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Mr. Hickok. No, you are not wrong. That is the nature of the costeffectiveness test. It is an economic test.

Chairman HATFIELD. I suppose we really never can spell things out precisely in law; we never can really explain total intent, but out of that Northwest Energy Act, I think Senator Jackson and I as the chief sponsor to the legislation frequently, frequently in the hearings on that legislation saw a proposition that energy, that conservation ought to be considered as a new source of energy, not only on the basis of economics which was at that time facing us as a serious problem and all these places, but primarily as an ethic, that we were trying to reverse this trend, what we identify as a throwaway, waste-it, use-it, exploit-it type of ethic in this country today to return to a conservation one.

Just because there is a quantity there, it doesn't mean we have to use it and waste it. It seems to me when we have the technology to conserve, even in a time of surplus, we have a responsibility to conserve it, even if it creates more surplus because of the ethic underlying the idea of careful utilization and not waste.

It just seems to me we have a conflict of interest when we are forced into purely the economic consideration and have to abandon the ethic of this whole conservation program. It is just a point of view, and I am not being critical except trying to be analytical of what keeps seemingly impeding our progress in the field of conservation.

I hate to think the American people can only be sold on conservation in times of shortages or because it can only appeal to their economic well-being. It surely must be some kind of appeal to the concept of a conservation ethic, and if public agencies, like Bonneville, can't give leadership on that, I guess it is kind of hopeless in terms of getting it elsewhere, although I must commend the IOU's for doing it, even though their motive was economic, their promotion was save it.

We have gone through a whole period of time where we had plenty and we waste it, then we get into shortages, then we get all excited about conservation.

That is the sermon for the day.
Senator Sasser.

Senator SASSER. Mr. Chairman, I got here late just in time for the end of your comments, but I must say, I couldn't agree more with what you just said. I don't see any reason to pursue excessive consumption if that is really not necessary. Sometimes it appears to me that just siding with economic necessities or it is more economically feasible to do so might be shortsighted in the long run.

So, if you are giving us a score and a grade on whether or not we agree with what you characterized as a sermon, Mr. Chairman, put me down for an A-plus because I find that I agree with you 100 percent.

I think we have been a country over the years that has been guilty, I think, of excessive consumption in a lot of different areas, and we paid, I think, a high penalty for that and perhaps we will pay a higher penalty in the years ahead.

So where we can conserve without unduly affecting the quality of life, I am all in favor of doing it.

I have got no questions to ask these distinguished gentlemen.
Mr. JOHNSON. Mr. Chairman-

Chairman HATFIELD. May I say, these questions were not prepared. I have gone off on my own, but this is an area of concern.

BPA'S COMMITMENT TO CONSERVATION Mr. JOHNSON. In all deference to the private utilities who, indeed, took a lead in acquiring conservation in the Pacific Northwest, maybe because of the current economic circumstances they have had to reassess the pace of that, and I would submit now, as you are aware, they have not seen their way clear to sign our long-term conservation contracts. Some of those utilities have pulled substantially behind where we are now.

I feel very good about what Steve and his staff have done in working with the private utilities and Regional Planning Council because we have moved way out in front in terms of seizing not only the economic opportunity conservation affords, but also the ethic it represents. We are committed to that conservation ethic in a lot of things we are doing at the present time. When the model building standards are adopted by State and local governments, they will have the effect of bringing about savings for more efficient utilization of this precious resource, and we are not discouraging that development.

Chairman HATFIELD. Mr. Johnson, then as I understand it, Mr. Hickok has total free range to move ahead as rapidly as possible on the conservation program without having to consider the economics on the matter of the amount of power that you can sell or the amount of power that will be created as additional surplus?

Mr. JOHNSON. That would be one interpretation of commitment to the ethic. I come, perhaps, a step or two short of that.

Chairman HATFIELD. You are looking at the ledger again. You are going to keep him on the ledger. Mr. JOHNSON. I have to run a sound fiscal ship.

Mr. Hickok. I might point out that Bonneville right now does seem to be swimming against the utility tide in the region. The public utility commissioner of Oregon is openly challenging the notion that we need to continue doing conservation. A number of investor-owned utilities that were the conservation pioneers are no longer advertising their weatherization programs. We are, at this time, willing to make investments that are looking farther into the future than perhaps anyone else in the region.

We are doing things that don't pay out in less than 30 years. We are having difficulties in getting our utility partners in this business to look beyond 2 years.

So I think that absent Bonneville's conservation program, there would be a lot less going on in the conservation field in the Northwest right now, and we intend to try to keep conservation on a steady course as

the first and best thing you do to meet the long-term power needs of the region. No matter what our need turns out to be, whether it is 11,000 megawatts under the council's higher load forecast or it is only 1,000 megawatts under their lower forecast, conservation is still the first contributor toward meeting those needs, and the only way we can be assured of being able to respond to that high-load growth scenario is if we rapidly develop and then put on the shelf the programs that can go after those conservation savings in areas where we are not now active. That is our insurance. That is our insurance of being able to develop the least costly response no matter what the need for power turns out to be.

So we will stay in stride with the council's current plan and will attempt to advance this program in a way that allows the Administrator to satisfy his load-serving obligations in the region at the least cost to the ratepayer.

Chairman HATFIELD. I appreciate what you say in maintaining a leadership role here. I guess to close off on this subject, there are those who believe conservation can only be promoted by shortage. There are those who believe conservation can only be promoted by price. If the price is high enough, people will conserve, or if there is a shortage, people are forced to conserve. I would like to think we could give leadership to a conservation ethic out of which people would be motivated to save and reduce consumption that is unnecessary, exploitive and wasteful because they have concern for the future and that they are not going to be bludgeoned into conservation either by price or shortage, and I visualize what is happening here, we are not giving that kind of leadership. We are still tied to either the price or to shortage.

