**WESTERN AREA POWER ADMINISTRATION**

**PACIFIC NORTHWEST - PACIFIC SOUTHWEST**

**INTERTIE PROJECT**

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height="4.1715277777777775in"}

**TRANSMISSION SERVICE RATES BROCHURE**

**FEBRUARY 2007**

**TABLE OF CONTENTS**

**I. Summary 1**

**II. Rate Adjustment Procedure \... 1**

**A. Announcement of Proposed Rates 2**

**B. Public Process 2**

**C. Public Information and Comment Forums 2**

**D. Written Comments 3**

**E. Revision of Proposed Rates 3**

**F. Decision on Proposed or Revised Proposed Rates 3**

**G. Final Decision on Rate Adjustment 3**

**H. Rate Adjustment Schedule 4**

**III. Proposed Rates for Transmission Service 5**

**IV. Supporting Data 5**

**A. Firm Transmission Sales 6**

**1. Firm 230/345-kV Transmission Service 6**

**2. Firm 500-kV Transmission Service 6**

**B. Revenues \... 7**

**1. Firm 230/345-kV Transmission Service 7**

**2. Firm 500-kV Transmission Service 7**

**3. Other Revenues 7**

**C. Expenses 7**

**1. Operation and Maintenance 7**

**2. Purchased Transmission 8**

**3. Abandoned Project 8**

**4. Other 8**

**5. Interest 9**

**D. Investments 9**

**1. Original Project 9**

**2. Additions 9**

**3. Replacements 9**

**4. Capitalized Deficits 10**

**E. Credit Risk Mitigation 10**

**APPENDICES**

**A. Federal Register Notice - Notice of Proposed Transmission Service
Rates**

**B. Procedures for Public Participation in Power and Transmission Rate
Adjustments**

**C. Ratebase Power Repayment Study**

**D. Department of Energy Order RA 6120.2**

**E. Abandoned Project Amortization Schedules**

**F. Project History**

**G. Project Description**

**H. History of Transmission Service Rates**

**I. SUMMARY**

> The Western Area Power Administration (Western) has initiated a public
> process to adjust the Pacific Northwest-Pacific Southwest Intertie
> Project (Intertie) transmission service rates, as announced in the
> Federal Register on July 12, 2006 (Appendix A). Western extended the
> public process to adjust the Intertie transmission service rates, as
> announced in the Federal Register on December 28, 2006. This revised
> brochure explains the need for the proposed rate adjustments and the
> methodologies used in developing the proposed transmission service
> rates.
>
> A public information forum and public comment forum will be held
> during the consultation period, discussed in Section II, to provide
> additional information and to receive comments from interested
> parties. After review of public comments and possible amendments or
> adjustments, Western will recommend that the Deputy Secretary of
> Energy approve the proposed rates for transmission service on an
> interim basis. The decision, and an explanation of the principal
> factors leading to the decision, will be announced in a Federal
> Register notice. Western expects the proposed rates to go into effect
> on October 1, 2007, and remain in effect through September 30, 2012.

**II. RATE ADJUSTMENT PROCEDURE**

> **A. Announcement of Proposed Transmission Service Rates**
>
> Power Repayment Studies (PRS) are conducted and analyzed to determine
> if transmission service revenues are sufficient to pay all of the
> project costs within the prescribed time periods.
>
> A rate adjustment is necessary because the fiscal year (FY) 2005 final
> PRS for the Intertie indicated that the existing transmission service
> rates were not sufficient to repay all of the project costs within the
> prescribed time periods.
>
> The FY 2007 ratebase PRS indicates the need for rates of \$15.24 per
> kilowatt-year (kW-yr) for firm transmission service and 1.74 mills per
> kilowatthour (kWh) for nonfirm transmission service on the
> 230/345/500-kV transmission system. This represents an increase of 27
> percent over the existing rate for 230/345-kV firm transmission
> service, a decrease of 12 percent over the existing rate for 500-kV
> firm transmission service and a decrease of 13 percent over the
> existing rate for 230/345/500-kV nonfirm transmission service.

