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STATEMENT OF KERMTT W. SCARBOROUGH 



Mr. Scarborough. Thank you, Mr. Chairman. My name is 

 Kermit Scarborough and I am chairman of the Canby UtiHty 

 Board. 



Our utility serves the city of Canby, Oregon, population 10,000. 

 We are entirely dependent on the Bonneville Power Administration 

 for electricity. 



Much has been written and said today about Bonneville's efforts 

 to become more competitive and business-like. These are laudable 

 goals, but we also need Bonneville to become more accountable, 

 and I would like to spend my time today addressing a major area 

 of concern, one that impacts the rates and power supply of every 

 utility in the Northwest. 



I am talking about Bonneville's long-standing relationship with 

 the Direct Service Industries. The DSIs are subsidized by Bonne- 

 ville and receive special treatment in the amount and price they 

 pay for power. The more that subsidies go to the smelters, the more 

 other customers around the region pay for electricity. 



The thrust of my testimony is that we need your assistance in 

 ending some of the lucrative DSI subsidies and in ensuring that 

 the contractual arrangements that Bonneville strikes with the 

 DSIs is fair to the public utilities, like Canby, which by statute are 

 Bonneville's preferred customers. 



In the time allotted me, I wish to make three basic points regard- 

 ing (1) competitiveness; (2) the new power sales contract renegoti- 

 ation process; and (3) the need for a thorough GAO review of the 

 Bonneville-DSI relationship. 



(1) Competitiveness. Bonneville's competitiveness initiative can- 

 not and will not succeed unless Bonneville reevaluates its relation- 

 ship with the DSIs. Bonneville, in our opinion, must end the two 

 significant subsidies it now bestows on the DSIs: the variable in- 

 dustrial rate for aluminum smelters and the out-of-date methodol- 

 ogy for calculating the value of DSI reserves. 



The variable rate applies only to aluminum smelters. It increases 

 when the price of aluminum goes up, and decreases when the 

 prices drops. 



Because aluminum prices are low, Bonneville now loses about 

 $32 million a quarter at this rate, compared with what the smelt- 

 ers would pay under the standard industrial firm power rate. 



It seems to me as a utility official that Bonneville has gambled 

 its financial security on a volatile, international commodity over 

 which it has no control. 



It is inconceivable that Canby or any other public utility in the 

 region would speculate with its future revenue stream that way. 



With regard to the value of reserves, I must tell you I believe 

 Bonneville's method for pajdng the DSIs for reserves is also fun- 

 damentally flawed. The DSIs receive a discount on their power bill 

 for providing reserves to Bonneville. In theory, the arrangement 

 makes enormous sense to both Bonneville and the DSIs. The prob- 

 lem comes about in the way Bonneville pays for the reserves. 



In 1987, Bonneville adopted what is Imown as the IP-PF rate 

 link, which freezes the value of the reserves. The link was extended 

 in 1991 and now expires in 1996, the same time as the variable in- 

 dustrial rate. 



