in the Notice of Inquiry. While BPA has statutory

responsibilities that are greater than Western's, BPA cannot undertake

many of the activities contemplated by the Notice. Moreover, the Public

Power Council would oppose BPA attempting to engage in such activities.

We believe Western's function is for the benefit of the region it

serves. Restructuring along the lines of this Notice of Inquiry could

lead Western to operate outside its boundaries to the detriment of

existing customers and perhaps even create a situation where Federal

agency competes with Federal agency. Western's current responsibilities

for supplying power take into account a number of State and regional

issues dealing with power, but also extend beyond power delivery to

other resource issues such as water management and impacts on the

environment.

Response: Western is persuaded by these comments, and will not

change its general role in the manner suggested by the Allocation

Issues Inquiry. Although Western has broad statutory authority, there

is no compelling policy rationale for Western to become more activist

in its role. The goal of the Clinton Administration, which is to have a

smaller government that works better and costs less, would be undercut

if Western adopts the wide ranging new responsibilities suggested by

the Inquiry.

Comment: Western should not build resources.

Response: Western has no plans to construct new power resources.

Comments: Federal power is marketed in accordance with Reclamation

law. Consequently, the allocation and rate-setting policies of Western

are not identical to the practices of other electric utilities. Federal

Reclamation projects were developed not as a means for the generation

of electricity, but as a means of generating revenues to repay Federal

investment in these projects, including irrigation assistance.

Multipurpose Federal project operation is unique as compared to

other resources that have more flexibility in a competitive power

market to meet individual loads.

Response: Western has less flexibility than other participants in

the competitive marketplace due to the multipurpose nature of the

resources we market. Western agrees that our role is to market power in

such a manner as to repay Federal investment.

Comment: As an agency of the Federal Government, Western is not

subject to deregulation rules promulgated by the FERC. Nor is Western

subject to the jurisdiction of State legislatures or public utility

commissions.

Response: Although the Clinton Administration's restructuring bill

would make Western's transmission rates subject to FERC review as a

matter of law, Western is not a public utility and therefore is not

presently subject to FERC jurisdiction under section 205 and section

206 of the Federal Power Act. However, as a transmitting utility,

[[Page 34439]]

Western is subject to sections 211-213 of the Federal Power Act.

Western is not subject to the jurisdiction of State legislatures or

public utility commissions.

G. Customer Support, Leadership and Reliance

Comment: The Natural Resources Defense Council (NRDC) applauds the

good stewardship example that has been set by northern California

customers of the Central Valley Project. In our judgment, that record

justifies both renewal of these customers' contracts and your

insistence that other customers meet the same high standard in return

for contract extensions.

In an increasingly competitive and environmentally constrained

industry, access to inexpensive power supplies should be limited to

distribution companies that make convincing commitments to use

electricity efficiently and to expand inventories of relatively benign

production. This is precisely what we have seen from the Sacramento

Municipal Utility District (SMUD), City of Redding Electric Department,

Silicon Valley Power, City of Palo Alto Department of Utilities, and

the Northern California Power Agency. These institutions have made

three overriding commitments: (1) Through 2001 at least, they will

devote at least 3 percent of retail electric revenues to long-term

investments in energy efficiency, renewable energy, and low-income

energy services; (2) after 2001, they will at least match California

investor-owned utilities' investments in these categories as a fraction

of retail sales; and (3) they will annually underwrite and publish

independent experts' reviews of all such investments. Those commitments

place these northern California institutions in the forefront of public

power nationally and amply justify a contract extension.

Response: Western appreciates the support of the SNR 2004 marketing

plan by NRDC.

Comment: Central Valley Project customers have paid for substantial

environmental restoration on the CVP. Moreover, the consumer-owned

municipal utilities served by the CVP have paid more than $20 million

to repair and upgrade the Federally owned power generating facilities

(including the funding of the Shasta temperature control device, the

Shasta rewind project, and CVP maintenance) to ensure their continued

reliability and value without the need for Federal appropriations. The

availability of this resource has been vital to the implementation of

many cutting edge environmental improvements that currently benefit the

citizens of California.

Response: Western agrees that CVP customers have paid for

substantial environmental restoration and improvement in northern

California. The 2004 marketing plan provides stability in the

collection of mitigation funds for the benefit of environmental

resources in California's Central Valley.

Comments: The CVP allocation is essential to SMUD's ability to

continue providing reliable, affordable electricity to its consumers.

It also makes possible SMUD's leadership role in energy efficiency and

renewable resource programs. The assurance of CVP allocations has also

been critical to the implementation of many cutting edge environmental

improvements that benefit citizens of my congressional district.

Along with other Northern California Power Agency (NCPA) customers,

we have made significant commitments to renewable resources that would

not have been feasible without the CVP contracts. Loss of these

contracts would make further commitments unlikely as well as jeopardize

the stability of existing commitments.

Response: Western's power customers in northern California are

leaders in the development of energy efficiency and renewable

resources. Western agrees that renewable resource commitments might be

adversely impacted if CVP contracts with existing customers did not

continue.

Comments: Current CRSP power customers have contributed

substantially to environmental protection programs and providing

revenues for the Glen Canyon Monitoring and Research Center (GCMRC).

Approximately 8-10 percent of CRSP rates fund environmental programs,

such as the Upper Basin Recovery Implementation Plan and the GCMRC.

This significant contribution, as well as customer commitments to

integrated resource plans, demonstrates the commitment of CRSP firm

power customers to environmental mitigation.

We could support the extension of SLCA/IP resources to existing

customers if they were to support such ideas as renewable and energy

efficiency investments, embracing green marketing to interested retail

customers, supporting codification of funding commitments for

mitigating the environmental impacts associated with the operation of

Federal hydroelectric facilities, and agreeing to provisions that

ensure that contract extension language will not impede dam

reoperation.

Response: Western agrees that a significant portion of CRSP power

revenues are used for environmental mitigation, monitoring, and

research, all of which benefit the environment. Over $160 million in

environmental costs, including purchased power required by experimental

flows, have been funded by CRSP power customers through 1998. Now that

operations at Glen Canyon Dam have been permanently changed to benefit

downstream natural resources, the cost to replace the lost electrical

power caused by this change is estimated to be in excess of $44 million

annually, and could approach double that amount. In addition to the

cost associated with lost electric power, there is a long-term

monitoring and research program funded by power revenues which is

anticipated to cost about $7,600,000 annually.

Capital funding of Upper Colorado River Basin endangered fish

recovery is expected to cost about $17 million. Research funding for

these same fish species is expected to cost $6 million per year. These

costs are funded by CRSP power contractors. Moreover, additional

purchase power expenses resulting from operational changes at Flaming

Gorge Dam to benefit these fish are expected to total about $15 million

over the next 5 years.

Purchasers of CRSP power have also had a positive record in energy

efficiency and renewables. In 1998, CRSP customers realized over

138,000 megawatthours (MWh) in energy savings due to demand-side

management investment. In excess of 692,000 MWh were generated from

renewable resources in 1998 due to the investments of CRSP customers.

In addition, contract language has been developed to assure that

dam reoperation will not be impeded by the extension of SLCA/IP

resources. Firm power contracts will flexibly accommodate changes in

operations, pursuant to the principles set forth in the EPAMP, 10 CFR

part 905.

CRSP customers have supported environmental goals in the upper

Colorado River Basin through significant direct funding and have paid,

through higher power rates, for the loss of revenues attributable to

environmentally beneficial changes in dam operations. In addition,

their support of energy efficiency and renewable resources has been

significant.

Comment: Existing customers have done IRP, now the Federal

government should recognize the quid pro quo.

Response: Western agrees that existing customers have achieved

environmental and economic benefits through preparation and

implementation of integrated resource

[[Page 34440]]

plans as well as historic conservation and renewable energy activities.

Comment: Federal power allocations are the cornerstone of many

consumer-owned electric systems. Many entities have acquired their

entire complement of resources assuming the long-term availability of

the core hydropower resource. Customers have planned their resource

portfolios around their Western allocations. Some customers have made

significant investments in transmission to deliver Western's power.

Response: Western agrees that economic dislocation would occur if

resource commitments to existing customers were substantially

withdrawn. Western and its customers have constructed high-voltage

transmission to deliver power to existing customers, which could not be

used for delivery of Federal power if allocation patterns were

significantly changed.

Comment: Each resource from which Western allocates power should be

analyzed separately with due consideration given to original

participants. The history of purchases and the past level of commitment

by existing customers need to be recognized.

Response: Through its project-specific marketing plans, Western

analyzes how power should best be sold to meet regional needs. The past

level of commitment is being recognized through the extension of a

major portion of the resource to existing customers.

Comment: Western's historical power users have an equitable, if not

a legal, interest in the hydroelectric systems providing the capacity

and energy that Western markets. Just as the Bureau of Reclamation's

water customers earn an equitable interest in the water rights held by

Reclamation by paying for the irrigation systems, Western's historical

customers have developed an equitable right to rely on the supply of

power for which they have paid. Before the DOE attempts to reallocate

the benefits of the Federal power system according to any of the new

policies discussed in the Notice of Inquiry, it ought to reallocate

system costs to reflect the contribution of current power users.

Response: Western's existing customers have no right to purchase

power from Western in the absence of a contract. While equity is a

consideration in the marketing of power by Western, customers have no

equitable or legal right to purchase power beyond the term of existing

power sales arrangements. There is no need to reallocate system costs,

as the new policies suggested in the Notice of Inquiry are not being

generally adopted by Western.

Comment: CRSP hydropower is a clean, renewable resource in which we

invested when coal-fired generation was less expensive, but CRSP

participation was needed.

Response: Western recognizes that many customers committed to the

Federal power program at a time when other alternatives were less

expensive. This historic support is appreciated.

Comments: Western's preference customers meet or exceed the goals

of California's deregulation law and Federal proposals, which address

reliability issues, independent system operator formation, market power

issues, environmental mitigation, and open access. Peer review by NRDC

of our public goods and environmental investments has demonstrated the

progressive nature of public power in northern California.

Consumer-owned utilities have provided competition and impetus for

open transmission access, and continue to be leaders in renewable and

efficiency accomplishments in the utility industry. It would be

inappropriate to threaten these worthy achievements by making adverse

changes to their Western power supply, and thus upset the competitive

balance that now exists between municipal utilities and other energy

providers.

Our power authority continues to be a leader in environmentally

friendly power generation, with a nationally recognized wind power

project, a photovoltaic demonstration project and one of the nation's

cleanest coal-fired power plants.

Response: Western agrees that many of its customers have been

leaders in the deregulation of the electric power industry and have

demonstrated their concern for the environment through action despite

the increasingly competitive nature of the electricity marketplace.

Comments: The CVP has been a model to emulate in the utilization of

the public's natural resources for the public good. The partnership

between the United States and local entities has been mutually

beneficial and should be continued. Continued access to the CVP power

resources is essential to achieving the goals of electric industry

restructuring--low electric rates for consumers.

Our water district and customers have worked in partnership with

Western to promote economic and environmental interests. Any changes to

the proposed 2004 marketing plan will only increase government costs

and bureaucracy.

Response: Partnerships with customers have been invaluable to the

success of the Federal power program.

H. Small Customer/Rural Impact

Comments: Under the State restructuring statutes adopted to date,

there has been no indication that small customers have benefitted other

than by legislatively mandated rate reductions required in the

legislation itself, rather than as a consequence of restructuring

itself. To the contrary, indications are that retail residential and

small business customers are not being pursued by energy marketers.

