KWUA Engagement in Klamath Project Power Rate Issues

January 25, 2005  

Dear Water and Power User:  

We have prepared this letter to update you on the efforts of the Klamath Water Users Association (KWUA) regarding power issues that affect all Klamath Project irrigators. We also have available the comments recently submitted to the Federal Energy Regulatory Commission (FERC), which provide additional detail on the history of, and our position on, the 1956 power rate currently paid by Klamath Project irrigators.  

The 1956 PacifiCorp contract and the utility’s license to operate the Klamath Hydroelectric Project both expire in early 2006. If a similar power rate arrangement cannot be reached by that time, irrigators throughout the Upper Klamath Basin may face considerably higher power costs.  

In early 2005, PacifiCorp will send to all irrigators in the Upper Basin a “mock bill”, which will essentially take recent monthly bills for two complete years and recalculate the costs that would be incurred under the 2006 tariff structure. Similar mock bills have already been provided to irrigation districts, and the anticipated cost increases associated with district-only pumping costs are considerable – roughly 10 to 15 times higher than current costs.  

KWUA is engaged in pursuing all available avenues to avoid large power cost increases associated with the contract termination. The association has a direct and substantial interest in ensuring that its members continue to have access to an adequate supply of low-cost electrical power. The association also has a similar interest in ensuring that its members’ access to adequate water supplies to meet their irrigation and domestic needs is not hampered by the future operation of the Klamath Hydroelectric Project. The environmental and operational aspects of PacifiCorp’s license application could affect water use throughout the Klamath River Basin.  

This letter has been prepared to outline the actions undertaken by KWUA since 2001 to address power issues.  

Overview KWUA Power Committee Actions  

The Klamath Water Users Association (KWUA) is a non-profit corporation that has represented Klamath Irrigation Project farmers and ranchers since 1953. Our members include rural irrigation districts and other public agencies, as well as private concerns operating on both sides of the California-Oregon border. KWUA’s Power Committee, consisting of volunteers from the local agriculture and business community, have over the past four years prepared a strategy to engage in the FERC relicensing process and to advocate for continued affordable power for Upper Klamath Basin agriculture.  

KWUA Renewable Resource Energy Audit  

Because of concerns that the 2006 contract renewal would not confer continued provisions for affordable power rates to Klamath Project irrigators, KWUA in 2001 hired Symbiotics, LLC of Rigby, Idaho to prepare a report that outlined the opportunities and constraints available to address water users’ energy needs. The intent at that time was to examine options that could provide long-term benefits to water users and to develop a roadmap for KWUA to achieve energy self-determination. The report provided an initial determination of major sources or sites for energy development, their feasibility, approximate cost, and time frame for development.  Key conclusions and recommendations from that report were:  

• Near-term development strongly favors hydroelectric options.
• The unknown extent of geothermal resources, coupled with high operation and maintenance costs, made this option less favorable.
• The power market for wind energy is not supportive of development by independent producers.
• The independent purchase of wholesale power represented a viable, but risky option to potentially serve as a bridge between contract expiration and the onset of power generation.

The report recommended aggressive pursuit of a more in-depth investigation of local hydroelectric projects. This recommendation was shortly followed up on by Klamath Drainage District, who filed an application for a preliminary permit with FERC for Keno Dam. Recent announcements by the Bush Administration also suggest support for developing more low-head hydropower in the western United States.  

KWUA’s Power Consultant  

After months of soliciting proposals, reviewing qualifications and interviewing potential candidates, KWUA in late 2003 entered into an agreement with a Portland law firm to guide the association’s efforts to address pending electrical power issues. KWUA signed into a formal agreement with Cable Huston Benedict Haagensen and Lloyd, to provide the association with professional legal and other consulting guidance as Klamath Project irrigators face the expiration in 2006 of a contract, which presently provides for power pricing in the Klamath Project.  

Klamath Project Power Contract 

The Klamath Project’s power contract dates to 1917, when PacifiCorp's predecessor, Copco, negotiated a deal with the U.S. government to build Link River Dam. The power company received the run of the river and storage benefits for hydropower, while the government and water users received affordable electricity for the Klamath Project. PacifiCorp and the federal government negotiated the current 50-year deal in 1956. KWUA was formed in 1953 in part to specifically address the power contract that was in place at that time.  

Klamath Irrigators’ Legal Rights to Power Benefits  

We believe the farmers of the Klamath Basin have certain legal rights that are reflected in the conditions on the current FERC license, and any entity that acquires a new license will be required to offer low cost power to the farmers, or equivalent consideration. In essence, the water users have a right to power benefits. This matter is further outlined in the memo prepared by Cable-Huston.  This 20-page memo is available at the Klamath Irrigation District office.  

Relationship Between Klamath Project Water Users and Off-Project Irrigators  

KWUA represents irrigation districts and other local entities that provide water to farmers and ranchers of the Klamath Project. Because the Klamath Project is a federal project, and particularly because of the contractual relationship that exists between irrigators and the Bureau of Reclamation (Reclamation), Project irrigators have different approaches to address the 2006 rate issue than those available to our neighbors outside of the Project. The so-called  “off-Project irrigators” have hired a Portland attorney to represent them on FERC and contract negotiation matters. While the two groups have different strategies in these arenas, there is interest to try to coordinate on other issues, with a structure that might include KWUA providing an “umbrella” for the off-Project efforts, wherever the two groups can work together.  