**B. Public Process**

> The published procedures for rate adjustments, as amended, are
> included in Appendix B of the revised brochure, entitled "Procedures
> for Public Participation in Power and Transmission Rate Adjustments"
> (10 CFR 903). The procedures adopted by the U.S. Department of Energy
> (DOE) give interested parties an opportunity to participate in the
> development of both power and transmission rates.
>
> A Federal Register notice was published on July 12, 2006, announcing
> the proposed rates and the initial consultation and comment period and
> is included in Appendix A of this revised brochure. A second Federal
> Register notice was published on December 28, 2006, extending the
> consultation and comment period and is included in Appendix A of this
> revised brochure. During the initial consultation and comment period,
> Western was evaluating the impacts of a transmission sales arrangement
> that would have mitigated the proposed rate adjustment. However, that
> proposed transaction has not come to fruition and Western must now
> evaluate additional alternatives. This revised brochure, along with
> its appendices, is being distributed in conjunction with the Federal
> Register notices. It provides additional information and a discussion
> on investments, revenues, expenses and methodologies used to develop
> the proposed rates for transmission service.
>
> The extended public consultation and comment period begins on the
> publication date of the Federal Register notice and closes 90 days
> thereafter. During this time, interested parties may consult with and
> obtain information from Western representatives about the proposed
> rates. Interested parties may also examine data contained in the
> ratebase PRS as well as data contained in all supporting documents.
> Copies of the ratebase PRS data and other supporting material are
> available for public review at Western's Desert Southwest Region
> Customer Service Office, 615 South 43^rd^ Avenue, Phoenix, AZ, 85009.
>
> **C. Public Information and Public Comment Forums**
>
> An additional public information forum will be held on February 8,
> 2007, at 10:00 a.m. MST at Western's Desert Southwest Region Customer
> Service Office, 615 South 43^rd^ Avenue, Phoenix, AZ, 85009. At the
> public information forum, Western representatives will explain the
> need for the proposed rate adjustment and answer questions. Questions
> not answered at the public information forum will be answered in
> writing before the end of the consultation and comment period. The
> public information forum will be recorded and transcribed. Copies of
> the transcript will be available for purchase from the firm providing
> the service.
>
> An additional public comment forum will be held on February 27, 2007,
> at 10:00 a.m. MST at Western's Desert Southwest Region Customer
> Service Office, 615 South 43^rd^ Avenue, Phoenix, AZ, 85009.
> Interested persons may submit written and/or oral comments at the
> public comment forum. As with the public information forum, the public
> comment forum will be recorded and transcribed. Copies of the
> transcript will be available for purchase from the firm providing the
> service.

**D. Written Comments**

> All interested parties may submit written comments to Western any time
> during the extended consultation and comment period. All comments must
> be received by Western by the end of the comment period. Written
> comments should be sent to Mr. J. Tyler Carlson, Regional Manager,
> Desert Southwest Region, Western Area Power Administration, P.O. Box
> 6457, Phoenix, AZ 85005-6457, e-mail Carlson@wapa.gov. Written
> comments may also be faxed to (602) 605-2490, attention: Jack Murray.
>
> **E. Revision of Proposed Rates**
>
> During and after the extended consultation and comment period and the
> review of oral and written comments, Western may revise the proposed
> rates for transmission service. If Western determines that further
> public comment on the revised proposed rates for transmission service
> should be invited, another extension of the consultation and comment
> period may be initiated and one or more additional public meetings may
> be convened.
>
> **F. Decision on Proposed or Revised Proposed Rates**
>
> Following the end of the extended consultation and comment period,
> Western may forward the revised proposed rates for transmission
> service to the Deputy Secretary of Energy who may confirm, approve,
> and place these rates into effect on an interim basis. The decision,
> and an explanation of the principal factors leading to this decision,
> will be announced in a Federal Register notice.
>
> **G. Final Decision on Rate Adjustment**
>
> The Deputy Secretary of Energy will submit all information concerning
> the provisional rates for transmission service to the FERC and request
> approval of the provisional rates for a 5-year period beginning
> October 1, 2007 through September 30, 2012. The FERC will then
> confirm, approve, and place the provisional rates into effect on a
> final basis, remand the provisional rates to Western, or disapprove
> the provisional rates.
>
> **H. Rate Adjustment Schedule**
>
> The following is Western\'s schedule for implementing the Intertie
> proposed transmission service rates:

+-------------------------------------------------+--------------------+
| Informal Customer Meeting                       | June 15, 2006      |
|                                                 |                    |
| Publish Federal Register Notice of              | July 12, 2006      |
|                                                 |                    |
| Proposed Transmission Service Rates             | August 17, 2006    |
|                                                 |                    |
| Conduct Public Information Forum                | August 24, 2006    |
|                                                 |                    |
| Conduct Public Comment Forum                    | October 10, 2006   |
|                                                 |                    |
| Consultation and Comment Period Ends            | December 28, 2006  |
|                                                 |                    |
| Publish Federal Register Notice of Extension of | February 8, 2007   |
| Public Process for Rate Adjustment              |                    |
|                                                 | February 27, 2007  |
| Conduct Public Information Forum                |                    |
|                                                 | March 28, 2007     |
| Conduct Public Comment Forum                    |                    |
|                                                 | Early August 2007  |
| Consultation and Comment Period Ends            |                    |
|                                                 | Mid August 2007    |
| Publish Federal Register Notice of Rate Order   |                    |
|                                                 | October 1, 2007    |
| Notify Customers of Rate Order Approval         |                    |
|                                                 |                    |
| Rates Effective                                 |                    |
+-------------------------------------------------+--------------------+

**III. PROPOSED RATES FOR TRANSMISSION SERVICE**

> Based upon the latest data available, the FY 2005 final PRS for the
> Intertie demonstrated that the existing rates for firm transmission
> service on the 230/345-kV and 500-kV transmission systems would not
> provide sufficient revenues to pay the project costs within the
> prescribed time periods. The existing rates for long-term firm
> point-to-point 230/345-kV and 500-kV transmission service are
> \$12.00/kW and \$17.23/kW-yr, respectively. To ensure project
> repayment and future economic viability of the Intertie, a
> 230/345/500-kV transmission system rate is being proposed. The FY 2007
> ratebase PRS indicates that the proposed rate for transmission service
> on the 230/345/500-kV transmission system is necessary to demonstrate
> that future revenues will satisfy the cost recovery criteria over the
> remainder of the repayment period for the Intertie. A copy of the FY
> 2007 ratebase PRS is shown in Appendix C of this revised brochure. The
> proposed rate for long-term firm point-to-point 230/345/500-kV
> transmission service is \$15.24/kW-yr. This represents an increase of
> 27 percent over the existing 230/345-kV transmission service rate and
> a decrease of 12 percent over the existing 500-kV transmission service
> rate. The following issues have prompted the proposed rates.
>
> First, sales of 500-kV transmission service are lower than projected.
> While Western was following an industry accepted practice of
> phasing-in sales of 500-kV transmission service over a 10-year period,
> the anticipated revenue contributions fell behind schedule. This
> revenue shortfall resulted in annual capitalized deficits with
> short-term repayment periods. The largest contributor to the proposed
> rates is the repayment obligation associated with these capitalized
> deficits.
>
> Second, operation and maintenance (O&M) costs have increased by
> approximately \$2.4 million per year when comparing the existing rates
> with the proposed rates. This increase is based on the average annual
> O&M amounts projected through the cost evaluation period.
>
> Third, purchased transmission costs have increased by approximately
> \$0.6 million per year when comparing the existing rates with the
> proposed rates. This increase is based on the average annual purchased
> transmission amounts projected through the cost evaluation period. No
> purchased transmission costs were projected when the existing rates
> were developed.

**IV. SUPPORTING DATA**

> Repayment criteria are based on law and upon policies established by
> DOE Order RA 6120.2 (RA 6120.2), a copy of which is included in
> Appendix C of this revised brochure. According to RA 6120.2, project
> revenues are required to repay investment costs, including interest.
>
> Generally, the repayment criteria formula is total annual revenues
> equal total annual expenses plus debt repayment. Annual revenues are
> first used to pay the annual expenses. These annual expenses include
> all costs for operation, maintenance, transmission service and
> interest on unpaid debt. Second, all required payments due on
> capitalized investments are paid. If the total annual revenues are
> insufficient to meet the annual expenses plus required debt repayment,
> \"loans\" are taken out (from the U.S. Treasury) and are amortized to
> be repaid over a specified time frame. These \"loans\" are referred to
> as \"capitalized deficits\". When the total annual revenues are
> sufficient to meet the annual operating expenses, any remaining annual
> revenue is used to repay capitalized deficits and capitalized
> investments based upon a hierarchy of repayment. The hierarchy of
> repayment requires that all capitalized deficits are repaid first
> followed by capitalized investments, with the highest interest-bearing
> investments being repaid first.
>
> The ratebase PRS on which this revised brochure is based may be
> updated or revised prior to final submittal to the Deputy Secretary of
> Energy for approval.
>
> Information sources for the ratebase PRS are discussed below:

**A. Firm Transmission Sales**

> **1. Firm 230/345-kV Transmission Service**
>
> Historical sales of firm 230/345-kV transmission service are based on
> actual sales as reported in the Annual Report of Deliveries and
> Income. Future sales of firm 230/345-kV transmission service are based
> on the anticipated contractual obligations with existing and future
> contractors. The firm 230/345-kV transmission service obligation
> beginning in
>
> FY 2008 is projected to be 1,064,540 kW.
>
> **2. Firm 500-kV Transmission Service**
>
> Historical sales of firm 500-kV transmission service are based on
> actual sales as reported in the Annual Report of Deliveries and
> Income. Future sales of firm 500-kV transmission service are based on
> an acceptable industry practice of marketing, over time, a major
> capital improvement such as the Intertie 500-kV transmission system.
> Initially, Western estimated that a phase-in period of approximately
> 10 years would be necessary to achieve sales of firm 500-kV
> transmission service to a level sufficient to satisfy revenue
> requirements. The marketing commenced in FY 1999 with a sales
> projection of 62,500 kW and increased by 100,000 kW each year during
> the 10-year phase-in period. The phase-in period would have ended in
> FY 2008 with a sales projection of 962,500 kW. Under this proposed
> rate adjustment, Western plans to extend the original phase-in period
> by 5 years to allow additional time to market firm 500-kV transmission
> service and to achieve total sales of 962,500 kW. The sales
> projections for firm 500-kV transmission service are 709,000 kW in FY
> 2008; 737,200 kW in FY 2009; 793,600 kW in FY 2010; 850,000 kW in FY
> 2011; 906,400 kW in FY 2012; 962,500 kW in FY2013 and beyond.

**B. Revenues**

> **1. Firm 230/345-kV Transmission Service**
>
> Historical revenues from sales of firm 230/345-kV transmission service
> are based on actual revenue reported on the Annual Report of
> Deliveries and Income. Projections for future revenue are based on
> future sales of firm 230/345-kV transmission service multiplied by the
> proposed firm transmission service rate.
>
> **2. Firm 500-kV Transmission Service**
>
> Historical revenues from sales of firm 500-kV transmission service are
> based on actual revenue reported on the Annual Report of Deliveries
> and Income. Projections for future revenue are based on future sales
> of firm 500-kV transmission service multiplied by the proposed firm
> transmission service rate.
>
> **3. Other Revenues**
>
> Other revenues include nonfirm transmission sales, facilities use
> charges, transmission line losses, and multi-project cost
> distributions and miscellaneous operations income. Historical other
> revenues are based on actual other revenue reported on the Annual
> Report of Deliveries and the Results of Operations. Projections for
> future other revenue are based on a three-year average of actual other
> revenue. The table below provides details of the projected annual
> other revenues under the proposed rates.

  ------------------------------------------------- ---------------------
  Fiscal Years 2008-2057                            

  Facilities Use Charges                            \$1,633,693

  Nonfirm Transmission Sales                        681,421

  Transmission Line Losses                          955,117

  Multi-Project Cost Distributions                  225,337

  Miscellaneous Operations Income                   42,160

  Total Other Revenues                              \$3,537,728
  ------------------------------------------------- ---------------------

**C. Expenses**

> **1. Operation and Maintenance (O&M)**
>
> Historical expenses for O&M are based on actual expenses reported in
> the Results of Operations. Projections for future O&M expense during
> the cost evaluation period (FY 2008-2012) are based on Western's
> current budget documents. Projections for future O&M expense after the
> cost evaluation period (FY 2013 --2058) are based on the last fiscal
> year of the cost evaluation period (FY 2012).
>
> The table below identifies the elements that make up O&M expenses.