Experience with deregulation in other industries has shown that

smaller communities and rural areas generally do not share in the

benefits of deregulation and are often harmed through the loss of

service providers. This has clearly been the case with the airlines,

trucking, railroad, and long-haul bus services. Telecommunications is

another area where urban consumers have enjoyed the benefits of new

technology before rural areas. Because of their population densities, a

restructured electric industry may present smaller communities and

rural areas with the same types of defection by service providers and/

or absence of competitive benefits.

Every indication to date is that State restructuring has not

achieved the anticipated benefits. It has instead led to mergers of

large utilities, the sale of generating assets based on a belief that

only large utilities can successfully compete in the marketplace, and a

lack of interest by new energy suppliers in serving retail residential

and small business markets.

Response: Part of Western's mission is to provide the economic

benefits of cost-based Federal hydropower to rural America. Western

declines to change its policies in a manner that has significant

adverse impacts on public power customers.

I. FERC Licenses

Comment: FERC recently renewed the hydroelectric licenses in the

Feather River Canyon held by investor-owned utilities without any

competitive process. As a matter of fairness and equity, we would hope

the customer-owned systems are treated in the same fashion. Renewals of

the CVP contracts as proposed will help maintain the balance between

investor and customer owned utilities in the region.

Response: The renewal of a FERC license appears to be comparable to

the situation facing Western's existing customers at the end of their

contracts for the purchase of power from Western.

[[Page 34441]]

The extension of FERC licenses lacks the flexibilities contained in

Western's 2004 marketing plans, such as the reservation of power for

new customers.

Comment: We think it very important to note that the investor-owned

utilities were granted virtually perpetual FERC licenses in 1986

through the poorly named ``Ratepayer Protection Act.'' The theory was

that the savings were being passed on to the ratepayers. In 1998,

Pacific Gas & Electric Company (PG&E) announced plans to sell off these

plants for close to $2 billion. PG&E is asking to be allowed to keep

massive benefits that were supposed to be passed on to ratepayers. At

the same time, CVP and CRSP customers are being challenged on our use

of Western power, when we are passing on the benefits to our member-

owners in a nonprofit fashion.

Response: Hydropower is a very capital-intensive resource that has

no fuel costs, so it tends to be an economical and desirable resource

in a utility's resource mix. FERC-licensed hydropower is a low cost

resource, but its value is not always apparent as it is blended with

other power resources of the licensee rather than being marketed on a

stand-alone basis.

J. Term of Contract

Comment: A 20-year contract term is appropriate. Twenty year

contracts have already been offered from the Pick-Sloan Missouri Basin

Program-Eastern Division and the Loveland Area Projects. Regional

equity calls for contract renewal for the remaining Federal hydropower

projects. Twenty years is shorter than the 30-year contract term for

the Boulder Canyon Project.

Response: In addition to the precedent cited in public comments,

contracts for the sale of Central Valley Project power have variable

terms, with the longest contract approaching 40 years in length.

Precedent exists within Western that supports 20-year contract

terms. Regional equity is served by offering 20-year resource

extensions to existing customers of the CVP and SLCA/IP.

Comment: The Southeastern Power Administration recently entered

into 20-year power contracts. FERC licenses for hydropower generation

have historically been granted for 30-50 years, a much longer time

period than what Western is proposing here. We note that the Bonneville

Power Administration has recently proposed a 20-year term for its post

2001 contracts.

Response: Precedent exists outside of Western for 20-year or longer

power commitments, both for the Southeastern Power Administration and

FERC licensees. The term of contract for Bonneville Power

Administration power varies depending on the type of service a customer

selects.

Comment: Contract terms under EPAMP, and as described in the

December 1 Federal Register notice, are sufficiently flexible to

justify a 20-year contract term. Western has already shown the

flexibility necessary to accommodate changes in the industry while

preserving its traditional mission. A 20-year contract term, with some

flexibility for Western and its customers, would provide an adequate

and stable environment for power marketing.

Response: Western's power sales contracts under the proposed 2004

marketing plans offer more flexibility to Western and its customers

than in the past.

Comments: Twenty-year contracts represent a meaningful planning

horizon and support the customer preparation of substantive integrated

resource plans. Shortening the contract term would undermine our

members' ability to do necessary resource planning, including further

development of renewable resources. Western's Environmental Impact

Statement (EIS) on EPAMP demonstrated that longer term contracts have a

positive impact on the environment.

The proposed 20-year contract term for contract renewals is

appropriate. Our town has planned its resource portfolio around the CVP

allocation, and shortening the contract term would undermine our

ability to perform quality planning, including further development of

renewable resources. Certainty of the CVP resource has become even more

crucial as we make the transition into the restructured industry.

Response: The EPAMP EIS predicted environmental benefits from

longer term contracts, as customer investments in renewable resources

and energy efficiency are more likely to occur when a stable foundation

of Western hydropower exists. Integrated resource planning is enhanced

when contracts provide a meaningful planning horizon. Many customers

have planned their resource mix around Western's allocations.

Comment: Not one of the hosts of compromises and consensuses made

during the development of the industry's restructuring in California

included a change in Western's allocation process, nor did they include

the possibility of Western's contracts being short term. With the

expectation of long-term contracts, as promised in the EPAMP process,

many public power utilities participated in and supported the

restructuring effort.

Response: Western has no reason to doubt this statement.

Comment: Western may want to consider shorter terms for future

contracts, or off ramps at set periods of time, where the option exists

for portions of the contract to be open for renegotiation.

Response: Shorter term contracts would increase the amount of

Western, customer, and public time and resources spent on marketing

plan development. Given the recent history of lengthy public processes

in the development of Western's marketing plans, the better policy

direction is to decrease the time spent on marketing plans.

Western has built flexibility into its contracts already by

allowing for resource adjustments in response to changes in power

operations, hydrology, and project use development, which is typically

water pumping load. Power can be withdrawn to meet the needs of

potential new customers for most of Western's projects. Rates can be

adjusted without limitation. Given this flexibility, Western sees no

need to enter into contracts with a shorter term.

Comment: The contract term should be shortened to reflect the new

marketplace. New entrants to the electricity market and the increased

ability and desire of customers to choose their own supplier--or be

their own supplier--means Western should be prepared to keep its

options open and allow its customers to do the same. Long-term supply

contracts prevent Western from responding to changing conditions.

Offering contracts with varying terms may offer the best deal for

Western and its customers.

Response: Western's customers have the flexibility to terminate

purchases from Western when a rate adjustment takes place. This

preserves customer flexibility. Western has withdrawn power from

existing customers to meet the needs of new customers, and has reserved

the right to withdraw additional power for new customers and other

purposes even after its power sales contracts become effective. In

addition, Western's power sales contracts already expire on different

dates, depending on the project from which Western is marketing power.

CVP and SLCA/IP contracts expire in the year 2004, while Parker-Davis

Project contracts expire in 2008, Boulder Canyon Project contracts

expire in 2017, Pick-Sloan Missouri Basin Program-Eastern Division

contracts expire in the year 2020 and Loveland Area Projects contracts

expire in the year 2024.

[[Page 34442]]

Comments: The current allocation system should be changed. The

development of competitive wholesale and retail electricity markets as

a result of electric restructuring increases the inherent market

distortions caused by low-cost hydroelectric power provided by the

PMAs. We believe that no PMA firm power contract should be longer than

5 years.

Since today's electricity market is in flux and is being

restructured, it makes no sense for the Federal Government, or even any

business, to sign 20-year contracts. The uncertain size and nature of

future electric loads have led the private sector to accept contracts

lasting no more than 5 years. Even if its contracts have withdrawal

opportunities and rate flexibility, Western should not tie up its

resources for any period longer than that done by the private sector.

Protecting the status quo is unresponsive to the new electricity

industry and the Federal taxpayer.

Response: Western notes that at least one power marketer has

identified a competitive advantage in longer term contracts, and has

run advertising promising peace of mind with a decade of locked-in,

long-term energy prices. As is the case in the competitive marketplace,

our customers can choose to enter into long-term arrangements (albeit

without any guarantee of price from Western) or acquire power from

others under either long-term or short-term arrangements. Far from

protecting the status quo, Western is building flexibility into its

contracts and marketing policies.

Comments: Lengthy Western contracts would ignore the very

inequities posed by taxpayer subsidies to select electricity users.

Those subsidies to Western, which are substantial according to the

General Accounting Office and the Congressional Budget Office, distort

the market, discourage efficiency, and waste taxpayer dollars. To

extend power sales contracts for 20 years would compromise the ability

of Congress and the administration to reform Western's operations and/

or to spin Western assets off to non-Federal interests.

We urge you to consider changes in the electric utility industry as

marketing plans are developed. Congress is actively considering

legislation that would restructure the industry. Competition in this

industry is vibrant and expanding. To date, 18 States have approved

plans for retail competition, and every State is considering these

issues. In this environment, Western and the other PMAs should not

enter into long-term contracts that would deprive both Congress and the

States of the flexibility to shape the emerging competitive electricity

market.

Response: Western's rates are not subsidized. Current interest

rates are charged on new investment, and recovery of costs that are not

used in the production of power (such as salinity control and

irrigation assistance) is required in Western's rates. Western's rates

are reasonable because hydroelectric generation has no fuel costs. As

the generation marketed by Western has been in service for many years,

much of the original investment has been repaid. Moreover, Western does

not have the responsibility to meet load growth through acquisition of

more expensive additional resources.

Congress certainly has the ability to consider changes to Western's

business practices or privatization. However, Western needs to carry

out its mission and market power in accordance with existing law.

Waiting for Congress to enact legislation deregulating the electric

utility industry, let alone dealing with the future of the PMAs, is

imprudent. There is no way to accurately predict whether and when any

changes might take place.

Comment: Operation, maintenance, and repayment of Reclamation

projects are critical items. Recognizing that power revenues are a

significant source of revenue, it is imperative that the power

contracts have a term of sufficient length to assure orderly repayment

and support appropriate operation and maintenance decisions. An

adequate time period is required to implement decisions and recover the

costs associated with major maintenance work that incurs significant

cost. Otherwise the work is vulnerable without commitments for funding

and assurance to the power contractor that they will recover their

investment during the contract period.

Response: Western agrees that shorter term contracts jeopardize

customer financing of project operation and maintenance. Without

customer financing, requests for appropriations will likely increase.

Comment: The Energy Planning and Management Program established 20

years as a floor.

Response: EPAMP established 20-year power sales contracts as a

precedent, not a floor.

Comment: Twenty years is too long for tribes to be condemned to

wait.

Response: Tribes are not being asked to wait. They can start

receiving the benefits of cost-based hydroelectric power in 2000 from

the Pick-Sloan Missouri Basin Program-Eastern Division and in 2004 from

the Loveland Area Projects, the Salt Lake City Area Integrated

Projects, and the Central Valley and Washoe Projects. Additional

resource pool increments will be available for allocation to new

customers 5 and 10 years into the 20-year contract terms for the Pick-

Sloan Missouri Basin Program-Eastern Division and the Loveland Area

Projects, and 10 years into the 20-year contract term for the Central

Valley and Washoe Projects.

Comment: Adjusting the length of power contracts in an effort to

affect retail markets may have unintended consequences. Shorter power

contract terms, which increase the frequency by which customers can

compare Western's cost-based products with market alternatives, may

result in marketing volatility that threatens its ability to meet

Treasury obligations if near or above-market Western rates encourage

customer flight.

Response: Western agrees that marketing volatility and risk of

nonrepayment to the Treasury increases with shorter term contracts.

