**UNITED STATES OF AMERICA**

**U.S. DEPARTMENT OF ENERGY**

**BEFORE THE**

**BONNEVILLE POWER ADMINISTRATION**

2003 Proposed Safety-Net Cost Recovery )

Adjustment Clause (SN CRAC) Rate ) BPA Docket No. SN-03

Proceeding )

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

**INITIAL BRIEF OF THE**

**SPRINGFIELD UTILITY BOARD**

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

Peter R. Mersereau

Mersereau and Shannon, LLP

1600 Benj. Franklin Plaza

One S.W. Columbia Street

Portland, Oregon 97258

\(503\) 226-6400

FAX (503) 226-0383

Email - [pmersereau@mershanlaw.com](mailto:mershanlaw@aol.com)

Attorney for the

SPRINGFIELD UTILITY BOARD

May 23, 2003 Exhibit : SN-03-B-SP-01

TaBle of Contents

**Introduction [1](#introduction)**

Statement of the Case [1](#statement-of-the-case)

BPA Statutory Framework [2](#bpa-statutory-framework)

Substantive Issues [3](#substantive-issues)

I. The 7(b)(2) Test Must Be Run In This Proceeding
[3](#i.-the-7b2-test-must-be-run-in-this-proceeding)

A. Background [3](#a.-background)

B. The Hearing Officer Is Obligated By Statute To Develop The Record
[4](#b.-the-hearing-officer-is-obligated-by-statute-to-develop-the-record)

C. When The 7(b)(2) Test Is Required, BPA Has The Statutory
Responsibility To Implement the 7(b)(2) Rate Test And Conduct The
Necessary Studies
[6](#c.-when-the-7b2-test-is-required-bpa-has-the-statutory-responsibility-to-implement-the-7b2-rate-test-and-conduct-the-necessary-studies)

D. A 7(b)(2) Test Is Required In The SN-03 Rate Proceeding(s)
[7](#d.-a-7b2-test-is-required-in-the-sn-03-rate-proceedings)

II\. SN CRAC Design [14](#sn-crac-design)

A. BPA's Current Toolkit Model Is Inconsistent With The WP-02 ROD
[14](#a.-bpas-current-toolkit-model-is-inconsistent-with-the-wp-02-rod)

B. SUB's SN CRAC Design Adjustments
[16](#b.-subs-sn-crac-design-adjustments)

C. Use of Liquidity Tools [18](#c.-use-of-liquidity-tools)

D. SUB Does Not Support The Removal Of The SN CRAC Cap
[19](#d.-sub-does-not-support-the-removal-of-the-sn-crac-cap)

Summary of Conclusions [19](#summary-of-conclusions)

SUB's Final Revised Exhibit List [19](#subs-final-revised-exhibit-list)

**[TABLE OF AUTHORITIES]{.underline}**

Page(s)

[Cases]{.underline}

*Portland Audubon Society v. Endangered Species Committee*, 984 F.2d
1534, 1548 (9th Cir. 1993) 6

*Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.*, 467 U.S. 837,
842-43 (1984). 9

*Pac. Coast Fed'n of Fishermen's Ass'ns v. Nat'l Marine Fisheries
Serv*., 265 F.3d 1034 (9th Cir. 2001) 9

[Statutes]{.underline}

16 U.S.C. § 832c(a) 2

16 U.S.C. § 825s 2

16 U.S.C. § 839e(a)(1) 2

16 U.S.C. § 839g(c) 2

16 U.S.C. §839e(a)(2) 3

16 U.S.C. §839e(b)(2) 3

16 U.S.C. §839e(i) 3

16 U.S.C. §839e(i)(2) 5

16 U.S.C. §839e(i)(5) 14

[Other]{.underline}

Legal Interpretation of Section 7(b)(2) of the Pacific Northwest
Electric Power Planning and Conservation Act 4, 7, 10

Section 7(b)(2) Implementation Methodology Administrator's

Record of Decision 4, 7, 10, 12

**UNITED STATES OF AMERICA**

**U.S. DEPARTMENT OF ENERGY**

**BEFORE THE**

**BONNEVILLE POWER ADMINISTRATION**

2003 Proposed Safety-Net Cost Recovery )

Adjustment Clause (SN CRAC) Rate ) BPA Docket No. SN-03

Proceeding )

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

**INITIAL BRIEF OF THE**

**SPRINGFIELD UTILITY BOARD**

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

# Introduction {#introduction .unnumbered}

The Springfield Utility Board ("SUB") submits this Initial Brief
pursuant to Rule 1010.13 of the *Procedures Governing Bonneville Power
Administration Rate Hearings*, 51 Fed. Reg. 7611 (Mar 5, 1986), the
*Order Enforcing Post-Hearing Exhibit List* issued on May 16, 2003
(SN-03-O-18), and the *Order On Initial Briefs* issued on May 16, 2003
(SN-03-O-19). SUB is a preference customer as defined by Bonneville
Power Administration's ("BPA") organic statutes. SUB currently meets
part of its wholesale power requirements through purchases of power
generated by federal resources and priced at BPAs Priority Firm ("PF")
rate.

SUB endorses and supports the issues, arguments, and conclusions
discussed in the Public Power Council's ("PPC") Initial Brief
(SN-03-B-PP-01).

Nothing in this brief should be interpreted as a waiver of SUB's
statutory rights. SUB preserves its preference and priority rights in
this and future rate cases.

