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Date: Fri, 27 Jul 2001 13:44:05 -0700 (PDT)
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Subject: Western Issues Update 7/27/01
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Below is the weekly western issues update sent to Tim earlier.  If you have=
 any questions, please feel free to contact me (x39510).

Executive Summary
BC Hydro=20
British Columbia Energy Politics
BPA Developments=20
Forestry Issues
Smelter Update=20

BC Hydro
The crown jewel in BC government's arsenal, BC Hydro is in a holding patter=
n until they can name a new Chair to head up the corporation.  Brian Smith =
was replaced with interim Chairman Robert Fairweather, but we do not expect=
 Fairweather to have a long tenure - the word is Gordon Campbell and compan=
y are seeking a replacement to fill Mr. Smith's shoes as early as mid-Augus=
t.  We expect key changes to occur in Hydro's executive and board of direct=
ors following the appointment of the new Chair.  Although senior management=
 at BC Hydro is relatively comfortable with the company's financial positio=
n and competitiveness, they will be pursuing a strategy of expanding genera=
tion capability through new dams and oil/gas exploration, pending environme=
ntal approvals.  As a part of BC Hydro's move to look for additional genera=
ting capacity, they are turning to a pair of mega-projects that were scrapp=
ed a decade ago.  BC Hydro has commissioned new technical review studies of=
 the 900MW Site C hydroelectric project near Fort St. John and the 2,000 MW=
 coal-fired Hat Creek project near Kamloops.

In terms of a rate hearing, we do not expect BC Hydro to conduct a rate hea=
ring until the new Chairman is appointed.  It will be difficult to get rate=
s raised, although with the government budget deficit looming there will be=
 considerable pressure to begin looking this direction.  Another key revenu=
e challenge for BC Hydro will be responding to the recent price caps impose=
d by FERC on western power markets and potential power purchase refunds to =
California (though their contributions are not immense, they are still sign=
ificant).=20

BC Energy Politics
Things have really heated up in Victoria now that the new Campbell administ=
ration is settling in.  Earlier, we reported that the Office of the Premier=
 had taken control of all the agencies and political staffing decisions.  W=
ith 77 of the 79 elected members of the BC Legislature, sources close to th=
e Premier indicate change will be "fast and furious" to offset any local co=
verage from volatile media.  The BC Government's primary focus will be to s=
timulate the economy while trying to restrain government spending.  To that=
 extent, they have instituted an across the board 25% stimulus tax cut and =
will have to deal with the deficit issues that that cut entails.  One of th=
e ways they are looking to balance things out is to outsource Crown assets =
and look for other areas to generate revenue - new sources of government re=
venue through oil and gas exploration and energy will be a top priority.

Minister of Energy and Mines, Richard Neufeld, will be one of the main driv=
ers behind the current fast-tracking of the offshore oil and natural gas ex=
ploration.  There is a great deal of pressure on the BC Liberals to balance=
 this budget and they will be looking at ways of delivering revenue sources=
 through oil and gas exploration permitting as a short-term solution.  Neuf=
eld has reviewed the Backhouse Report (Northern Development Commission) reg=
arding the need for continued local public input and has basically tossed i=
t aside - the report had not gone far enough to please the Liberals.  Other=
 things on the Minister of Energy's agenda:

?=09Oppose Sumas 2 power project & phase out Burarrd Thermal (Sumas has bee=
n a serious bone of contention between Washington State and Canada)
?=09With Core Review, protect BC Hydro and all of its core assets, includin=
g dams, reservoirs, and power lines under public ownership
?=09Restore independent BC Utilities Commission, to re-regulate BC Hydro's =
electricity rates
?=09Maintain the longstanding ban on bulk water exports
?=09Encourage mineral exploration
?=09Promote clean and renewable alternative energy sources
?=09Review and make recommendations regarding allocation of funding that ha=
s been frozen for the "Power for Jobs" Initiative

BPA
Senator Patty Murray moved last week to drop the review provision on the Se=
nate bill, which would have opened up an additional $2 billion for BPA borr=
owing authority.  If Senator Murray is successful, the measure could have a=
 substantial impact on BPA financial solvency.

With the exception of the approximately $5 million spill over the Dalles an=
d Bonneville dams, BPA has already foregone a major summer spill to protect=
 endangered salmon species. =20

Representatives of four Northwest governors ventured to Washington DC last =
week to express concerns over the new hydro BiOp and how it will be impleme=
nted.  States were concerned about their lack of input in the implementatio=
n process - a plan being developed by action agencies and spearheaded by BP=
A.  The plan has been put on hold pending a review headed by Interior Depar=
tment lawyer Ann Klee.  Idaho and Washington representatives showed concern=
 that the BiOp could be overturned in court - they were concerned that the =
NMFS underestimated the risk of extinction of Snake River stocks and that i=
t was illegal to rely on off-site mitigation to help satisfy the hydro syst=
em's ESA obligations.  While the administration has said it plans to double=
 past expenditures to implement the BiOp, nobody at the meeting could come =
up with just what the previous BiOp costs were - for now, the salmon plan i=
s pure lip service.

Smelter Curtailments
Kaiser: Faced with declining aluminum prices, which have decreased 9% from =
last year, Kaiser is in a difficult position due to the fact that they are =
maintaining a level of infrastructure and personnel-readiness which will al=
low them to restart 4-3/4's lines of their operations on the fly.  Should t=
his curtailment last longer than a year, it would be cost-prohibitive for t=
hem to continue incurring that infrastructure expense.  Kaiser has gone on =
the record to say it is still open to signing load a curtailment agreement =
with BPA, but it is unclear at this time whether BPA foresees a benefit in =
signing an agreement considering short-term and perceived mid-term electric=
ity price decreases.  We are continuing to monitor this situation as it dev=
elops, although an agreement in the short-term seems doubtful.

Alcoa: Recently mentioned in the press, Canada's Newfoundland government an=
d U.S. aluminum giant Alcoa Inc. announced Thursday they would conduct a fe=
asibility study to possibly revive the stalled Lower Churchill hydroelectri=
c project in the remote Labrador region.  The generating station on Gull Is=
land could produce up to 2,000 MW of electricity.  Costs of the project are=
 estimated at some C$4 billion ($2.6 billion), far below the C$10 billion o=
riginally thought.  With a 16% drop in net income due to slackening global =
aluminum demand and higher energy prices, Alcoa has suffered along with the=
 rest of the aluminum industry to find cheaper, less volatile sources of el=
ectricity.  Along with their ongoing negotiations with BC Hydro, it appears=
 Alcoa is making a determined push to work with the Canadians to play all s=
ides of a competitive electricity market.

Forestry Issues
There are a number of fuel management projects which are going on right now=
 in the Bitterroot National Forest.=20

Ecosystem Management Burn - Burnt Fork Ecoburn - Completed 7/01
Fuels Reduction - Sheafman Fuel Project - Completed
Fuels Reduction - Darby Ranger District
*  Trapper Overlook - 10/01 expected decision date
*  Como Restoration - 9/01 expected decision date
*  Como Campground - 9/01 expected decision date
Fuels Reduction - Sula Ranger District
*  Springer Memorial Fuel Hazard Reduction Project - completed
Multi-Forest Ecosystem Management Burn - West Fork Ranger District
*  Salmon River Canyon Project - Ongoing, Preparing Supplemental Draft
Fuels Reduction - Sula Ranger District
*  Sam Billings Camp Ground Fuel Reduction - Completed
Steep Creek Fuel Reduction - 10/01 expected decision date
