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Good morning everyone and welcome.
It's not often that so many stakeholders in the Columbia River gather in the same room to talk about the future. But then, there have been only a few such pivotal moments in the 60-year history of the Columbia River Power System.
As I see it, we are at a turning point. Today the region faces fundamental choices that will affect its environment, its economy, its very way of life for many years to come.
Because in the Northwest, water is more than an element we need to survive. It is fundamental to our view of ourselves and our culture. As the native American representatives here today will testify, it is also of great spiritual significance. We enjoy this high quality of life because, to borrow a phrase from the movie, A River Runs Through It.
The real purpose of this gathering today is to re-focus on that fact. It is to take stock of the unique benefits we have, and to decide how we are going to preserve and extend them into the new millennium. It is to appreciate what we get from the river, and to decide how we can give back what it needs to survive. Notice that I said "we." There is no way that I, as administrator, can make these decisions in isolation, even if I wanted to. And I don't.
I want to re-emphasize something I said when I took this job. BPA exists to advance the values that the people of the region define for us. You must tell us what you think the values are. The subscription proposal is our response to your discussions with us over the last year or so. It is our best shot at balancing the many interests in the region. And those interests are complex. They are both economic and environmental.
If we've learned anything from our history, it's that we will inevitably encounter new circumstances that affect the way we do business. We will respond successfully to most of them. But sometimes our assumptions prove incorrect.
There are economic changes; shifts in public policy; environmental challenges; and political currents. What has distinguished our community of interests in the past is our willingness to work together to resolve our differences. We have, in the end, recognized that although we weren’t going to get all we wanted, compromise was better than conflict. We have been willing to find that middle ground that ensures the preservation of the benefits we all enjoy.
Examples of resolutions of thorny issues abound throughout the history of the Columbia River system. In 1961, Administrator Charles Luce led the region in pursuit of the Columbia River Treaty between the United States and Canada. Protocols signed in 1964 cleared the way for construction of storage dams in Canada, vastly increasing power production downstream. Construction of the intertie to markets in California followed. President Johnson said at the time:
“This system is also the proof of the power of cooperation and unity. You have proved that if we turn away from division, if we just ignore dissention and distrust, there is no limit to our achievements.”
The federal Columbia River Power System is first and foremost a resource for the benefit of the people who live here. In 1964, Congress passed a law that guaranteed electric consumers in the Northwest first call on electric energy generated at federal hydroelectric plants in the Columbia Basin. But regional preference has not prevented attempts in Washington D.C. to rake off the value of hydropower for other purposes. For many years we have doggedly resisted them, led by a strong Congressional delegation.
In 1974, Congress passed the federal Columbia River Transmission System Act. It evolved from 30 years of thinking in the region about how best to deliver power over high-voltage lines. BPA got the ability to finance its own operations from revenues. It also won full authority to wheel power from anyone and in effect act as a power broker for the region.
Here in the region, we have overcome parochial interests to protect and share the benefits of the system among ourselves. In the late 1970s, when there wasn't enough low-cost hydropower from the Columbia system to go around, some states considered forming domestic and rural power authorities to increase their share. But instead, the region came together to craft the Northwest Power Act. It provided rate relief to rural and domestic customers of investor-owned utilities, whose costs had risen due to investments in thermal plants.
That law also proved to be a turning point in our power system's history. It re-ordered our priorities as a region. Conservation and renewable energy became preferred resources. And, in an unprecedented way, we began to address the needs of fish and wildlife. As Administrator Peter Johnson said at the time, we owed a debt to the past, and we had an obligation to the future.
Some of you worked on the passage of the Northwest Power Act. One of those who did was Roy Hemmingway, who today advises Gov. John Kitzhaber on energy issues. In 1980, he held a similar position for then-Governor Vic Atiyeh. The governor asked Hemmingway how Oregon fared in the distribution of benefits under the new Power Act. Roy reportedly answered: "Well, we got everything we wanted. But so did everybody else."
