**DEPARTMENT OF ENERGY**

**BONNEVILLE POWER ADMINISTRATION**

**Legal Interpretation of Section 7(b)(2) of the Pacific Northwest**

**Power Planning and Conservation Act**

**I. Background**

**A. Relevant Statutory Provisions**

BPA is charged with the responsibility of implementing section 7(b)(2)
of the Northwest Power Act. An agency's interpretation of the statute it
is charged to administer is entitled to great deference; in particular,
the United States Supreme Court has held that "it is clear that the
Administrator\'s interpretation of the Regional \[Northwest Power\] Act
is to be given great weight." *Aluminum Co. of America v. Central
Lincoln Peoples' Util. Dist.,* 467 U.S. 380, 389 (1984).

Basic principles of statutory construction must be followed in
interpreting the Northwest Power Act. These principles require that
particular provisions of a statute be interpreted to give effect to its
overall purposes. *United States v. Am Trucking Ass'n*, 310 U.S. 534,
543 (1950). Wherever possible, statutory provisions should be construed
so as to be consistent with each other. *Adams v. Howerton*, 673 F.2d
1036, 1040 (9th Cir. 1982), cert. denied, 458 U.S. 1111 (1982). Thus,
BPA interprets the Northwest Power Act in a manner which seeks
consistency among the requirements of each section of the Northwest
Power Act.

In addition to the Northwest Power Act, BPA is governed by the
Bonneville Project Act. 16 U.S.C. § 832, *et seq.*, the Federal Columbia
River Transmission System Act, 16 U.S.C. § 838 *et seq.*, and the Flood
Control Act of 1944, 16 U.S.C. § 825 *et seq.* These statutes require
BPA to set rates, in accordance with sound business principles, at
levels sufficient to recover BPA's total system costs, including
repayment of the Federal Treasury investment in the Federal Columbia
River Power and Transmission System. All statutory provisions concerning
the timely recovery of BPA's revenue requirement are relevant to the
interpretation of the Northwest Power Act. For "\[w\]hen there are two
acts upon the same subject, the rule is to give effect to both if
possible." *Morton v. Mancari*, 417 U.S. 535, 551 (1974), quoting
*United States v. Borden Co.*, 308 U.S. 188, 198 (1939).

Section 7 of the Northwest Power Act, 16 U.S.C. § 839e, contains a
number of directives that the BPA Administrator must consider in
establishing rates for the sale of electric energy and capacity and for
the transmission of non-Federal power. Section 7(b)(2), commonly
referred to as the "rate test," is one of these directives. Section
7(b)(2) of the Northwest Power Act, 16 U.S.C. § 839e(b)(2), provides:

> After July 1, 1985, the projected amounts to be charged for firm power
> for the combined general requirements of public body, cooperative, and
> Federal agency customers exclusive of amounts charged such customers
> under subsection 7(g) of this section for the costs of conservation,
> resource and conservation credits, experimental resources and
> uncontrollable events, may not exceed in total, as determined by the
> Administrator, during any year after July 1, 1985, plus the ensuing
> four years, an amount equal to the power costs for general
> requirements of such customers if, the Administrator assumes that\--
>
> \(A\) the public body and cooperative customers' general requirements
> had included during such five-year period the direct service
> industrial customer loads which are
>
> \(i\) served by the Administrator, and
>
> \(ii\) located within or adjacent to the geographic service boundaries
> of such public bodies and cooperatives;
>
> \(B\) public body, cooperative, and federal agency customers were
> served, during such five-year period, with Federal base system
> resources not obligated to other entities under contracts existing as
> of December 5, 1980, (during the remaining term of such contracts)
> excluding obligations to direct service industrial customer loads
> included in subparagraph (A) of this paragraph;
>
> \(C\) no purchases or sales by the Administrator as provided in
> section 5(c) were made during such five-year period;
>
> \(D\) all resources that would have been required, during such
> five-year period, to meet remaining general requirements of the public
> body, cooperative and Federal agency customers (other than
> requirements met by the available Federal base system resources
> determined under subparagraph (B) of this paragraph) were\--
>
> \(i\) purchased from such customers by the Administrator pursuant to
> section 6, or
>
> \(ii\) not committed to load pursuant to section 5(b),
>
> and were the least expensive resources owned or purchased by public
> bodies or cooperatives; and any additional needed resources were
> obtained at the average cost of all other new resources acquired by
> the Administrator; and
>
> \(E\) the quantifiable monetary savings, during such five-year period,
> to public body, cooperative and federal agency customers resulting
> from\--
>
> \(i\) reduced public body and cooperative financing costs as applied
> to the total amount of resources, other than Federal base system
> resources, identified under subparagraph (D) of this paragraph, and
>
> \(ii\) reserve benefits as a result of the Administrator's actions
> under this Act
>
> were not achieved.

16 U.S.C. § 839e(b)(2).

**B. Scope of Interpretation**

This Legal Interpretation resolves only the basic legal issues necessary
to implement section 7(b)(2) and modifies the first Legal Interpretation
issued June 8, 1984. *See* Legal Interpretation of Section 7(b)(2) of
the Pacific Northwest Electric Power Planning and Conservation Act, 49
Fed. Reg. 23,998 (June 8, 1984).

**II. Interpretation**

**A. Definitions**

This section contains definitions applicable to section 7(b)(2). Terms
identified in the Northwest Power Act have the same meaning in this
interpretation, unless further defined.

1\. [Relevant Rate Case]{.underline}: The section 7(i) wholesale power
rate adjustment proceeding being conducted at the time the projections
for section 7(b)(2) are made, and in which any adjustment to rates in
accordance with section 7(b)(2) may be reflected.

