UNITED STATES OF AMERICA

# U.S. DEPARTMENT OF ENERGY

# BEFORE THE

# BONNEVILLE POWER ADMINISTRATION

Proposed Safety-Net Cost Recovery )

Adjustment Clause Adjustment to ) BPA File No.: SN-03

2002 Wholesale Power Rates )

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# 

# BRIEF ON EXCEPTIONS OF PUBLIC POWER COUNCIL

AND IDAHO ENERGY AUTHORITY, INC.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Denise Peterson

Senior Counsel

Public Power Council

1500 NE Irving Street, Suite 200

Portland, OR 97232

Phone: (503) 232-2427

Fax: (503) 239-5959

Email: <denisep@ppcpdx.org>

Attorney for PUBLIC POWER COUNCIL

Peter J. Richardson

Richardson & O'Leary

99 E. State Street, Suite 200

P.O. Box 1849

Eagle, ID 83616

Phone: (208) 938-7904

Fax: (208) 938-7904

Email: <Peter@richardsonandoleary.com>

Attorney for IDAHO ENERGY AUTHORITY, INC.

June 20, 2003

### BRIEF ON EXCEPTIONS OF PUBLIC POWER COUNCIL

[AND IDAHO ENERGY AUTHORITY, INC.]{.underline}

#### *TABLE OF CONTENTS*

***TABLE OF
AUTHORITIES***.............................................................*ii*

I.
INTRODUCTION..................................................................\.........1

II\. SUMMARY OF
EXCEPTIONS...........................................................2

III\. ARGUMENTS ON
EXCEPTIONS.................................\..........\..............2

A.  **BPA's decision to exclude from the record any Toolkit analysis,
    net revenue forecasts, or any other documentation, studies or
    evidence**

> **to support the draft decisions included in the DROD precludes
> meaningful evaluation of BPA's proposed SN CRAC and**
>
> **is an abuse of
> discretion**..........................................................4

B.  **BPA's decision to abandon its proposed 50% TPP and 80% TRP
    financial standards in determining an SN CRAC does not account for
    the state of the regional economy, and is a policy departure
    unsupported on the
    record**......................................................5

C.  **BPA's decision to adopt a new financial standard of an 80%
    three-year TPP is not supported by
    evidence**.......................................6

D.  **BPA's decision to adopt a rate design for the SN CRAC that yields
    roughly flat expected value total rate levels over the FY 04-06
    period**

> **is not based on the
> record**.......................................................6

E.  **BPA's decision to include revised GRSPs without sufficient
    opportunity for parties to review precludes meaningful assessment**

> **of BPA's last-minute proposal, and is an abuse of
> discretion**............**8**
>
> **F. BPA's decision not to use the 7(b)(2) rate test is based on
> incorrect**
>
> **analysis of the Supplemental ROD under WP-02, the JCG/BPA settlement
> agreement in that proceeding and the arguments in the JCG
> brief**...........................................................................9

IV\.
CONCLUSION.............................................................................10

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

Cases

*Alcoa v. Bonneville Power Administration*,

891 F.2d 1467, 1472 (9^th^ Cir.
1989)...............................................................3

*California Energy Resources Conservation and Development Commission v.*

*Bonneville Power Administration*, 831 F.2d 1467, 1472 (9^th^ Cir.
1987)......................3

Statutes

5 U.S.C. §
706.........................................................................................3

16 U.S.C. §
839e(b)(2)...............................................................................9

16 U.S.C. §
839e(i)(5)................................................................................3

16 U.S.C. §
839f(e)(2)...........................................................................\.....3

UNITED STATES OF AMERICA

U.S. DEPARTMENT OF ENERGY

BEFORE THE

BONNEVILLE POWER ADMINISTRATION

Proposed Safety-Net Cost Recovery )

Adjustment Clause Adjustment to ) BPA Docket No.: SN-03

2002 Wholesale Power Rates )

BRIEF ON EXCEPTIONS OF PUBLIC POWER COUNCIL

AND IDAHO ENERGY AUTHORITY, INC.

