**UNITED STATES OF AMERICA**

**U.S. DEPARTMENT OF ENERGY**

**BEFORE THE**

**BONNEVILLE POWER ADMINISTRATION**

PROPOSED SAFETY-NET COST )

RECOVERY ADJUSTMENT CLAUSE ) BPA Docket No. SN‑03

(SN CRAC) ADJUSTMENT TO 2002 )

WHOLESALE POWER RATES )

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**BRIEF ON EXCEPTIONS OF THE INVESTOR-OWNED UTILITIES GROUP**

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**1. Introduction and Summary of Arguments.**

This Brief on Exceptions is submitted on behalf of Avista Corporation,
PacifiCorp, Portland General Electric Company, and Puget Sound Energy,
Inc. (the "Investor-Owned Utilities Group").

## 2. The DROD[^1] Erroneously Confuses BPA's Costs With BPA's Providing Benefits to Residential and Small Farm Consumers.

The Residential Exchange Program ("REP") settlement agreements provide a
share of the benefits of the Federal Columbia River Power System
("FCRPS") to 60 percent of the region's residential and small farm
consumers, which are served by the region's investor-owned utilities.
This is one of the objectives of the Pacific Northwest Electric Power
Planning and Conservation Act ("Regional Act").[^2] Confusing BPA's
costs with BPA's providing of these benefits is erroneous and creates
unnecessary confusion and regional divisiveness.

The Administrator's Draft Record of Decision ("DROD") perpetuates this
confusion. It erroneously labels or characterizes BPA's providing a
share of the benefits of the Federal Columbia River Power System
("FCRPS") to residential and small farm consumers served by the region's
investor-owned utilities as a BPA "cost" or "expense."[^3]

BPA cost reductions benefit the region generally, whereas reducing FCRPS
benefits to residential and small farm consumers served by
investor-owned utilities would benefit some regional consumers at the
expense of others. Reducing FCRPS benefits to residential and small farm
consumers of investor-owned utilities is not a BPA cost reduction at all
but rather a shift in FCRPS benefits among regional consumers.[^4]

Indeed, the DROD recognizes in a number of other places that BPA's
providing of benefits to residential and small farm consumers served by
investor-owned utilities is not a cost. For example, as discussed in
detail below, the proposed General Rate Schedule Provisions ("GRSPs") in
the DROD include provisions that indicate that the SN CRAC adjustment
applies to the Residential Load firm power rate schedule as well as the
financial portion of the REP settlement. Similarly, the DROD recognizes
at page 2.1‑16 that the "five-year buydown agreements with Puget and
PacifiCorp included specific provisions to ensure that those loads would
share in the SN CRAC . . . . Thus, those loads continue to help share in
BPA's costs."

In other words, the DROD recognizes that the REP settlement agreements
share in SN CRAC adjustments. Thus, they are not costs but rather a
sharing of benefits that themselves bear BPA costs, e.g., through the SN
CRAC.

## 3. The Reference to "Residential Exchange" as One of BPA's "Capped Expenses" in the DROD's GRSPs Must Be Eliminated or Clarified.[^5]

In the DROD at Appendix A, page A‑14, Table C: Cost Adjustment Limits by
Category refers to "Capped Expenses" and includes a line item for
"Residential Exchange," which states an amount equal to \$143.8 million
for each of FY 2003, FY 2004, and FY 2005. These amounts appear to
correspond to BPA's projection of the cost of the 900 aMW of what the
GRSPs refer to as the monetary benefits under the financial portion of
REP settlements.[^6]

This "Residential Exchange" entry in the table raises several issues.
First, the amounts shown are not reflective of the total amounts to be
paid by BPA to investor-owned utilities for the benefit of their
residential and small farm consumers for the referenced fiscal
years.[^7] Rather, the amounts shown appear to be a projection of one
element (REP settlement financial payments) of such amounts to be paid;
any such amounts, if included in the table, should be clearly identified
as only an element of the benefits.

Further, inclusion of any such amounts in the table should not and
cannot limit the residential exchange benefits to be paid by BPA to
investor-owned utilities for the benefit of their residential and small
farm consumers. As discussed above, the DROD recognizes that this
mechanism only limits the [recovery]{.underline} through the SN CRAC of
certain spending levels. The Final Record of Decision ("ROD") in this
proceeding should be consistent in this regard with the DROD and
recognize that BPA cannot through the ROD amend its contractual
obligations pursuant to which such benefits are to be paid.

