251 



"In order to avoid adverse impacts on retail rates of the 

 Administrator's customers with low system densities, the 

 Administrator shall, to the extent appropriate, apply 

 discounts to the rate or rates of such customers." 



In approving this provision, Congress clearly recognized the need 

 to maintain the economic viability of the Northwest's rural areas 

 which have high distribution costs due to difficult terrain, remote 

 service areas, or other factors. 



The economic hardship that the low-density systems face is 

 illustrated by the lack of mergers or take-overs of these systems. 

 Despite much talk, no system receiving the LDD has been taken over 

 or merged with a better positioned system even though many 

 neighboring systems have substantially lower rates. Why not? 

 These utilities have such high distribution costs that they would 

 merely serve to raise the average cost of doing business of the 

 better positioned system. The lOU's would not serve these areas 

 initially because there was no profit in them; the situation today 

 is no different. 



This does not stop other utilities from trying to acquire the 

 portions of low density systems that have become attractive — a 

 practice known as cream skimming. Without the LDD, the rates of 

 low-density systems would be even higher and would encourage even 

 more competition for the more densely populated areas, potentially 

 destroying the overall economic viability of these systems. 



BPA has had two major reviews of the LDD. Its customers were 

 active in these processes. As a result of these reviews and 

 subsequent implementation of its recommendations, many safeguards 

 and eligibility criteria have been added to the LDD. Additionally, 

 the discount itself contains a sliding scale under which utilities 

 who qualify receive discounts that diminish with increasing 

 density. 



Most importantly when viewed from a competitiveness aspect, the Low 

 Density Discount adds no net cost to the Priority Firm rate class 

 since the cost of the discount ($24 million/year average over the 

 1994-1995 test period) is allocated back to the Priority Firm rate 

 class. It is a redistribution within this rate class and does not 

 impact other BPA rate classes. 



Conclusion 



In summary, it is vital to the Northwest that regional energy 

 markets and the Bonneville Power Administration become more 

 competitive. Efforts towards that end should focus on internal 

 efficiencies as well as on BPA's role as a supplier of power, 

 generation control, and transmission products. These products 

 should be priced at the cost of providing them and the regulatory 

 environment should be reshaped to provide for more competition. 



If Bonneville is indeed the most efficient provider of new power 



