INDEX

REBUTTAL TESTIMONY OF

MARGARET E. PEDERSEN AND PATRICK G. McRAE

Witnesses for Bonneville Power Administration

**SUBJECT: Rebuttal Testimony** **for** **Transmission Expense
Forecast**

**Page**

Section 1. Introduction and Purpose of Testimony 1

Section 2. Transmission Expense Forecast 1

Section 3. Delivery Charge 6

Attachments

1\. Chart: HLH Southwest Sales (50 Historical Water Years) and
Prepurchased Intertie Transmission

2\. Chart: LLH Southwest Sales (50 Historical Water Years) and
Prepurchased Intertie Transmission

REBUTTAL TESTIMONY OF

MARGARET E. PEDERSEN AND PATRICK G. McRAE

Witnesses for Bonneville Power Administration

SUBJECT: REBUTTAL TESTIMONY FOR TRANSMISSION EXPENSE FORECAST

Section 1. Introduction and Purpose of Testimony

*Q. Please state your names and qualifications.*

A. My name is Margaret E. Pedersen. My qualifications are contained in
WP-02-Q-BPA-56.

A. My name is Patrick G. McRae. My qualifications are contained in
WP-02-Q-BPA-47.

*Q. Please state the purpose of your testimony.*

A. Our testimony has two purposes. First, to respond to direct testimony
filed by witnesses Donald W. Schoenbeck and Raymond D. Bliven
(WP-02-E-DS/AL/VN-03) relating to transmission expenses. Second, to
respond to the request by the Pacific Northwest Generating Cooperative
(PNGC) for Power Business Line (PBL) to retain \$6 million of Delivery
segment costs in power rates and meld across all power rates.

*Q. How is your testimony organized?*

A. This testimony is presented in three sections, including this
introductory section. The second section responds to the modifications
to the transmission expense forecast proposed in the testimony of Donald
W. Schoenbeck and Raymond D. Bliven. The third section discusses the
request made by the PNGC regarding the Delivery Charge.

Section 2. Transmission Expense Forecast

*Q. Have you reviewed the parties' direct testimony pertaining to
Bonneville Power Administration's (BPA) forecast of transmission
expenses?*

A. Yes. The testimony of Donald W. Schoenbeck and Raymond D. Bliven
(Schoenbeck and Bliven, WP-02-E-DS/AL/VN-03 at 12) proposes several
modifications and corrections to the forecast of transmission expense.
In this testimony, the parties argue that the transmission expense
forecast is too high. The parties make several arguments to support a
reduction in the transmission expense forecast. These are: (1) The PBL
should utilize its prepurchased intertie rights for the Pacific
Southwest "grandfathered" contract deliveries; (2) maximize the
"sheltering" of short-term power sales, storage and Pacific Northwest
Coordination Agreement (PNCA) transactions under long-term contractual
entitlements; and (3) that the upward rate pressure associated with the
shift from 1 non-coincidental demand (NCD) to 12 coincidental peak
demand (CP) cost recovery should be removed from the hourly nonfirm
(HNF) rate increase calculation.

*Q. The testimony of Schoenbeck and Bliven asserts the PBL has*
*prepurchased capacity on* *the intertie above expected need. Do you
agree?*

A. No. The transmission expense forecast in the initial proposal is
based on the average monthly megawatt (MW) sales over 50 historical
water years. In consideration of the Schoenbeck and Bliven testimony,
PBL compared the surplus in each of the 50 water years, by month, to the
level of prepurchased intertie transmission. The results are illustrated
in the attached charts. During the months of runoff (May, June, and
July), there is a 60 percent probability that surplus sales will exceed
prepurchased transmission capacity.

