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KWUA ELECTRICAL POWER LEGAL BRIEF

RATE WAS PART OF ORIGINAL DEAL ASSERTED BY FEDERAL LAW

posted to KBC 3/7/05 

I.          What We Want:         The Klamath Water Users Associations (“KWUA”) seeks to continue the longstanding power arrangement between the Bureau of Reclamation (“Bureau”) and PacifiCorp through which the irrigators of the Klamath Irrigation Project purchase low-cost power (the “1956 Power Contract”).  KWUA’s goal is that affordable electrical energy continues to be available for irrigation, drainage, water conservation and wildlife needs.  This requires only that state and federal authorities observe and enforce the policies and laws that already exist. 

II.        Our Basic Position:    Federal and state law, in additional to basic notions of logic and fairness, compel PacifiCorp to renew the 1956 Power Contract.  PacifiCorp’s obligation to continue providing low-cost power for irrigation and drainage pumping is set-forth in the Klamath River Basin Compact (“Compact”).  The Compact is a federal law that unambiguously requires that any hydroelectric development of the Klamath River be used, in part, to secure the “lowest power rates which may be reasonable for irrigation and drainage pumping.”  Thus, PacifiCorp is required by law to renew the 1956 Power Contract so long as it is the licensee for the Klamath Hydroelectric Project—whether under an extension of the original license or under a new license.

III.       The 1956 Power Contract Is A Condition On PacifiCorp’s FERC License:

·         The Reclamation Act was enacted in 1902 to encourage irrigation and homesteading in arid western states.  It was anticipated that the irrigation would require two interrelated resources: water and power.  The Reclamation Act grants the Bureau legal authority to develop hydroelectric power projects.   

·         Within the Klamath Irrigation Project, the Bureau gave permission to PacifiCorp to begin developing the Klamath Hydroelectric Project pursuant to terms of the 1917 Agreement.  PacifiCorp initially agreed to provide low cost power to the Klamath Irrigation Project for a term of 50 years. 

·         In 1951 PacifiCorp sought a federal license for two new hydroelectric facilities—now known as JC Boyle.  The Bureau vigorously opposed the license as it would impede the Bureau from ever developing its own power resources.  The Bureau advised FERC that “[i]f power were developed by the Interior Department, it would be available for pumping, for financial aid to irrigation, and for sales to customers having preference rights under the reclamation laws.” See Reply Brief of the Secretary of the Interior, October 17, 1952, p. 10. At the time, the Bureau was actively pursuing its own hydroelectric resources.

·         FERC interpreted the Bureau’s objection as an exercise of the Bureau’s mandatory conditioning authority under Section 4(e) of the Federal Power Act.  FERC therefore conditioned the original license issued to PacifiCorp on the renewal of a low-cost power contract in favor of the KWUA members:

“Provided, further, That with and as a part of the acceptance of this license, the Licensee hereunder shall file conformed copies (in quadruplicate) of the existing agreement between the Licensee and the United States (by the Secretary of the Interior), dated February 24, 1917, as amended, which has been further amended or renewed to cover a time period at least equivalent to the time period of this license, or a new agreement, covering a time period at least equivalent to the time period of this license between the Licensee and the United States, which provides for the storage in and release of water from Upper Klamath Lake in Oregon, and the use thereof by the Licensee for the generation of electric energy under terms and conditions substantially similar to those terms and conditions contained in the existing February 24, 1917 agreement, as amended.”  Order Issuing License (Major) issued for Project No. 2082, January 28, 1954, ¶ A. 

·         Between 1954 and 1956 KWUA, PacifiCorp and the Bureau negotiated the 1956 Power Contract.  In January of 1956 the new contract was submitted to FERC in order to satisfy the license condition. FERC accepted the contract and issued a supplemental license order to that effect.  Because the FERC license expired in 2006, FERC did not have the authority to require a power contract beyond that date.