# Statement of the Case {#statement-of-the-case .unnumbered}

It is SUB's position, based on statute, legislative history, precedent,
and argument raised in testimony, that the 7(b)(2) test must be run
prior to the implementation of any Safety Net Cost Recovery Adjustment
Clause ("SN CRAC"). It is also SUB's position that BPA has changed the
Toolkit model to the extent that it conflicts with a specific decision
in the WP-02 rate case. SUB identified this change in its direct
testimony and provided a SN CRAC design alternative which was acceptable
to SUB in lieu of using the Toolkit logic decided in the WP-02 rate case
consistent with the Federal Register Notice for this proceeding. SUB\'s
primary objective in this case is to attempt to address areas of this
rate case which do not comport with SUB's statutory rights. SUB's goal
is to provide legal background to issues where necessary and to provide
rate design alternatives that remedy specific issues where appropriate.

# BPA Statutory Framework {#bpa-statutory-framework .unnumbered}

BPA must comply with a number of organic statutes, including the
Bonneville Project Act and the Pacific Northwest Electric Power Planning
and Conservation Act (Northwest Power Act), when engaging in power
sales. Consumer-owned entities ("Preference Customers") such as SUB are
given preference under sections of the statutes that govern BPA. "In
order to insure that the facilities for the generation of electric
energy at the Bonneville project shall be operated for the benefit of
the general public, and particularly of domestic and rural consumers,
the administrator shall at all times, in disposing of electric energy at
said project, give preference and priority to public bodies and
cooperatives." *Bonneville Project Act* 16 U.S.C. § 832c(a).

BPA's rate making process is predominantly driven by the provisions of
the Northwest Power Act. BPA must establish rates in accordance "with
sound business principles." *Flood Control Act of 1944* 16 U.S.C. § 825s
and *Northwest Power Act* 16 U.S.C. § 839e(a)(1). In addition, BPA must
sell power and energy at the "lowest possible rates" and "preference in
the sale of such power and energy shall be given to public bodies and
cooperatives." *Flood Control Act of 1944* 16 U.S.C. § 825s. While BPA's
rate making process is predominantly driven by the provisions of the
Northwest Power Act, nothing in the Northwest Power Act "shall alter,
diminish, abridge, or otherwise affect the provisions of other Federal
laws by which public bodies and cooperatives are entitled to preference
and priority in the sale of federally generated electric power."
*Northwest Power Act* 16 U.S.C. § 839g(c).

# Substantive Issues {#substantive-issues .unnumbered}

## I. The 7(b)(2) Test Must Be Run In This Proceeding {#i.-the-7b2-test-must-be-run-in-this-proceeding .unnumbered}

### A. Background {#a.-background .unnumbered}

On July 6, 2000, BPA filed proposed wholesale power rates with the
Federal

Energy Regulatory Commission (FERC). 16 U.S.C. § 839e(a)(2). In
developing these proposed rates, BPA conducted a rate test required by
section 7(b)(2) of the Northwest Power Act. 16 U.S.C. § 839e(b)(2).[^1]

BPA later conducted a supplemental rate hearing under section 7(i) of
the Northwest Power Act. 16 § U.S.C. § 839e(i). BPA's supplemental
proposal included three specific risk mitigation tools in BPA's General
Rate Schedule Provisions (GRSPs): the Load-Based (LB) Cost Recovery
Adjustment Clause (CRAC), the Financial-Based (FB) CRAC, and the
Safety-Net (SN) CRAC.

Both the LB and FB CRACs were based on specific formulas established in
the rate case; they each had their own parameters and trigger points.
Under those CRACs, BPA would simply make the necessary calculations and
changes to rates without conducting a separate section 7(i) hearing
process.

Initially, BPA proposed that any SN CRAC would be implemented without a
7(i) rate proceeding. However, in a "Partial Stipulation and Settlement
Agreement" (the "Settlement Agreement") with certain customers, signed
by BPA staff in February 2001, BPA agreed to hold a formal section 7(i)
rate hearing before imposing the SN-CRAC.[^2]

On February 7, 2003, BPA initiated this SN CRAC (SN-03) rate proceeding
in accordance with section 7(i) of the Northwest Power Act. In its
direct testimony SUB describes the circumstances which have changed
between the last time the 7(b)(2) test was run compared to the current
rate proceeding.[^3] Included as attachments to SUB's direct testimony
were the *Legal Interpretation of Section 7(b)(2) of the Pacific
Northwest Electric Power Planning and Conservation Act* (b2-84-FR-03,
May 1984) ("Legal Interpretation") and the *Section 7(b)(2)
Implementation Methodology Administrator's Record of Decision*
(b-2-84-F-02, August 1984) ("Implementation ROD"). SUB asserts that
based on historic and precedent-setting implementation and development
of the 7(b)(2) test, the 7(b)(2) test must be run for this SN-03 rate
proceeding.[^4] This is also supported by statute and the legislative
record as discussed below.

### B. The Hearing Officer Is Obligated By Statute To Develop The Record {#b.-the-hearing-officer-is-obligated-by-statute-to-develop-the-record .unnumbered}

The duties of the Hearing Officer are proscribed in the contractual
arrangement with BPA and by statute.