More fundamentally, as discussed above, it is erroneous to refer to or
consider BPA's providing a share of the benefits of the FCRPS to
residential and small farm consumers served by the region's
investor-owned utilities to be a BPA "cost" or "expense." For that
reason, the "Residential Exchange" entry should be excluded from Table
C: Cost Adjustment Limits by Category, which refers to "Capped
Expenses."

## 4. The Scope of the DDC in the Proposed GRSPs in the DROD Must Be Revised to Comport With the Scope of the SN CRAC and the Scope of the SN CRAC Rebate.[^8] 

The GRSPs proposed in the DROD add a reference to "buy-downs and load
reduction agreements" and specify that the SN CRAC applies "to power
purchases under the Residential Load (RL‑02) (including both actual
power deliveries and the 900 aMW of monetary benefits under the
financial portion of any REP Settlement, buy-downs and load reduction
agreements) . . . ." The GRSPs proposed in the DROD also specify that
the SN CRAC Rebate has the same applicability in this regard.

By contrast, the GRSPs proposed in the Draft ROD specify changes in the
DDC[^9] but do not specify corresponding adjustments to the language
describing the scope of applicability of the DDC (even though the GRSPs
proposed in the Draft ROD specify other changes in the existing
DDC).[^10] It would be misleading to revise certain portions of the DDC
in the GRSPs adopted in this proceeding and not update the description
of the scope of the DDC with respect to the REP settlement agreements.

Specifically, the words "Residential Load (RL‑02)" in the Dividend
Distribution Clause at SN‑03-A‑01, Appendix A, Page A‑31 should be
revised to read as follows:

"Residential Load (RL‑02) (including both actual power deliveries and
the 900 aMW of monetary benefits under the financial portion of any REP
Settlement, buy-downs and load reduction agreements),"

This revision makes redundant the sentence in the DDC at SN‑03-A‑01,
Appendix A, page A‑31 that reads as follows: "The DDC also applies to
the financial portion of the REP Settlement as described herein." This
sentence should be deleted as redundant if the revision described above
is adopted.

## 5. The GRSPs Adopted in This Proceeding Should Specify More Clearly the Sequence of Calculations to be Followed in the Public Process in 2004 and 2005.

The Draft ROD at Appendix A, pages A‑18‑19 describes the SN CRAC Public
Process in 2003 and specifies that, after the Contingent Recalculation
Phase, there is a sequence of two stages of calculations:

The Variable Phase - FB CRAC Revenue And Percentages, followed by The
Variable Phase - SN CRAC Revenue And Percentages

This is the sequence that is to be followed for the Public Process in
2004 and 2005 (for FY 2005 and FY 2006). However, the proposed GRSPs in
that regard, at Appendix A, page A‑20, "Public Process in 2004 and 2005
(for FY 2005 and 2006)" are in summary form and as a result do not
clearly specify the sequence of calculations to be followed.

To avoid confusion, the following language should be added at the end of
and as part of the description of the Public Process in 2004 and 2005
(for FY 2005 and FY 2006):

**Public Process in 2004 (for FY 2005)**

The Public Process in 2004 for FY 2005 will have a sequence of two
stages of calculations for both the first and second workshops as
described below.

**1. Variable Phase - FB CRAC Revenue And Percentages**

Following any Contingent Recalculation or Recalibration under Section
1.F or 2.C for 2005, a forecast of 2004 PBL ANR will be presented. The
FB CRAC rate calculations, and the forecast of 2005 revenue generated by
the FB CRAC, will be presented.

**2. Variable Phase - SN CRAC Revenue And Percentages**

The SN CRAC rate calculations will assume the revenue generated by the
FB CRAC rate calculated in stage 1. The SN CRAC revenue amount will be
the Threshold minus the sum of the ANR forecast and the forecast of 2005
FB CRAC revenue, or the annual cap, whichever is smaller. The SN CRAC
rate percentage will be calculated so that the SN CRAC revenue amount is
generated from the loads subject to the SN CRAC.