·         If PacifiCorp is not granted a new license by the time its original license expires, then FERC will grant PacifiCorp an annual extension of the original license.  Such annual license extensions include all original conditions.  Section 15(a)(1) of the Federal Power Act states that “the commission shall issue from year to year an annual license to the then licensee under the terms and conditions of the existing license until the property is taken over or a new license is issued as aforesaid.” (Emphasis added).  As applied here, the above-quoted license condition would be included on any annual extension and would require PacifiCorp to extend the 1956 Power Contract at least as long as the annual license extension. 

·         In summary, PacifiCorp was permitted to develop the hydroelectric potential of the Klamath River, instead of the Bureau, only on the condition that PacifiCorp act as the Bureau’s “surrogate” with respect to providing low-cost power to the Klamath Irrigation Project.  By both logic and basic fairness, this deal was intended to continue so long as PacifiCorp is the licensee. 

·         PacifiCorp is in the process of applying for a new FERC license.  In its license application and supporting documentation, PacifiCorp has stated its intention of not renewing the 1956 Power Contract.  PacifiCorp has vigorously argued that FERC lacks the authority to impose such a condition—a claim disputed by PacifiCorp’s own original license.    PacifiCorp also argues that the 1956 Power Contract should not be a condition on any annual license extension, a claim that finds no basis in the law.  PacifiCorp’s application for a new license also makes no attempt to demonstrate its compliance with Article IV of the Compact.

IV.       The Compact Makes The Power Contract A State And Federal Law Beyond 2006:

·         In 1955 Congress authorized the creation of the Klamath River Compact Commission.  The Commission was comprised of representatives from Oregon, California and the federal government.  The purpose of the Commission was to negotiate an interstate compact establishing coherent policies concerning the use of the Klamath River.

·         The Compact contains the following provision:

                “It shall be the objective of each state, in the formulation and the execution and the granting of authority for the formulation and execution of plans for the distribution and use of the waters of the Klamath River Basin, to provide for the most efficient use of available power head and its economic integration with the distribution of water for other beneficial uses in order to secure the most economical distribution and use of water and lowest power rates which may be reasonable for irrigation and drainage pumping, including pumping from wells.” Article IV (Emphasis added).

·         In short, hydroelectric development of the Klamath River is to be encouraged and used, in part, to provide the “lowest power rates which may be reasonable for irrigation and drainage pumping, including pumping from wells.”  This provision was drafted contemporaneously with the negotiation of the 1956 Power Contract and FERC licensing.

·         In August of 1957 the Compact was approved by the United States Congress.  The legislative history indicates: (1) Congress understood that PacifiCorp was the only developer of hydroelectric power to which Article IV would be applicable; and (2) PacifiCorp’s hydroelectric development was subject to the licensing authority of FERC. 

·         Upon its approval by Congress, the Compact became (and remains) a law of the United States.  The United States Supreme Court has repeatedly held that interstate compacts are not merely advisory in nature—but shall have the force and effect of a federal law. See, e.g.,  Virginia v. Maryland, 540 U.S. 56, 66, 124 S. Ct. 598, 605 (2003) (“We interpret a congressionally approved interstate compact just as if we were addressing a federal statute.”) (Internal citations omitted.) 

·         In approving the Compact with Article IV, Congress intended for the condition on the original license to continue so long as PacifiCorp continues to own and operate the Klamath Hydroelectric Project.  FERC has since reaffirmed its authority to require a licensee to allocate a portion of project output to a third party based on such Congressional intent. See Massachusetts Municipal Wholesale Electric Co. v. Power Authority of the State of New York, 105 FERC ¶ 61,102 (October 23, 2003) (overruled on other grounds).  At this point, it is unknown whether or not FERC intends to include this condition in any new license issued to PacifiCorp. 

V.        Renewing The 1956 Power Contract Will Benefit, Not Harm, PacifiCorp’s Customers:

·         In order to avoid the mandate stated in the Compact, PacifiCorp has argued that it is contrary to the interests of its remaining retail customers to renew the 1956 Power Contract.  While this position may have superficial appeal, it simply cannot withstand any level of scrutiny. 