> "One or more hearings shall be conducted as expeditiously as
> practicable by a hearing officer to develop a full and complete record
> and to receive public comment in the form of written and oral
> presentation of views, data, questions, and argument related to such
> proposed rates."[^5]

The Procedures Governing Bonneville Power Administration Rate Hearings,
51 Fed. Reg. 5,611 (1986) ("7(i) rules") allow a party to submit motions
to the Hearing Officer, but under the rules a party cannot *compel* a
Hearing Officer to compel BPA to conduct a 7(b)(2) test in order to
establish a full and complete record. It is the responsibility of the
Hearing Officer to meet his or her statutory obligation to ensure the
record is fully developed, even if carrying out the responsibility
resides outside the scope of the 7(i) rules. The Hearing Officer should
have addressed the 7(b)(2) issue when it was first raised near the onset
of this proceeding.[^6]

The 7(b)(2) issue has continually resurfaced in testimony, motions, and
orders.[^7] This included a motion to compel BPA to run the 7(b)(2) test
that was subsequently denied by the Hearing Officer based on the 7(i)
rules.[^8] The merits of the argument to compel were not considered.[^9]
BPA's response to the motion to compel states:

> "Thus, under BPA's Procedures, the Hearing Officer cannot extend the
> hearing schedule...Furthermore, while BPA's Procedures provide the
> Hearing Officer authority to grant or deny interventions, establish
> procedural schedule, grant or deny motions to *strike* evidence, grant
> or deny motions to compel the production of *existing* evidence, and
> other matters, the Procedures to not provide the Hearing Officer with
> authority to compel any litigant to create and file specific
> substantive evidence."[^10]

According to BPA, SUB and other parties cannot attempt to compel BPA to
produce evidence that doesn't exist through the 7(i) rules, such as an
updated 7(b)(2) test that does not exist.

Without a 7(b)(2) test the record remains incomplete and the
Administrator cannot make a decision on an incomplete record.[^11] To
fulfill the requirement that the record be complete, the Administrator
should request the Hearing Officer exercise his authority to hold an
additional hearing in order for the issue of the 7(b)(2) test to be
properly developed.

### C. When The 7(b)(2) Test Is Required, BPA Has The Statutory Responsibility To Implement the 7(b)(2) Rate Test And Conduct The Necessary Studies {#c.-when-the-7b2-test-is-required-bpa-has-the-statutory-responsibility-to-implement-the-7b2-rate-test-and-conduct-the-necessary-studies .unnumbered}

In BPA's rebuttal of SUB direct testimony of the 7(b)(2) test, BPA
states "Furthermore, SUB had the opportunity to conduct a section
7(b)(2) rate test study and present it with its direct case, but chose
not to do so."[^12]. BPA, not SUB, bears the responsibility for
implementing section 7(b)(2) of the Northwest Power Act. The statute
refers to the Administrator, not the customers, deciding upon the
assumptions needed to compare proposed rates with the rates that would
have occurred under the hypothetical conditions mandated by the statute.
16 U.S.C. § 839e(b)(2).

Furthermore, BPA's own 1984 Legal Interpretation cited three tasks it
had recently completed to implement the Act. The first was the
development of a legal interpretation. The second was "the development
of a computer model to perform the rate test."[^13] The third task was
the preparation and release of a rate test methodology (later called the
Implementation ROD). The Implementation ROD itself repeatedly refers to
BPA's computer model and analytical skills. In addition, the
Implementation ROD states "The exact methodology for the rate
calculation in the program case cannot be determined until BPA has
prepared its rate proposal."[^14]

BPA has the statutory obligation to perform the necessary studies.[^15]
SUB can offer criticisms, it can cross examine, it can suggest
improvements, but SUB is not required to assume the mantle of BPA's
statutory authority or responsibilities.

### D. A 7(b)(2) Test Is Required In The SN-03 Rate Proceeding(s) {#d.-a-7b2-test-is-required-in-the-sn-03-rate-proceedings .unnumbered}

#### 1. 7(b)(2) Issues Have Not Been Decided {#b2-issues-have-not-been-decided .unnumbered}

In its motion to strike and in its response to the motion to compel BPA
argues that all 7(b)(2) issues had been decided in the WP-02 case.[^16]
SUB argues that all issues regarding the 7(b)(2) test were not decided
in the WP-02 rate proceeding.

First, the General Rate Schedule Provisions (GRSPs) are silent on the
issue of the 7(b)(2) test when conducting a 7(b)(2) test for the SN
CRAC. Second, it is not unusual for 7(b)(2) issues to vary from rate
case to rate case.[^17] Third, each 7(i) process is unique. Fourth, the
Hearing Officer did not grant BPA's motion to strike SUB's 7(b)(2)
testimony. The denial of BPA's motion was based, in part, on the finding
that the 7(b)(2) test as it relates to the SN CRAC was not addressed in
the WP-02 rate proceeding.[^18]

#### 2. The 7(b)(2) Test Is Required By Statute Consistent With Legislative History {#the-7b2-test-is-required-by-statute-consistent-with-legislative-history .unnumbered}

The SN CRAC is a rate adjustment to posted power rates, including rates
charged for general requirements service to preference customers. Where
the GRSPs are silent as to statutory obligations, statutory obligations
remain in force. The legislative history clearly states the protection
provided by the 7(b)(2) test.