It is not my intention here to judge the Northwest Power Act, or any other decisions and policies of the past. No decision is permanent; no law is flawless. My point is that we have, as a region, made the best decisions we could, given the lights that we had to go by. And when those decisions needed adjustment, we put aside our selfish interests and made them. Slavish adherence to our rights, as we define them, had to be let go.
A notable example of that was the way we dealt with the large industrial customers of BPA. In the early 1980s, the companies were on the brink of extinction in the Northwest. Depressed aluminum prices and relatively high power rates led to the closure of several plants. At the same time, BPA had a large surplus of power. The regional interests rallied around an innovative, win-win plan that pegged BPA's rates to the price of aluminum. The Variable Rate helped save the industry and provided a lucrative market for federal power.
There are many other examples of regional cooperation to build a strong transmission system, including the construction of the Colstrip transmission line and other transmission lines needed by all of our customers.
None of these agreements was perfect, but in the final analysis, they helped preserve the benefits of the system that bring us here today. And those benefits are substantial. They will grow more so in the years ahead, if we exercise good stewardship and come up with balanced approaches to sharing them.
The preference granted to public agencies under the Bonneville Project Act of 1937 has endured through many political and market changes in the intervening years. But more than half of the consumers in the Northwest are served by investor-owned utilities. Congress clearly intended that the benefits of the system be spread as broadly as possible to these consumers too, while respecting preference. The public agencies have recognized that intra-regional warfare over preference would eventually destroy it. And so they have wisely agreed to share these benefits for the common good.
I want to assure all of you that what we are proposing now to spread the benefits of the system is entirely consistent with this balanced approach. I know that some of you have concerns about some of the components of the subscription plan with regard to preference. The policies we adopt will be consistent with preference. We are prepared to work with you to that end.
It’s particularly important now that we do resolve them. I said at the outset that we have reached a turning point in the history of the power system. As you well know, the electric energy industry is in the throes of change. It is not intuitively obvious what the industry will look like in five years. Nor is it clear what role BPA will be playing. In a very real sense, that's up to us. The Subscription Process updates the way the Northwest's interstate power system does business. It breaks a trail into the future. It provides the flexibility to respond to changing circumstances, no matter what comes our way.
When we designed this proposal, we recognized that with all the uncertainties ahead, we have an enormous job of balancing risks and benefits. Sound management of risk is essential to preserving the benefits. Despite our efforts to reduce costs -- and I promise you that we will vigorously pursue those opportunities -- our costs may go up in ways we can't control. On the other side of the ledger, experience tells us that our revenues can fluctuate due to the availability of water, as well as market conditions.
We also face a broad range of costs in our region's effort to save salmon and other species. We will continue to push for a single, coordinated approach to planning and managing the program. But improving conditions for native fish may require an even greater economic commitment by the region. We must take that into account.
So we designed tools to manage the risk and achieve a high probability of meeting our bottom-line obligation to repay the U.S. Treasury. Staggered-term contracts, indexed rates, options and incentives to sign agreements varying in duration are primary tools.
As you can see from this slide (Chart 1), our funding sources are varied. At current rates or lower, we expect to build reserves sufficient to meet long-term obligations, including uncertain fish and wildlife costs. Sales to core customers and surplus and secondary sales remain the economic mainstays. We also believe we will be able to sell power into the non-firm market to capture the upside as prices climb.
And if we encounter circumstances we didn't anticipate, we think it is only prudent to have a limited ability to adjust power rates temporarily. Although it is extremely unlikely that we would need it, we are proposing a surcharge on the transmission system. But it would have to be repaid by the power side. These are tools we don't expect to have to use, but it's prudent to have them in our kit.
In designing a subscription proposal, we tried to achieve an even-handed, balanced approach. As you can see (Chart 2), we expect that preference customers will purchase up to 5,500 average megawatts of firm resources. To the residential and small farm customers of investor-owned utilities, we have dedicated 1,500 average megawatts – at least 1,000 of it in power sales and up to 500 in a financial equivalent. Depending on how much power the preference customers purchase, there would be up to 1,000 megawatts available for the direct-service industries. We also would make available to these valued industrial customers 1,000 megawatts of non-firm power from the system.
