Do you realize the exchange now represents 33 percent of my budget, $1 billion? That is the gross amount of the exchange, although the net amount is just roughly $170 million. I am obligated now to the tune of $1 billion, which is 33 percent of my total expenditures at this time. I must control all costs of the agency; I must control the supply system costs; I must control the internal efficiency of the agency; and I certainly have responsibility to make sure those costs coming through the exchange, whether for private utilities or for public utilities, are those that meet the test of law, the Regional Power Act. I have to make sure those costs or benefits are passed back to these domestic and rural customers are prudent and that they meet the test of the law. As far as the methodology is concerned, however, my mind is open, and I assure you I am anxious for the parties to explain how the present system might be reformed or, in their judgment, can be made to work. It is not working at the present time. This present methodology could lead, in my judgment, to bad utility decisions in the future. It encourages or almost invites it. I am not saying it has already, but I think it holds the potential for leading to bad utility decisions, all of which would result in costs coming back to Bonneville and others in the States of Oregon, Montana, Idaho, and Washington.

I can assure you that at the conclusion of our process to reform the methodology that the exchange will still exist and that it will make provision for properly allowing those costs which were intended by Congress to be allowed.

At the present time, based upon our proposed methodology, which is nothing more than a discussion piece from which the parties can begin, it will result in the continuation of roughly $170 million per year in benefits passing back to the domestic and rural customers of private utilities. This is roughly-I emphasize roughly-the current level of today. The current methodology

Chairman HATFIELD. Let me interrupt. Why do you have to do it now? I don't quite get a clear answer. Why do you have to do it now? Mr. JOHNSON. Three reasons. First, we are coming upon the most important rate case to be filed under the Regional Power Act. That is the one that will begin in August in order for it to go into effect in July 1985. Second, there is a further 10-percent increase in the amount of power which can be exchanged as scheduled in the Regional Power Act Reforming the methodology at this time might avoid what otherwise could be viewed as a potential rate increase.

The third factor is that floor rate the lowest rate paid by the DST's after 1985, must be established under the act in the year preceding Ly 1985. This has been interpreted to mean it has to be the rate in effect July 1984.

We have begun this rulemaking process for those free reasons in order for me to meet my obligations under the law.

AUTHORITY OF BPA IN COST ALLOCATION

Chairman HATFIELD. Did you comment yet on the part of the question that related to the authority to correct these abuses if they exist within some units in their allocating costs? Do you have that authority now, do you feel?

Mr. JOHNSON. Not as I think it should be clarified. Under the present system, public utility commissions make determinations and that is binding upon the parties. You find rate differences based on that right now. For instance, in connection with the new coal-fired plants which are not needed to meet the loads of any private utilities except, perhaps, Puget Sound Power & Light, I understand they may be allowed as useful resources in the average system cost calculations of a private utility in Oregon. And in Montana, where the plants exist, the Montana commission is saying, "No, they are not needed," and they are disallowing them.

Chairman HATFIELD. Would that be true with the new methodology as well as

Mr. JOHNSON. We have to deal with that, Mr. Chairman, in the new methodology.

CONSERVATION ACTIVITIES

Chairman HATFIELD. Let me shift now and ask you about a thought or two on the conservation program. I have been somewhat concerned about the reduction of the level of spending for residential and other general reductions in activities related to the conservation programs. Each time I raise the question the answer is always, "We are in a period of surplus and, therefore, the call or demand is not as great as when we were projecting in shortages."

Now, at the same time in your 1985 budget request that activity relating to the building of future capability is substantially increased; is that correct?

Mr. JOHNSON. I think the division between actual acquisition of kilowatt-hour savings versus the moneys that we will be spending on the development of capability has shifted in the direction of the latter.

Chairman HATFIELD. If those trend lines, as I understand them, one of the future capabilities now tending to have a slight increase, but the conservation programs are continually going downward-explain that to

me.

Mr. JOHNSON. Mr. Chairman, that is a good question, and I think we have a good response. It is one we have worked out with the Regional Planning Council. They, too, feel it is inappropriate to be acquiring conservation at a rapid pace during a period of surplus. It is not what they consider to be a prudent utility cost.

On the other hand, they feel strongly we should use the present time to develop the capability to effect the programs, so, when the opportunity presents itself, we will be able to avail ourselves of the conservation opportunities in a sound, businesslike, and expeditious fashion. We are now developing this capability through program design and testing and the Hood River project is one example with which I am sure you

are familiar. When that day arrives, when we see load growth coming, we will have the opportunity to move efficiently and speedily into the acquisition of conservation as the primary resource under the Regional Power Act.

Chairman HATFIELD. I think that makes ample sense, but in that rationale I detect that you do not equate conservation as a new source of energy. It seems to me if you are using this time to calmly project and blueprint future need, there would be just as much reason to look at future need in terms of the equivalency of new source in the field of conservation as well as new capability.

Isn't conservation additional capacity?

Mr. JOHNSON. I am not sure I quite understand the question. Can I have you repeat it?

Chairman HATFIELD. The budgetary spending trend is moving upward in planning for new capacity, while, as I indicated, your conservation activities are continuing downward. I look at conservation, and we spelled it out in the Northwest Energy Act very specifically, conservation for the first time, in law, was identified as an equivalent to new source of energy.

So it seems to me when you are looking at future capacity, you ought to include conservation as an additional source, not just constructing plants; isn't that true?

Mr. JOHNSON. Yes, and that is exactly the way we see it. It is a resource, the same as a thermal plant or the same as a renewable resource. We treat it that way. We are planning to acquire it that way. The Regional Power Act requires that as the Administrator proceeds to acquire resources, he include conservation as the No. 1 priority based upon need. That need depends upon the loads placed upon the Administrator that he must meet under the law.