**Public Process in 2005 (for FY 2006)**

The Public Process in 2005 for FY 2006 will have a sequence of two
stages of calculations for both the first and second workshops as
described below.

**1. Variable Phase - FB CRAC Revenue And Percentages**

Following any Contingent Recalculation or Recalibration under Section
1.F or 2.C for 2006, a forecast of 2005 PBL ANR will be presented. The
FB CRAC rate calculations, and the forecast of 2006 revenue generated by
the FB CRAC, will be presented.

**2. Variable Phase - SN CRAC Revenue And Percentages**

The SN CRAC rate calculations will assume the revenue generated by the
FB CRAC rate calculated in stage 1. The SN CRAC revenue amount will be
the Threshold minus the sum of the ANR forecast and the forecast of 2006
FB CRAC revenue, or the annual cap, whichever is smaller. The SN CRAC
rate percentage will be calculated so that the SN CRAC revenue amount is
generated from the loads subject to the SN CRAC.

These revisions will make clear the dates and sequence of calculations
that are intended.

**6. The DROD is Incomplete and Does Not Isolate or Identify the Amount
of the SN CRAC Rate Increase; Nor Does the DROD Specify the Impact of SN
CRAC Rate Increases on Various Customer Groups.**

As the Investor-Owned Utilities Group noted in its Initial Brief, BPA
has made improvements in communicating openly with its customers
regarding BPA's views of its financial condition and the effect of this
condition on rates.[^11] *See* SN‑03-B-PL/PS/GE/AC‑01, p. 2.
Unfortunately, the DROD fails to specify the level of the SN CRAC rate
increase. Instead, the DROD identifies aggregate "total average rate
level" increases, which include not only the SN CRAC rate increase but
the recently announced LB CRAC rate decrease. Not all BPA customer
groups are subject to the LB CRAC. Thus, these aggregate averages mask
the effects of the proposed double-digit SN CRAC rate increases that
will be experienced by some of BPA's customers.

Given that BPA itself recognizes that the various CRACs "apply to
different customers and involve different contractual provisions,"
SN‑03-E-BPA‑04, p. 13, there is no plausible rationale for BPA not
explicitly explaining the effects of its decision. Accordingly, BPA's
ROD should explicitly describe the projected rate effect on each BPA
customer group due to the SN CRAC itself.[^12]

**7. BPA Should Not Conduct The Section 7(b) Rate Test in This
Proceeding.**

Some parties to this proceeding have argued that BPA should have
conducted a section 7(b)(2) rate test in the SN CRAC proceeding. [^13]
After comprehensively evaluating and considering the parties' arguments,
the DROD correctly restated the well-settled rule that the section
7(b)(2) rate test is only applicable when BPA is developing base rates,
including the PF rate.[^14] BPA has consistently interpreted the
Regional Act in this manner and a section 7(b)(2) rate test has never
been conducted outside of a general rate case where BPA was developing
base rates.[^15] The DROD outlined BPA's view of the fundamental
standards that govern implementation of the section 7(b)(2) rate
directive, the development of power rates in the 2002 wholesale power
rate proceeding ("WP‑02"), including BPA's implementation of the section
7(b)(2) rate test.[^16] This section of the Brief on Exceptions of the
Investor-Owned Utilities Group will provide additional support for
certain aspects of BPA's decision in its DROD regarding the 7(b)(2) rate
test.

> **a.** **The Section 7(b)(2) rate test applies only to the
> establishment of BPA's base rates.**

The Investor-Owned Utilities Group supports BPA's longstanding and
consistent interpretation that the section 7(b)(2) rate test is only
conducted when BPA establishes base rates, including the PF rate. DROD,
p. 2.1‑52. BPA conducted the section 7(b)(2) rate test when BPA
developed its proposed 2002 wholesale power rates.[^17] Therefore, BPA's
obligation to perform the section 7(b)(2) rate test has been met with
respect to WP‑02 base rates, and it would be improper for BPA to revisit
the section 7(b)(2) rate test until BPA replaces its base rates.

Moreover, as the DROD correctly acknowledged, it would be illogical to
apply the section 7(b)(2) rate test to an adjustment clause, because so
doing would require BPA to conduct an entirely new base rate
proceeding\-\--thereby making any adjustment clauses superfluous.[^18]
As BPA observed, "If BPA had to implement all the section 7 directives
when establishing or implementing adjustment clauses, BPA would never
establish adjustment clauses, but would only establish base rates."[^19]
Indeed, the purpose of an adjustment clause is to allow a utility to
recover costs without having a full rate case.

