65 



forecasting do not fully capture the effects of price increases on some firms. Elastic- 

 ities in our long-term load forecasting models are higher (about -0.3) reflecting the 

 fact that consumers will show a greater response to price increases when they nave 

 more time to react (i.e., acquire more efficient buildings and equipment and/or sub- 

 stitute alternative fuels for electricity). 



Unfortunately, several factors complicate the assessment of load responses to 

 price increases outlined above. First, at the wholesale level, our utility customers 

 will consider alternative sources of bulk power (generation resources or possibly 

 non-BPA power purchases) that are competitive with the price of BPA's power. We 

 presently oelieve that this rate threshold is between 35 and 40 mills/kVh depending 

 upon the utility and resource being considered, assuming that utilities can acquire 

 generation resources at a price comparable to BPA's acquisitions. This level is still 

 significantly above our expected wholesale rate level, but the gap is narrowing. 



Second, our analysis for the initial rate proposal considered BPA wholesale rate 

 increases in the range of 15 to 17 percent. Significantly higher wholesale rate in- 

 creases in the range of 20 percent or hither were not incorporated in the initial rate 

 proposal, but sensitivity analyses with respect to higher rate increases have been 

 conducted. Our current assessment based on work done to date is that most firms 

 and industries will respond to higher rates consistent with the elasticities described 

 above. We are continuing to review and assess likely responses to rate increases and 

 will reflect the results of such review when we prepare our final rate analyses of 

 loads. 



Third, at the retail level, industrial consumers could be made temjMjrarily or per- 

 manently unprofitable if their production costs increase significantly as a result of 

 our rate increase relative to the market price for their products. At some point, are 

 "thresholds" are reached, such that the load responses by individual consumers will 

 be "lumpy." These response thresholds differ by individual firm and industry be- 

 cause individual economic and market circumstances differ. We focus emalysis on 

 those firms and industries most apt to hit "thresholds" and believe we have a rea- 

 sonable assessment of likely load responses, but this sort of firm and industry level 

 analysis is inherently complicated and difficult given the myriad factors that influ- 

 ence firms' decisions about operations and investments in plant and equipment. 



Two large Northwest industries in particular, primary aluminum and pulp and 

 paper, have sufficiently high electricity costs as a fi-action of total production costs 

 that significant load reductions are plausible. For example, a rate increase in excess 

 of 25 percent would result in an aluminum smelter production cost increase of over 

 5 cents per pound of aluminum, which, at currently forecasted aluminum prices, 

 could cause an additional load loss of 150 average Nw beyond currently forecasted 

 smelter curtailments, an amount equivalent to a small regional smelter. 



At retail rates of 35 to 40 mills per kWh, pulp and paper mills would begin to 

 consider installation of cogeneration facilities to decrease their reliance on pur- 

 chased electricity. Even large (40 percent) wholesale rate increases do not result in 

 industrial retail rates for most public industrial electricity consumption that ap- 

 proach 35 mills per kWh, however, Therefore our current analyses ao not indicate 

 that large reductions in pulp and paper loads will be triggered by the BPA rate in- 

 creases currently being considered. 



Mr. DeFazio. One other last, last point. Just an observation from 

 my years in public service and government is that I realize that 

 you are making some extraordinary efforts in terms of your admin- 

 istrative costs, and I was very pleased to hear that we are going 

 to look at the contractors and WPPSS and their administrative and 

 operating costs, et cetera. 



But when you look at your major program areas, I guess I would 

 say I am not certain that across-the-board cuts are most desirable, 

 that in the case there may be some parts of the organization that 

 haven't seen reductions or cuts or pressures as much as other parts 

 of the organization; some parts of the organization are more essen- 

 tial than other parts of the organization; some parts are mandated, 

 some parts are not. 



I just want to express that general concern when you are looking 

 at those sorts of constraints, and again, you are the administrator 

 and you have got to make these calls, but it is just a general obser- 

 vation. It goes to the concern that I opened with and I'll close with, 