·         First, renewing the 1956 Power Contract would confer a significant benefit on PacifiCorp’s other ratepayers because it is necessary under the Compact for PacifiCorp to receive and hold a federal license to own and operate the Klamath Hydroelectric Project.  If PacifiCorp had not agreed to provide low cost power for irrigation in the Upper Klamath Basin, it would not have been allowed to build the project in the first place.

·         Second, KWUA seeks to implement an affordable low cost rate as specified in the Klamath River Basin Compact.  PacifiCorp’s other ratepayers would not shoulder any new or increased burden. 

·         Third, the power “preference” reflected in the Compact is no different from numerous other power preferences created by federal law.  There is a longstanding federal policy of granting agricultural interests a “preference” right to power developed using federal resources.  Examples: Boulder Canyon Project Act of 1928, 43 USC § 617d; Tennessee Valley Authority Act of 1933, 16 USC § 831; Flood Control Act of 1944, 16 USC § 825s; The Niagra Redevelopment Act of 1957, 16 USC § 836(b)(1); Pacific Northwest Power Planning And Conservation Act of 1981, 16 USC § 839h. 

·         Fourth, not renewing the 1956 Power Contract may precipitate an erosion of PacifiCorp’s retail rate base.  PacifiCorp has estimated a 2500% instantaneous rate hike.  In lieu of simply paying this high rate, the Klamath irrigators are exploring other service options, including the formation of a People’s Utility District (“PUD”).  KWUA notes that if a PUD were formed in Klamath County, this would be within the geographic preference boundary of the Pacific Northwest Power Planning And Conservation Act of 1981, 16 USC § 839h.  Removing Klamath County from PacifiCorp’s rate base would not be beneficial to PacifiCorp’s other retail customers or shareholders. 

VI.       KWUA Has Attempted Without Success To Negotiate A Compromise With PacifiCorp:

·         KWUA has met and negotiated in good faith with PacifiCorp to achieve a suitable power arrangement beyond 2006.  In particular, KWUA has entertained various “credit for value” scenarios proposed by PacifiCorp.  Under this theory, the irrigators would pay tariff irrigation rates, but would receive from PacifiCorp a cash payment or credit for “value” conferred upon PacifiCorp.  This concept has not worked in large part because PacifiCorp steadfastly refuses to recognize any “value” in KWUA’s compromise of its legal entitlements as reflected in the Compact. 

·         PacifiCorp has rejected KWUA’s suggestion that PacifiCorp simply pay the Bureau a “falling water charge” in consideration for PacifiCorp’s occupation of the Klamath River.  KWUA believes that a very modest falling water charge, calculated either on a per kilowatt or per cubic foot of water basis, could produce a reasonable settlement.  The Bureau has indicated that it has received a falling water charge in connection with other irrigation projects.  PacifiCorp’s response has been to simply conflate the broad concept of “falling water charge” with the narrow term-of-art “headwater benefit,” which is limited under the Federal Power Act.  In short, KWUA has not asserted a legal right to a falling water charge—but has proposed this as a means of satisfying its legal right under the Compact to low cost power.

·         PacifiCorp has made no effort to address its inequitable demand charges.  KWUA has inquired as to why PacifiCorp intends to impose, as part of its retail tariff, a year-round demand charge for a load that essentially exists only two months out of the year.  Because PacifiCorp has not addressed this issue, KWUA intends to present evidence to the Oregon and California PUCs that this demand charge is not just and reasonable.

·          Any settlement negotiated between the Bureau and PacifiCorp may require federal legislation for implementation.  KWUA is aware that the Bureau has attempted to negotiate a renewal of the 1956 Power Contract.  KWUA is supportive of the Bureau’s efforts, but notes that further federal legislation may be required enabling the Bureau to pass monetary or other considerations through to the irrigators. 

 

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Page Updated: Thursday May 07, 2009 09:14 AM  Pacific


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