> **b.** **The Regional Act does not require BPA to conduct a section
> 7(b)(2) test every time that BPA holds a section 7(i) proceeding.**

The Investor-Owned Utilities Group supports the Administrator's
rejection of the argument that every section 7(i) proceeding requires
that BPA conduct a 7(b)(2) rate test. As the Administrator correctly
acknowledged, neither section 7(i), section 7(b)(2), nor any other
provision of the Regional Act requires BPA to use the section 7(b)(2)
rate test in each 7(i) proceeding.[^20] Moreover, this decision is
consistent with BPA's past practice and interpretation as BPA evidenced
in the DROD by showing several examples of 7(i) proceedings that did not
involve 7(b)(2) rate tests.[^21]

> **c.** **No legal basis exists for BPA to implement the section
> 7(b)(2) rate directive without implementing the other rate
> directives.**

The Investor-Owned Utilities Group supports the DROD's rejection of the
arguments of certain parties that BPA could, at the request of a single
class of BPA customers, respond to a perceived financial crisis by
selectively imposing one of several rate directives against another
class of customers. No party in this proceeding has established the
legal basis for implementing the Section 7(b)(2) rate directive while
ignoring the other rate directives of section 7 (and, without
redeveloping all of its base rates, for that matter). As BPA correctly
observed, the section 7(b)(2) rate test is "no more or less a part of
BPA's statutory rate directives than section 7(b)(1), or section 7(c),
or section 7(f), etc."[^22]

> **d.** **The Administrator should not ask the Hearing Officer to
> conduct an additional hearing where BPA would conduct the section
> 7(b)(2) rate test.**

The Investor-Owned Utilities Group supports the DROD's decision to
reject the request for the Administrator to ask the Hearing Officer to
conduct an additional hearing where BPA would perform in this proceeding
the section 7(b)(2) rate test.[^23] As explained in this Brief on
Exceptions and in the DROD, the section 7(b) rate test is only performed
on base rates, including the PF rate.

**8. An SN-CRAC Rate Increase Is Not Required For FY 2004, Particularly
in Light of the Significant Improvement in BPA's Financial Condition.**

Since BPA filed its Initial Proposal, BPA's financial condition has
improved substantially. BPA has made progress in controlling its
internal costs, BPA's hydroelectric generating conditions have improved,
BPA has achieved savings from settling certain augmentation contracts,
and power prices have remained relatively high, suggesting
better-than-expected secondary revenues.[^24] BPA did not have the
benefit of this information in March 2003, when it made the decision,
currently being challenged in the Ninth Circuit Court of Appeals, to
commence the SN CRAC proceeding. It is the position of the
Investor-Owned Utilities Group that the SN CRAC proceeding should not
have triggered in March and certainly should not continue in light of
the information currently available.

BPA's financial recovery, in combination with the wide array of
financial tools at BPA's disposal, makes a compelling case that an SN
CRAC rate increase is not required for FY 2004. Accordingly, the
Investor-Owned Utilities Group join the other BPA customers who urge BPA
to withdraw its SN CRAC proposal and implement no SN CRAC for FY 2004.

**9. BPA Should Consider The Need For SN-CRAC** **Rate Increases in FY
2005‑2006 On A Year-By-Year Basis.**

The DROD proposes a three-year, variable-rate SN CRAC. Like many other
BPA customers, the investor-owned utilities believe that the SN CRAC, if
applied, should be applied on a year-by-year basis only. A single-year
SN CRAC, for example, will allow BPA and its customers to take advantage
of, and benefit by, control of BPA costs for internal operations and
corporate overhead. And it reduces the possibility that BPA will
unnecessarily collect money for problems that may never
materialize.[^25]

**10. Conclusion.**

The Investor-Owned Utilities Group submits this Brief on Exceptions
setting forth its exceptions, comments, and support for the tentative
decisions set forth in the DROD.