At such times as those loads increase or as we move out of a surplus period, then you can be sure we will be required to acquire conservation as a resource, and it will be a No. 1 priority.

PROPER EMPHASIS FOR CONSERVATION PROGRAMS

Chairman HATFIELD. The Planning Council has indicated they feel you should put a greater emphasis on commercial, industrial, and agricultural conservation programs. Obviously, they see a level of activity within the current BPA program and they view that as a lesser level than what they would like to see. Why is that? Can you comment on the difference between the BPA level and what the Planning Council has indicated should be the level?

Mr. JOHNSON. Mr. Chairman, I should have introduced Steve Hickok on my right

Chairman HATFIELD. Who was that? [Laughter.]

Mr. JOHNSON. Steve Hickok, our chief conservation man, and Steve Ailshie on my left, our chief financial man. I had planned to draw them more into our exchange; I am going to do that now. Steve Hickok has done an outstanding job of organizing our conservation office and

developing capability. He is also dealing with this issue you raise about how much are we spending on developing conservation in the commercial and industrial sectors.

Chairman HATFIELD. Will you give me a memorandum on that, Steve? [Laughter.]

Mr. HICKOK. Gladly. Let me step back a couple of steps in time. In early 1981, we thought that conservation ought to contribute about a thousand average megawatts by 1990 toward meeting what we thought would be deficits we would be facing in the mid to late 1980's. Then, when the picture changed in 1982, we recheduled that conservation powerplant.

Basically, we now see that by 1990 on the order of 500 to 600 average megawatts ought to be installed and in place and offsetting load. So we are still constructing the conservation powerplant, if you will, to continue the generating analogy. We are just constructing it on a different schedule.

We still see the need for conservation programs to make certain contributions over time toward meeting our long-term power needs, but those needs now look different to us. So it is a matter of timing.

The council's picture, both the 1988 to 1990 time frame and the longterm time frame, shows us the same picture. As a matter of fact, they recommended that we slow the weatherization powerplant down to a much slower construction schedule than we finally did. We felt we couldn't pull it down any farther and still have it be a reasonable administrative and customer service proposition for the utilities that are running the program.

So, there is a sort of a minimum construction pace below which you should shut the whole project down cold. In other words, mothball the weatherization program.

In addition to the programs that currently are developing the kilowatt-hours of savings for the long term-and those are weatherization, institutional buildings, and street and area lighting-we are also trying to develop the capability to move rapidly into the commercial and industrial and agricultural areas.

So, we have designed pilot programs that are now operating to test the mechanisms that will allow us to develop the conservation potential in those areas as well as the residential area. Residential is practically all we are doing on a large scale right now.

We agree with the council that we need to diversify our efforts; in other words, pay more attention to the nonresidential area because there is a great potential in those nonresidential areas and we know relatively little about how to get the savings out of them.

In terms of our fiscal 1985 budget, we placed a lot of attention on the commercial, industrial, and agricultural sectors. In other words, if you take the residential weatherization powerplant construction out of the picture for a minute and just look at the capability building, it is almost all going on in nonresidential areas. So we don't have any substantial disagreement with the council over how we should be proceeding in

1985, nor in our long-term picture in terms of the megawatts that we think we can get out of those different end-use sectors.

Chairman HATFIELD. If you had a magic wand in the context of what you have just given me as information, and you could wave that magic wand to have instant weatherization, would you do it?

Mr. HICKOK. At what price?

CONSERVATION RATIONALE

Chairman HATFIELD. What I am trying to get at, and I think you put your finger on it, is that Bonneville so tied to the construction of additional generation capacity that really you ought to look at an independent agency to handle conservation activities. BPA is tied to the rate structure, you are tied to the overall economics of the Bonneville Power Administration; is that correct?

You say we want to slow down weatherization because we have surplus power. Why not accelerate weatherization? The ratepayer would be saving energy. Don't we want conservation even in times of surplus?

Mr. HICKOK. It is for the same reason you wouldn't try to accelerate construction of WPPS units 1 and 3 right now. Basically, the need for the power is now in a timeframe that dictates we not do that. The Regional Act did plug conservation into a utility framework. It said treat it as a power resource. We are not doing conservation for an altruistic motive; we are doing it for a need-for-power motive.

The cost-effectiveness test says you go after the resource that is available to meet the need in the timeframe of the need at the least cost.

Chairman HATFIELD. Don't you believe there is a conservation ethic? Mr. HICKOK. Yes, I think conservation is not only the cheapest way to go, it is widely perceived as advantageous from standpoints that are beyond the realm of the power system.

Chairman HATFIELD. We are in a time of surplus, slowing down conservation. We have all the power we need in the Northwest and can use it as we wish, so forth. That is just like the mind set we had before the oil embargo an infinite resource in many areas, and it is not infinite.

I don't quite follow or understand why because we are in a time of surplus, this is the time we use, use, use, unless it is tied to the economics of the institution which you represent. The private power companies have done it. They led the way in weatherization; they led the way in getting people conscious of conservation. Bonneville always felt we had to push, push, push every inch of the way to get conservation a vital part of the Bonneville operation, primarily because, I guess, and I think it comes out now, you are looking at economics-you are not looking at the ethic, you are looking at economics.

I would think if you could have weatherization, instant weatherization today, I would take it, and that might increase your surplus, then you wonder where I am going to sell it, how am I going to make repayment to the Treasury, because we are looking at conservation as an economic factor and not an ethic. Am I wrong?