Comment: Long-term resource and rate stability is important not

only to our customers, but also to our ability to meet the

environmentally important integrated resource planning requirements of

Western.

Response: The EPAMP EIS found that long-term contracts are

beneficial to the environment. Short-term contracts cause customers to

focus on the uncertainty surrounding the Western resource, rather than

looking to implementation of cost-effective energy efficiency and

demand-side management to meet future needs. Short-term contracts could

be a disincentive to the implementation of environmentally beneficial

project improvements in support of the Clinton Administration's climate

control action plan. Twenty-year contracts balance the environmental

benefits associated with long-term resource certainty against the need

for flexibility to respond to changing circumstances over time.

K. Legal Issues

Comment: Until such time as Congress enacts Federal retail

competition legislation, Western should not change its existing

policies. The Clinton Administration has not proposed to change

Western's existing mission in its electric utility industry

restructuring bill.

Response: Western's core mission remains unchanged in the absence

of legislation from Congress.

Comment: Western's Energy Planning and Management Program has

already received congressional scrutiny. Some members of Congress

opposed the contract extension portion of Western's

[[Page 34443]]

program and unsuccessfully attempted to have it legislatively curtailed

or erased. Therefore, there is no barrier to the extension of resource

commitments to existing customers in accordance with EPAMP.

Response: The Energy Policy Act of 1992 contains no congressional

barrier to the extension of resource commitments to existing customers.

Comment: Western's allocation policies are far too important to be

substantially altered--as this Federal Register notice strongly

suggests--without congressional action. Indeed, much of the policy

might not be able to be changed without congressional action.

Response: No policy changes will be made that are not allowed by

existing law.

Comment: Western has no authority to compete at the retail level.

Response: Western has broad legal authority to sell Federal power

pursuant to statutory and case law. No Federal law prohibits Western

from selling directly to nonutilities.

Comment: As the Second Circuit Court of Appeals has held, Congress

believed that all interests can best be served by giving the local

entities the right to decide on the ultimate retail distribution of the

preference power sold to them. This belief was founded in the so-called

``yardstick competition'' principle, which assumes that if municipal

entities are supplied with cheap hydropower, their lower competitive

rates will force the private utilities to reduce their rates, with

resulting benefits for all. It is not for FERC or the courts to second

guess that basic determination.

Response: The cited Second Circuit case interprets the Niagara

Project Power Act, which gives preference to public bodies and

nonprofit cooperatives within economic transmission distance of certain

hydroelectric facilities in the State of New York. In that litigation,

the court limited the statutory definition of ``public body'' to

publicly-owned entities capable of selling and distributing power

directly to consumers.

Western's marketing authority is broader than that defined by the

Niagara Project Power Act. Reclamation law allows Western to market to

municipal utilities, rural electric cooperatives, public corporations

and agencies, nonprofit organizations, Federal agencies, State

agencies, and Native American tribes.

Comment: The legal problems associated with a change from the

existing power allocation system are numerous. If changes are

attempted, legal challenges lasting for years will be triggered. As the

EPAMP and 2004 marketing plan processes have already been ongoing for

years, there is a need to adopt a lawful marketing plan and allocations

expeditiously.

Response: Western's marketing plans will be lawful.

Comment: Under the Trinity River Division Act of 1955, Congress

intended to provide the Trinity Public Utilities District a perpetual

right to certain Western energy. The draft 2004 CVP marketing plan

contains provisions toward that end, and should be approved.

Response: The Trinity River Division Act of 1955 provides certain

rights to preference customers in California's Trinity County. The 2004

marketing plan for the Central Valley and Washoe Projects will carry

out the requirements of this law.

Comment: Congress has not been receptive to fundamental changes to

the PMAs. For example, Congress recently reaffirmed its ban on studying

the sale of the power marketing administrations.

Response: While some members of Congress have proposed the sale of

the PMAs or significant changes to their missions, many others support

the continuation of the PMAs and their existing programs.

Comment: The enactment of California AB 1890 did not, and was

specifically not meant to, disrupt the long-term contractual

relationship that California entities have for hydropower. The CVP

marketing plan was developed at the same time as the California public

utility commission restructuring plans which were incorporated into AB

1890. In fact, provisions of AB 1890 specifically provide for the

delivery of preference power purchased from the Federal PMAs. Retail

competition is just the most recent in a long line of changes to the

increasingly competitive electric industry. The present power

allocation system has been very effective in keeping pace with those

changes.

Response: As a Federal entity, Western is not bound by the

provisions of AB 1890. Western agrees that AB 1890 did not intend to

impact Western's preexisting power sales contracts for the Central

Valley Project.

Comment: California municipal utilities already fully comply with

the requirements of AB 1890 and have even voluntarily agreed to

independent verification of their programs. Western should not

superimpose additional conditions on California public power utilities

that were not intended when AB 1890 was enacted.

Response: Western agrees that many public power utilities are

voluntarily complying with AB 1890. Adding conditions not intended by

the California State Legislature would not be consistent with the

policy of the Clinton Administration.

L. Existing Contracts

Comment: Western should honor existing obligations and contracts.

Western should assure that the distribution of costs and benefits

remains equitable and does not inadvertently harm existing contract

holders. For example, distribution of costs based upon some criteria

contained in existing contracts but not applicable to new participants

may require amendments to those contracts, to avoid an inequitable

distribution of costs.

Response: Western has every intention of honoring existing

obligations and contracts. Western also intends to assure that the

equitable distribution of costs and benefits will continue.

Comment: A basic element of the State of California's restructuring

legislation, AB 1890, was that existing contractual relationships, such

as CVP power contracts, would not be impacted.

Response: Western agrees that AB 1890 did not intend to impact

Western's preexisting power sales contracts for the Central Valley

Project.

M. Need To Complete Process Quickly

Comments: The 2004 marketing plans should be approved in a timely

manner. Western has already invested considerable time and effort in

lengthy public processes and environmental evaluations for the Energy

Planning and Management Program and the project-specific marketing

efforts for the Salt Lake City Area Integrated Projects, the Central

Valley Project, and the Washoe Project. There is no compelling reason

to undertake another lengthy process prior to approval of the plans.

Our tribal utility would greatly benefit from an extension of

Western's resources as quickly as possible.

Western needs to approve the marketing plans quickly, as it takes

time to negotiate contracts and acquire replacement resources. The

contractual process for Pick-Sloan Missouri Basin Program-Eastern

Division power started in 1995, and is still incomplete.

CVP customers are eager to sign power contracts, as they need to

know the status of future resources to make choices on issues such as

stranded costs, adoption of customer choice, and planning for

replacement power.

[[Page 34444]]

Marketing plans should not be held up while the restructuring

evolution takes place across the several States served by CRSP and CVP

power. Five years' notice is necessary to allow resource plan

adjustments if significant changes are planned.

Swift approval of the 2004 marketing plans and renewal of the

contracts will ensure that the ``win-win'' relationship between Western

and its customers will continue. Western's customers need sufficient

advance notice of power allocations to allow for electric resource

planning.

We support the approval of the 2004 marketing plan as a document

reflecting significant compromise and feel that DOE should recognize

the long public process conducted in its development.

Reopening the public process seems not only duplicative but places

in question the credibility of such processes and perhaps even Western

itself. It is essential that public processes be respected rather than

manipulated. Any further review would be redundant and waste the

taxpayer's money.

We are extremely disappointed that Western must regress to this

unnecessary process, as we believe Western adequately addressed

restructuring in preparing its 2004 power marketing plan. The CVP 2004

marketing plan is significantly different from the current plan and is

fully adaptable to the newly restructured utility industry.

If Western would spend as much time developing new resources or

resource improvement as it does on public processes, maybe they would

have something to market without withdrawing from existing, long-served

preference customers.

Response: Western agrees that the time has come to finish pending

marketing plans for the Central Valley, Washoe, and Salt Lake City Area

Integrated Projects.

Comments: The delay in approval of Western's 2004 marketing plan is

resulting in negative impacts to the relationship that Reclamation and

Western have worked to achieve and maintain with the public power

industry. Western and Reclamation entered into funding arrangements

with the long-term firm power customers in order to reduce the level of

appropriations needed from Congress. Delay of marketing plan approval

may cause customers to withdraw from funding long-term projects. Power

customers would also be unwilling to fund long-term capital improvement

projects if they cannot be assured that they will receive the benefits

of the improvements. This would negatively impact repayment and the

overall power marketing function.

The contract uncertainty created by lack of approval of the CVP

marketing plan is manifesting itself in customer reluctance to fund

improvements with payback periods beyond the current contract term. The

result is lost economic opportunities and lost opportunities to reduce

greenhouse gas emissions.

Response: Western does not want to jeopardize customer funding of

long-term projects beneficial to the operation of power generation.

N. Ability To Compete

Comments: Hidden in this question is the thought that Western

should dabble in retail markets and participate in a bidding war.

Western is not a big enough player to be effective in the retail

market. Since Western has little, if any, energy to sell in the open

market to other than preference entities, there should be no change in

Western's power allocation approach.

The majority of CRSP wholesale customers are small, rural and often

Indian communities with marginal economic situations that will add

nothing to enhance regional competition.

Response: Western's ability to impact the marketplace is limited

due to our relatively narrow mission and the size of our resources as

compared to the size of the electricity marketplace. Western has no

intent to enter the retail marketplace in a substantial manner.

O. Repayment

Comments: CRSP power customers are repaying their debt ahead of

schedule under long-term contracts that were negotiated at a time when

CRSP power was higher than other sources. A shorter contract term

increases the risk that the Federal investment will not be repaid on

time.

Power revenues repay Federal debt for CRSP hydropower facilities,

pay for the CRSP power program's annual operation, interest and

replacement costs, and assist in the repayment of 95 percent of the

project's irrigation costs.

CVP power sales have repaid over 70 percent of the Federal debt

allocated to power so far, and will completely repay the power debt in

the upcoming contract term, allowing Western to commence repayment of

Federal debt allocated to irrigation which may otherwise not be repaid.

Clearly the public interest is best served by renewing this

partnership, not disturbing it.

Long-term contracts offer stability and value to both Western and

its customers. Preference customers have repaid Federal debt ahead of

schedule, furnished irrigation assistance, adopted and promoted

environmental programs, and provided up-front funding of O&M expense.

Response: Western agrees that debt for both the Central Valley

Project and the Salt Lake City Area Integrated Projects is being repaid

ahead of schedule. Shorter term contracts increase Western's exposure

to the volatility of the marketplace and may increase the risk of

nonrepayment to the Treasury.

Comments: Given current uncertainties in the electricity

marketplace, and the tremendous financial exposure to the taxpayers

that unrepaid investment represents, it is responsible and beneficial

for the United States to secure the repayment of investment with a

long-term extension of Western's firm electric service contracts. The

existing power allocation system works well, and has proven to provide

a reliable revenue stream that assures repayment of multipurpose water

projects, including irrigation aid. Do not jeopardize the repayment

guarantee under existing contracts.

Western should not pursue a role that would create economic risk

for the Federal Government (such as becoming a competitive generating

agency) or would position the Federal Government to compete at retail

against publicly and privately-owned utilities and other market

participants.

The Federal Government also benefits from long-term, 20-year

contracts by assuring revenues for project repayment with well-

established customers without exposure to the volatility of the

evolving marketplace.

Response: Western agrees that long-term contracts mitigate the

market volatility that would otherwise exist.

