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rate, which is the preference and priority firm rate, for the four-State region and all of its ratepayers would definitely be something higher, an amalgamated rate.
I don't know what we do in the meantime with the resources controlled by private utilities. Maybe that would be acquired by Bonneville to meet the new loads placed upon it by the newly formed public customers.
Chairman HATFIELD. My question, of course, would assume it would bring all the existing resources together under the same kind of aegis that we have in the Northwest Power Act. I am not sure I got a yes or no answer in terms of what kind of differential exists, or would there be a lesser or greater differential in terms of the character of the structure that distributes this power to the respective customers between the public agencies the IOU's?
Mr. JOHNSON. I don't know that things would change significantly; I really don't. We still have related distribution costs which are those costs which go beyond purchasing at wholesale and getting it out to the ultimate consumer.
We would have costs within systems, public or private, where there were costs that could not be reduced, such as terminated plant costs. I don't think the private utilities in Oregon can walk away from the scheduled costs. Those will have to be accounted for somewhere, unless the Congress were to instruct Bonneville to reimburse those.
Chairman HATFIELD. It is interesting that all the IOU's seem to have a higher figure here than any of the other entities, the public-owned entities. I am not advocating that at this point in time, but at the same time it is awfully hard to explain to people, after the Northwest Energy Act, and Senator Jackson and I had to reach a compromise in terms of cosponsorship of the act based upon a requirement I made that we remove the discriminatory rate structures that have been characteristic of the Bonneville program all these years between those ratepayers who are serviced by IOU's and those who are serviced under a preference, PUD, or public-owned agency.
Senator Jackson made a very courageous and difficult step by accepting that as part of the Northwest Energy Act. As you know, about 80 percent of his State was serviced by the public-owned type facilities, whereas the opposite is true in my State. Yet, as it trickles down to the actual ratepayer, it is hard to explain why those differentials are still so great.
AMENDING THE REGIONAL POWER ACT I am sure it is a complex matter that doesn't resolve itself by some kind of legislative act. Do you feel there is a need, at this time, to amend the act to give you greater authority in this particular area on matters of enforcing or matters of changing the average system cost?
Mr. JOHNSON. Mr. Chairman, a number of issues have come to the front that suggest that perhaps we should revisit the Regional Power Act and make some modifications. Possibly after we have come across the threshold date of July 1985, by which time Congress was hoping we would be in a state of relative equilibrium of wholesale rates for private customers and preference customers, we should see if we have brought about what Congress envisioned in the act.
I am still optimistic about our efforts, though the final result is not going to be perfect. I am not prepared to say at this time that this particular issue is one we should revisit with respect to modifying the act. We may know more after July 1985.
Mr. Chairman, I respect what took place prior to the passage of the act. I don't have to remind you of a provision that is very important to the public agency customers regarding their rights in section 7(b)(2) of the act. That section says there will be a rate test established to see whether they would pay more than they would absent the act. I have responsibility under the law to make sure I develop the methodology, and we are proceeding accordingly at this time.
I am not sure exactly how that is going to operate once we have completed this next rate case which will go into effect in July 1985. I am optimistic that it will work well with appropriate revisions of the exchange methodology.
RATE OF INCREASE FOR INVESTOR OWNED UTILITIES Chairman HATFIELD. Let me restate the queston. What do you foresee to be the rate of increase for the IOU's under this change of methodology? Is it going to be more than 30 percent, lower than 30 percent? Give me a ballpark, what is the range of possibilities here?
Mr. JOHNSON. That is difficult. Let me offer a couple of comments on that, may I?
Chairman HATFIELD. Can you refute the allegation that it is going to be 26 to 38 percent higher increase in rates?
Mr. JOHNSON. I do not have information available to me now. I have heard those numbers. I agree with you that is high.