2\. [General Requirements]{.underline}: The public body, cooperative and
Federal agency customers' electric power assumed in the Relevant Rate
Case to be purchased from BPA, exclusive of new large single loads.
General Requirements are limited to power purchased from BPA under
section 5(b) of the Northwest Power Act; section 5(c) purchases from BPA
are not included.

3\. [7(b)(2) Customers]{.underline}: Those firm power customers of BPA
that are listed in section 7(b)(2) of the Northwest Power Act as subject
to the rate test, *viz*, public bodies, cooperatives, and Federal
agencies.

4\. [Applicable 7(g) Costs]{.underline}: The costs identified in section
7(g) of the Northwest Power Act that are also listed in section 7(b)(2),
*viz*, costs chargeable to 7(b)(2) Customers for conservation, resource
and conservation credits, Experimental Resources and Uncontrollable
Events.

5\. [Uncontrollable Event]{.underline}: A discrete event which differs
from the continuum of changing events that occur in nature, business and
government (such as changes in water conditions, aluminum prices, and
electricity markets) and that are routinely reflected in ratemaking.

6\. [Experimental Resources]{.underline}: Resources that are undergoing
research and development and are funded by BPA in full or in part.

7\. [Five-Year Period]{.underline}: The rate recovery period of the
Relevant Rate Case, plus the ensuing four years. If the Relevant Rate
Case has more than a one-year rate recovery period, the Five-Year Period
will be greater than five years.

8\. [Program Case]{.underline}: The entire process of calculating rates
to be charged in the Five-Year Period of the Relevant Rate Case under
the provisions of the Northwest Power Act other than section 7(b)(2),
including all specific data, assumptions, and results.

9\. [7(b)(2) Case]{.underline}: The entire process of calculating rates
for the relevant Five-Year Period under the provisions of section
7(b)(2) of the Northwest Power Act, including all specific data,
assumptions, and results.

10\. [Five Assumptions]{.underline}: The five differences between the
Program Case and the 7(b)(2) Case specified in subsections (A) through
(E) of section 7(b)(2) of the Northwest Power Act.

11\. [DSI Loads]{.underline}: Those loads of direct service industries
(DSI) that are forecast to be served by BPA, during the Five-Year
Period, pursuant to sections 5(d)(1) or 5(f) of the Northwest Power Act.

12\. [Within or Adjacent]{.underline}: Relating to DSI customer loads
determined in accordance with section 7(b)(2)(A) to be electrically
within or adjacent to the geographic service territories of 7(b)(2)
Customers.

13\. [Quantifiable]{.underline} [Monetary]{.underline}
[Savings]{.underline}: The change in annual costs attributable to
differences in resource financing or Reserve Benefits.

14\. [Reserve]{.underline} [Benefits]{.underline}: The annual financial
value of interruptible load that forestalls a resource acquisition by
virtue of the ability to curtail the load at a time when off-line
generation would otherwise need to be available to startup and serve
load during unexpected conditions.

**B. General Approach** **and Specific Issues of** **Interpreting**
**Section 7(b)(2)**

Section 7(b)(2) assures that 7(b)(2) Customers are charged no more for
their General Requirements after July 1, 1985, than they would have been
charged if the Five Assumptions were to be realized. These assumptions
direct BPA to hypothesize power supply arrangements between itself and
its customers that are quite different from reality. Implementation of
the Five Assumptions listed in section 7(b)(2) is by nature an exercise
in speculation. This interpretation was undertaken to reduce this
inherent speculation insofar as possible.

**1. Interpretation: Section 7(b)(2)** **limits** **the 7(b)(2) Case to
the Five Assumptions listed in section 7(b)(2)** **and** **the**
**secondary effects** **of those assumptions.**

**Discussion:**

The Northwest Power Act provides that after July 1, 1985, the 7(b)(2)
Customers' power costs "may not exceed ... as determined by the
Administrator" the power costs for General Requirements based on the
enumerated Five Assumptions. 16 U.S.C. § 839e(b)(2). This language
grants the Administrator discretion to determine the manner in which the
Five Assumptions of section 7(b)(2) are applied and the rate test is
implemented. However, BPA recognizes that the reasonableness of
methodologies used to implement section 7(b)(2) will be tested in the
Relevant Rate Case.

The Administrator will exercise his discretionary authority in the
following manner. Except for the Five Assumptions specified in section
7(b)(2), all underlying premises will remain constant between the
Program Case and the 7(b)(2) Case. Assumptions not specified by the
statute will not be considered. Secondary effects, however, of the Five
Assumptions will be given full recognition in the modeling of the
7(b)(2) Customers' power costs in the 7(b)(2) Case. This general
approach will allow the 7(b)(2) Case to be modeled under the same
accepted ratemaking techniques used in the Program Case. This approach
will also avoid the modeling of a hypothetical world that attempts to
reflect in extreme detail what would have occurred had the Northwest
Power Act not been enacted.

The legislative history of the Northwest Power Act supports limiting the
assumptions of the 7(b)(2) Case to those specified in the statute. The
House Committee on Interstate and Foreign Commerce Report accompanying
S. 885 (the bill that became the Northwest Power Act) notes that
"\[t\]he assumptions to be made by the Administrator in establishing
this ceiling are specifically set forth." H. Rep. No. 976-I, 96th Cong.,
2d Sess. 68 (1980). Similarly, the Report of the House Committee on
Interior and Insular Affairs declares that "\[s\]ubsection 7(b)(2)
establishes a 'rate ceiling' for BPA's preference customers, and
specifies the method of calculating this ceiling..." H. Rep. No. 976-II,
96th Cong., 2d Sess. 52 (1980).