Just a little more than a year ago, very few observers in the region thought that BPA would be able to offer competitive products. The agency was too bureaucratic and hamstrung with costs, or so many believed. What a difference today. I detect a real optimism that BPA and the federal system are getting a handle on costs, and that we have turned the corner economically.
At BPA we take little comfort in that. As administrator, I heard you loud and clear when I became a candidate for this job. You want costs reduced. I am committed to capturing another $130 million, on top of the $600 million already cut from budgets going forward. As is the case with any budget, the cutting becomes more difficult and painful the deeper you go. But we'll endure it and emerge even more competitive and responsive.
Remove from your minds any doubt about our enthusiasm for keeping rates at current levels or lower. We intend to hold our rates at or below current levels until 2006. If we do, BPA will have achieved ten years without an increase. And remember, in 1996, BPA reduced its rates by 13 percent.
Coming to an agreement soon on subscription is the key to addressing long-term issues affecting the power system. Customers have told us they want to get on with negotiations as soon as possible so they can plan for the future. In order for BPA to satisfy its public purpose obligations, the agency needs predictable revenues. None of us would be sanguine about the tense situation that developed a few years ago, when BPA and its customers had to make last-minute decisions on contracts.
But there's another reason for getting on with contract negotiations as soon as possible. Next year, we face the possibility of some kind of national energy legislation. Even if such legislation doesn't pass next year, the groundwork will be laid. In any case, there is a regional interest in crafting a "Northwest Chapter."
A healthy, competitive BPA, one that is supported by its customers and providing good stewardship of the river and its benefits, will be much better positioned in Washington, D.C. We need to present a united front, led by our Northwest delegation, if we are to protect the benefits we enjoy and prepare for the restructuring of the electricity industry.
Legislation will be necessary to separate transmission and generation in the federal system. Such legislation would provide the basis for setting up an Integrated Grid Operator. Legislation could also remove the encumbrances on staffing and compensating the BPA work force. We need to keep the good people we have and hire the specialized talent that it will take to run a first-rate utility in a competitive environment.
Beyond these measures, we can only speculate what the next five years will bring legislatively. For example, the region's Congressional delegation has throughout its history protected the federal system from attacks on its value by representatives of states that do not enjoy low power rates. Do we want to protect power at cost? If we do, is this the moment for the region to get behind a plan to regionalize the federal generating assets? But we shouldn't even be asking such questions until we have our own house in order. We must agree on the elements in the subscription package, lest we place the our federal system benefits in jeopardy as deregulation proceeds in years ahead.
We call what we are proposing a "Subscription Proposal," but that's an understatement. It's much more than subscribing federal power. Embodied in the proposal is the delicate balancing of a multitude of interests. Your critique of the proposal will be helpful; but even more helpful will be your constructive suggestions for improving this product.
I want to make one thing clear at the outset: I am open to changes in this proposal, and I fully intend to make some changes if they are warranted. But in the end, someone is going to have to make some calls, and I think it's me. I have discussed this proposal with the Congressional delegation, and the members understand what we are trying to accomplish. I have also reviewed subscription and the proposal for funding fish programs with my superiors in the Clinton Administration. They have endorsed the approach we are taking.
But I must tell you that no matter what I do or say, it won't be up to me to make this proposal work. Only through good will and compromise will we move ahead strongly as a region.
So I am appealing to you to take what we have proposed and not just criticize it, but continue to negotiate among yourselves over the next month. Where you have strong disagreements, work together to resolve them and bring your ideas to us. We are here to help. Let this meeting today be an opportunity for everyone to air their positions and move that last mile to consensus.
This is a unique moment in the history of the Columbia River Power System. We can and must seize the opportunity to move our energy industry into the 21st century. And we will if we don't lose sight of our common objective, which is to preserve and extend the benefits of the Columbia River System for the people of the Pacific Northwest. They have entrusted us with stewardship of the system. I believe we will not disappoint them.
Rep. Al Swift's keynote address at the Columbia River conference