  ----------- ----------- -------------- ------------- ---------------- -------------
  Fiscal Year System Wide Transmission                 Administrative & Total O&M
                          System                       General          

                          Operation      Maintenance                    

  2008        \$871,789   \$2,047,338    \$1,879,632   \$1,167,620      \$5,966,379

  2009        905,638     2,115,850      1,950,763     1,207,181        6,179,432

  2010        940,807     2,186,701      2,024,616     1,248,288        6,400,412

  2011        977,352     2,259,973      2,101,299     1,290,996        6,629,620

  2012        1,015,325   2,335,750      2,180,921     1,335,372        6,867,368

  2013-2057   1,015,325   2,335,750      2,180,921     1,335,372        6,867,368
  ----------- ----------- -------------- ------------- ---------------- -------------

**2. Purchased Transmission**

> Historical expenses for Purchased Transmission are based on actual
> expenses reported in the Results of Operations. Projections for future
> Purchased Transmission expense are based on Western's contract with
> the transmission service provider.

  ------------------------------------------ ----------------------------
  Fiscal Years 2008-2057                     

  Firm Transmission Service                  \$349,920

  Transmission Losses                        189,512

  Ancillary Services                         11,533

  Purchased Transmission                     \$550,965
  ------------------------------------------ ----------------------------

**3. Abandoned Project**

> Historical expenses for the Abandoned Project are based on actual
> expenses reported in the Results of Operations. Projections for future
> Abandoned Project expense are based on Western's amortization
> schedules for the abandoned project cost and associated interest. See
> Appendix D for details.

**4. Other**

> Other expenses consist of the unfunded portion of the Civil Service
> Retirement System and Post-Retirement Health and Life Insurance
> Benefits (Retirement Benefits) and Multi-Project Costs (MPC).
> Historical other expenses are based on actual expenses reported in the
> Results of Operations. Projections for future Retirement Benefits
> expense are based on the previous year's actual expense. Projections
> for future MPC are based on the MPC amortization tables.

**5. Interest**

> Historical expenses for Interest are based on actual expenses reported
> in the Results of Operations. Projections for future Interest expense
> are calculated annually by the ratebase PRS based on the unpaid debt.
> The projections also include interest associated with the
> undepreciated balance of capitalized movable equipment and warehouse
> stores balance older than one year.

**D. Investments**

**1. Original Project**

> The cumulative investments in the original project total \$45.6
> million and are repayable over a 50-year period at 3% interest. The
> unpaid balance of the original project investments is \$45.6 million.
> The unpaid balance is scheduled to be repaid by FY 2028 under the
> proposed rates.

**2. Additions**

> The cumulative investments in additions to the original project total
> \$172.0 million and are repayable over a 50-year period at various
> interest rates. The unpaid balance of the investments in additions to
> the original project is \$171.4 million. The interest rates range from
> 4.875% to 11.375%. The unpaid balance is scheduled to be repaid by FY
> 2037 under the proposed rates.
>
> The projected investments for additions during the cost evaluation
> period (FY 2008-2012) are based on the Final FY 2008 Ten Year Plan for
> the Maintenance, Construction, and Rehabilitation Program.

**3. Replacements**

> The investments in replacements total \$16.5 million and are repayable
> over the useful service lives of the replacements at various interest
> rates. The service lives for transmission facilities vary from 20 to
> 50 years. The unpaid balance of the investments in replacements is
> \$15.2 million. The interest rates range from 4.875% to 10.750%. The
> unpaid balance is scheduled to be repaid by FY 2033 under the proposed
> rates.
>
> The projected investments for replacements during the cost evaluation
> period (FY 2008-2012) are based on the Final FY 2008 Ten Year Plan for
> the Maintenance, Construction, and Rehabilitation Program. Projected
> investments for replacements after the cost evaluation period
> (FY2013-2057) are calculated by the ratebase PRS replacement program.

**4. Capitalized Deficits**

> When annual revenues are insufficient to meet the annual expenses plus
> required debt repayment, "loans" are taken out (from the U.S.
> Treasury) and are amortized to be repaid over a specified period of
> time. These "loans" are referred to as "capitalized deficits."
>
> The cumulative capitalized deficits total \$70.9 million and are
> repayable over a 10-year period at various interest rates. The unpaid
> balance of capitalized deficits is \$52.1 million. The interest rates
> range from 4.625% to 6.875%. The table below reflects the annual
> deficits that were incurred under the existing rates and the annual
> deficits that are projected under the proposed rates.