Legislative history also supports including the unavoidable secondary
effects of the assumptions listed in the Northwest Power Act. In
particular, in addressing Reserve Benefits, Appendix B to the Report of
the Senate Committee on Energy and Natural Resources provides that in
addition to costs specifically described in sections 7(b)(2)(B) and (D),
the Administrator is to consider "\[a\]ny other general system operating
costs, including reserves..." S. Rep. No. 272, 96th Cong., 1st Sess.
(1979), Appendix B at 58.

As an illustration of the secondary effects referred to above, BPA has
identified two secondary effects of the Five Assumptions found in
section 7(b)(2). These effects involve surplus levels and secondary
energy markets. The secondary effects must be included in section
7(b)(2) methodologies as natural consequences of the Five Assumptions in
section 7(b)(2) on the results of underlying premises that are held
constant between the Program Case and the 7(b)(2) Case. Surplus levels
and the secondary energy market must change as a natural consequence of
the Five Assumptions. As the DSIs are assumed to shift to the private
utilities and 7(b)(2) Customers under section 7(b)(2), BPA's
load/resource balance changes. This change will affect the level of
BPA's surplus. The secondary energy market will also change; the top
quartile of DSI Loads will not be served by BPA's secondary energy.

Section 7(b)(2) requires BPA to assume that the 7(b)(2) Case is
identical to the Program Case except for those differences required by
the Five Assumptions set out in section 7(b)(2)(A)-(E). Present modeling
techniques used in the Program Case, which will be used in the modeling
of the 7(b)(2) Case, incorporate secondary effects.

**2. Interpretation: Implementation of section 7(b)(2), and any
subsequent reallocation pursuant to section 7(b)(3), will not conflict
with the requirements of section 7(a).**

**Discussion:**

BPA will conscientiously follow the requirements of section 7(b)(2) to
perform the "rate test" for its public body, cooperative and Federal
agency customers. If the results of the rate test indicate that BPA must
recover costs in excess of those allowed under section 7(b)(2), BPA will
implement the section 7(b)(3) supplemental rate charge provision for
that purpose. BPA's concern is that failure to recover some, or all, of
the reallocated costs "through supplemental rate charges for all other
power sold by the Administrator to all customers" may result in BPA's
inability to meet the requirements of section 7(a). Such a
determination, if it occurs, would be rigorously documented and exposed
to careful review during the section 7(i) process for the Relevant Rate
Case. Should this occur, BPA would be forced to resolve a possible
conflict among sections 7(b)(2), 7(b)(3), and 7(a).

Section 7(a) of the Northwest Power Act requires that BPA rates recover
the costs of the electric power and transmission systems, including the
repayment of Federal Treasury investments in those systems. Section 7(a)
reaffirms this long-standing obligation which was articulated earlier in
the Bonneville Project Act and the Federal Columbia River Transmission
System Act. Section 7(b)(2) must be applied in a manner which enables
BPA to set rates at levels sufficient to recover costs, or the rates
will not receive confirmation and approval from the Federal Energy
Regulatory Commission. *See* 16 U.S.C. § 839e(a)(2).

The legislative history of the Northwest Power Act supports application
of section 7(b)(2) in a manner consistent with BPA's primary statutory
obligation that its rates recover costs. The House Interior Committee
report declares that:

> Section 7 of the legislation sets out the requirements BPA must follow
> when fixing rates for the power sold its customers under this
> legislation. Subject to the general requirement (contained in section
> 7(a)) that BPA must continue to set its rates so that its total
> revenues continue to recover its total costs, BPA is required by the
> legislation to establish the following rates: \[report continues by
> setting out rate structure of the Act\].

H. Rep. No. 976-11, 96th Cong., 2d Sess. 36 (1980).

Section 7(a)(2) illustrates the importance of BPA's statutory obligation
to set rates at levels sufficient to collect its costs. Section 7(a)(2)
states that FERC cannot approve BPA's rates unless the rates "are
sufficient to assure repayment of federal investment in the Federal
Columbia River Power System over a reasonable number of years after
first meeting the Administrator's other costs," 16 U.S.C.
§ 839e(a)(2)(A), and "are based upon the Administrator's total system
costs..." 16 U.S.C. § 839e(a)(2)(B). Indeed:

> BPA is a self-financed agency under the terms of the Federal Columbia
> River Transmission System Act of 1974. This means that BPA receives no
> appropriations. It is required by law to cover its full costs through
> its own revenues derived from the sale of power and other services...
> The United States of America does not stand behind BPA's obligations.
> ... BPA alone must meet these obligations, and BPA's rates cannot be
> approved by FERC unless they are sufficient to meet these obligations.
> These requirements, and the lack of any Federal guarantees, are made
> explicit in sections 6(j) and 7(a) of S 885, even though they are also
> explicit in the Federal Columbia River Transmission System Act.

126 Cong. Rec. H9843 (daily ed. Sep. 29, 1980) (statement of Rep.
Ullman).

BPA is neither predetermining the results of the rate test nor
suggesting a disregard for section 7(b)(2) with this discussion. BPA is
not suggesting a solution to any problem arising from a potential
conflict among sections 7(a), 7(b)(2), and 7(b)(3). BPA is merely
attempting through this interpretation to alert its customers and the
public to one possible problem which may present itself in the future.