> "As an added protection against preference utilities and their
> customers suffering adverse economic consequences as a result of this
> legislation, section 7(b)(2) establishes a 'rate ceiling' which is
> hypothetically intended to insure that these customers' rates will be
> no higher than they would have been had the Administrator not been
> required to participate in power sales or purchase transactions with
> non-preference customers under this legislation." Administrator's
> Record of Decision, Final Power Rate Proposal (May 2000), WP-02-A-02
> at 13-4, quoting from H.R. Rep. No. 976, Part II, 96^th^ Cong. 2^nd^
> Sess. 35 (1980).
>
> "Section 7(b)---This section establishes a rate or rates for electric
> power sold to meet the general requirements (defined in this section)
> of public body cooperative and Federal agency customers and utilities
> under section 5(b)(2); a rate test to limit the charges that may be
> recovered by such rates applicable to public body, cooperative, and
> Federal agency customers after July 1, 1985; and a supplemental rate
> charge to recover any costs not recovered as a result of the rate
> test, to be applied through rates to all other power sales of the
> Administrator which are not limited by the rate test..."
> Administrator's Record of Decision, Final Power Rate Proposal (May
> 2000), WP-02-A-02 at 13-5, quoting from S. Rep. No. 272, 96^th^ Cong.
> 1^st^ Sess. 20 (1979).

The legislative history does not distinguish between base rates or rate
adjustments when discussing the protection provided by the 7(b)(2) test.
Any judicial deference provided to BPA on this matter is limited.

> "Whether Congress has directly spoken to the precise question is at
> issue. If the intent of congress is clear, that is the end of the
> matter; for the court, as well as the agency, must give effect to the
> unambiguously expressed intent of Congress*." Chevron U.S.A., Inc. v.
> Natural Res. Def. Council, Inc.*, 467 U.S. 837, 842-43 (1984).

However, "...where Congress expressly or implicitly confers authority to
fill in a gap in the enacted law or resolve a statutory ambiguity...",
an agency's decisions may be granted deference. This narrow review of an
agency's decisions is not without guidelines. The courts assess "whether
the agency considered the relevant factors and articulated a rational
connection between the facts found and the choice made." *Pac. Coast
Fed'n of Fishermen's Ass'ns v. Nat'l Marine Fisheries Serv.*, 265 F.3d
1034 (9^th^ Cir. 2001) (quotations omitted).

In this case, Congress has directly spoken to the intent of the 7(b)(2)
test. BPA must defer to Congress' intent rather than rely on any
incorrect interpretation that the 7(b)(2) test is not legally required
in the SN-03 proceeding.

#### 3. The 7(b)(2) Test For The SN CRAC Is Supported By Precedent {#the-7b2-test-for-the-sn-crac-is-supported-by-precedent .unnumbered}

The argument that the 7(b)(2) test is required is also supported by
precedent. "BPA has also conducted the 7(b)(2) rate test in every rate
case since 1985, except in the cases where the rate case was settled and
the test was not performed."[^19] The 2002 rate case, like the SN-03
rate case, set rates to be charged for preference service based on a
7(i) process. In its response to the motion to compel, BPA states that
this is incorrect and that BPA has held at least seven section 7(i)
hearings to establish rates where the BPA did not conduct the 7(b)(2)
rate test. The cases cited by BPA did not deal with rates charged for
preference service, were settled, or assumptions were not changed from
prior 7(b)(2) tests.[^20] BPA states that the there have been prior
adjustment clauses implemented by BPA without a 7(i) process, however
these had specific prescribed parameters.[^21] The SN CRAC, in contrast,
is an open-ended rate established through a 7(i) process. The SN CRAC
was not modeled in the WP-02 rate case, and assumptions for the 7(b)(2)
test, such as IOU benefits and DSI loads, have changed significantly
from the WP-02 rate proceeding.[^22]

BPA's argument that the 7(b)(2) test applies only to "base rates" and
not to rate adjustments is not supported by the 7(b)(2) Legal
Interpretation nor the Implementation ROD. Both references specifically
identify rate adjustments and define the "Relevant rate case" as:

> "The 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."[^23]

In addition, The SN CRAC, like the Priority Firm ("PF") rate, is a rate
as defined in the 7(i) rules.[^24]

#### 4. The "Absurdity" Argument {#the-absurdity-argument .unnumbered}

In its rebuttal testimony and response to the motion to compel, BPA
argues that running the 7(b)(2) test would produce absurd results.[^25]
BPA states that it was BPA's intent that BPA not conduct the 7(b)(2)
test. If this were this case, then BPA should not have signed the
Settlement Agreement as this agreement was silent to the issue of
conducting or not conducting a 7(b)(2) test for any SN CRAC which
adjusts rates for general requirements service to preference customers
through a 7(i) process. Also, the GRSPs would have specifically
addressed this issue.

While the assumptions in this particular SN CRAC rate proceeding have
changed relative to the assumptions used in the 7(b)(2) test for the
WP-02 rate proceeding, the triggering of the SN CRAC could have occurred
without changes in the assumptions for the 7(b)(2) test. For example,
BPA could have missed a treasury payment at the end of fiscal year 2003,
triggered an SN CRAC as a result, conducted a 7(i) process to establish
reserves, and used the same assumptions for future loads, resources,
costs, and benefits that were assumed in the WP-02 rate case. This may
have resulted in no change in the 7(b)(2) test. Instead, BPA has
forecasted substantially different loads, resources, costs, and benefits
in the SN-03 proceeding compared to the WP-02 rate case. The SN CRAC
process, in and of itself, need not be inherently complicated. BPA has
elected to make it complicated. SUB notes that on May 21, 2003 BPA
jointly entered a motion for the SN-03 proceeding that included evidence
raised outside the formal SN-03 rate process regarding BPA's liquidity
tools.[^26] BPA conducted two publicly noticed meetings regarding this
issue.[^27] Rather than spend time on the 7(b)(2) issue, BPA has elected
to spend time on the issue of BPA's liquidity tools.