There is no repayment guarantee under existing power sales

contracts, as customers have the right to opt out whenever a rate

adjustment occurs. However, few customers have exercised this

contractual right, due in part to Western's control of costs and

commitment to rate stability. Although power revenues associated with

hydroelectric resources vary depending on water availability, power

sales contract certainty has contributed to relatively steady repayment

to the Treasury.

Western believes there are advantages to marketing power to well-

established customers with a positive record for payment of bills in a

timely manner. Some new participants in the deregulated industry have

defaulted on

[[Page 34445]]

their obligations. In addition, Western believes that retail customers

are more likely to switch power suppliers than wholesale customers,

which would cause fluctuations in the revenue stream that is used to

repay the multipurpose projects from which Western markets power.

P. Tribal Issues

Comment: Tribes are eligible preference customers. Most tribes are

interested in receiving an allocation of power from Western. A useable

allocation of Western power makes the difference in accomplishing

economic development.

Response: Western agrees that tribes are eligible preference

entities.

Comment: Western has a trust responsibility to the Indian tribes

within its service territory. This is a different and greater

responsibility than Western has to its current customers. In destroying

traditional tribal economies, the Federal Government accepted a

responsibility to assist and allow tribes to create new economies that

are equal to the standards of living of other Americans.

Response: Western supports the DOE's Indian policy, which stresses

the need for a government-to-government, trust-based relationship. The

key theme throughout the Department's policy is consultation with

tribal governments so that tribal rights and concerns are considered

prior to action being taken. Western has met with Indian tribes and

tribal representatives throughout the Energy Planning and Management

Program's public process. Western also has met informally on a number

of occasions with tribes since completion of EPAMP, both in the

Missouri River Basin and in New Mexico and Arizona. In February of

1999, Western held informational meetings in Phoenix, Arizona,

Albuquerque, New Mexico, and Folsom, California, to engage in dialogue

with Native Americans on Western's power marketing programs. A 30-day

comment period also took place in February to receive additional public

input on the size of project-specific resource pools necessary to meet

the fair share needs of new customers, including Native Americans. An

informal meeting in Albuquerque in May of 1999 allowed additional

consultation between Western and the Council of Energy Resource Tribes.

Western believes that its consultation with tribes has been meaningful

and substantive, and will continue at a high level in the future.

Comment: Western must help tribes to become ready, willing, and

able. Western should help tribes to negotiate to obtain electric

utility status.

Response: Western plans to allocate power to tribes and assist the

tribes in obtaining delivery of the benefits of their allocations. As

tribes need not form utilities to receive an allocation of power,

Western is neutral on whether tribes should form utilities to meet

electricity needs on the reservation. Technical and financial

assistance to a tribe in support of utility formation may be available

from the DOE or some other agency of the United States Government.

Comments: Access to electric service is a major issue for tribes

and the people living within reservation boundaries. Some reservation

residents have no electric service, while others have service that is

high priced and of lower reliability than service off the reservation.

Western's power allocation system should be modified to take into

account all regulatory changes, including those which allow Indian

tribes and others open access to transmission and, therefore, greater

access to Western's power and the power of others.

Response: Open transmission access at the wholesale level should

make it easier for Western's allocations of power to be delivered to

customers. Western is committed to working with the tribes and

interested third parties to assure that Native Americans receive the

benefit of allocations from Western.

Comment: Tribes are in the process of establishing vehicles for

making utility choices. These vehicles will sometimes be utilities, and

should be given full recognition by Western in its policy making and

power allocations. Even if tribes do not form utilities, Western should

allocate power directly to Indian tribal governmental loads such as

government buildings, tribally owned economic activities, and public

tribal housing and schools.

Response: Western intends to allocate power to eligible tribes

whether they form utilities or not.

Comment: We believe that the historic marketing plans of Western

are too lengthy, expensive and, therefore, too preclusive for small

entities such as tribes.

Response: Under the Administrative Procedure Act, Western seeks

public involvement and input on its marketing plans. Western agrees

that its recent public processes have been lengthy. However, we believe

it important that our processes allow for the involvement of small

entities such as Native American tribes.

Comments: We believe the current power allocation program would

greatly assist our five tribes in attaining an allocation of CRSP power

and having certainty of that power as a resource in the future once an

allocation is attained.

The current program with the specific language provided in the

final EPAMP regulations, which provides for preference to small Indian

communities, is more than adequate to assure our Indian communities can

attain some of this power efficiently. Our tribes believe the contract

extension policy is a sound business practice because once we receive

an allocation, we should be able to plan on receiving it for many years

to come. This would allow small Indian communities to receive a

tremendous economic benefit.

Response: Western agrees that a potentially large economic benefit

can be derived from an allocation of Federal hydropower, especially

over the term of a 20-year firm-power contract. However, other costs

associated with the delivery of Western's power could have a

considerable impact on the size of any benefit, such as the cost of

transmission service, supplemental power supply, and ancillary

services.

Comment: The present power allocation system should be modified

substantially to recognize the needs of the Indian tribes and its

agencies the same as that accorded the States, municipalities,

irrigation or power districts, and Federal entities.

Response: The 2004 marketing plans provide the same or better

treatment for tribes as compared to other customers.

Comment: The history of energy development and use in general and

Federal hydroelectric development in specific is a history of injustice

and abuse of power on the part of the Federal Government. Many of the

Federal dams were built from Indian lands and the resultant economic

and social benefits from those projects were denied to Indian tribes.

In many cases, tribes were inadequately compensated for the loss of

whole communities, valuable farmland and cultural/religious/spiritual

resources.

Response: Just compensation for the taking of lands to construct

Federal dams is not an issue that is appropriately addressed through an

allocation of power by Western.

Comment: The tribes request that Western, in performance of its

trust responsibility, provide tribes with technical assistance to

ensure the tribes receive the maximum economic benefits of low-cost

Federally generated hydropower through management agreements with

distribution utilities.

Response: To the extent that a tribe does not form a utility,

Western intends to assist the tribes in obtaining the

[[Page 34446]]

economic benefit of allocations through bill crediting or some other

appropriate mechanism involving the distribution utility. Western is

committed to providing an appropriate level of technical assistance to

tribes.

Comment: Policy and practice have discouraged tribes from

developing the institutional, management, and technical capabilities as

well as the physical infrastructure and financing to access the power.

Response: Western's allocation of power to tribes, without a

requirement for utility status, should enable the tribes to access the

benefits of Federal hydropower more easily. Historic assistance to the

Navajo Nation by Western has resulted in tribal access to photovoltaic

power in northern Arizona.

Comment: It could be argued that the Indian tribes' unused water,

such as the Navajo Agricultural Products Industry which is 20 years

behind schedule, is being utilized to generate Federal power over and

over while it travels down river. While other entities have enjoyed the

benefits derived from Federal power, Indian tribes and their agencies

have yet to see equal benefits.

Response: Rights to the water that passes through turbines at

Federal hydroelectric facilities are vested in different entities and/

or are reserved for certain in-stream purposes. Possession of water

rights does not mean a right to hydroelectric power generated by that

water also exists.

Comment: A tribal utility could provide tribal government with the

opportunity and means to use tribal borrowing and bonding status to

improve utility infrastructure, improving the quality of life on very

poor reservations. If done in conjunction with systemwide planning,

tribal infrastructure development could very well reduce physical

constraints in the transmission systems that would benefit everyone.

Response: Many of Western's customers have found utility formation

to be beneficial.

Comment: We request that Western abide by the preference customer

status provided to the tribes as described in the Energy Policy Act of

1992. The tribes would request the ``right of first refusal'' be

provided to tribes and would remain in effect until the tribes receive

their fair share of unobligated Western power.

Response: Western is unaware of any provision in the Energy Policy

Act of 1992 that confers preference status on tribes. Western's

treatment of tribes as preference entities is due to our interpretation

of Reclamation law, taking into account DOE's Indian policy and the

government-to-government relationship that exists between the

Department of Energy/Western and tribes. Western believes that it can

successfully meet the fair share needs of Native Americans without

adopting a ``right of first refusal'' policy.

Comments: Issues of transmission and distribution must be addressed

to allow tribes to access power. It has been Western's past history to

build transmission to serve its customers. The new regulatory structure

provides the opportunity to wheel power over existing systems. Tribes

know they must negotiate with current service providers for access to

distribution facilities and services. These negotiations can create

win-win situations that are acceptable and even favorable to both

parties. The degree by which Western's policies reward cooperation over

conflict should be the standard by which its policies are judged.

Our greatest issue is communication and understanding. Tribes could

be assisted to know how best to access the parties and individuals

within the industry to make power allocations and utility operations

workable.

Response: Western believes that cooperation, communication, and

understanding are far preferable to conflict in achieving policy goals.

Q. Water Supply

Comments: Any changes in Western's allocations that are based on

electricity industry restructuring should impact only distribution

utilities and not water supply agencies.

Nothing in the California restructuring plan warrants fundamental

departure from the 2004 marketing plan, especially with regard to

service for end-use irrigation pumping loads.

Program purposes and the statutory intent underlying Pick-Sloan and

the Flood Control Act have not changed and commitments must continue to

be honored, particularly in view of the fact that actual irrigation

development was substantially less than what was promised.

Western should continue to provide low-cost power to irrigation,

and should not enter retail markets.

Response: Western intends to abide by Reclamation law requirements,

including the requirement that hydroelectric power be reserved first

for project-use loads. As there is no convincing rationale to do

otherwise, policies regarding reductions in commitments of power to

existing customers will be uniform. To the extent irrigators receive

allocations of power from Western that are not project use in nature,

they will not be exempt from equitable contribution by existing

customers to project-specific resource pools.

R. Need for Power

Comments: Long-term reliability is critical to farmers who raise

crops. The benefits derived from our power contract with Western have a

direct impact on the local economy and produce far-reaching benefits,

such as groundwater improvement, efficient water exchanges, and a

vibrant local agricultural economy.

The State of New Mexico is sparsely populated and relatively poor.

Western's CRSP power means a lot to us. There are a substantial number

of customers who have contributed to the repayment of Federally-owned

generation facilities for over 30 years. If those customers had built

generation plants in the '60s rather than purchased the output of

Federal facilities built for the primary purpose of irrigation, flood

control and recreation, these generation facilities would now be paid

for and competitively priced.

Resource uncertainty is especially critical in rural areas which

have limited access to resource opportunities. To deny utilities with

low customer density access to Federal power would be devastating to

rural consumers and small businesses who are already paying much higher

rates for distribution and transmission services than urban customers.

Share the benefits of cost-based hydropower with the taxpayers by

extending contracts with the Air Force.

Significant reductions in or the loss of the CRSP resource would

necessitate acquiring alternative power supply at dates later than

prudent from a long-term planning standpoint. The cost of replacement

power would be passed on directly to the retail consumer.

Western's allocation of CRSP power to our electrical district is

integral to the long-term groundwater management plan in Arizona,

including the goal of reducing groundwater pumping within the State as

documented in our integrated resource plan. CRSP power is also key in

maintaining the viability of the Central Arizona Project for future

generations. The long-term bonding and financing of our canal system is

also based on the continued economics of preference power.

Continued access to the CVP resource is necessary to ensure

affordable future improvements. It would be inappropriate to threaten

these worthy achievements by making adverse changes to customers' CVP

power supply, and upset the competitive balance that now exists between

[[Page 34447]]

municipal utilities and other energy providers.

Western's power allocation is very important to our rural electric

cooperative in Wyoming, as we have a consumer density of 2.2 consumers

per mile of line. Our neighboring investor-owned utility has a density

of 26 consumers per mile of line. For each cooperative customer, more

than 11 times the facilities are required. Because of the rural nature

of the area we serve, we are already at a price disadvantage in a

competitive marketplace.

