Subject: Western Issues Update 7/27/01
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 27 Jul 2001 13:44:05 -0700 (PDT)

Below is the weekly western issues update sent to Tim earlier.  If you have any questions, please feel free to contact me (x39510).

Executive Summary
BC Hydro 
British Columbia Energy Politics
BPA Developments 
Forestry Issues
Smelter Update 

BC Hydro
The crown jewel in BC government's arsenal, BC Hydro is in a holding pattern until they can name a new Chair to head up the corporation.  Brian Smith was replaced with interim Chairman Robert Fairweather, but we do not expect Fairweather to have a long tenure - the word is Gordon Campbell and company are seeking a replacement to fill Mr. Smith's shoes as early as mid-August.  We expect key changes to occur in Hydro's executive and board of directors following the appointment of the new Chair.  Although senior management at BC Hydro is relatively comfortable with the company's financial position and competitiveness, they will be pursuing a strategy of expanding generation capability through new dams and oil/gas exploration, pending environmental approvals.  As a part of BC Hydro's move to look for additional generating capacity, they are turning to a pair of mega-projects that were scrapped a decade ago.  BC Hydro has commissioned new technical review studies of the 900MW Site C hydroelectric project near Fort St. John and the 2,000 MW coal-fired Hat Creek project near Kamloops.

In terms of a rate hearing, we do not expect BC Hydro to conduct a rate hearing until the new Chairman is appointed.  It will be difficult to get rates raised, although with the government budget deficit looming there will be considerable pressure to begin looking this direction.  Another key revenue challenge for BC Hydro will be responding to the recent price caps imposed by FERC on western power markets and potential power purchase refunds to California (though their contributions are not immense, they are still significant). 

BC Energy Politics
Things have really heated up in Victoria now that the new Campbell administration is settling in.  Earlier, we reported that the Office of the Premier had taken control of all the agencies and political staffing decisions.  With 77 of the 79 elected members of the BC Legislature, sources close to the Premier indicate change will be "fast and furious" to offset any local coverage from volatile media.  The BC Government's primary focus will be to stimulate the economy while trying to restrain government spending.  To that extent, they have instituted an across the board 25% stimulus tax cut and will have to deal with the deficit issues that that cut entails.  One of the ways they are looking to balance things out is to outsource Crown assets and look for other areas to generate revenue - new sources of government revenue through oil and gas exploration and energy will be a top priority.

Minister of Energy and Mines, Richard Neufeld, will be one of the main drivers behind the current fast-tracking of the offshore oil and natural gas exploration.  There is a great deal of pressure on the BC Liberals to balance this budget and they will be looking at ways of delivering revenue sources through oil and gas exploration permitting as a short-term solution.  Neufeld has reviewed the Backhouse Report (Northern Development Commission) regarding the need for continued local public input and has basically tossed it aside - the report had not gone far enough to please the Liberals.  Other things on the Minister of Energy's agenda:

?	Oppose Sumas 2 power project & phase out Burarrd Thermal (Sumas has been a serious bone of contention between Washington State and Canada)
?	With Core Review, protect BC Hydro and all of its core assets, including dams, reservoirs, and power lines under public ownership
?	Restore independent BC Utilities Commission, to re-regulate BC Hydro's electricity rates
?	Maintain the longstanding ban on bulk water exports
?	Encourage mineral exploration
?	Promote clean and renewable alternative energy sources
?	Review and make recommendations regarding allocation of funding that has been frozen for the "Power for Jobs" Initiative

BPA
Senator Patty Murray moved last week to drop the review provision on the Senate bill, which would have opened up an additional $2 billion for BPA borrowing authority.  If Senator Murray is successful, the measure could have a substantial impact on BPA financial solvency.

With the exception of the approximately $5 million spill over the Dalles and Bonneville dams, BPA has already foregone a major summer spill to protect endangered salmon species.  

Representatives of four Northwest governors ventured to Washington DC last week to express concerns over the new hydro BiOp and how it will be implemented.  States were concerned about their lack of input in the implementation process - a plan being developed by action agencies and spearheaded by BPA.  The plan has been put on hold pending a review headed by Interior Department lawyer Ann Klee.  Idaho and Washington representatives showed concern that the BiOp could be overturned in court - they were concerned that the NMFS underestimated the risk of extinction of Snake River stocks and that it was illegal to rely on off-site mitigation to help satisfy the hydro system's ESA obligations.  While the administration has said it plans to double past expenditures to implement the BiOp, nobody at the meeting could come up with just what the previous BiOp costs were - for now, the salmon plan is pure lip service.

Smelter Curtailments
Kaiser: Faced with declining aluminum prices, which have decreased 9% from last year, Kaiser is in a difficult position due to the fact that they are maintaining a level of infrastructure and personnel-readiness which will allow them to restart 4-3/4's lines of their operations on the fly.  Should this curtailment last longer than a year, it would be cost-prohibitive for them to continue incurring that infrastructure expense.  Kaiser has gone on the record to say it is still open to signing load a curtailment agreement with BPA, but it is unclear at this time whether BPA foresees a benefit in signing an agreement considering short-term and perceived mid-term electricity price decreases.  We are continuing to monitor this situation as it develops, although an agreement in the short-term seems doubtful.

Alcoa: Recently mentioned in the press, Canada's Newfoundland government and U.S. aluminum giant Alcoa Inc. announced Thursday they would conduct a feasibility study to possibly revive the stalled Lower Churchill hydroelectric project in the remote Labrador region.  The generating station on Gull Island could produce up to 2,000 MW of electricity.  Costs of the project are estimated at some C$4 billion ($2.6 billion), far below the C$10 billion originally thought.  With a 16% drop in net income due to slackening global aluminum demand and higher energy prices, Alcoa has suffered along with the rest of the aluminum industry to find cheaper, less volatile sources of electricity.  Along with their ongoing negotiations with BC Hydro, it appears Alcoa is making a determined push to work with the Canadians to play all sides of a competitive electricity market.

Forestry Issues
There are a number of fuel management projects which are going on right now in the Bitterroot National Forest. 

Ecosystem Management Burn - Burnt Fork Ecoburn - Completed 7/01
Fuels Reduction - Sheafman Fuel Project - Completed
Fuels Reduction - Darby Ranger District
*  Trapper Overlook - 10/01 expected decision date
*  Como Restoration - 9/01 expected decision date
*  Como Campground - 9/01 expected decision date
Fuels Reduction - Sula Ranger District
*  Springer Memorial Fuel Hazard Reduction Project - completed
Multi-Forest Ecosystem Management Burn - West Fork Ranger District
*  Salmon River Canyon Project - Ongoing, Preparing Supplemental Draft
Fuels Reduction - Sula Ranger District
*  Sam Billings Camp Ground Fuel Reduction - Completed
Steep Creek Fuel Reduction - 10/01 expected decision date