I.  INTRODUCTION.

Public Power Council (PPC) and Idaho Energy Authority, Inc., (IDEA)
(jointly, "PPC/IDEA") submit this Brief on Exceptions pursuant to
*Procedures Governing Bonneville Power Administration Rate Hearings,* 51
Fed. Reg. 7611 (1986) (Procedures), Rule 1010.13, and, as applicable,
*Special Rules of Practice to Govern These Proceedings* (Special Rules)
issued on March 31, 2003 (SN-03-O-01). PPC/IDEA take exception to
portions of the Administrator's Draft Record of Decision, 2003
Safety-Net Cost Recovery Adjustment Clause Final Proposal, SN-03-A-01
(DROD) as discussed in the following Argument on Exceptions, part III.

PPC is a non-profit Washington corporation consisting of 110 publicly-
or cooperatively-owned electric utilities that are statutory preference
customers of BPA, purchasing all or part of their wholesale power
requirements from BPA. IDEA is an Idaho corporation with 21 members
composed of municipally- and cooperatively-owned utilities.

II. SUMMARY OF EXCEPTIONS.

> PPC/IDEA take exception to the following decisions set forth in the
> DROD:

-   BPA's decision to exclude from the record any Toolkit analysis, net
    revenue forecasts, or any other documentation or studies to support
    the draft decisions included in the DROD.

-   BPA's decision to abandon its proposed 50% TPP and 80% TRP financial
    standards in determining an SN CRAC.

-   BPA's decision to adopt a new financial standard of an 80%
    three-year TPP.

-   BPA's decision to adopt a rate design for the SN CRAC that yields
    roughly flat expected value total rate levels over the FY 04-06
    period.

-   BPA's decision to include revised GRSPs without sufficient
    opportunity for parties to review.

-   BPA's decision to bypass the 7(b)(2) rate test in determining the SN
    CRAC.

# ARGUMENTS ON EXCEPTIONS

In 250-some pages, BPA's DROD has modified its rate increase proposal
from as much as 41% above May 2000 rates (WP-02), to about 5% over FY 03
rates, without any supporting documentation. The basis for triggering
the SN-CRAC was the projection that BPA's ability to make the FY 03
treasury payment was imperiled. BPA now acknowledges significant
improvements to its financial condition in numerous areas, without
quantification (other than \$80 million in net expense reductions).
(SN-03-A-01, p. 2.1-2.) BPA admits that there is now 100% probability of
Treasury payment in FY 03---well above the 39% TPP BPA claimed that it
faced when the SN-03 7(i) process began. (SN-03-A-01, p. 2.7-34.) There
is no basis for an SN-CRAC rate adjustment in FY 04.

While BPA is moving in the right direction, the draft decision is
unsupported by substantial evidence on the record, since there should be
no rate increase in FY 04. BPA cannot demonstrate that it requires a
rate increase in FY 04, in order to make its treasury payment, and
arbitrarily picks 5% for a rate increase. The lengthy draft decision
amounts to pulling numbers out of a hat to justify an unneeded rate
increase. Without substantial evidence to support BPA's determinations
in the DROD regarding rates under a 7(i) proceeding, the decision does
not meet the standard of Section 9(e)(2) of the Pacific Northwest
Electric Power Planning and Conservation Act ("Northwest Power Act"). 16
U.S.C. § 839f(e)(2).

Furthermore, BPA's changing its TPP and TRP standards without a rational
basis is arbitrary and capricious and an abuse of its discretion. On
this basis PPC/IDEA assert that a court should not affirm this decision,
if finally approved by BPA. *Alcoa v. Bonneville Power Administration*,
891 F.2d 748, 752 (9^th^ Circuit 1989); *California Energy Resources
Conservation and Development Commission v. Bonneville Power
Administration*, 831 F.2d 1467, 1472 (9^th^ Circuit 1987) (also citing
the Administrative Procedures Act, 5 U.S.C. § 706).

BPA's Administrator is required to make the final decision establishing
rate(s) based on the record, which includes the hearing transcript,
exhibits, and materials and information submitted in the proceeding. (16
U.S.C. § 839e(i)(5).) In the DROD, the proposed decision is based on
material not admitted into evidence. On judicial review, "final
determinations regarding rates under section 839e of this title shall be
supported by substantial evidence in the rulemaking record required by
section 839e(i) of this title...." (16 U.S.C. § 839f(e)(2).)