BPA argues that it would need to generate new studies and rebuild the
computer model to run the 7(b)(2) test and that the expedited rate
hearing schedule precludes BPA, as a practical matter, from performing
such a test.[^28] BPA asks "...if BPA had to conduct the section 7(b)(2)
rate test in order to implement the SN CRAC, why would BPA even bother
to establish an SN CRAC? BPA could simply develop completely new rates.
The public utilities have provided no answer to this critical
question."[^29]

The answers are simple.

First, "the section 7(b)(2) rate test, up to and including the point at
which the test year amount is determined, is conducted outside the
mainstream of BPA's rate development process."[^30] BPA has been
evaluating its financial position since the middle of 2002 and publicly
reviewed its financial situation through the Financial Choices process.
It has had ample time to conduct studies and modeling necessary to
perform a 7(b)(2) test.

Second, BPA can request the Hearing Officer to hold an additional
hearing specifically for the 7(b)(2) test consistent with the statutory
authority granted to the Hearing Officer to hold multiple hearings.

Third, BPA has settled cases in the past whereby the parties agreed not
to run the 7(b)(2) test. It can do so in a SN CRAC proceeding as well.

Fourth, the SN CRAC could have triggered due to BPA missing a treasury
payment and BPA could have structured an SN CRAC to recover a specific
amount of money to replenish reserves without basing the SN CRAC on a
complicated multi-year process burdened by multiple requirements (such
as a zero net revenue requirement).

Fifth, the CRAC mechanisms are not functioning as intended. In
WP-02-A-09, BPA states, "the strengthening of the FB CRAC and the
addition of the SN CRAC give BPA greater ability to respond to
fluctuations in market prices." Under BPA's SN-03 initial proposal, the
SN CRAC is being driven by multiple issues - including significant
increases in program costs. Augmentation costs which were intended to be
recovered through the LB CRAC are spilling over into the FB and SN
CRACs.[^31]

In rebuttal testimony BPA states that it is inappropriate for SUB to
suggest only modifying a portion of the of the model used to conduct the
7(b)(2) test and that SUB implicitly acknowledges there is insufficient
time to conduct a 7(b)(2) test. BPA states that it would be
inappropriate to allow specific customers to pick and choose which
parameters of the test to update and which to ignore.[^32] The issues
which SUB specifically identified that did not need to be changed were
specific issues decided in the WP-02 rate case, consistent with the
Federal Register Notice for this proceeding.[^33] BPA incorrectly
assumes too much when stating that SUB implicitly acknowledges there is
insufficient time to conduct a 7(b)(2) test. SUB suggested adjusting the
model used in the WP-02 proceeding because treatment of the issues
identified by SUB, which were decided in the WP-02 rate case, was
already part of the WP-02 modeling logic.

#### 5. Without A Full And Complete Record The Administrator Cannot Make A Decision  {#without-a-full-and-complete-record-the-administrator-cannot-make-a-decision .unnumbered}

When establishing rates "The Administrator shall make a final decision
establishing a rate or rates based on the record which shall include the
hearing transcript, together with exhibits, and such other materials and
information as may have been submitted to, or developed by, the
Administrator. The decision shall include a full and complete
justification of the final rates pursuant to this section."[^34] Prior
to making a final decision on the proposed SN-03 rate, the
Administrator's decision must be based a full and complete record which
includes the 7(b)(2) test.

## SN CRAC Design

In SUB's direct testimony, SUB discusses how the CRACs are not
functioning as intended, that BPA's current Toolkit model has been
modified to the extent that it conflicts with a specific decision in the
WP-02 Record of Decision, and suggests alternative rate design. SUB's
rebuttal testimony further discussed the calculation of the Treasury
Payment Probability and CRAC design.

### A. BPA's Current Toolkit Model Is Inconsistent With The WP-02 ROD {#a.-bpas-current-toolkit-model-is-inconsistent-with-the-wp-02-rod .unnumbered}

On March 13, 2003, BPA published notice of the instant proceeding in the
Federal Register, entitled "Bonneville Power Administration's Proposed
Safety-Net Cost Recovery Adjustment Clause, Adjustment to 2002 Wholesale
Power Rates, BPA File No: SN-03," 68 Fed. Reg.12,048 (2003). The notice
established the scope of this proceeding. The notice states:

> "Pursuant to section 1010.3(f) of BPA's Procedures, the Administrator
> directs the Hearing Officer to exclude from the record any material
> attempted to be submitted or arguments attempted to be made in the
> hearing which seek to in any way visit the appropriateness or
> reasonableness of BPA\'s decisions in the WP-02 rate hearing."

In SUB's direct testimony, SUB demonstrates that BPA's own Federal
Register Notice is in conflict with itself. BPA has removed the \$50
million floor in Toolkit that was a specific decision in the WP-02
Supplemental Record of Decision.[^35] In the WP-02 proceeding, SUB
raised the issue that the \$50 million floor leads to an understatement
of the rate impact of the SN CRAC on non-Slice customers.[^36] In direct
testimony, SUB states that using the \$50 million floor decided in the
WP-02 proceeding would result in an increase of the Treasury Payment
Probability (TPP) by 10 -- 20%.[^37] BPA did not rebut the magnitude of
the increase in its rebuttal. In rebuttal testimony, BPA did acknowledge
that it removed the \$50 million floor.