Chairman HATFIELD. Those figures are on the high side? Mr. JOHNSON. Yes. Chairman HATFIELD. What is the low side? Mr. JOHNSON. The first numbers I saw ranged between 15 and 20 percent at the outside, but that was on a preliminary proposal. This would be a reduction in the amount of costs allowed in the exchange. We are still at the 7(b) rate at 22 mills, but it might be a reduction in the cost allowed in the exchange.
Chairman HATFIELD. The low side would be 15 to 20 percent, or the high side would be 15 to 20 percent?
Mr. JOHNSON. That would be the high side.
Chairman HaTFIELD. Not 28 to 30, but 15 to 20. What would then be the low side of that range?
Mr. JOHNSON. In some instances, with some of the private utilities, there would be no change.
Chairman HATFIELD. No change.
Mr. JOHNSON. Fifteen percent with respect to Pacific Power & Light and maybe as high as 25 percent with respect to PGE. That was preliminary information I saw.
Chairman the exchange 22 mills, besis allowed any propo
Chairman HATFIELD. Let's translate that into another facet of this whole rate structure. What do you project will happen in the DSI area? Let's take the aluminum industry. As you know, the aluminum industry, I believe, is about 26 mills per pound of aluminum.
Mr. JOHNSON. Yes, 26.8 mills per kilowatt-hour.
Chairman HATFIELD. The world market average on production is what, 15 or 16 mills? Mr. JOHNSON. Fifteen or sixteen.
Chairman HATFIELD. Fifteen or sixteen. Massena, N.Y., is lower than that, 11 to 13 mills. · Mr. JOHNSON. Correct.
Chairman HATFIELD. Quebec, the new concentration of governmentsponsored and supported power in Quebec will probably be between 10 and 12 mills. Mr. JOHNSON. That's correct.
ALUMINUM INDUSTRY IN THE NORTHWEST Chairman HATFIELD. How then are we going to hold the aluminum industry in the Pacific Northwest with those kind of figures. By the way, I believe the world price now has dropped back from about a high of 73 cents per pound back down to about 65 or 66 cents. Mr. JOHNSON. That is my understanding, too.
Chairman HATFIELD. How are we going to hold the aluminum industry in the Pacific Northwest, or would you agree with some assessments that the aluminum industry will be gone from the Northwest in the next decade? And if that industry, which is about a 90-percent user of DSI power, leaves the region,
Mr. JOHNSON. The aluminum industry consumes 30 percent of Bonneville's entire nonexchange power supply.
Chairman HATFIELD. If that scenario should work out because of what the rate structures are and cost production, world market prices in Messena, N.Y., and Quebec, and we lose all the aluminum industry in the Northwest in the next decade or less, therefore, the rate structure would have a tremendous shift and impact upon the overall system, would it not, with the loss of that much DSI?
Mr. JOHNSON. There is a very real possibility of that.
Chairman HATFIELD. What do you project in this situation that I have outlined?
Mr. JOHNSON. Senator, when the Northwest Power Act was passed, you believed there was a place for the DSI plants and the employment that they represent, 15,000 people and a $150 million a year payroll. You believed there was certainly room to serve the domestic and rural customers within the State of Oregon as well as Washington. That we could, in fact, effect the exchange. You believed the Regional Planning Council should be the guide and lead planner in securing the new power supplies. I accepted the charge as the Administrator of Bonneville to try to bring that about.
In the first instance, I found I had to hedge on costs. You know some of the actions I have taken to get costs down. If the rates had continued to increase at the rate they were increasing for Bonneville, then we would have chased a lot of industry out of the Pacific Northwest, not just the aluminum industry. We would have crippled our agricultural industry, especially our deep-pump irrigators.
That is why I took such firm action to get Bonneville's costs down. That is the only way I can get the rates down. Having taken the action we have, seeing this plateau coming, I believe that the DSI's are not going to be forced out of the Pacific Northwest. I feel that even though as they try to make decisions on plant allocations now, nevertheless, they will find it wise to leave their operations in the region. I think there are advantages to be had by industries located here within the United States over some of those other locations we were describing.