Most entities, including the investor owned utilities, continue to

serve their customer base reliably, efficiently, and at lower rates

than previously existed. As California emerges from the imposition of

transition costs after 2002, rates will further decline and customers

will likely be less inclined to switch providers. Western's customers

must have an assurance of long term, 20-year contracts to remain in

this competitive mix.

Regarding the effect on the University of California, Davis of AB

1890 and the deregulation of the electric power market in California,

no clear conclusions can be drawn. The UC Davis campus has joined with

the other University of California campuses, and the California State

University system, to contract for purchase on the open market for our

power requirements not met by Western. This is a short 4-year contract

with an independent power marketer. While this contract is expected to

save the campus money compared to the cost of power purchased directly

through the California Power Exchange, it is more expensive than

Western's hydropower, and the term of the contract is short. Adoption

of the proposed 2004 marketing plan will benefit us by protecting our

cornerstone of Western power, while at the same time, for our remaining

power needs, allowing the pursuit of future benefits that may come

available through deregulation of the California electric power market.

Both the Black and Hispanic Chambers of Commerce for the City of

Sacramento urge the expeditious approval of the CVP 2004 marketing

plan. Access to low cost, clean, renewable public power is an essential

prerequisite for continued economic development and growth of

communities in northern California.

With regard to the Ames Research Center, National Aeronautics and

Space Administration, our allocation needs to be maintained in order to

minimize the cost of operating two national wind tunnel complexes.

There is an urgent need for our wind tunnel data, as it enables

aircraft manufacturers to design transports that can fly with greater

energy efficiency. Estimates of fuel savings as a result of our

research are in the hundreds of millions of dollars per year. In

addition, our research enables American aircraft manufacturers to

maintain a trade surplus of $15 billion per year.

Response: These representative comments from existing customers

demonstrate the widespread need for Western's power.

Comment: Extending Western contracts would further the discrepancy

between the preference clause's intent of advancing ``municipal

purposes'' and the distribution of Western power to some of the

nation's wealthiest communities. As you know, Western does no means

testing for the distribution of its low cost and subsidized

electricity, nor does it provide any preference to public schools or

other public purposes. Power marketing administrations, if they are to

continue to exist, need to focus on end users and offer true public

benefits only to those in need.

Response: As is the case with any utility, some customers

purchasing electricity are more affluent than others. The same is true

for the customers served by a PMA. However, the great majority of

Western's customers are in genuine need of Western's resources, as

evidenced by the comments previously set forth. Western already

allocates power to universities and a variety of State and Federal

loads. Western's intent to sell power from project-specific resource

pools to Native American tribes is clear evidence of our intent to

assure that the benefits of Western's cost-based hydroelectric

resources are available to economically disadvantaged entities.

Comment: Today, preference power is being used in ways that

Congress did not originally intend. For example, power generated from

facilities owned by the American public is being allocated to provide

below market electric service to wealthy communities such as Vail,

Colorado, and Palm Springs, California. Other customers, such as the

Salt River Project, have formed a for-profit marketing entity whose

mission is to compete against private, taxpaying, and often highly

regulated energy companies.

Response: Western does not market power to Palm Springs. The ski

resort of Vail is served by Holy Cross Energy, which also has within

its service territory many rural consumers and small communities that

do not enjoy economic benefits from ski resorts. Both the Department of

Energy and the Department of the Interior have formally issued opinions

finding no violation of law or contract in the efforts by the Salt

River Project to compete in the rapidly changing utility industry, as

the Salt River Project is not reselling Federal power.

Comment: Rather than going to customers based upon their geographic

location, allocations from the Federal power facilities should be based

on means testing. Only those who truly cannot afford to pay market

rates should be the beneficiaries of continued preference allocations.

This class of citizens obviously includes more than just rural western

or southern America. Federal preference power should be targeted only

to State and Federal buildings and facilities where the taxpayer is

paying the energy bill. We cannot legitimately continue to act as a

Nation to provide wealthy ranchers and owners of posh ski resorts with

preference power to the exclusion of poor families located in Toledo,

Hartford, or St. Paul.

Response: Congress has by statute authorized Western to sell firm

power in its 15-State service territory. The other Federal PMAs also

market power in the territory adjacent to their power and transmission

resources. Well over half of the country is within the marketing areas

of the PMAs.

According to the latest estimates of the United States Census

Bureau on national income and poverty, the poverty rate in the western

States is 14.6 percent. Both the Northeast States (12.6 percent poverty

level) and the Midwest States (10.4 percent poverty level) enjoy higher

prosperity. Also of interest is the Census Bureau's conclusion, based

on 1997 data, that 12.6 percent of residences inside metropolitan areas

are in poverty, while 15.9 percent of residences outside of

metropolitan areas are below the poverty line. This information

suggests that the greater need for cost-based Federal power exists in

the western United States and in rural areas.

Even if Western had the legal flexibility to sell power to needy

entities throughout the Nation, the cost of delivering the power would

erode any cost savings. Acquiring rights over intervening transmission

systems would be a significant expense. Losses in energy due to

resistance in the transmission line conductors would also diminish the

economic benefit.

Western already markets its power to many State and Federal

facilities that meet existing allocation criteria. Allocating more

power to these entities could give them disproportionate

[[Page 34448]]

benefits and cause power resource dislocations for existing customers.

S. Supplemental Suppliers

Comment: The impacts of any change in policy would fall primarily

on supplemental suppliers. Western should move cautiously when the

impact of its decisions may be to undermine or damage contractual

relationships between its preference customers and their supplemental

power suppliers.

Response: Western agrees that the impacts of its policies on

supplemental suppliers must be taken into account before decisions are

made.

T. Dam Operations

Comments: There are a number of aquatic environmental issues

associated with the operation of the Federal hydroelectric facilities

that produce SLCA/IP power. The Aspinall unit on the Gunnison River and

the Flaming Gorge unit on the Green River dramatically affect

downstream flow conditions and habitat for fish species. We believe the

Endangered Species Act requires Western to evaluate the effects of

contract extension on conservation and recovery of listed species. If

Western believes that, either as a policy or legal matter, the

extension of SLCA/IP contracts could limit the Bureau of Reclamation's

discretion in operating facilities like Aspinall and Flaming Gorge,

Western must prepare a site-specific assessment of the environmental

impacts of contract extension.

We are aware that Western contends that DOE regulations

categorically exclude marketing plans from NEPA documentation unless

they involve new generation, new transmission, or a change in

operations. However, we believe the regulations are illegal if their

effect is to excuse Western from assessing the impact of contract

extensions that circumscribe the ability of the Bureau to reoperate a

project.

We have concerns, legal and otherwise, regarding the relationship

between contract extensions and programs to recover endangered fish and

otherwise protect the aquatic environment.

Response: Under EPAMP, the extension of resources to existing

customers is based on the marketable resource determined to be

available at the time future resource extensions begin. If the Bureau

of Reclamation reoperates power generation facilities such as Flaming

Gorge and Aspinall before September 30, 2004, that change in operations

will be reflected in the power commitments to existing customers. In

addition, Western's contracts allow for changes in our contractual

commitments attributable to changes in operations after 2004. Given

this flexibility, there is no need for site-specific assessments of the

impacts of contract extensions. The extension of firm power commitments

does not limit the ability of the Bureau of Reclamation to reoperate

power generation facilities.

U. Integrated Resource Planning

Comments: If retail competition expands, key resource acquisition

decisions will shift away from today's utilities and toward private

generation markets and retail customers. In this environment, the role

of EPAMP's IRP requirement is unclear. We have heard from a number of

Western's customers that they are not interested in pursuing IRP given

the competitive changes in the industry. We are concerned that EPAMP no

longer represents responsible environmental stewardship in a changing

utility industry.

We oppose contract extensions for SLCA/IP power until EPAMP

regulations are made consistent with the evolving industry structure.

The State of South Dakota encourages Western to amend EPAMP's IRP

regulations to allow the most flexible requirements possible.

IRP no longer makes sense in a retail environment.

Response: Western's integrated resource planning regulations are

outside the scope of this notice of inquiry, which deals only with

power allocation issues. Western intends to start a public process to

consider revision of our IRP criteria later in 1999.

V. Preference

Comment: Preference should be examined carefully in a full NEPA

review considering both the economic and environmental impacts on

preference and nonpreference customers. Western should mitigate for any

serious effects and proper mitigation may include eliminating or

drastically altering preference.

Response: Preference in the sale of Western's power is mandated by

law. As Western does not have the authority to eliminate or drastically

alter preference, a full NEPA review of the issue would not be

fruitful.

Comment: As electric restructuring moves forward and the paradigms

governing electric distribution and financial risk are changed, we must

consider how the existing Federal system is managed. Equally important

is how we distribute the benefits of the Federal system. In the

upcoming year the Congress will be reviewing some of the fundamental

issues that are raised in allocating Federal power. What were the

characteristics of the group originally intended to be benefitted by

defining them as preference customers? Why did one group of Americans

receive the benefits while others did not? Do the criteria remain the

same today? Are we still benefitting fundamentally the same people?

Since the Federal allocation system was designed to benefit a

particular group, do we need to respond to changes in the larger

electric utility industry to make sure the same beneficiaries are

reached? Do the changes in the electric utility industry that have

occurred since the Federal system was originally established eliminate

the need for the historic distribution/allocation scheme? And finally,

if there is going to be a change, how can we best protect the

legitimate needs of existing PMA customers?

Response: Western lacks the legislative authority to make

fundamental changes to preference in the sale of our hydroelectric

resources. However, allocations are not limited strictly to municipal

utilities and rural electric cooperatives. Western has allocated power

and/or transmission rights to such diverse public loads as wildlife

refuges, universities, and a mass transit system. Native American

tribes are also treated as preference entities without the need for

utility status. These allocations to nontraditional customers were made

while still meeting the needs of existing customers, and contribute to

the widespread use of Western's resources.

W. Rates

Comment: Western's ratesetting must be cost-based. Western lacks

authority to introduce new rate components or to reinterpret 60 years

of statutory construction. Western also lacks authority to charge rates

based on a newly conceived formulation intended to effectuate a

redistribution of its electricity among electric consumers.

Response: While ratesetting is outside the scope of the power

allocation issues inquiry, Western agrees that our firm power rates

must be cost-based.

Comments: The real implication of this first question is that

Western should sell its resources in a short-term fashion to the

highest bidder.

We support legislation that mandates a bidding system in which

preference power is allocated to the highest bidder, or one in which

the high bid sets the contract price for such power. Under such a

scheme, the preference customer would be given a right of first refusal

to purchase the power at high bid, thus preserving traditional

preference. This approach has the advantage of

[[Page 34449]]

eliminating the inequities now incumbent in Federal power allocations,

prevents further under recovery of PMA costs, and maximizes revenue to

the Treasury.

Western should adopt a tiered, marginal cost rate structure to

reflect appropriate market rates and eliminate the subsidy inherent in

the existing system. Offering low rates encourages Western's customers

to use electricity wastefully and forces other consumers to develop

excessively expensive supply resources to meet electricity needs.

We congratulate Western on recognizing the need to consider the

impact of electric utility industry restructuring on the way Western

allocates power. A level playing field among all electric suppliers is

mandatory in an open access retail electric marketplace. All

competitors should have the opportunity to bid for low-cost power

allocations. A bid system would lessen the anti-competitive impact of

PMA power.

Response: Pursuant to law, Western sets its firm-power rates to

recover costs. FERC's review of Western's rates is based upon whether

the rates are the lowest possible consistent with sound business

principles.