In SUB's rebuttal testimony, SUB responded to arguments raised by other
parties regarding TPP and demonstrated that the TPP increases to 74.6%
using the parameters in BPA's Initial Proposal and Toolkit logic with a
\$50 million floor. This is an increase of 24.5%.[^38]

BPA justified going against the WP-02 decision by stating that the \$50
million floor was removed so that the Treasury Repayment Probability
("TRP") could be measured.[^39] In effect, BPA has overturned a decision
in the WP-02 rate case. This has created cost shifts, understated the
TPP, and created additional burdens on ratepayers. This also
demonstrates that BPA has the position that it is entitled to make
changes which conflict with the Federal Register Notice while preventing
other parties' attempts to revisit issues in the WP-02 rate case. Unless
BPA implements SUB's SN CRAC Design Adjustments discussed below, BPA
should remove the measurement of the TRP in its SN CRAC design to be
consistent with the specific decision in the WP-02 rate case to maintain
a \$50 million floor in Toolkit.

### B. SUB's SN CRAC Design Adjustments {#b.-subs-sn-crac-design-adjustments .unnumbered}

In direct testimony, SUB attempted to provide BPA some flexibility by
stating that BPA either use the logic decided in the WP-02 rate case or
establishing a SN CRAC refund along with the assumption of the use of
the \$250 million note from the Treasury in the new Toolkit model.[^40]
This latter proposal was consistent with the logic behind the decision
in the WP-02 rate case where BPA retained the \$50 million floor because
the \$250 million note was not modeled. By the same logic, removal of
the \$50 million floor would require including the \$250 million note in
the Toolkit model for the model to resemble any consistency with the
WP-02 Record of Decision. BPA argues against reflecting the \$250
million note in its rebuttal testimony stating simply that "BPA is not
using cash tools to reduce rates; this specifically applies to planning
to use the \$250 million note at the end of 2006 -- BPA will not plan to
do that."[^41]

First, BPA's rebuttal testimony shows a continued disregard for the
WP-02 Record of Decision. Second, SUB's proposal would not mandate that
BPA use the \$250 million note for rate relief -- BPA would do so only
under certain circumstances. SUB's proposal simply would increase the
TPP calculation in the Toolkit file, allow for a reduction in the SN
CRAC threshold in 2006 from \$5 million to -\$285 million, reduce the
burden of costs placed on customers, and place more cost accountability
on to BPA.

In rebuttal testimony, BPA states that SUB selected an arbitrary ending
reserve target of \$350 million as the trigger point for a proposed SN
CRAC refund.[^42] To the contrary, the \$350 million figure was not
arbitrary. The \$350 million ending reserve figure was higher than the
expected value of BPA's ending reserves in the Toolkit run provided in
BPA's initial proposal.[^43] BPA deemed an ending reserve figure less
than \$350 million as reasonable -- otherwise it would have added
another requirement to the SN CRAC rate design.[^44] Therefore the \$350
million trigger point for the SN CRAC refund is reasonable. For BPA to
argue otherwise would mean that BPA viewed the Initial Proposal as
unreasonable at the time the Initial Proposal was developed.

BPA also argues that it does not believe that a SN CRAC rebate is either
needed or prudent. BPA continues in its rebuttal by stating that BPA's
proposal provides customers with direct and immediate relief if its
finances improve.[^45] SUB disagrees. Any SN CRAC is a financial burden.
BPA's logic suggests that customers should be happy they are not being
burdened with rates that are even higher than those proposed in this SN
CRAC proceeding.

SUB argues that if BPA is going to raise rates and inflict economic harm
on customers, then BPA should take steps to remedy the harm caused to
customers by giving back SN CRAC revenues recovered by BPA. SUB's
specific proposal was that the refund would trigger should BPA's ending
reserves be greater than \$350 million at the end of the rate period
*after* paying off any balance due on the borrowing of the \$250 million
Treasury note and replenishing any temporary use of Energy Northwest
2002 refinancing benefits used to mitigate rates.[^46] The GRSPs related
to the SN CRAC would be modified and no modification to the Dividend
Distribution Clause ("DDC") would be required, contrary to BPA's
assertion in its rebuttal.[^47]

In the WP-02 Supplemental ROD, BPA stated "BPA\'s financial health
cannot be separated from the financial health of its customers."[^48] By
not implementing a SN CRAC refund, BPA is again backing away from the
WP-02 ROD. SUB maintains its argument that BPA should either use the
\$50 million floor in the Toolkit when calculating TPP or any other
treasury payment parameter, consistent with the WP-02 rate case
decision, or BPA should implement the SN CRAC refund and reflect the
\$250 Treasury note in the last year of the Toolkit model consistent
with SUB's direct testimony.