The volume of PBL surplus varies widely from year-to-year and is
seasonally shaped, reaching its annual maximums during the runoff
period. The southern intertie is a constrained path with rapidly
increasing competition for available transmission capability,
particularly with respect to short-term point-to-point (PTP). PBL
prepurchases long-term Intertie PTP to provide certainty of transmission
capability and supplements that amount with short-term purchases. Absent
competition for intertie transmission, PBL could simply purchase
long-term to cover the flat annual portion of the forecasted surplus
sales, and purchase short-term PTP in amounts that closely match the
shaped portion. However, because of competition for limited transmission
capability on the Intertie, there is high-level risk associated with the
ability to make short-term purchases. Short-term PTP is available on a
first-come, first-served basis, and can only be purchased within a
window that begins at midnight, 60 days before the day the service
begins. Some competitors have developed the capability to submit their
electronic requests within nanoseconds of when the window opens, thus
increasing the intensity of competition and reducing the probability
that any entity, including PBL will be able to get the short-term PTP it
requires.

PBL surplus sales to the Southwest markets over the southern intertie
are critical to BPA's mission; sufficient transmission access to
Southwest markets during May, June, and July is a prerequisite to making
those sales. Failure to obtain transmission into the Southwest market
for the runoff period poses significant risks, including lower value for
the energy in a saturated Northwest market, increased spill levels, and
lower treasury payment probabilities. Consequently, in choosing the
appropriate level of prepurchased long-term transmission, PBL considered
the value of additional transmission certainty during the critical
period of May, June, and July.

*Q. The testimony of Schoenbeck and Bliven claims that BPA should assume
the unused prepurchased intertie capacity can be used to serve
grandfathered contracts. Do you agree?*

A. No. For grandfathered contracts, which are usually "delivered"
contracts, PBL believes it must have a secure path during the term of
the contract. During the spring months, PBL does not forecast any
available surplus PTP transmission. While it may appear that PBL has
enough forecasted surplus under prepurchased PTP in the month of October
2001 to serve the amount of grandfathered contracts listed for October
2001, this conclusion is incorrect because most of that surplus is
California-Oregon Border (COB) intertie, and the majority of
grandfathered agreements are delivered over Nevada-Oregon Border

(NOB) intertie. In addition, PBL does not expect to have a firm path in
all months of the year under the surplus PTP inventory at NOB.

The majority of the grandfathered contracts that are under the category
grandfathered transmission are for delivery at NOB. Specifically, all
grandfathered contracts for the period October 2001 through June 2002
are to be delivered at NOB, all but 14 MW are to be delivered at NOB for
the period July 2002 through June 2003, and all but 50 MW are to be
delivered at NOB for the period July 2003 through September 2006.

Currently, PBL has only 50 MW of surplus PTP on the NOB intertie in the
months of June through October for the period Fiscal Year (FY) 2003
through FY 2006, the remainder of the PBL surplus being on COB. This 50
MW is not sufficient surplus to cover the grandfathered contracts.

*Q. The testimony of Schoenbeck and Bliven claims PBL has not maximized
the "Sheltering" of short-term power sales, storage and PNCA
transactions, under long-term contractual entitlements in the
transmission expense forecast. Do you agree?*

A. No. In the initial proposal, PBL forecasted firm transmission on the
Network based on heavy load hour (HLH) demand; then light load hour
(LLH) sales were sheltered under the capacity purchased for HLH. There
are more LLH sales expected than HLH sales; therefore in every month the
firm transmission purchased is fully maximized. For all incremental LLH
sales above HLH sales, PBL assumed the HNF transmission product was
purchased since it is the most economical product for the shape of LLH
sales. The HNF transmission product was purchased for storage and PNCA
because the shape of these power sales are unknown and can vary across
hours. Given that hourly megawatthour values may vary across hours, the
most economical transmission product to purchase on a forecast basis is
the HNF product.

*Q. The testimony of Schoenbeck and Bliven argues that the PBL's
assumption that it will have to procure transmission for 85 percent of
HLH and 75 percent of LLHs sales levels is grossly overstated. Do you
agree?*

A. No. The 85 percent and 75 percent figures are based on internal
discussions with power traders and forecasters. In consideration of the
testimony by Schoenbeck and Bliven, PBL compiled the best available data
on FY 1999 sales made in the short-term and within-month markets. The
data indicated that presently nearly 100 percent of the HLH sales, and
96 percent of LLH sales, are made with a delivery clause.