Past Position of the U.S. Bureau of Reclamation  

The Reclamation Act was enacted in 1902 to encourage irrigation and homesteading in western states.  It was anticipated that the irrigation would require two interrelated resources: water and power. Reclamation asserted legal claim to all residual or inchoate water rights within the Project boundary.  Reclamation also has authority to develop hydroelectric power projects. Within the Klamath Irrigation Project, Reclamation gave permission to Copco to begin developing key components of the Klamath Hydroelectric Project pursuant to terms of the 1917 agreement. In 1951, Copco sought a federal license for two new hydroelectric facilities—now known as JC Boyle.  Reclamation and local interests vigorously opposed the license, as it would impede the federal agency from ever developing its own power resources. FERC interpreted Reclamation’s objection as an exercise of Reclamation’s mandatory conditioning authority under Section 4(e) of the Federal Power Act.  FERC ultimately issued the license solely upon the condition that the 1917 agreement be renewed for the term of the license.    

We believe that any license issued for the Project beyond 2006 should be subject to a similar condition.  The terms of the current contract were intended to be in place so long as PacifiCorp impedes Reclamation’s ability to develop power resources within Project boundaries. Again, in other words, the power company received the run of the river and storage benefits for hydropower, while the federal government and water users received affordable electricity.  

Federal Agency License Conditioning Aut hority  

Under law, federal agencies can require conditions for projects located on or within federal “reservation” lands.  In general, the agency can require conditions to ensure that the hydro project, as operated pursuant to the license, is consistent with the basic purpose of the federal reservation.  Reclamation is entitled to require license conditions to ensure that the hydro Project license is not inconsistent with the irrigation purposes of the Klamath Irrigation Project. In addition to the mandatory conditioning authority, there are several other bases under the Federal Power Act upon which FERC would have discretion to condition PacifiCorp’s license.  

PacifiCorp’s Application to FERC  

We have monitored PacifiCorp's collaborative pre-filing consultation process for the Klamath relicensing for the past several years. We generally support the PacifiCorp application as presented, although we have formally submitted specific concerns to FERC. This support is concurrent, of course, with an understanding that all practical measures will be taken to ensure that continued affordable power rates are provided to Upper Basin irrigators.  

This process is one of several that the association is currently involved with, and at the present time, it is difficult to discern which process or combination of processes will lead to success. If our negotiations with PacifiCorp (see below) do not bear fruit, we have alternate, more aggressive, and political strategies that we will pursue. Our involvement in these forums is briefly discussed below.  

Direct Settlement Negotiations with PacifiCorp  

We are working with Reclamation and the U.S. Department of Interior to ensure that PacifiCorp respects the history and justification behind the fact that the current rate schedule is a reasonable consideration of the relationship between the Klamath Hydroelectric Project and the federal Klamath Irrigation Project. We continue to meet with PacifiCorp to determine whether we can negotiate an agreement that, from our end, is driven by an understanding that this relationship has not changed in the past fifty years.  We should know early 2005 whether we can reach an agreement with PacifiCorp on this matter.  

KWUA’s Role in FERC Relicensing  

KWUA in October formally filed its motion to intervene in the FERC relicensing proceedings.  While we continue to work to reach a settlement with PacifiCorp, we assert that no entity should receive a new license unless it is willing to enter into a low cost power supply contract for the irrigation project as occurred when the hydroelectric project was last licensed.  We also assert that, regardless of whether the new license will be conditioned on the execution of a new contract, the existing license is so conditioned and, therefore, any extension of the license should be conditioned on honoring all existing commitments contained in the license.   

FERC Relicensing Settlement Process  

PacifiCorp is now moving forward with a relicensing settlement process.  Participation in the settlement process has both benefits and risks. As a dues-paying member of the association, you should feel some pride that KWUA has been identified as one of the few stakeholder groups that has been invited to the settlement table. However, we need to carefully gauge our involvement with this process as it bears on our ability to fully engage in FERC, particularly if we oppose PacifiCorp’s license renewal, should they fail to commit to deliver us a meaningful rate package.  

Other Actions  

KWUA is also working in other venues to address the power rate issue. We are preparing to engage on several matters before the Oregon and California Public Utility Commissions. Also, from the inception of our work, we have been assessing and pursuing legislative, political and public relations strategies to address the 2006 rate issue. We will absolutely need the support of you and the rest of our community as we define specific objectives in the coming year.  Finally, we are also preliminarily considering the feasibility of forming a new publicly or cooperatively owned utility (co-op).   

Conclusion  

We hope this provides you and your neighbors with a better sense of our involvement on the power rate issue. Our engagement on this issue occurs on a daily basis, and we are working hard to address the changing situation, as new developments and politics require us to adapt. Lynn Long, a landowner who farms within the Klamath Drainage District, is chairman of KWUA’s Power Committee. If you have further questions about the status of our power rate negotiation activities, we urge that you contact Lynn, KWUA, or KID.

Sincerely,

Steve Kandra, KWUA President
Lynn Long, Power Committee Chair
Dan Keppen, KWUA Executive Director