### C. Use of Liquidity Tools {#c.-use-of-liquidity-tools .unnumbered}

On May 22, 2003, the Hearing Officer granted the motion to include
evidence regarding liquidity tools into the SN-03 record which was
developed in a publicly noticed process outside the formal SN-03 rate
proceeding. The order included Appendix A which lists the liquidity
tools. One of the tools discussed is the \$250 million Treasury note.
Another is Bond Reserve Fund Free Ups. Both of these specific tools were
raised in SUB's testimony.[^49] SUB is encouraged by BPA's joint motion
to include these tools in the SN-03 record. SUB is hopeful that this
marks a reversal in BPA's position not to use liquidity tools. It is
SUB's position that BPA should reflect the use of cash tools in the
Toolkit model when developing the SN-03 SN CRAC to minimize SN CRAC
thresholds and limits.

### D. SUB Does Not Support The Removal Of The SN CRAC Cap {#d.-sub-does-not-support-the-removal-of-the-sn-crac-cap .unnumbered}

In direct testimony, Save Our Wild Salmon/Northwest Energy Coalition
suggest a forward looking SN CRAC adjustment and CRITFC/Yakima Nations
supports this and additionally suggests eliminating the cap for the SN
CRAC.[^50] SUB maintains its argument raised in its rebuttal testimony
that SUB does not support a unilateral decision by BPA to increase
rates.[^51]

# Summary of Conclusions {#summary-of-conclusions .unnumbered}

Below are SUB's conclusions on each issue identified above:

A. Without settlement, The 7(b)(2) Test is required prior to any final
decision by the Administrator on implementing the SN-03 Rate. This is
supported by law, legal history, and precedent.

B. Unless BPA implements SUB's SN CRAC design adjustments, BPA should
use the \$50 million floor in Toolkit consistent with the decision in
the WP-02 rate proceeding. SUB supports the use of liquidity tools to
mitigate rates consistent with its testimony and arguments raised in
this brief. SUB does not support modifying SN CRAC design to allow BPA
to unilaterally increase rates.

# SUB's Final Revised Exhibit List {#subs-final-revised-exhibit-list .unnumbered}

The following exhibits were moved into the record through SUB's motion
to admit evidence (SN-03-M-24) in accordance with the direction from the
hearing clerk to those parties which were not present at the Cross
Examination hearing held on May 16, 2003. These exhibits are
incorporated into this brief by this reference. SUB's cross-examination
was waived, and the witness was excused from appearing.

  ------------------- ------------------------------------------------------
  SN-03-Q-SP-01       Qualification Statement of Jeffrey D. Nelson

  SN-03-E-SP-01       Direct Testimony of the Springfield Utility Board

  SN-03-E-SP-01A      PNUCC's 2003 Northwest Regional Forecast, Table II-4

  SN-03-E-SP-01B      PNUCC's 2003 Northwest Regional Forecast, Table II-5

  SN-03-E-SP-01C      PNUCC's 2003 Northwest Regional Forecast, Table II-3

  SN-03-E-SP-01D      Data Response SP-BPA:001

  SN-03-E-SP-01E      Data Response SP-BPA:004

  SN-03-E-SP-01F      Data Response SP-BPA:014

  SN-03-E-SP-01G      BPA Summary of Net Revenues provided at the 2/13/03 SN
                      CRAC Workshop

  SN-03-E-SP-01H      Data Response SP-BPA:011

  SN-03-E-SP-01I      Data Response SP-BPA:012

  SN-03-E-SP-01J      Legal Interpretation of Section 7(b)(2) of the Pacific
                      Northwest Electric Power Planning and Conservation Act
                      (b2-84-FR-03, May 1984)

  SN-03-E-SP-01K      Section 7(b)(2) Implementation Methodology
                      Administrator's Record of Decision (b-2-84-F-02,
                      August 1984)

  SN-03-E-SP-01L      Data Response SP-BPA:006

  SN-03-E-SP-01M      Data Response SP-BPA:007

  SN-03-E-SP-01N      Augmentation Data for SN CRAC Workshop 213-032.xls

  SN-03-E-SP-01(E1)   Errata to the Direct Testimony of the Springfield
                      Utility Board

  SN-03-E-SP-02       Rebuttal Testimony of the Springfield Utility Board

  SN-03-E-SP-02A      Corrected Toolkit File

  SN-03-E-SP-02B      Output from Corrected Toolkit File
  ------------------- ------------------------------------------------------

DATED this 23^rd^ of May, 2003.

Respectfully submitted,

\_\_\_\_\_\_\_/s/\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Peter R. Mersereau

Attorney for the

Springfield Utility Board

[^1]: 2002 Final Power Rate Proposal, Administrator's Record of
    Decision, WP-02-A-02, at 13-1 to 13-63

[^2]: Springfield Utility Board did not sign the Settlement Agreement.

[^3]: SN-03-E-SP-01, pages 1 - 11

[^4]: The BPA and representatives of the Investor Owned Utilities
    attempted to strike SUB's testimony (See motions to strike
    SN-03-M-01 and SN-03-M-03). The Hearing Officer denied the motions
    to strike.

[^5]: *Northwest Power Act* 16 U.S.C. § 839e(i)(2)

[^6]: The 7(b)(2) test was raised at the February 13^th^, 2003 SN CRAC
    workshop and in SUB's data request SP-BPA:006 and BPA's subsequent
    data response.

[^7]: Along with Springfield's direct testimony (SN-03-E-SP-01), there
    were motions to strike from representatives from Investor Owned
    Utilities and BPA (SN-03-M-01 and SN-03-M-03). SUB filed responses
    (SN-03-M-11 and SN-03-M-12) and the Hearing Officer subsequently
    denied the motions to strike (SN-03-O-12). Springfield and other
    parties filed a motion to compel BPA to run the 7(b)(2) test
    (SN-03-M-19), BPA responded (SN-03-M-22), and the Hearing Officer
    denied the motion to compel (SN-03-O-15). The Customer Coalition and
    BPA also filed rebuttal testimony on the issue (SN-03-E-CC-02 and
    SN-03-E-BPA-11).