Neither does the administrative record provide the documentation to
support the SN CRAC parameters and the methodology used in the GRSPs. It
is arbitrary and capricious, and an abuse of discretion, for BPA to base
its rates on material developed outside the administrative record and
shielded from cross-examination by the parties.

PPC/IDEA assert the following exceptions to the DROD as decisions
unsupported by substantial evidence on the record, and/or arbitrary and
capricious and an abuse of discretion, in accordance with the preceding
discussion.

> **A. BPA's decision to exclude from the record any Toolkit analysis,
> net revenue forecasts, or any other documentation, studies or evidence
> to support the draft decisions included in the DROD precludes
> meaningful evaluation of BPA's proposed SN CRAC, and is an abuse of
> discretion.**

In the DROD, BPA proposes an SN CRAC that it claims would result in
about a 5% increase to FY 03 rates for the remainder of the rate period
and ending reserves for the rate period of \$354 million. (SN-03-A-01,
p. 2.1-2; and SN-03-A-01, p. 2.8-18.) BPA does not address the exact
size of the proposed SN CRAC in terms of a percent adjustment to May
2000 base rates. Nowhere in the record is there documentation to support
an SN CRAC with this resulting rate impact. Consequently, the parties
have no opportunity to analyze the appropriateness, accuracy, or impacts
of BPA's draft decision on the SN CRAC. Without an updated Toolkit model
and associated source files, the parties cannot ascertain the
truthfulness of BPA's claim regarding the level of ending reserves
resulting from the proposed rate increase. The proposed rate increase
and design could actually produce even larger agency reserves, but
parties have no way of knowing.

PPC/IDEA take exception to the way this rate increase and new design
could enable BPA to accumulate excessive reserves at a time of financial
duress in the region. BPA fails to provide parties an opportunity to
review an updated accounting of the costs associated with this rate
increase. The DROD refers to the rate increase in veiled terms and not
in terms of an explicit increase to May 2000 base rates, as the SN CRAC
was intended to function. With the resources at BPA's command, the
parties expect a straightforward case with documentation. BPA's
take-it-or-leave-it attitude in burying two unsupported numbers in the
approximately 250 pages of DROD was not based on substantial evidence,
and was, further, arbitrary and capricious.

> **B. BPA's decision to abandon its proposed 50% TPP and 80% TRP
> financial standards in determining an SN CRAC does not account for the
> state of the regional economy, and was a policy departure unsupported
> on the record.**

In its Initial Proposal, BPA proposed adopting two new financial
standards, a 50% three-year TPP and an 80% TRP, in lieu of a more
traditional 80% five-year TPP which corresponds to an 87.5% three-year
TPP. (SN-03-E-BPA-04, p. 14.) In its direct testimony and again in its
rebuttal testimony, BPA supported this decision by explaining that it
chose to temporarily relax its financial standards out of concern for
the economic health of the region. (SN-03-E-BPA-04, pp. 13-15; and
SN-03-E-BPA-11, p. 29.)

In the DROD, BPA now explains that because its financial health has
improved it no longer needs to relax the TPP standard to the same extent
proposed initially. (SN-03-A-01, pp. 2.7-7 through 2.7-14.) BPA fails to
acknowledge the continued dismal state of the regional economy---the
original basis for BPA's decision to relax its TPP standard. The "unique
circumstances presented by the poor regional economy" persist, as does
BPA's need to modify its financial standards to the extent originally
proposed. (SN-03-A-01, p. 2.7-13.) BPA's improved financial health means
that the need for an SN CRAC has diminished, not that BPA's financial
standards need to be made more rigorous. Making this incongruous leap is
an arbitrary and capricious, and not supported in the record.

In taking exception to BPA's policy change in the DROD without a basis
in the record, PPC/IDEA assert that BPA should articulate sound reasons,
based on facts, for making changes in policy. The economy can ill afford
the pressure of a more stringent TPP standard, while BPA admits that it
no longer needs a rate increase to meet its treasury obligations in FY
04.