+-----------+-------------+-------------+-------------+-------------+
| Fiscal    | Capitalized | Interest    | Unpaid      | Fiscal Year |
| Year      | Deficits    |             |             | Due         |
|           |             | Rate        | Balance     |             |
+-----------+-------------+-------------+-------------+-------------+
| 1996      | \$2,797,847 | 7.625%      | \$0         | 2006        |
+-----------+-------------+-------------+-------------+-------------+
| 1997      | 5,067,955   | 6.875%      | 5,067,955   | 2007        |
+-----------+-------------+-------------+-------------+-------------+
| 1998      | 15,606,272  | 6.875%      | 15,606,272  | 2008        |
+-----------+-------------+-------------+-------------+-------------+
| 1999      | 14,932,440  | 6.000%      | 14,932,440  | 2009        |
+-----------+-------------+-------------+-------------+-------------+
| 2000      | 8,154,374   | 5.750%      | 8,154,374   | 2010        |
+-----------+-------------+-------------+-------------+-------------+
| 2002      | 1,666,241   | 5.625%      | 1,666,241   | 2012        |
+-----------+-------------+-------------+-------------+-------------+
| 2003      | 465,934     | 5.500%      | 465,934     | 2013        |
+-----------+-------------+-------------+-------------+-------------+
| 2004      | 1,752,391   | 4.875%      | 1,752,391   | 2014        |
+-----------+-------------+-------------+-------------+-------------+
| 2005      | 2,906,660   | 5.125%      | 2,906,660   | 2015        |
+-----------+-------------+-------------+-------------+-------------+
| 2006      | 1,541,408   | 4.625%      | 1,541,408   | 2016        |
+-----------+-------------+-------------+-------------+-------------+
| 2007      | 7,556,507   | 4.875%      |             | 2017        |
+-----------+-------------+-------------+-------------+-------------+
|           |             |             |             |             |
+-----------+-------------+-------------+-------------+-------------+
| 2008      | 13,138,270  | 4.875% (e)  |             | 2018        |
+-----------+-------------+-------------+-------------+-------------+
| 2009      | 11,820,352  | 4.875% (e)  |             | 2019        |
+-----------+-------------+-------------+-------------+-------------+
| 2010      | 4,344,978   | 4.875% (e)  |             | 2020        |
+-----------+-------------+-------------+-------------+-------------+

> The unpaid balance of all capitalized deficits is scheduled to be
> repaid by FY 2017 under the proposed rates.

**E. Credit Risk Mitigation Procedure**

> Western's Desert Southwest Customer Service Region (DSW) is proposing
> a modification to its billing practices for long-term firm
> transmission service. This change will ultimately be incorporated into
> the Rate Schedule for Intertie long-term firm 230/345/500-kV
> transmission service.
>
> The current business practice requires customers to pay for long-term
> firm transmission service after the fact, usually one month in the
> arrears. In today's business and economic environment, an entity's
> financial and credit status can change quickly and under the existing
> billing practices, Western's DSW can experience up to four months of
> uncollectible revenue before it becomes apparent that an entity is
> unable to pay its transmission service bills. On more than one
> occasion, Western's DSW has dealt with uncollectible revenue due to an
> entity's bankruptcy and credit rating change. Western's DSW risk of
> nonpayment is further increased by the fact that several of the
> long-term firm transmission service customers are not traditional
> preference customers. Many are independent power producers and other
> entities whose financial status can significantly and rapidly change
> due to the volatile energy market. Uncollectible revenue places all
> ratepayers at risk, since Western's DSW assumes full collection of all
> revenue when establishing long-term firm transmission service rates.
> To the extent that revenue is uncollectible, the rate will be
> insufficient to recover revenue requirements, which will result in
> upward pressure on the rate.
>
> To mitigate the credit risk exposure and the uncollectible revenue
> vulnerability, Western's DSW is proposing the requirement for Intertie
> customers to pay for long-term firm transmission service one month in
> advance. As stated, this proposed requirement will be integrated into
> the Rate Schedule for Intertie long-term 230/345/500-kV transmission
> service and will become effective when the proposed rates go into
> effect. Western expects the proposed rates to go into effect on
> October 1, 2007.