[^8]: SN-03-M-19 (and attachments)

[^9]: SN-03-O-15, page 2

[^10]: SN-03-M-22, page 7,8

[^11]: "If the record is not complete, then the requirement that the
    agency decision be supported by the record becomes almost
    meaningless." [Portland Audubon Society v. Endangered Species
    Committee]{.underline}, 984 F.2d 1534, 1548 (9^th^ Cir. 1993)

[^12]: SN-03-E-BPA-11 page 78, lines 21-23

[^13]: 7(b)(2) Legal Interpretation, page 4

[^14]: 7(b)(2) Implementation ROD, page 40

[^15]: "The language of section 7(b)(2) not only directs BPA to conduct
    a rate test for the 7(b)(2) customers, but also provides a
    considerable amount of direction as to how the rate test is to be
    conducted." 7(b)(2) Implementation ROD, page 41.

[^16]: SN-03-M-03, page 2 and SN-03-M-22, page 4

[^17]: The WP-02 rate case addressed different 7(b)(2) issues than the
    1996 rate case (See WP-02-A-02, page 13-62)

[^18]: "I also find that the issue of the utilization of a section
    7(b)(2) rate test in the SN CRAC 7(I) case, was not a decision
    directly or indirectly addressed in the WP-02 rate proceeding."
    SN-03-O-12, page 4

[^19]: WP-02-A-02, page 13-60

[^20]: SN-03-M-22, page 20. SUB notes that the paragraph prior to the
    discussion on the seven section 7(i) proceedings which did not
    adjust rates for general requirements of preference agencies, BPA
    cites 16 U.S.C. §839e(b)(2). 16 U.S.C. §839e(b)(2) states that the
    7(b)(2) test is performed for the development of a new rate for
    general requirements of public body, cooperative, and Federal agency
    customers.

[^21]: SN-03-M-22, page 10. See also the 1987 and 1989 Wholesale Power
    and Transmission Rate Schedules, and the FB and LB CRACs developed
    in the WP-02 rate case.

[^22]: *See* SUB's Direct testimony (SN-03-E-SP-01, pages 1-11) and
    attachments for further details.

[^23]: Legal Interpretation, page 5, Implementation ROD, page 38

[^24]: 7(i) Rules, §1010.2(j)

[^25]: SN-03-E-BPA-11, page 75 and SN-03-M-22, page 12

[^26]: The motion was granted on May 22, 2003 (SN-03-O-20).

[^27]: SN-03-M-25. This motion identifies two public hearings held on
    May 1^st^ and May 13^th^ regarding liquidity tools.

[^28]: SN-03-M-22, page 12 and SN-03-E-BPA-11, page 75

[^29]: SN-03-M-22, page 14

[^30]: 7(b)(2) Implementation ROD, page 45

[^31]: SN-03-E-SP-01, pages 11-14

[^32]: SN-03-E-BPA-11, pages 77,78

[^33]: In SUB's direct testimony, SUB states that treatment of
    Conservation Resources, Planned Net Revenues For Risk, Mid-Columbia
    Resources, and terminated generating facilities need not be
    revisited. Treatment of these issues were decided in pages 13-25,
    13-36, 13-46, and 13-50 of WP-02-A-02 (WP-02 Record of Decision).

[^34]: *Northwest Power Act* 16 U.S.C. § 839e(i)(5)

[^35]: WP-02-A-09, page 4-48 states the decision that "BPA does not need
    to remove the "floor" in Toolkit. It is reasonable for BPA to expect
    that the \$250 million Treasury note can be used to solve some very
    short-term cash-flow problems. BPA will continue to employ models in
    its rate case that use the assumption that BPA ends each year with a
    minimum of \$50 million in cash reserves. This assumption has not
    caused and overstatement of TPP values."

[^36]: WP-02-A-09, page 4-49

[^37]: SN-03-E-SP-01, page 14,15

[^38]: SN-03-E-SP-02, page 2 and attachments SN-03-E-SP-02A and
    SN-03-E-SP-02B

[^39]: SN-03-E-BPA-17, page 23

[^40]: SN-03-E-SP-01, pages 16 -- 17

[^41]: SN-03-E-BPA-17, page 23

[^42]: SN-03-E-BPA-17, page 11

[^43]: SN-03-E-SP-01, page 17

[^44]: BPA already proposed three standards: a 50% TPP, an 80% TRP (a
    new concept), and zero net revenue.

[^45]: SN-03-E-BPA-17, page 11

[^46]: SN-03-E-SP-01, page 17

[^47]: SN-03-E-SP-01, page 11-12

[^48]: 2002 Supplemental Power Rate Proposal Administrator's Final
    Record Of Decision, June 2001, WP-02-A-09, page 4-26

[^49]: SN-03-E-SP-01, page 7 and 15-17.

[^50]: SN-03-E-SA-01 page 25 and SN-03-E-CR/YA-01 page 51

[^51]: SN-03-E-SP-02, page 4. SUB raises concerns that BPA will attempt
    to modify models to increase customer rates and states and any SN-03
    CRAC adjustment may be down, but not up.