**3. Interpretation:** **Applicable 7(g) Costs** **are to be**
**excluded from** **the Program Case rates** **and the 7(b)(2) Case
rates** **prior to** **comparison** **with the 7(b)(2) Case** **rates.**

**Discussion:**

Section 7(b)(2) states: "...the projected amounts to be charged for firm
power for the combined general requirements of public body, cooperative
and Federal agency customers, exclusive of amounts charged such
customers under subsection (g) for the costs of conservation, resource
and conservation credits, experimental resources and uncontrollable
events, may not exceed in total, ... an amount equal to the power costs
for general requirements of such customers if the Administrator
assumes..." the Five Assumptions. 16 U.S.C. § 839e(b)(2).

The foregoing language describes the basic comparison of the Program
Case and the 7(b)(2) Case in performing the section 7(b)(2) rate test.
In particular, it sets forth the instructions on how BPA is to initially
construct the two revenue requirements that will serve as the foundation
of the rate test comparison. The language begins with the Program Case.
The revenue requirement in the Program Case rate is to be constructed
from the "projected amounts to be charged for firm power" for the
"general requirements" of BPA's preference customers. This phrase refers
to the firm power costs BPA is proposing to recover through its 7(b)
rates. Thus, BPA is to start with its total revenue requirement in the
Program Case.

The statutory language further directs BPA to modify this revenue
requirement by excluding "the amounts charged such customers under
subsection (g) for the costs of conservation, resource and conservation
credits, experimental resources and uncontrollable events..." In other
words, BPA must subtract the identified 7(g) costs (referred to
hereafter as Applicable 7(g) Costs) from the Program Case revenue
requirement. This reduces the revenue requirement in the Program Case,
resulting in the power costs to be recovered in the Program Case.

The second half of the above-noted language then describes how BPA is to
initially construct the revenue requirement in the 7(b)(2) Case.
Specifically, the 7(b)(2) Case revenue requirement is equal to "the
power costs for general requirements of such customers..." as modified
by the Five Assumptions. The phrase "power costs for general
requirements of such customers" is a direct reference back to the same
power costs, general requirements, and customers discussed in the
earlier clause when calculating the costs of the Program Case. The only
substantive textual difference between this clause and the previously
discussed language is the reference to "power cost." That difference,
however, is immaterial because the phrase "power costs" is simply a
short-hand reference to the longer description of "the amounts to be
charged for firm power" used in the preceding section. Because the two
clauses are identical in all material respects, the two provisions
should be interpreted consistently. Consequently, the same power costs
that were used to serve the "general requirements" in the Program Case
should be used to construct the revenue requirement for the 7(b)(2)
Case; that is, "the projected amounts to be charged for firm power ...
exclusive of" Applicable 7(g) costs.

This interpretation, in addition to being consistent with the
aforementioned statutory text, also makes practical sense when actually
implementing the 7(b)(2) rate test. First, having symmetry between the
initial power costs in the Program Case and the 7(b)(2) Case ensures
that the later application of the Five Assumptions is the central reason
the rate test triggers or fails to trigger. Congress specifically
identified the Five Assumptions as the factors the Administrator was to
"assume" in conducting the rate test. By limiting the cost differences
between the Program Case and the 7(b)(2) Case before the application of
these assumptions, BPA can give the full and proper effect to the rate
test construct envisioned by Congress. Without this symmetry, the rate
test results may become skewed by factors other than the Five
Assumptions. For example, if Applicable 7(g) costs were excluded from
the Program Case (making it less expensive), but included in the 7(b)(2)
Case (making it more expensive), it could create a cost incongruity that
could become a determinative factor in whether the rate test will
trigger. Having an equilibrium between the costs in the Program Case and
the 7(b)(2) Case reduces these unintended consequences and preserves the
Congressionally identified drivers of the rate test--- the Five
Assumptions.

Second, this interpretation also avoids potential conflicts with the
remaining sections of the 7(b)(2) rate test. Specifically, if the "power
costs" used in the 7(b)(2) Case were not interpreted to mean the same
power costs in the Program Case, a conflict would occur between the
above-mentioned paragraph and section 7(b)(2)(D)(i), the fourth of the
Five Assumptions. The fourth assumption specifies that any remaining
General Requirements in the 7(b)(2) Case that have not been satisfied by
Federal Base System (FBS) resources pursuant to the second assumption
(*i.e.*, section 7(b)(2)(B)) are met with resources taken from a
resource stack developed in accordance with subsection 7(b)(2)(D). *See*
Issue 11 *supra*.

Section 7(b)(2)(D) provides:

> all resources that would have been required, during such five-year
> period, to meet remaining general requirements of the public body,
> cooperative and Federal agency customers (other than requirements met
> by the available Federal base system resources determined under
> subparagraph (B) of this paragraph) were --
>
> \(i\) purchased from such customers by the Administrator pursuant to
> section 6, or
>
> \(ii\) not committed to load pursuant to section 5(b),
>
> and were the least expensive resources owned or purchased by public
> bodies and cooperatives; and any additional needed resources were
> obtained at the average cost of all other resources acquired by the
> Administrator...

16 U.S.C. § 839e(b)(2)(D). Resources that meet the criteria identified
in section 7(b)(2)(D) are assumed to be in a "resource stack," available
for use to serve the General Requirements of the 7(b)(2) Customers in
the 7(b)(2) Case. This resource stack includes three types of resources.
Type 1 resources are resources the Administrator acquired or plans to
acquire from 7(b)(2) Customers pursuant to section 6 of the Northwest
Power Act. Type 2 resources are not committed to load pursuant to
section 5(b). Type 3 resources are any remaining needed resources. *See*
Issue 11 *supra*. It is the Type 1 resources that create an anomaly in
the treatment of 7(g) costs.