I would just like to see conservation restored. We have lots of great resources, but there are future generations beyond this one.

PREPARED QUESTIONS SUBMITTED FOR THE RECORD We will submit to you, Mr. Johnson, and your staff, additional questions for the record. It is always a pleasure to welcome Bonneville's consistently excellent testimony, as presented by you, Mr. Johnson, and your predecessors over the years. I think out of all of the marketing areas, the most consistently excellent testimony and responsive answers have been given by Bonneville.

With that, we will place the BPA questions in the record followed by the statements and questions for the other power marketing administrations

(The questions and answers follow:]

BONNEVILLE POWER ADMINISTRATION

QUESTIONS SUBMITTED BY SENATOR HATFIELD

FINANCIAL STATUS

Question: Will you give the Committee a status report on the financial situation for FY 1984 as well as your expectations for FY 1985?

Answer: Our operations for the first 5 months of FY 1984 have slightly exceeded our projections made in the FY 1983 rate case. We are pleased to report that revenues are currently running about two percent above projections, while expenses are running nearly four percent below projections.

During FY 1985, we expect revenues and expenses to be close to the budgeted amounts. BPA's staff will continue to work diligently in its efforts to meet BPA's FY 1985 fiscal commitments.

Question: Although the region's energy situation is extremely volatile, what do you expect to occur in the future with respect to repayment?

Answer: BPA's budget assumes that in FY 1985 we will make cash payments to the Treasury of $197.6 million for current interest, $64.2 million for de ferred interest, and $225.9 million for amortization of facilities. BPA also plans to return to the Treasury $179.2 million for interest on Corps of Engineers and BPA appropriated funds, as well as $107.2 million for associated project costs in FY 1985. In total, BPA plans to transfer more than $780 million to the Treasury in FY 1985.

AVERAGE SYSTEM COST

Question: Why change the current methodology which uses the "jurisdictional approach" for including costs as allowed by state regulatory bodies?

Answer: The change in the "jurisdictional approach" was contained in BPA's proposal to address certain deficiencies in the existing methodology. BPA has encouraged comments on this, and other changes, and is now in the process of assessing the content of the comments. It is emphasized that there has been no change in the existing methodology, and none will be made unless it is determined, after careful review, that change will improve the methodology in the interests of BPA, the exchanging utilities, and the regions ratepayers. Some of the "deficiencies" referred to above, and upon which BPA has urged comment, are:

(1). Costs approved for retail ratemaking, while allowable by a particular State's regulatory commission, are not in all cases includable in the Average System Cost as defined by the Pacific Northwest Power Planning and Conservation Act. BPA cannot disaggregate those costs without appearing to challenge the State regulators. A case in point is the recent controversy over whether certain utilities' filings have included terminated plant costs · prohibited under Section 5(c) (7) (c) of the Act.

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(2). With the current methodology, the utilities do not have equal incentives to control exchange costs. BPA has neither the staff nor the desire to intervene and participate in every rate proceeding in the region to offset this tendency.

(3). The Administrator has an obligation to 8 million residents to run a fiscally sound program. The methodology is currently projected to cost $1 billion in FY 1985 and be a third of BPA's entire budget. BPA must control these and other costs in order to remain competitive in its pricing of power sales and at the same time encourage the exchanging utilities to maintain their rates at the lowest prudent levels.

(4). The orders of the regulatory bodies often do not contain the specific numbers necessary for an Average System Cost computation.

(5). The current methodology produces a large number of utility filings. This causes a large administrative burden for both BPA and the utilities.

Question: Why change the existing methodology approach to equity return which is return on equity as allowed by state regulatory bodies?

Answer: The argument in favor of such a change is that equity returns allowed by regulatory agencies may have indirectly compensated some participating utilities for the costs of generation facilities terminated prior to initial commercial operation. Although not necessarily inconsistent with relevant State laws, such allowances, if included in Average System Cost determinations, violate Section 5(c)(7)(C) of the Pacific Northwest Power Planning and Conservation Act.

It is not BPA's role to independently determine a rate-of-return on equity for every exchanging utility. To do so might be viewed as an attempt to circumscribe the authority of State regulators. Instead, BPA could publish a rate-of-return on equity derived from published sources and adjusted by BPA for national terminated plant costs, implicitly or explicitly part of the rate-of-return on equity component, and to reflect the reduced risk premium component of the cost of equity as a result of the Act. As reflected in our answer above, this is one of the items upon which comment has been requested.

Question: Explain the new limitation on the amount of allowable transmission expense.

Answer: BPA interpreted the term "resources" in Section 5(c)(1) of the Pacific Northwest Power Planning and Conservation Act to include only electric generating facilities and appropriate conservation measures. The Average System Cost, therefore, is intended to reflect the utility's cost of resources. The Act does not require that any transmission expenses be included in an Average System Cost determination. Since BPA's Priority Firu rate includes transmission costs, BPA proposes to allow an amount of transmission expense equal to the lesser of the utility's transmission cost in mills/kilowatthour or the transmission cost component of BPA's Priority Firm rate. Currently, transmission costs for most utilities participating in the exchange program do not exceed the transmission cost component of the Priority Firm rate. BPA's proposal is consistent with the "single utility concept", and was designed to provide a disincentive for utilities to construct unnecessary and costly transmission facilities.

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