We do agree with Schoenbeck and Bliven's testimony that transmission
customers are becoming more sophisticated in the procurement and
utilization of transmission capacity and therefore we expect to see some
reduction in delivered sales. PBL believes the assumption of delivered
sales of 85 percent of HLH sale and 75 percent of LLH is a reasonable
expectation for the post-2002 period.

*Q. After considering the testimony of Schoenbeck and Bliven, does PBL
propose any modifications to the forecast level of prepurchased intertie
transmission* *capacity?*

A. PBL is modifying the level of prepurchased intertie transmission
capacity included in the transmission expense forecast to account for
the most current data on the level of prepurchased intertie capacity
available. When the initial proposal was developed, PBL had pending
transmission requests totaling 600 MW that were counted as prepurchased
intertie transmission. The requests totaling 600 MW were not fulfilled,
so PBL proposes that they be removed from the transmission expense
forecast. In conjunction with the transmission requests that were not
fulfilled, PBL found discrepancies in the post-2001 period in the data
base that tracks the prepurchased transmission inventory to what was
actually acquired for the same time period.

*Q. How will this* *affect the final proposal?*

A. In the final proposal, PBL will use the following amounts of
prepurchased intertie transmission: October, 2001 to March 2002: 1,605
MW; April 2002 to August 2002: 2,005 MW; September 2003 to December
2003: 1,350 MW; and from January 2004 through September 2006: 1,150 MW.

*Q. Does PBL agree with the proposal to recalculate the HNF rate
increase?*

A. PBL agrees with the party's testimony on the methodology for the
calculation of the HNF rate increase. The HNF rate should not include
costs associated with the shift from 1 NCD to 12 CP cost recovery
because the HNF load is not affected by the shift from 1 NCD to 12 CP.
Thus, PBL proposes to recalculate the HNF rate increase without any
upward rate pressure associated with the shift from 1 NCD to 12 CP cost
recovery.

Section 3. Delivery Charge

*Q. Have you reviewed the parties' direct testimony pertaining to the
delivery charge?*

A. Yes. The testimony of the PNGC (WP-02-E-PN-05) proposes BPA PBL
retain \$6 million of Delivery segment costs in power rates and meld
that cost across all power rates. The PNGC argues that, without BPA
continuing this practice, the expected cost of the delivery segment
would be "simply unacceptable" to smaller customers and would have
significant impact on these utilities' revenue requirements.

*Q. Do you agree that PBL should retain \$6 million of Delivery segment
costs in power rates and meld that cost across all power rates?*

A. No. BPA has made efforts to comply with the regulatory paradigms
established by Federal Energy Regulatory Commission in restructuring the
wholesale electric industry, including functionally unbundling power and
transmission rates. Thus, the merchant function (PBL) is responsible for
establishing power rates that recover power costs and the transmission
function (Transmission Business Line) is responsible for establishing
transmission rates that recover transmission costs. For the 2002-2006
rate period, all issues concerning the Delivery segment, including which
facilities are in the segment and how the Delivery charge is designed,
will be determined in the transmission rate case. *See* Cherry and
Metcalf, WP-02-E-BPA-10, at 1-2, 7.

The PNGC proposal to retain \$6 million of Delivery costs in the power
revenue requirement is not consistent with cost/price linking or
functional unbundling. The Delivery segment currently consists primarily
of substation facilities required to step‑down transmission voltages to
voltages below 34.5 kilovolts for deliveries to customers. These
facilities are generally located at the points of delivery. They
typically serve one or two customers at the delivery point.

BPA recognizes that the transition to unbundled electric rates may
impact some customers more significantly than others. As a result, and
in an attempt to spread the benefits of the Federal Columbia River Power
System fairly, the initial power rate case proposal provides some rate
impact mitigation. For example, BPA has proposed to cap the Demand
Charge and the Load Variance Charge, to continue the Low Density
Discount, and to provide \$4 million for relief for customers with high
irrigation loads. *See* Burns and Elizalde, WP-02-E-BPA-08, at 17. While
the PBL is sympathetic to the customer's concerns, the transmission rate
case is the proper forum for customers to address the handling of the
Delivery charge.

*Q. Does this conclude your testimony?*

A. Yes.