When resources are included in the resource stack, they are not used to
serve General Requirements in the 7(b)(2) Case unless needed and
selected from the stack. Section 7(b)(2)(D) refers to "resources ...
purchased from such \[7(b)(2)\] customers by the Administrator pursuant
to section 6 \[of the Northwest Power Act\]." *Id.* Conservation is a
resource that is assumed to be available in the resource stack. The
Northwest Power Act specifically defines conservation as a resource:

> "Resource" means -- electric power, including the actual or planned
> electric power capability of generating facilities, or actual or
> planned *load reduction resulting from* direct application of a
> renewable energy resource by a consumer, or from *a* *conservation
> measure*.

16 U.S.C. § 839a(19) (emphasis added). Furthermore, conservation is
acquired pursuant to section 6 of the Act. Section 6 provides, *inter
alia*, that "\[t\]he Administrator shall acquire such resources through
conservation..." 16 U.S.C. § 839d(a)(1). Therefore, conservation is a
Type 1 resource and must be included in the resource stack.

Conservation resources and billing credit resources, however, can only
be included in the resource stack if Applicable 7(g) costs are removed
from the 7(b)(2) Case. Recall that the Applicable 7(g) costs exclude the
cost "*of conservation, resource and conservation credits*, experimental
resources and uncontrollable events..." 16 U.S.C. § 839e(b)(2) (emphasis
added). The import of leaving the Applicable 7(g) costs in the 7(b)(2)
Case is that the costs of "conservation, resource and conservation
credits" will remain in the 7(b)(2) revenue requirement. With
conservation costs already in the costs of the 7(b)(2) Case, there is no
logical way for conservation resources to be available *again* in the
resource stack. To do so would be to effectively double-count the
conservation costs -- first in the 7(b)(2) revenue requirement (because
they were never taken out), and second as the costs of a Type 1 resource
(assuming it is selected). The only way to avoid this double-counting is
to either remove the conservation costs from the 7(b)(2) Case revenue
requirement *or* remove conservation resource costs from the resource
stack.

In BPA's view, the more appropriate alternative is the former. Treating
conservation as a Type 1 resource gives full effect to section
7(b)(2)(D)(i). The Administrator will be fulfilling the Congressional
mandate to include resources in the 7(b)(2) Case resource stack
"purchased from such customers by the Administrator pursuant to section
6...," *e.g*., conservation resources. 16 U.S.C. § 839e(b)(2)(D)(i). By
contrast, the latter alternative of removing all conservation costs from
the resource stack would completely frustrate the purpose of referring
to section 6 resources in section 7(b)(2)(D)(i). The better
interpretation is therefore to include conservation as a Type 1
resource. To effectuate this interpretation, Applicable 7(g) costs,
which include conservation costs, must be removed from the 7(b)(2) Case
revenue requirement.

In summary, BPA will interpret the aforementioned statutory language as
meaning that the Program Case and 7(b)(2) Case must begin with the same
power costs. That is, the Applicable 7(g) costs will be excluded from
both the Program Case and the 7(b)(2) Case prior to application of the
Five Assumptions. This interpretation is consistent with the statutory
language and the purpose of the section 7(b)(2) rate test. It also
avoids unnecessary conflicts with, and gives full effect to, the other
provisions of section 7(b)(2).

**4.** **Interpretation:** **The appropriate Five-Year Period is the
rate recovery period for the applicable rate case plus the ensuing four
years.**

**Discussion:**

Section 7(b)(2) states: "...during any year after July 1, 1985, plus the
ensuing four years, ..." and several times thereafter "...during such
five-year period..." "Any year," in this context, refers to the period
of time applicable to the opening statement of section 7(b)(2), namely,
the period over which "the projected amounts to be charged for firm
power" is applicable, otherwise known as the revenue recovery period.

BPA has had varying lengths of revenue recovery periods in the 22 years
between July 1, 1985, and October 1, 2007. Four times BPA has used
two-year periods, twice BPA has used five-year periods, once for
one-year, once for three-years, and once for 27 months. In each of these
periods, the rate test was performed on the basis that the revenue
recovery period was the "first year" of the Five-Year Period. For each
of these rate tests, the four years subsequent to the last year of the
revenue recovery period were appended to form the Five-Year Period.

It is reasonable to consider that the Five-Year Period might encompass
more than 60 months. As noted above, the rate test is to compare the
projected amounts to be charged for firm power. In the instance of a
revenue recovery period that encompasses more than 12 months, the
projected amounts to be charged are developed for the entire revenue
recovery period. Therefore, to be consistent with the development of the
amounts to be charged, it is reasonable to consider that time period, be
it for 12 months or more, the first year of the period of consideration
for the rate test.

**5. Interpretation: 7(b)(2) Customers' loads include** **DSI Loads that
are** **Within or Adjacent to the 7(b)(2) Customers' service
territories.**

**Discussion:**

Section 7(b)(2)(A) provides that BPA is to assume that "the public body
and cooperative customers' general requirements had included during such
five-year period the direct service industrial customer loads which are:
(i) served by the Administrator, and (ii) located within or adjacent to
the geographic service boundaries of such public bodies and
cooperatives..." 16 U.S.C. § 839e(b)(2)(A). The plain language of
section 7(b)(2)(A) requires the Administrator to assume that 7(b)(2)
Customers' loads include any Within or Adjacent DSI Loads during the
Five-Year Period.