> **C. BPA's decision to adopt a new financial standard of an 80%
> three-year TPP is not supported by evidence.**

In the DROD, BPA proposes that adopting an 80% three-year TPP strikes a
better balance between BPA's financial health and the regional economy
than did the standards BPA proposed in its Initial Proposal.
(SN-03-A-01, pp. 2.7-7 through 2.7-14.) BPA claims that this new
standard, along with improvements in its financial health and
alterations in the FB CRAC and SN CRAC parameters, produce an SN CRAC
that increases rates 5% above the FY 03 level. (SN-03-A-01, p. 2.7-13.)
BPA does not support this new TPP standard on the record, offering no
documentation in the form of a Toolkit analysis (or any documentation)
to support these claims. PPC/IDEA take exception to the fact that we
cannot ascertain the basis of these claims that BPA has failed to
substantiate. If BPA used the financial standards presented in the
Initial Proposal, it could possibly produce a smaller rate increase, but
PPC is incapable of verifying this, because BPA has not supplied parties
with an updated Toolkit model and updated source files.

D.  **BPA's decision to adopt a rate design for the SN CRAC that yields
    roughly flat expected value total rate levels over the FY 04-06
    period is not based on the record.**

Although BPA has said that its financial health has improved, the extent
to which remains a mystery to the parties, as BPA persists in avoiding
quantification of the improvement. BPA admits that there is now 100%
probability of Treasury payment in FY 03---well above the 39% TPP BPA
projected at the time the SN-03 7(i) process began. (SN-03-A-01, p.
2.7-34.) Unfortunately, the financial health of the region and BPA's
customers has not improved, and, in fact, may have worsened since this
7(i) process triggered. Immediate rate relief is of supreme importance
to BPA's customers. The region struggles to support rates at their
current level, and the prospect of an increase in FY 04 causes grave
concern. As noted in the DROD, the record documents the substantial
support on the part of the parties for a tilted SN CRAC, if one must be
implemented at all. (SN CRAC-03-A-01, pp. 2.7-22 through 2.7-24.) The
parties have put forth a preponderance of evidence to support a small SN
CRAC in FY 04, which would result in no net increase over FY 03 (or even
a decrease) in average annual rates, followed, if need be, by a modest
increase in FY 05 and FY 06. BPA's rendering the decision to adopt this
proposal would be on sound legal grounds, supported on the record and
not arbitrary and capricous, unlike BPA's proposal for levelized rates
for the entire rate period.

In the DROD, BPA proposes that a tilted SN CRAC, using the 80%
three-year TPP standard BPA now prefers, would generate more overall
revenues than if rates were flat. (SN-03-A-01, p. 2.7-24.) This proposal
is unsubstantiated by Toolkit or any other analysis. It makes little
sense, moreover, because BPA can shape the collection of the SN CRAC
(*i.e.*, tilt or flatten the size of the annual rate adjustment) by
changing the parameters (*i.e.*, the annual thresholds and maximum
recovery amounts), while still satisfying whatever three-year TPP
standard BPA chooses, thereby collecting whatever amount of revenues BPA
requires.

PPC/IDEA take exception to BPA's decision to spread its FY 03 financial
improvements over the course of the rate period, instead of
concentrating them on the near-term. A reversal of this decision would
provide short-term wholesale power rate relief to the region and give
the region an opportunity to bear the current recession with less
difficulty.

> **E. BPA's decision to include revised GRSPs without sufficient
> opportunity for parties to review precludes meaningful assessment of
> BPA's last-minute proposal, and is an abuse of discretion.**

BPA includes in Appendix A of the DROD revised General Rate Schedule
Provisions (GRSPs) that reflect the decisions contained within the DROD.
In Appendix A, BPA has made substantial changes to the WP-02
Supplemental Final ROD GRSPs, and this is the first opportunity given to
parties to review the changes. BPA has abused its discretion in failing
to supply documentation or study to support its proposed changes to the
FB CRAC and SN CRAC parameters.

PPC/IDEA take exception to the GRSPs' current language, and suggest,
along with NRU, that BPA conduct a workshop before the Final ROD is
produced to work on further revisions with its customers and their
representatives.