> [/s/ Tom DeBoer]{.underline}
>
> Tom DeBoer
>
> Of Attorneys for Avista Corporation
>
> [/s/­ Stephen C. Hall]{.underline}
>
> Stephen C. Hall
>
> Of Attorneys for PacifiCorp
>
> [/s/ Loretta Mabinton]{.underline}
>
> Loretta Mabinton
>
> Of Attorneys for Portland General Electric Company
>
> [/s/ Donald G. Kari]{.underline}
>
> Donald G. Kari
>
> Of Attorneys for Puget Sound Energy, Inc.

[^1]: Administrator's Draft Record of Decision ("DROD"), SN-03-A-01.

[^2]: Pub. L. No. 96-501, 94 Stat. 2697, 16 U.S.C.A. §§ 839-839h (1980);
    *see, e.g.,* House Report on S. 885 (which became the Regional Act)
    in which the Committee set out its understanding of what conditions
    had to be met for legislation to be successful and included among
    those conditions "a share in the economic benefits of the lower-cost
    Federal system for the residential customers of the non-preference
    customers . . .". H.R. Rep. No. 976, 96th Cong., 2d Sess., pt. I, at
    27 (1980).

[^3]: *See, e.g.,* SN‑03‑A‑01, p. 2.1‑2 ("PBL \[BPA Power Business
    Line\] cost increases. . . . include . . . Residential Exchange
    Settlement Agreements . . . ." ); SN-03-A-01, at 2.1-13 (describing
    a settlement of the "IOU Residential Exchange Program settlement
    contracts agreements" as an "area of identified cost reduction").

[^4]: Initial Brief on Behalf of the Investor-Owned Utilities Group,
    SN-03-B-PL/PSI/GE/AC-01; s*ee also, e.g.,* SN‑03‑E‑CC‑01B, March 26,
    2000 letter from the BPA Administrator to Customers and Other
    Interested Parties, Attachment 1, items 5 and 6.

[^5]: BPA included in the DROD its proposed revisions to Bonneville's
    GRSPs. *See, e.g.,* Initial Brief on Behalf of the Investor-Owned
    Utilities Group, SN-03-B-PL/PS/GE/AC-01.

[^6]: *See, e.g.,* SN‑03‑A‑01, Appendix A, page A‑2, A-11.

[^7]: This is recognized in the DROD at 2.7-30, which refers to
    "limiting the [recovery]{.underline} of spending levels in the SN
    CRAC design for . . . . [Residential Exchange Financial
    Payments]{.underline} . . . ." (emphasis added).

[^8]: This is not to suggest that the applicability of the DDC or the
    SN CRAC specified in the REP settlement agreements could be changed
    by the GRSPs.

[^9]: Changes in the DDC in the GRSP were was not included in the
    Initial Proposal General Rate Schedule Provisions in this
    proceeding, SN‑03‑E‑BPA‑01, March 2003.

[^10]: The DDC in the Draft ROD, Appendix 1, page A‑31, specifies that
    "the DDC applies to purchases by power customers under... firm power
    rate schedules... including... Residential Load (RL‑02) . . . \[and
    further specifies that the\] DDC also applies to the financial
    portion of the REP \[Residential Exchange Program\] Settlement as
    described herein."

[^11]: BPA's Initial Proposal projected an "annual average expected
    value for the SN CRAC" of about 30 percent above BPA\'s May 2000
    base rates. SN-03-E-BPA-10, p.6.

[^12]: Indeed such description is consistent with BPA's statutory
    obligations with respect to 7(i) proceeding and the Administrative
    Procedures Act, 5 U.S.C § 500 *et seq*.

[^13]: DROD, p. 2.1-39.

[^14]: DROD, p. 2.1-52.

[^15]: *Id.*

[^16]: *See* DROD, SN-03-A-01, P. 2.1-36, 37, 40.

[^17]: See DROD, p. 2.1-39, *citing* Keep, *et al.*, SN-03-E-BPA-11, at
    74-78; SN-03-M-22.

[^18]: DROD, p. 2.1-43.

[^19]: *Id.*

[^20]: DROD, p. 2.1-44-47.

[^21]: DROD, p. 2.1-58.

[^22]: DROD, p. 2.1-42.

[^23]: DROD, p. 2.1-65

[^24]: SN-03-E-JC-01, at 18, lines 20-23.

[^25]: *See,* SN-03-E-PP-01 at 4, lines 4-6.