The legislative history of the Northwest Power Act also supports BPA's
interpretation of the statute. In the analysis of the section 7(b)(2)
directives contained in Appendix B to the Senate Report, S. Rep. No.
272, 96th Cong. 1st Sess., at 65-79 (1979), forecasted DSI Loads were
transferred from BPA to 7(b)(2) Customers for the entire test period
regardless of contracts in effect as of the effective date of the
Northwest Power Act. In the projections contained in Appendix B,
calculations of public agency loads for the 7(b)(2) Case included a full
85 percent of projected DSI Loads beginning in 1980 (85 percent was the
amount determined to be "Within or Adjacent" to preference agency
service areas). Although Appendix B is not conclusive evidence of
legislative intent, it was "an important part of the common
understanding about how the costs of resources would be distributed as a
result of \[the Northwest Power Act\]." *Id.* at 31. Appendix B is a
useful tool for statutory construction where it does not conflict with
the language of the statute.

**6. Interpretation: BPA will use Appendix B of the Senate Report** **to
assist in** **determining which** **DSI Loads are** **Within or Adjacent
to the geographic service** **boundaries of 7(b)(2) Customers.**

**Discussion:**

Section 7(b)(2)(A) requires the Administrator to assume that during the
relevant Five-Year Period, "the public body and cooperative customers'
general requirements had included ... the direct service industrial
customer loads which are ... located within or adjacent to the
geographic service boundaries of such public bodies and cooperatives..."
16 U.S.C. § 839e(b)(2)(A). It is not apparent from the statute how BPA
is to resolve the question of which DSIs are Within or Adjacent to
public body and cooperative customers' boundaries. Therefore, BPA must
look to legislative history to resolve the ambiguity.

The legislative history of the Northwest Power Act indicates that a
determination of which DSIs are Within or Adjacent to public body and
cooperative customers' boundaries was made in Appendix B. S. Rep. No.
272, 96th Cong., 1st Sess., Appendix B at 66. Appendix B includes a
table listing the DSIs "within BPA preference customers' service areas,"
DSIs "adjacent to BPA preference customers' service areas" and those
DSIs that "could not readily be served by BPA preference customers."
*Id.*

The Within or Adjacent table in the numerical analysis in Appendix B is
accompanied by a narrative explanation which states that the loads for
establishing resource requirements under section 7(b)(2) will include
"DSI total loads within or adjacent to the service territory of the
public bodies and cooperatives. (85 percent of existing DSIs as shown in
the attached table)." *Id.* at 58. The detailed nature of the Within or
Adjacent table and the narrative explanation in Appendix B convince BPA
that Congress intended the Appendix B table to be used in resolving
which DSIs are Within or Adjacent to the service territory of public
body and cooperative customers. The Appendix B table will be disregarded
only if conditions of service to those DSI customers change, such as in
the case of termination of BPA service to a DSI industrial plant or if
the location of the DSI changes from an IOU service territory to a
public utility service territory.

Adjacent will be assessed on electrical connections rather than a
strictly locational basis. Circumstances may occur where a DSI's
location may be outside of a 7(b)(2) Customer's service territory, but a
direct electrical connection exists between the DSI and the 7(b)(2)
Customer. Conversely, a DSI's location may be inside a 7(b)(2)
Customer's service territory, but no direct electrical connection exists
between the DSI and the 7(b)(2) Customer. This determination will
consider normal operating electrical connections and disregard emergency
connections.

**7. Interpretation: All DSI Loads assumed to be placed on 7(b)(2)
Customers will be treated as firm** **loads.**

**Discussion:**

Section 7(b)(2)(A) provides that BPA is to assume "that the public body
and cooperative customers' general requirements had included during such
five-year period the direct service industrial customers loads..." 16
U.S.C. § 839e(b)(2)(A). Section 7(b)(2)(A) does not expressly state the
nature or quality of service assumed to be provided by the public bodies
and cooperatives to the relevant DSI Loads.

The DSI Loads originally served by BPA under the Northwest Power Act
included three quartiles that were firm loads and one quartile (the
first quartile) that BPA did not plan or acquire resources to serve.
However, the language of the Act is compelling that Congress intended
all relevant DSI Loads, assumed to be served by public bodies and
cooperatives, to be treated as firm.

Section 7(b)(2)(A) requires BPA to assume that the loads of relevant
DSIs are included in the 7(b)(2) Customers' "general requirements," a
term defined by section 7(b)(4) of the Northwest Power Act as limited to
electric power purchased from the Administrator under section 5(b) of
the Act. Section 5(b) deals exclusively with firm power. In addition,
sections 7(b)(2)(B) and 7(b)(2)(D) require that FBS and additional
resources be assumed to serve the total General Requirements of the
7(b)(2) Customers.

The legislative history of the Northwest Power Act supports interpreting
the statute to require 7(b)(2) Customers' firm power General
Requirements in the 7(b)(2) Case to include all DSI Loads served by the
Administrator. This includes DSI Loads that BPA does not plan or acquire
resources to serve (*e.g.*, first quartile service) in the Program Case.
In Appendix B, all four quartiles of DSI Loads were treated as firm when
assigned to public agency customers in the 7(b)(2) Case.

**8. Interpretation: Section 7(b)(2)(B) necessitates** **an examination
of Program Case** **contracts** **in the determination of "Federal base
system resources not obligated to other entities."**

**Discussion:**

Section 7(b)(2)(B) provides that the Administrator is to assume that
7(b)(2) Customers were served by FBS resources "not obligated to other
entities under contracts existing as of December 5, 1980, (during the
remaining term of such contracts) excluding obligations to direct
service industrial customer loads included in \[Section 7(b)(2)(A)\])."
16 U.S.C. § 839e(b)(2)(A). Unlike the assumption relating to DSI Loads
served by public body and cooperative customers, section 7(b)(2)(B)
requires BPA to make two factual determinations: (1) what the level of
FBS resources is, and (2) what level of FBS resources is obligated for
service to other entities, for all or a portion of the relevant
Five-Year Period. The first determination is necessary because the FBS
includes resources purchased by BPA under long-term contracts.
Expiration of these contracts may cause a change in the size of the FBS
during the relevant Five-Year Period.