Western has no leeway to adopt a generic bid-based method for

marketing firm power, even if a preference customer has the ability to

buy the power by matching the high bid. If Congress mandates the sale

of power at market-based rates, Western has the flexibility to comply

pursuant to the rate adjustment provisions in its firm-power contracts.

PMA power is not anti-competitive in its impact. Western markets

cost-based hydroelectric resources, which are relatively inflation

resistant as compared to non-hydro generation due to the absence of

fuel costs. In addition, Western has no responsibility to meet load

growth with relatively expensive additional power. Western's hydropower

resources are reasonably priced due to these factors, and promote

yardstick competition.

Western's customers do not waste electricity. Pursuant to Western's

integrated resource planning regulations, customers have established an

impressive record of investment in energy efficiency, demand-side

management, and renewable resources.

Comment: Even under existing statutes, Western should re-prioritize

its allocation of preference power to better reflect competitive market

principles. Specifically, Western should adopt a system under which

Federal electricity is auctioned to bidders in the same way as is

Federal coal, oil, and natural gas. Revenues so garnered could be used

for worthy purposes in Western's service territory.

Response: Bidding for Western's firm power to generate revenues in

excess of those needed for project repayment is not allowed under

Federal law.

Comment: Western has a cost problem due to the increasingly

competitive regional power market and the social costs (e.g.,

environmental costs and irrigation assistance) that have been mandated

for inclusion in CRSP rates. Western has a finite window within which

it can contract into the future to protect its congressionally mandated

repayment mission. Western is ill-equipped because of its role as a

Government sales agent and its congressionally mandated

responsibilities to compete in future markets.

Response: Western will continue to make every effort to assure that

CRSP power remains marketable.

Comment: Is it fair for neighbors to pay different rates for their

electricity because of their race?

Response: Western's wholesale rates are the same for all long-term

firm customers. Many different factors influence retail rate levels,

including the cost of other power, transmission cost, and distribution

expense.

Comment: Western should move to unbundle its firm power rate to

accelerate Western's movement into an open access environment.

Response: Western has developed rates to implement its open access

tariff.

X. Delivery Changes

Comment: Western currently requires concurrence from all affected

parties before the State of South Dakota is allowed to redistribute

power from one State load to another. This policy places veto power in

the hands of supplemental power and transmission suppliers with the

effect that the State's use of Western power and other power available

under open transmission access principles is constrained. The present

policy should be replaced. Western should be willing to move

allocations upon proof of a legitimate load and adequate billing

mechanisms. IRP stabilization arguments that benefit supplemental

suppliers should be rejected in the face of the State's interest in

wholesale open access consistent with FERC's actions.

Response: Western's requirement of concurrence by the transmission

provider and supplemental power supplier is a contractual and policy

issue that does not conflict with FERC Order No. 888, which preserves

existing contracts. Western has experienced instances where allocations

were made, but the allottee was unable to take delivery because

existing power supply contracts did not allow additional power

suppliers. Requiring concurrence avoids this situation, and recognizes

that transmission arrangements also need to be amended when power

deliveries change. It also avoids conflict with mandated franchise

service territories, as South Dakota has not yet mandated open access

for end users. Concurrence has been a policy requirement for over two

decades, and has yet to have been unreasonably withheld. IRP

stabilization arguments, based on the premise that load stability

promotes better resource planning, are secondary to the contractual

considerations.

Question

2. To the extent a utility with an allocation of preference power

loses load due to retail competition, should it receive the same

allocation as it received previously or should its allocation be

reduced proportionately?

A. Disincentive to Retail Wheeling

Comment: Adoption of this policy would discourage retail wheeling,

as the risk would be a disincentive for a utility to open up its load

to competition.

Response: Utilities might see the potential loss of an allocation

as a disincentive to adopting retail wheeling.

B. Administrative Issues

Comments: A real time, load based allocation process is complex

from both a policy and an administrative basis. There is no guarantee

that the change would lead to an improved outcome.

Administration of this policy would be time-consuming and costly.

As retail customers make choices and come and go, Western would be

required to address daily, weekly, or even monthly load fluctuations

for the many preference customers who currently receive hydroelectric

resources from Western.

What if a retail customer has a business downturn and their power

usage is reduced by half? How would Western reallocate the power from

this reduced usage? Would Western reallocate the power if the retail

customer's business returns to normal at some later date? It seems that

Western is opening up a can of worms that could have unintended

consequences.

Western cannot possibly know whether the lost load is due to a

temporary problem on the part of the wholesale customer, a problem

resulting from demographic trends or economic cycles, or whether it is

a permanent loss

[[Page 34450]]

due to restructuring of the utility industry. At the very least,

Western should not attempt a reallocation from existing users to new

customers without developing a record of the factors underlying such a

move and offering existing contractors the opportunity to review and

comment on the record.

Response: Western believes that the administrative complexities of

adopting such a policy are significant. The policy benefits of

monitoring load losses and gains, if any, are minor as compared to the

cost and administrative burden associated with a change in policy as

suggested by this issue.

C. Increase in Allocation

Comments: The utility should receive the same allocation. As a

preference utility does not receive an increase in its allocation if

its electric load increases, why should there be a loss of allocation

if load declines? If Western does not strive to achieve a sound and

balanced basis for adjustment of allocations, it appears that the

purpose of the suggested change in policy is to find ways to reduce

allocations to preference customers using State restructuring

legislation as an excuse.

Western is a sales agent, not a utility. Western did not increase

our allocation when our load outgrew the original commitment of Federal

power, so we were forced to acquire supplemental power elsewhere.

If energy is freed up as a result of a preference power entity

allowing retail access in its traditional service territory, then this

power can be made available on a temporary basis to other preference

entities as withdrawable power. Since the entity offering retail access

will remain as the default energy provider, and would be required to

serve customers returning to its system, a permanent reduction of an

allocation may not be prudent.

Response: Western has a finite resource to market. Unless power is

withdrawn from a customer pursuant to the terms of a firm power

contract, Western does not have additional electricity to market on a

firm basis. Western agrees that there are many administrative

complexities associated with reducing, restoring, and reallocating

power in the manner suggested by this issue.

D. Local Decision Making

Comment: The local utility is best positioned to distribute

Western's power among the remaining customers.

Response: Public power utilities are well positioned to distribute

power among consumers. Western's firm-power contracts address this

responsibility. The most recent provision of Western's general power

contract provisions states: ``The contractor agrees that the benefits

of firm electric power or energy supplied under the contract shall be

made available to its consumers at rates that are established at the

lowest possible level consistent with sound business principles, and

that these rates will be established in an open and public manner.''

E. Policy

Comment: Federal power is only a fraction of the total resource

needs of Western's customers. Even if significant load is lost, the

Federal power allocation will still be needed to serve remaining load.

Response: With only minor exceptions, Western agrees that its power

only meets a portion of the load of its customers.

Comments: Allowing preference customers to retain the same

allocation of preference power would be anti-competitive.

When a utility with a preference allocation loses load due to

retail competition, that preference customer's allocation should be

reduced proportionately and indefinitely.

It is unclear what Western plans to do with any power withdrawn

under this proposed policy. If the power is to be redistributed among

preference entities that have experienced gains in load, this only

serves to increase the competitiveness of those utilities which are

already competitive and further weaken those without as competitive a

resource mix or higher unit costs.

Response: Western normally serves only a portion of a customer's

load. As the marginal resource necessary to meet the rest of a

customer's load is typically higher in cost, it is more appropriate to

reduce the non-Western resource when load is lost due to retail

competition.

Comments: Current policy requires that unused allocations revert

back to Western for sale to other preference entities, therefore

preventing the resale of power. Western has built in adequate

safeguards that limit use of an allocation to the retail load that we

serve, and Western has retained the requirement that Federal power not

be sold for resale.

Western's 2004 marketing plan for the CVP addresses recall of any

allocation beyond a customer's demand.

Response: Western agrees with these comments. Currently applicable

language in Western's firm power sales contracts prohibits the sale for

resale of Western's power.

Comment: Customers who choose to leave a utility that has a power

allocation from Western also have elected to leave their ``share'' of

Western power to the customers who do not leave.

Response: Western agrees that this may be the result, depending on

applicable contractual language.

Comments: Western should only withdraw power if the customer load

exceeds the Western allocation. If a contractor loses so much load that

it cannot use all the Western power it has under contract, it will

advise Western and reduce its obligation. Otherwise, it will pay for a

resource it cannot use.

Customers are prohibited from resale of Western power pursuant to

contract. As a result, there is no ability for a customer to use

Western power in excess of its load. Allocations of power in excess of

a customer's load must be returned to Western for reallocation,

pursuant to the applicable project-specific marketing plan.

Response: Western's 2004 marketing plans and contracts will not

allow for the resale of hydroelectric power if a customer loses load

and their Western allocation exceeds the remaining load.

Comment: Should preference distribution customers split away from a

generation and transmission cooperative, and form new aggregations,

Western should follow the preference distribution customers upon whose

load profiles the allocations were originally given.

Response: When an existing customer merges with another customer,

or members of a customer want to leave a parent entity such as a

generation and transmission cooperative, disposition of allocations

must take place in accordance with applicable marketing plans and

contractual provisions. Each situation must be addressed on a case-by-

case basis. New contracts executed under the Sierra Nevada Region and

Salt Lake City Area Integrated Projects 2004 marketing plans will give

the Administrator the discretion to adjust a customer's power

allocation in the event the customer merges with another organizational

entity, acquires or ``spins off'' another utility, joins or withdraws

from a membership-based organization, or adds members from a membership

organization.

Comments: Why would Western want to punish a small customer who has

no market clout by reducing its allocation of preference power because

a larger retail customer, by its own choice, decided to receive its

power and energy from someone else?

Reducing the Western allocation would be like trying to put out a

fire by

[[Page 34451]]

throwing gasoline on it. Our cooperative is a perfect example of what

happens when you lose load. We lost load due to the bankruptcy of our

largest user, a mining company. We had to raise rates by 32 percent

early this year to compensate for the loss of fixed cost and revenue.

Can you imagine what would happen to the remaining consumers if Western

notified us that because we lost 60 percent of our load, we should lose

60 percent of our allocation? Western's allocation is the one stable

foundation we have left.

Retail competition has not benefitted residential customers in

States that have opted for retail access. Those customers who leave the

system are typically larger customers who have the expertise and

business sophistication to negotiate and bear the risks of arranging

for power supply service from alternate suppliers. If a small municipal

customer loses a commercial or industrial load and also loses a share

of its Federal allocation, it will be a double whammy to residential

customers who stay on the system.

Power marketers are interested in achieving market share, and later

reducing competition to maximize profits. A change in Western's policy

could accelerate this process by penalizing cooperatives that lose

load. If large industrial customers with good load factor are removed

from a local cooperative's customer base, the impact will be

devastating enough without Western's policy adding more momentum to a

process that seriously damages remaining customers.

Loss of any portion of the Western allocation would unfairly

penalize existing customers and decrease our competitive position in

the marketplace. Such a policy would also eliminate the very important

``yardstick'' vehicle which consumers can use in determining their

power supplier in a competitive marketplace.

Reducing our allocation if some retail customers choose other

suppliers could cause a cascading effect and serious economic

consequences to our community and burden remaining customers.

To reduce allocations because of retail competition losses could

initiate a ``death spiral'' for the affected utility and penalize

remaining customers, mostly residential, rural, and small business in

nature.