There is certainly no more low-cost power available in the continental United States. Yes, they can get attracted out by Canada, Brazil, or Australia. If we can show in the Pacific Northwest that we can responsibly control costs, and try to deal with them fairly as we do with other customer classes, I don't think we will see that exit. I would hate to see the world forces in the marketplace and economic circumstances ultimately cause some of those industries to relocate. I am not expecting that at this time. I think there is a reasonable prospect, if we bring about rate stability, that we will not face losing that industry, and I think that is important.
RATE IMPACT OF METHODOLOGY CHANGES Chairman HATFIELD. Mr. Johnson, even if you changed the methodology, what kind of impact on rates would the DSI's expect, anymore than maybe two to three mills?
Mr. JOHNSON. I think that shows the magnitude of what we are contemplating in terms of the reformation of the methodology. It would be a very small impact. What we would do is reduce what is called the floor rate, which would be the lowest cost with the smallest rate that would be paid by the DSI's after July 1985. It is 26.8 mills right now. If it is reduced 2 or 3 mills, then it is 24 to 25. It is a signal to them we are prepared to act responsibly. As Administrator, I have to act not only private and rural customers, but also for the DSI's in terms of their own responsibilities and rights under the Regional Power Act. I have to administer it in a sound, businesslike fashion.
Chairman HATFIELD. I think I would be more assured by that analysis if all the corporate structures were worldwide in terms of averaging out their costs within the corporation. But there are some aluminum companies that are a single corporation operating only in the Northwest, and they are not able to average their costs throughout a broad range locations or plants where they have the great variation of millage and other production costs.
I assume, correct me if I am wrong, that the availability and the dependability of power in New York and Quebec will be every much as dependable as that which we have in the Northwest; is that true?
Mr. JOHNSON. I think that the actual production in those locations is vastly smaller than in the Pacific Northwest. But, yes, I would think they have dependable power, and I don't know the nature of their contracts as to price stability or predictability. I would have to believe they are astute managers and will protect their interests.
Chairman HATFIELD. You are giving rates for interruptible power into the Pacific southwestern part of the country at a far lesser rate than either DSI's or other buyers of firm power received in the Bonneville service area. Have you considered the possibility of either raising or melding firm with interruptible power over the Intertie in order to bring in more revenue to lessen the pressure on these rate changes within the region?
Mr. JOHNSON. Mr. Chairman, we are undertaking a very concerted effort at the present time to serve as an agent for all utilities in surplus, to try to put together a package sale to the Southwest, the object being to increase the revenues for the region and to mitigate rates within the region. That will probably benefit not only the preference and private customers, but the DSI's as well.
Chairman HATFIELD. Have you had any encouragement that California will pay a higher rate?
Mr. JOHNSON. Right now they seem to want to pay a lower rate. Competition is keen in that market. It has been a revelation to us, with oil prices low at the present time, that we may have to live with this transitory phenomenon. They have been very tough bargainers. As you know, they went right past the Pacific Northwest and entered into a contract with BC Hydro for between 20 and 23 mills. That is not firm power, but, nevertheless, they have been tough to bargain with.
We think with patience and perseverence that we will be able to negotiate a transaction that will be in the Northwest interest as well as the Southwest interest.
Chairman HaTFIELD. I interrupted you a while ago when you were responding to the overall question. I don't think you had indicated up to that point about the reason why the methodology is being changed now after such a short time of implementation.
Mr. JOHNSON. I would like to continue that, if I might.
Mr. JOHNSON. I believe that all sales made under the methodology to date are disputed and are either before FERC or before the 9th Circuit Court of Appeals.
In my judgment, it has been abused, not only in the judgments of the private utilities but, for example, it has been abused in terms of inclusion of terminated plant costs. Those are some of the disputes that are now before us. That is what has made it such a nightmare to try to administer.
Here is the way I look at the situation, Mr. Chairman. I have an obligation as the Administrator of Bonneville to 8 million ratepayers in the Pacific Northwest. It is not just the domestic and rural customers of the private utilities; it is all customers. This means running a sound fiscal program within the agency.