The second determination concerns BPA power sales contracts or other
obligations existing as of the effective date of the Northwest Power
Act. Should these contractual obligations on FBS resources be removed
through expiration of the relevant contracts, the size of FBS resources
available to 7(b)(2) Customers would increase. Obligations on FBS
resources include uses of power mandated by treaty, statute, or
contracts entered into by BPA before December 5, 1980. The DSI
obligations referenced in subsection 7(b)(2)(B) have since expired,
rendering the "excluding obligations" language as no longer effective.

Any contract that BPA enters into subsequent to December 5, 1980, that
exchanges FBS capacity for energy, exchanges seasonal FBS energy, or for
the sale of FBS capacity with the return of the energy, will be assumed
only if there is FBS surplus to 7(b)(2) Customer needs. Therefore, the
energy and revenue from such contracts will not be recognized in the
7(b)(2) Case unless, and to the extent that, there is surplus FBS in the
7(b)(2) Case.

**9.** **Interpretation:** **Section 7(b)(2)(B) requires** **the**
**allocation of resource pools** **to load pools** **in the Program Case
to be reconsidered** **in the 7(b)(2) Case.**

**Discussion:**

Section 7(b)(2)(B) states that the Administrator is to assume that
"public body ... customers were served ... with Federal base system
resources not obligated to other entities under contracts existing as of
December 5, 1980 ... excluding obligations to direct service industrial
customer loads included in subparagraph (A) of this paragraph." 16
U.S.C. § 839e(b)(2)(B).

In the Program Case, section 7(b)(1) sets forth the sequence of
allocating resource pools to load pools.

> Such rate or rates shall recover the costs of that portion of the
> Federal base system resources needed to supply such loads until such
> sales exceed the Federal base system resources. Thereafter, such rate
> or rates shall recover the cost of additional electric power as needed
> to supply such loads, first from the electric power acquired by the
> Administrator under section 5(c) and then from other resources.

The hierarchy established by section 7(b)(1), and complemented for other
rates in sections 7(c)(1)(A) and 7(f), is that the FBS is to be used
first to serve 7(b) loads, then for 7(c) loads and 7(f) loads until the
FBS resources are exhausted. After the FBS resources are exhausted, BPA
uses power acquired from the section 5(c) exchange to serve remaining
loads. After using FBS and exchange resources, other resources acquired
by BPA, also referred to as new resources, are used to serve remaining
loads.

The Program Case uses this hierarchy to apply the resource pools, and
their costs, to the load pools as the method of assigning resource costs
to the load pools. However, in the 7(b)(2) Case, the size of the load
pools will be different than in the Program Case. For example, section
5(c) exchange loads are removed from the 7(b)(2) Case load pool, thereby
creating a smaller 7(b) load pool in the 7(b)(2) Case.

As a result of the different sizes of load pools in the two cases, the
7(b)(2) Case must construct its own separate allocation of resource
pools to load pools. Furthermore, because of the explicit exclusion of
the section 5(c) exchange in the 7(b)(2) Case, the exchange resource
pool is eliminated. Lastly, because additional resources necessary in
the 7(b)(2) Case are to be added through the 7(b)(2)(D) resource stack,
the new resource resource pool is eliminated from the 7(b)(2) Case. All
of these differences will result in different resource cost allocations
than in the Program Case.

**10.** **Interpretation:** **Section 7(b)(2)(C) requires the
exclusion** **of** **all costs relating to the section 5(c) exchange,
otherwise known as the Residential Exchange Program, from the 7(b)(2)
Case. In addition, the loads and resources associated with the exchange
will also be excluded from the 7(b)(2) Case.**

**Discussion:**

Section 7(b)(2)(C) states that the Administrator is to assume that "no
purchases or sales by the Administrator as provided in section 5(c) were
made during such five-year period." 16 U.S.C. § 839e(b)(2)(C). This
language unmistakably provides that the 7(b)(2) Case is to assume that
the Residential Exchange Program is to be excluded from consideration.
This includes all aspects of the exchange: the costs, the purchases and
the sales. Further, any implementation costs included in the Program
Case should be excluded from the 7(b)(2) Case, as should any costs
associated with a settlement of residential exchange benefits.

**11. Interpretation: Section 7(b)(2)(D)** **identifies three
additional** **resource** **types assumed to be** **available** **to
meet the 7(b)(2) Customers' General Requirements when FBS resources are
exhausted.** **Type 1** **are** **those resources not included in the
FBS that are** **actually acquired by BPA from** **7(b)(2) Customers in
the Program Case.** **Type 2** **are** **those resources owned or
purchased by the 7(b)(2) Customers and not dedicated to** **load** **by
public agencies** **or** **investor-owned utilities** **pursuant to**
**section 5(b). These two types of** **resources** **are** **to be
stacked in order of cost and then pulled from the stack to meet 7(b)(2)
Customers' loads** **as needed, least expensive first.** **Type 3**
**resources** **are** **additional** **acquired** **resources** **not
included in the FBS,** **which are** **priced at the average cost of all
new resources acquired by BPA from non-7(b)(2) Customers during the
Five-Year** **Period.**

**Discussion:**

Section 7(b)(2)(D) describes the manner in which additional resources
are assumed to be acquired to meet the 7(b)(2) Customers' loads when FBS
resources are exhausted. Three types of additional resources are
available in the 7(b)(2) Case. The first type of resource is described
in section 7(b)(2)(D)(i) as being resources that were "purchased from
such customers by the Administrator pursuant to section 6." These are
the resources actually acquired by BPA from the 7(b)(2) Customers in the
Program Case.