Response: Western agrees that no policy purpose is served by

withdrawing allocations from customers that have recently lost load due

to retail competition.

F. Public Power and Competition

Comments: Although this question is academic at present, when it

becomes reality preference power allocations should be reduced

proportionately. The larger issue is what to do with large public power

entities that are entering competitive markets and winning new load,

while at the same time being subsidized by taxpayers through preference

allocations and favorable tax treatment. Western customers like Salt

River Project who are competing for and winning new load should have

their allocations stripped or, at the very least, offset on a megawatt-

for-megawatt basis.

The more important question is why a utility that receives

preference power should be allowed to compete for retail load in the

first place. Western has some of the lowest power costs in the nation.

Preference utilities receive other Federal preferences, either through

tax-exempt municipal financing, low interest loan programs, and

clemency from income taxes. The more likely scenario is that these

preference utilities will be adding customers, not losing them.

Response: The Department of Energy has reviewed allegations that

the Salt River Project inappropriately used Western hydropower to

enhance its competitive position in seeking new customers. DOE found

that those allegations had no merit, and that the Salt River Project

was acting in accordance with the law. The Department of the Interior

recently issued a similar finding. Under these circumstances, Western

sees no reason to diminish its hydropower allocations to the Salt River

Project.

As Western's customers cannot resell Western's power, they have no

competitive advantage from a Federal hydropower allocation in the

utility marketplace.

G. Reason for Load Decline

Comments: There is little substantive difference between consumers

who move out of the area or close down a business, and those who decide

to use a different energy supplier. We see no rational basis to

penalize loss of load due to retail competition but not loss of load

for any other reason.

If a utility receiving preference power from Western loses load due

to retail competition, or any other reason, the resulting allocation

amount should be reduced accordingly. To do otherwise would change the

allocation process to introduce artificial, and probably arbitrary,

factors necessary to compensate for lost load, rendering the process

inconsistent. In States that have adopted retail access, preference

customers have the option to opt in or not participate. Thus, load loss

is due to the choice of Western's customers. Judgment by Western's

customers, like any other business enterprise, results in the

stakeholders being rewarded either positively or negatively.

This approach is contrary to the manner in which electric utilities

acquire and maintain commitments for resources that are an essential

portion of the stability of wholesale power supply.

The alteration of allocations to accommodate fluctuations in retail

load would diminish the certainty of a power supply source which many

preference customers have incorporated into their forecasting for power

supply.

What if a customer has undertaken a program to encourage

conservation at the same time competition has come to its service

territory? Will Western penalize its customer because load has been

reduced due to conservation?

Response: Western's historic allocations to customers have been

principally based on the load of applicants. Those loads are dynamic

over time, as some consumers leave and others move to a utility's

service territory. However, these are not the only factors that

influence electricity usage. Adoption of conservation and energy

efficiency measures, changes of service territories between utility

providers, weather, improvements in industrial processing, fuel

switching due to price or availability, construction of cogeneration,

and improvements in distribution system losses all can impact a

utility's load. Tracing a change in load to a particular cause, such as

the impact of implementation of retail wheeling, might present some

difficulties. Western certainly does not want to punish utilities that

have implemented conservation and energy efficiencies.

Western has not monitored load growth and adjusted its allocations

in the past. As loads have grown for certain customers over time,

Western's allocations became a smaller portion of those customers'

resource mixes. Other customers have not experienced load growth, or

the pace of growth has been slower. Western's allocations have not been

adjusted in response to load changes for a variety of reasons. First,

resource planning for Western's customers would be disrupted. Second,

continually adjusting firm power contracts is not a standard practice

in the utility industry. Third, if load decreases, Western's customers

adjust their resource mix in a manner that results in the lowest cost

to the ultimate consumer. As other resources are typically more

expensive than Western power, consumers are best served if

[[Page 34452]]

other resources are cut first as opposed to Western's hydropower.

Fourth, Western does not want to increase its budget to monitor load

changes, as there is no clear policy benefit that would warrant the

additional cost, which would put upward pressure on our rates.

Adoption of this policy would fundamentally change the nature of

the service Western currently provides under firm-power contracts.

Continuous adjustments to the quantities of power sold by Western would

convert a very valuable class of service, firm power, to a more

contingent resource.

Western does have the ability, when existing contracts expire, to

consider the percentage of our power that existing customers receive.

An example is the 2004 marketing plan for the Central Valley and Washoe

Projects, which has proposed to increase allocations to existing

customers who enjoy a relatively small allocation of Western power as a

percentage of load.

H. Stability

Comment: The threat of reductions in allocations would make it

difficult for Western's customers to offer stable products and services

to their consumers on other than a short-term basis. This lack of

resource and administrative stability would be a significant

competitive disadvantage for CRSP customers.

Response: Western agrees with this comment.

I. Tribal Issues

Comments: If a utility with an allocation of preference power loses

load due to retail competition, its allocation should be reduced

proportionately. The resulting savings should go back into the pool for

reallocation to Indian tribes who have historically enjoyed the least

benefit from national resources.

Our tribes request that any Western power that becomes available

through the power allocation system restructuring process be directed

to address the inequity of the system to provide tribes with a fair

share of available power. The tribes request a ``right of first

refusal'' option be incorporated into the restructuring system.

Response: For the reasons outlined earlier, Western will not reduce

allocations to customers, whether Native American or not, who lose load

specifically due to retail competition. Therefore, there is no power

available for this reason to allocate to tribes.

J. Unintended Consequences

Comment: If a utility were to be stripped of its allocation in

proportion to its loss of load resulting from voluntarily allowing its

customer-owners retail access, that utility would be tempted to cut

deals to retain the large customers that competitors would pursue. This

would tend to distribute the benefits of preference power away from

small customers. Energy efficiency programs might also suffer if a

utility were tempted to focus instead on acquiring new load.

Response: Western agrees that a utility might take steps in

response to a change in policy that adversely impacts energy efficiency

investment and small customers.

K. Western's Role

Comment: This question mischaracterizes Western's function.

Western's power allocation decisions have not been made on load growth

or loss analyses. Western is not a utility, it is a marketing agent

with a finite and declining resource to market. It is in no position to

accommodate load growth and in even less position to monitor load loss.

Response: Western agrees that its role is to market power to repay

the U.S. Treasury for investments financed by taxpayers. Adopting the

policy suggested by the question would blur Western's focus on its

primary mission.

Comment: If Western's decisions with respect to power allocations

will have the effect of making it more difficult for municipal

governments to attract new business, the purpose of the municipal

preference will be entirely thwarted.

Response: Western has no desire to impede the economic development

efforts of municipal governments.

Question

3. Should Western allocate power directly to electricity end-users

that are preference entities such as publicly-owned schools in States

or localities that permit retail access? If so, how much power should

be allocated for this purpose? Alternatively, should Western continue

to allocate power primarily to its traditional customers such as

municipal and cooperative utilities and Federal and State agencies?

A. Administrative Issues

Comments: Making Western a retail provider would change Western's

business structure. Western would have to organize its workforce to

deal with hundreds or thousands of customers, with significant start up

and ongoing costs to Western and its customers.

Allocating power to thousands of end users, as opposed to the

current 600 customers Western serves, is not economically warranted or

practical, and would result in a paperwork nightmare for Western.

Response: The benefit of a Federal power marketing administration

gearing up to play a major role in the retail marketplace is unclear.

The cost of adding staff to carry out this role would be considerable.

Comments: While direct retail sales by Western may appear to spread

the benefits of Western power more broadly, most retail customers are

poorly equipped to handle the vagaries of fluctuating hydropower

production or sharp reductions in available power due to changes in

operations of CRSP facilities required by law. Retail service involves

much more than a simple allocation of power and energy. Load following

and other intricate ancillary problems of electric service become

involved.

Adoption of this policy would be an administrative nightmare.

Direct retail sales would be less efficient, as retail allottees would

be required to seek additional power resources, combine those

resources, and schedule them in the most economical manner.

Transmission, distribution, metering, reserves, energy imbalance, and

other services would have to be obtained to deliver electricity. Most

end-use consumers are not sophisticated enough to provide for such

services themselves. Alternatively, they would need the services of a

scheduling agent or an existing utility to provide these services, with

an increase in cost to the end-use consumer.

If Western were to serve an end user directly (such as a school),

what would Western do with the power generated at night when a school

cannot use it? How would Western meet the school's air conditioning

load in September during drought years? Such a proposal would likely

lead to increased profits for those wanting to absorb the excesses, and

make up for the deficiencies, by dismantling public power.

Response: Western agrees that allocation of power to end users

presents a number of complex problems.

Comment: If Western were to single out its utility customers for

allocation reductions that would be transferred to end use preference

entities in States that allow retail access, Western would incur

increased administrative costs and need to raise rates while reducing

the benefits of preference power to existing customers.

Response: Western agrees that one impact of allocating power to

public

[[Page 34453]]

schools directly could be an increase in costs to existing customers.

Comment: No new contracts should be written at less than a 100

kilowatt allocation.

Response: Minimum allocation amounts are often appropriate, but are

best determined in project-specific marketing plans.

Comments: Changing allocation policies also raises the question of

assuring equity among States. How will Western compare different

States' programs for retail electric competition? Allocating Federal

power to customers based on State laws will result in unequal access to

such resources. Some States have now created quasi-public schools by

allocating tax moneys to charter schools and private schools. Some

States have proposed adoption of school voucher programs to allow

students to use tax dollars to go to the school of their choice. The

definition of a public school is becoming less clear every year. Every

educational institution from home schooling to correspondence classes

that can show Federal or State tax support will want to apply for an

allotment of Western power.

Response: Western agrees that it could be difficult to compare the

different approaches to retail wheeling among the States within our

service territory and incorporate them into a cohesive overall policy.

Western also agrees that the definition of a public school is not

straightforward.

B. Allocation Priorities

Comment: End-use customers, although previously excluded because of

a lack of access, should be treated at least on a basis comparable to

traditional Western customers. An enhanced priority should be

considered for these customers, since any economic benefits would

accrue to all segments of the public.

Response: Western has allocated power to large Federal and State

installations in the past, as they are public bodies. The economic

benefits derived by these installations are to the benefit of the

public. These installations typically take delivery at transmission

voltage and operate their own system for distributing power to load.

This approach avoids the complications of delivering Federal power to

numerous smaller end users and the associated administrative burden.

Comments: Western should make its allocations based on the nature

of the end use customer served, and should not be made simply to the

cooperative or municipal utility. To the extent that Western's power is

not priced at market rates but instead continues to be subsidized, we

believe that allocations should only be made to public facilities that

are supported by taxpayer moneys, such as military bases, State

universities, hospitals, and prisons.

Providing power directly to end users such as public schools and

other Government entities is far more consistent with the spirit and

intent of the preference clause than providing allocations to wholesale

customers who use preference power to engage in their own competitive

efforts.

Response: Western already allocates power to military bases, State

universities, hospitals, and prisons. Exclusively serving these

entities would dislocate existing power supply for cooperatives and

municipal utilities.

Comment: Allocations of Pick-Sloan preference power should not be

distributed to retail competition loads but rather to its current

contract customers who are not receiving their full allocation from

Western. Our current allocation would have been larger during the

original allocation if not for the fact that formation of our municipal

utility was delayed by years of litigation by the IOU that served our

city.

Response: This comment was raised by a customer of the Pick-Sloan

Missouri Basin Program-Eastern Division. As power from the Pick-Sloan

has already been allocated and in most cases placed under contract

through the year 2020, Western has no immediate ability to respond

positively to this comment. A resource pool increment of up to 20 MW

will be available from the Eastern Division of Pick-Sloan in the year

2005. How this power will be distributed will be determined on a

project-specific basis in a future allocation process.