F.  **BPA's decision not to use the 7(b)(2) rate test is based on
    incorrect analysis of the Supplemental ROD under WP-02, the JCG/BPA
    settlement agreement in that proceeding and the arguments in the JCG
    brief.**

BPA is in uncharted territory in interpreting the requirements for a
7(i) process to set rates for implementation of an SN CRAC, and whether
it requires a 7(b)(2) rate test, because the process was an inchoate
concept as demonstrated in the WP-02 Supplemental ROD and Power Rate
Proposal Final Study and Documentation. (WP-02-FS-BPA-09-and -10, June
2001.) Therefore, circuitously in the DROD, BPA extensively cites as
authority the Initial Brief of the Parties that Comprise the Joint
Customer Group (JCG), filed April 24, 2001. (WP-02-B-JCG-01.)
Furthermore, BPA maintains that this brief judicially estops PPC/IDEA
from raising the issue of the 7(b)(2) rate test in a subsequent
proceeding, as one of many signatories to the brief. (SN-03-A-01, pp.
2.1-56 -- 2.1.57.)

PPC/IDEA takes exception to BPA's characterization of the JCG brief as
precluding this legal argument in this SN-03 proceeding to determine the
parameters of an SN CRAC for the first time. The JCG Brief referred to
the fact that there was no need to redo the test in the *second phase*
of the WP-02 proceeding.

> ... the focus of this *second phase* of the WP-02 proceeding has been
> the extent to which the Cost Recovery Adjustment Clause ('CRAC") . . .
> should be revised to deal with BPA's cost recovery problem. .... In
> the *first phase* of this proceeding, BPA subjected these base rates
> to all of the statutory tests it deemed necessary to satisfy the
> requirements of Section 7 of the Regional Act, including the various
> rate tests contained in sections 7(b) and (c) of the Regional Act. And
> since it is only the contingent cost recovery clauses contained in the
> GRSPs, and not the base rates contained in the rate schedules, that
> are being modified in the *second* *phase* *of this proceeding*, there
> is no legal requirement that these rate tests be performed a second
> time. (WP-02-B-JCG-01, p. 5, *emphasis added*.)

The brief referred to the contingent cost recovery clauses that were
being modified in the *second phase* of the WP-02 proceeding, thus not
requiring redoing the test at that time; *i.e.*, for the FB and LB
CRACs' parameters and adjustments that were actually established. The SN
CRAC was left for determination in a separate 7(i) proceeding. It is in
this separate proceeding that the 7(b)(2) rate test is required when
setting rates for public agencies. (16 U.S.C. § 839e(b)(2).)

BPA cannot point to where it is precluded from applying the 7(b)(2) test
by the Supplemental ROD or its 2002 Supplemental Power Rate Proposal
Appendix to the ROD and the GRSPs (WP-02-A-08 and -09), and hence relies
on a determination that "this conclusion is implicit in the agreement."
(SN-03-A-01, p. 2.1-56.) PPC/IDEA take exception to BPA's erroneous
reliance on an "implicit" assumption and citation to an initial brief
for authority, when BPA's interpretation should be supported by the
express language of its decisions.

III. CONCLUSION

For the foregoing reasons, PPC/IDEA submit that BPA does not need an
SN CRAC rate increase in FY 04, and has provided no evidence, let alone
substantial evidence on the record, to support an increase. If BPA does
institute an SN CRAC, it should be tilted to FY 05 and FY 06, with no
net increase or a possible decrease in FY 04, to allow the stressed
regional economy to benefit from BPA's improved financial condition.
Delaying implementation of an SN CRAC to FY 05 will allow BPA to use
tools at its disposal and account for events as they actually happen in
order to reduce the likelihood of needing a rate increase, while
providing security to BPA that it can meet its TPP in those years.

PPC/IDEA joins NRU and others in requesting that BPA open a proceeding
to allow BPA and its customers to develop GRSPs for incorporation in the
Final ROD.

Dated this 20^th^ day of June, 2003.

Respectfully submitted,

/s/

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Denise Peterson

Senior Counsel

Public Power Council

1500 NE Irving Street, Suite 200

Portland, OR 97232

Phone: (503) 232-2427

Fax: (503) 239-5959

Email: <denisep@ppcpdx.org>

/s/

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Peter J. Richardson

Richardson & O'Leary

99 E. State Street, Suite 200

P.O. Box 1849

Eagle, ID 83616

Phone: (208) 938-7904

Fax: (208) 938-7904

Email: <Peter@richardsonandoleary.com>

Attorney for Idaho Energy Authority, Inc.