Conservation is defined in the Northwest Power Act as a resource.
"'Resource' means ... actual or planned load reduction resulting from
direct application of a renewable energy resource by a consumer, or from
a conservation measure." 16 U.S.C. § 839a(19). In addition, conservation
is acquired by BPA under section 6. "The Administrator shall acquire
such resources through conservation, implement all such conservation
measures, and acquire such renewable resources which are installed by a
residential or small commercial consumer to reduce load..." 16 U.S.C.
§ 839d(a)(1). Because conservation is acquired from 7(b)(2) Customers,
it is a Type 1 resource. Such being the case, section 7(b)(2)(D)
requires that any conservation being acquired by BPA must be included in
the resource stack as a non-FBS resource and available to serve 7(b)(2)
Customer load to the extent it is needed and it is among the least
expensive resources available. *See* Issue 4 *infra*.

Section 7(b)(2)(D)(ii) describes the second type of resource as those
"not committed to load pursuant to section 5(b)." These are resources
owned or purchased by the 7(b)(2) Customers that are not dedicated to
load. Section 5(b)(1) of the Northwest Power Act provides:

> Whenever requested, the Administrator shall offer to sell to each
> requesting public body and cooperative entitled to preference and
> priority under the Bonneville Project Act of 1937 and to each
> requesting investor-owned utility electric power to meet the firm
> power load of such public body, cooperative or investor-owned utility
> in the Region to the extent that such firm power load exceeds---(A)
> the capability of such entity's firm peaking and energy resources used
> in the year prior to the enactment of this Act to serve its firm load
> in the region, and (B) such other resources as such entity determines,
> pursuant to contracts under this Act, will be used to serve its firm
> load in the region.

16 U.S.C. § 839c(b)(1). As noted in section 3(19) of the Northwest Power
Act, the term "resource" includes "electric power." 16 U.S.C.
§ 839a(19). Because section 5(b) applies to requirements determinations
for both preference customers and investor-owned utilities, section
7(b)(2)(D)(ii) precludes BPA from including resources owned or purchased
by 7(b)(2) Customers in the 7(b)(2) Case resource stack if such
resources are committed to load by preference customers or
investor-owned utilities.

Together, sections 7(b)(2)(D)(i) and (ii) result in a list of resources
which are assumed to be available to meet 7(b)(2) Customer loads. The
remainder of section 7(b)(2)(D) outlines how this list of resources is
to be used to serve the 7(b)(2) Customers' loads and describes the third
type of resources available to meet 7(b)(2) Case loads. BPA is to assume
for the 7(b)(2) Case that any required additional resources "were the
least expensive resources owned or purchased by public bodies or
cooperatives." This means that 7(b)(2)(D)(i) and (ii) resources are
stacked in order of cost and pulled from that stack to meet 7(b)(2)
Customers' loads in order of least to greatest cost. Should these
resources be insufficient to satisfy the General Requirements of 7(b)(2)
Customers, section 7(b)(2)(D) provides the assumption that "\...any
additional needed resources were obtained at the average cost of all
other new resources acquired by the Administrator." This third resource
type consists of the other new resources acquired by BPA in an amount
required to meet the 7(b)(2) Customers' remaining loads, the cost of
which is determined by the average cost of all new resources acquired by
BPA from non-7(b)(2) Customers during the relevant Five-Year Period.

**12.** **Interpretation:** **Section 7(b)(2)(E) requires an assessment
of the Quantifiable Monetary Savings that** **are** **realized** **by**
**public** **body** **financing** **of resources** **that are in the
resource stack.**

**Discussion:**

Section 7(b)(2)(E) states that the Administrator is to assume that "the
quantifiable monetary savings, during such five-year period, to public
body, cooperative and federal agency customers resulting from reduced
public body and cooperative financing costs as applied to the total
amount of resources, other than Federal base system resources,
identified under subparagraph (D) of this paragraph, ... were not
achieved." 16 U.S.C. § 839e(b)(2)(E). The legislative history adds some
clarification to this language. "Costs of new resources, either actual
or hypothetical, constructed or acquired by the public bodies and
cooperatives as necessary to meet these preference customer load
requirements using the financing costs of such agencies that would have
resulted if actions of the Administrator under Section 6 of the Bill
were not achieved." S. Rep. No. 272, 96th Cong., 1st Sess., Appendix B
at 58.

This subsection provides that the 7(b)(2) Case is to assume that the
cost of resources in the subsection 7(b)(2)(D) resource stack is to
exclude any 7(b)(2) Customer's financing benefits due to BPA's purchase
of the output of the resource.

**13.** **Interpretation:** **Section 7(b)(2)(E) requires an assessment
of the value of Reserve Benefits acquired by BPA due to the Northwest
Power Act.**

**Discussion:**

Section 7(b)(2)(E) states that the Administrator is to assume that "the
quantifiable monetary savings, during such five-year period, to public
body, cooperative and federal agency customers resulting from ...
reserve benefits as a result of the Administrator's actions under this
chapter were not achieved." 16 U.S.C. § 839e(b)(2)(E). Reserve Benefits
result from BPA's restriction rights on loads provided for in power
sales contracts. In the 7(b)(2) Case, these restriction rights are
unavailable to BPA. Without the restriction rights, BPA would have to
incur the costs of providing an equivalent amount of reserves from
another source. This subsection provides that the 7(b)(2) Case is to
assume that cost reductions attributable to Reserve Benefits are not
achieved in the 7(b)(2) Case. Therefore, the 7(b)(2) Case revenue
requirement is to assume the extra cost of procuring the reserves
provided to the Program Case.