Comment: Western should consider widening the eligibility for

Western power to include retail cooperatives.

Response: Western will consider any application for Federal power

in accordance with Reclamation law and project-specific allocation

criteria.

C. Dilution of Benefits

Comments: Changing Western from a wholesale provider to a retail

provider raises the very real risk of diluting this resource to the

point where it is of no value to the end-user.

Current policies spread the benefits to end users. Broader

distribution of Federal resources would further dilute the benefits of

hydropower. The CRSP annually meets less than 4 percent of the total

load in the marketing area. The CRSP is increasingly an insignificant

market factor from a commercial or competitive standpoint. Any broader

distribution or allocation would simply further dilute the resource.

Response: Western agrees that this is a concern. However, part of

Western's responsibility is to distribute power on widespread basis.

Western needs to consider the needs of new preference entities, as well

as the continuing reliance of existing customers on the Western

resource.

D. Duplication of Resources

Comments: We do not believe that it would be appropriate for

Western to jump into the retail sales business when selling power to

preference customers at the wholesale level is a very efficient and

effective way for Western to carry out its legislative requirements.

Western should not compete with its customers, who already provide

benefits of cost-based Federal hydropower to end users.

If Western were to expand its role into the retail end of the

industry, the result would be an inefficient duplication of

distribution, rate making, billing, and ancillary services that would

most likely more than offset any benefit to Western or the end user of

the power.

Response: Western agrees that it is more efficient to continue to

distribute the benefits of Federal power through its customers. Western

has no desire to duplicate services already provided by its customers.

E. Favoritism

Comment: Adoption of this policy would penalize consumers served by

public power distributing utilities in States that choose not to engage

in competition, while favoring schools and localities in States that

permit competition.

Response: Penalizing consumers served by Western's customers, based

solely on their State of residence, is not equitable.

Comment: There should be no favoritism among preference entities.

Response: Western makes every effort to assure that its power is

allocated in an equitable manner.

F. Legal

Comment: Allocating power to end use loads is far beyond the intent

of the preference laws. Western is a wholesaler of power.

Response: There is nothing in Reclamation law that prohibits

Western from allocating power at wholesale to nonutilities, such as

Federal and State agencies. Congress has recognized this on many

occasions. For example, in authorizing the California-Oregon

Transmission project, Congress recognized that Western markets to loads

such as the Department of Energy

[[Page 34454]]

laboratories in California. Hearings have also been held regarding

Western's marketing policies. In June of 1994, the Deputy Secretary of

Energy testified before the House Subcommittee on Oversight and

Investigations, Committee on Natural Resources, on a variety of

marketing issues, including the status of Native American tribes as

preference customers.

Comment: Western cannot market to publicly owned schools, as they

are not preference entities. In its post-89 marketing criteria for the

CRSP, Western interpreted section 9(c) of the Reclamation Project Act

of 1939 as requiring any new preference entities to have utility

responsibility.

Response: The Post-1989 General Power Marketing Criteria for the

SLCA/IP were published in the Federal Register on February 7, 1986 at

51 FR 4866. At page 4870 of that notice, Western stated that power

would be allocated to a State or Federal agency with an ultimate

consumer type load, to utilities, and to existing contractors that did

not otherwise qualify for an allocation. Under these project-specific

criteria, Western allocated power to a number of nonutilities,

including the University of Utah. However, these criteria represent

policy specific to SLCA/IP power, which is narrower than the parameters

of preference law generally. Criteria for marketing to new customers

after 2004 will be broader than those existing in the 1989-2004 time

frame, in order to assure that Native American tribes are eligible to

receive allocations, regardless whether utility status exists.

Comment: Western is prohibited by law to sell power to nonutility

customers while there are preference utilities who are willing to

purchase the power. Western's sales are subject to a statutory

preference requiring it to sell power to municipal utilities and

cooperatives.

Response: Reclamation law requires Western to offer to sell power

first to preference customers. Among preference customers, Western has

discretion to whom it sells. Pursuant to law, Western has allocated

power to State and Federal entities, which are not utilities.

Comment: The concept of allocating preference power to entities

such as schools has been firmly rejected as conflicting with the

promotion of yardstick competition required by Federal preference acts.

The Second Circuit Court of Appeals has ruled that yardstick

competition would exist if publicly-owned utilities competed against

privately-owned utilities in selling of power to ultimate consumers. If

the ``public body'' used the preference power itself, the privately-

owned utilities would not face any pressure to reduce the prices they

charge other customers. If preference power were made available to all

government bodies, whether or not they distributed that power to

consumers, every town and local library would be entitled to claim a

direct share. Hydropower would be spread so thin that any competitive

effect it might have had would be lost. Metropolitan Transportation

Authority v. FERC. 796 F.2d 584, 592 (2d Cir. 1986).

Response: This case is based on the Niagara Project Power Act, and

a FERC license issued to the Power Authority of the State of New York,

pursuant to that act. Neither the Act, which contains a narrow

definition of preference entity as compared to Reclamation law, nor the

terms of the FERC license are applicable to Western.

Comment: Regardless of electric utility industry restructuring,

Reclamation has the legal responsibility to deliver irrigation pumping

power to existing irrigation pump units prior to any other use.

Response: Western markets Federal power which is surplus to the

needs of the project, and may not execute contracts which impair the

efficiency of the project.

Comment: This issue raises significant questions of the legal

authority of the PMAs to participate in retail electric markets.

Reclamation law does not authorize such a result, and the Federal Power

Act has provided for local jurisdiction over retail markets.

Response: Western agrees that decisions regarding retail markets

are local in nature, and that the Federal Power Act only gives FERC

regulatory authority over wholesale transactions by public utilities in

interstate commerce.

G. Need for Power

Comment: In order to promote a competitive open power market,

Western must explore alternatives to its traditional power allocation

criteria and select customers. Such alternatives should include Indian

communities such as Shiprock, Kayenta, Chinle, Tuba City, Window Rock,

and Ramah on the Navajo Reservation. Allocations of Federal power to

these communities may enable them to attract and establish economic

development within their areas. Currently, unemployment among Indian

communities is the highest in the Nation.

Response: While Western intends to market power to tribes without

requiring utility formation, Western does not market electricity to

municipalities unless they have utility status.

H. Partnership

Comments: It is unlikely that end use customers would band

together, as existing customers have, to fund and finance deferred

maintenance and efficiency improvements such as the new runners at

Shasta or to lobby for the Shasta Temperature Control Device. Either

appropriations for maintenance would need to be increased, or

environmental and economic opportunities would be squandered. Energy

expenses are a large and important fraction of a Western distribution

customer's budget, but only account for a small portion of a typical

end user's budget. Pragmatically, this means that Western is much more

able to influence and gain attention from distribution customers than

from end use customers.

Allocation of power in this manner will undermine existing

environmental commitments, as hydroelectric power would not be

available for integration with other renewable resources.

Response: Western agrees that end users are much less likely to

have the resources to integrate Federal hydropower with renewable

resource development. Customer financing of project maintenance and

improvements is also much more achievable with a smaller number of

entities, such as has been the case with Western's existing customers.

I. Policy

Comments: Allocation of power directly to end users such as schools

would require them to administer a new resource contract and convert

their prior utility relationship to multiple electric contract

management. For schools with loads under about 4 MW (all but college

campuses) the administrative costs would overwhelm the bill reduction.

Schools in existing preference customer territory would suffer higher

rates as resources were taken away from their existing utilities to be

allocated to schools outside of their utilities.

Our school district is a customer of a Utah municipal utility that

receives an allocation of CRSP power. The CRSP allocation is an

integral part of the resource portfolio of our consumer-owned utility

and is essential to its ability to continue providing reliable,

affordable electricity to our citizens and businesses. It is of

paramount importance to our community and local economy that the

marketing proposal be approved as quickly as possible to provide

certainty to our utility and to the consumers it serves.

[[Page 34455]]

Expanding direct access to Western's resources by an ever-widening

list of end users at the consumer level will become discriminatory,

litigious, unmanageable, and bad policy.

Response: Western agrees with these comments. Administrative costs

would likely offset the bill reduction for small school loads. Schools

that receive the benefits of Western hydropower would be adversely

impacted if the communities they serve did not continue to have access

to Federal electricity.

Comment: Western's current marketing approach benefits publicly

owned schools in those communities receiving Western allocations. In

addition, both the University of California at Davis and the Radiation

Laboratory at the University of California at Berkeley receive

allocations. Further allocations to publicly owned schools would be

unnecessary.

Response: Western agrees that many schools and universities already

receive the benefits of power allocations from Western.

Comment: It is unclear what national policy objective would be

served by the change in policy suggested by this question. Assuming

Western has a policy objective in mind, it would be helpful if Western

would articulate it and seek comment on the goal. It is also unclear

how present practice does not serve a policy of widespread use of

Western's hydropower.

Response: The question was posed to see if further extension of

widespread use to retail loads was feasible and practicable. Western

believes that widespread use is being achieved under its present

allocation practices.

Comment: Adoption of this policy would favor school districts in

high power cost States at the expense of school districts in low power

cost States which have done a good job throughout the years in holding

rates down and see no need to restructure their electric utility

industry.

Response: Western agrees that this might be the result of a change

in policy.

Comment: Western should consider giving allocation priority or

credits to customers that undertake aggressive energy conservation and/

or demand-side management efforts.

Response: Pursuant to the Energy Planning and Management Program,

Western has reserved the right to allocate power from project-specific

resource pools for this purpose. However, decisions on how to allocate

power from resource pools will be made on a project-specific basis.

Comment: Western should continue to allocate power to its

traditional customers so they can continue to serve end users and

ensure that the benefits of Federal power are broadly and efficiently

distributed. Public schools get their pro rata share of preference

power through municipal utilities and cooperatives. Western was created

to conduct wholesale sales of Federal hydropower, with certain limited

exceptions for direct Federal loads. Western is not a retail

distributor and there is no reason to change its role. Western should

focus on what it does best and not enter the retail market.

Response: Western's expertise is as a wholesaler of power.

Comments: Participation by the Federal government in the business

of producing electricity is no longer warranted. The conditions under

which the Federal government entered the electricity business due to

widespread areas of the country being in need of electrification no

longer exist.

Should the Federal government remain in the electricity business

under current law, the question becomes how best to allocate the

electricity produced at government-owned dams. Western should not be a

retail marketer of electricity to end-use customers. However, today's

economic and competitive realities also are against continued power

allocations to cooperatives and other traditional preference customers

other than for historic purposes.

The National Rural Electric Cooperative Association's (NRECA) own

website proclaims cooperatives to be ``the electric utility industry's

most powerful, strongest and fastest growing markets with a growth rate

that is nearly three times that of investor-owned utilities.'' NRECA

further states that cooperatives ``are affecting retention, expansion

and growth by offering incentive rates to large consumers of

electricity.'' Rural electric cooperatives have moved away from their

purpose of serving sparsely populated rural areas. Cooperatives can

offer lower incentive rates to large consumers in significant part

because of allocations of low-priced Western hydroelectric power which

is not available to their for-profit competitors. Continued

subsidization of cooperatives by such means is obviously no longer

required and only will help drive private utilities and marketers from

the marketplace through subsidization of Western hydropower.

Response: Only Congress can decide to remove the PMAs from the

electricity business.

Comment: The priority shou

This text is long and has been trimmed here. Open the source document for the complete record.