**PACIFIC NORTHWEST-PACIFIC SOUTHWEST INTERTIE PROJECT**

**Project History and Description**

The Pacific Northwest-Pacific Southwest Intertie Project (Intertie) was
authorized by Section 8 of the Pacific Northwest Power Marketing Act of
August 31, 1964. As authorized, the Intertie was to be a cooperative
construction venture by Federal and non-Federal entities, incorporating
the capability for both AC and DC transmission components and providing
a transmission connection among certain Federal and non-Federal power
systems.

The basic purpose of the Intertie was to provide, through power
transmission system interconnections, maximum utilization of the total
power resources to meet the nation's growing demands. This purpose was
to be accomplished through: (1) the exchange of summer-winter surplus
peaking capacity between the Northwest and Southwest to reduce capital
expenditures for new generating capacity; (2) the sale of Northwest
secondary energy to the Southwest; (3) the sale of Southwest energy to
the Northwest to "firm" peaking hydroelectric sources during critical
water years; (4) conservation of significant amounts of fuel through the
use of surplus hydroelectric energy; and (5) increased efficiency in the
operation of hydroelectric and thermal resources.

However, due to several delays in congressional construction funding for
the DC line the estimated in‑service date was extended to the point that
interest by potential users diminished. The combination of delays and
reduction of user interest resulted in the indefinite postponement of
the DC line construction. Consequently, the facilities constructed
provide only AC transmission service.

Western's portion of the Intertie consists of two parts, a Northwest
portion and a Southwest portion. The Northwest portion is administered
by Western's Sierra Nevada Regional Office and is incorporated, for
repayment and operation, within the Central Valley Project. The northern
portion consists of a 94‑mile (151 km) 500‑kV transmission line from
Malin Substation in Oregon through Round Mountain to Cottonwood
Substation in California. By agreement, the Central Valley Project has
transmission rights for 400 MW of Northwest Intertie capacity.

The Southwest portion is administered by Western's Desert Southwest
Regional Office and is treated as a separate project for repayment and
operational purposes. It consists of a 238 mile (383 km) 345‑kV
transmission line from Mead Substation in southern Nevada to Liberty
Substation in Arizona; a 19 mile (31 km) 230‑kV transmission line from
Liberty Substation to Westwing Substation in Arizona; a 22 mile (35 km)
230‑kV transmission line from Westwing Substation to Pinnacle Peak
Substation in Arizona; and two new segments which were brought on-line
in April 1996: the 260 mile (419 km) 500‑kV Mead-Phoenix Project
transmission line between Perkins Switchyard in Arizona and Marketplace
Substation in Nevada, including an interconnection to Mead Substation at
230‑kV; and a 202 mile (325 km) 500‑kV Mead-Adelanto Project
transmission line between Marketplace Substation and the existing
Adelanto Switching Station in southern California.

**POWER REPAYMENT STUDY (PRS)**

The proposed annual revenue requirement for firm and nonfirm
transmission service are based on the data outlined in this Brochure.
Repayment criteria are based on law and policies established by DOE
Order R.A. 6120.2 (RA 6120,2). According to RA 6120.2 project revenues
are required to repay investment costs including interest.

Generally, the repayment criteria formula is that total annual revenues
should equal total annual expenses plus debt repayment. Annual revenues
are first used to pay the annual operating expenses. These annual
operating expenses include all costs for operation, maintenance, and
interest on investments and capitalized deficits. Secondly, all required
payments due on capitalized investments are paid. In the event the total
annual revenues are insufficient to meet the annual expenses plus the
annual debt repayment, these deferred annual expense are amortized to be
repaid over a specified time frame. These deferred annual expense are
referred to as "capitalized deficits". When the total annual revenues
are sufficient to meet the annual operating expenses plus the debt
repayment, any remaining annual revenue is used to repay capitalized
deficits and 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 AC Intertie uses the fifty-year (50) Interest Amortization (IA)
methodology. Under this methodology, revenue requirements are determined
for the next 50 years.

The PRS on which this brochure is based may be updated with certain
technical adjustments prior to final submittal to DOE for approval.

*Transmission Sales*

[Firm Transmission Service]{.underline}

Historical firm transmission service sales are based on actual sales as
reported in the Yearly Report of Energy Deliveries and Income. Future
firm transmission service sales are based on the anticipated contractual
obligations with existing and future contractors. The 230/345-kV system
contractual commitments are 1,239 megawatts (MW). The existing 500-kV
system contractual commitments are 564 megawatts (MW). The total
combined firm transmission sales in FY 2005 is projected to be 2000 MW.

[Nonfirm Transmission Service]{.underline}

Historical nonfirm transmission sales are based upon actual sales
reported on the Yearly Report of Energy Deliveries and Income. Revenues
from future nonfirm transmission sales are included as "Other Revenue"
and are projected based on a five year historical average.

*Revenues*

[Firm Transmission Revenue]{.underline}

Historical firm transmission service revenues are based on actual firm
transmission service revenue reported on the Yearly Report of Energy
Deliveries and Income Report, and the financial statements. Projections
for future firm transmission service revenues are based on the projected
future firm contractual sales multiplied by the proposed firm
transmission service rate.

[Other Revenue]{.underline}

Other revenues include receipts from sources not otherwise addressed.
Historically, the sources included have been nonfirm transmission sales,
fuel replacement and interchange sales and settlements, rental of
electric property, facility charges, multiproject facilities revenue,
and miscellaneous operating income.

*Annual Expenses*

[Operation and Maintenance (O&M)]{.underline}

The O&M costs are for maintaining and operating AC Intertie substations,
switchyards, transmission lines, and administrative and general
expenses.

While historical O&M data has been obtained from Western's financial
statements, the O&M projections for future years of the cost evaluation
period (2005 -- 2009) are taken from Western's current budget documents.
O&M costs for the out years (2005 -- 2052) of the PRS are based on the
last budget year (2004) costs, less any non-recurring costs. The total
O&M expense over the repayment period (1970 -- 2052) of the PRS is equal
to \$ 407,490,132.

The following table displays the elements that make up the total O&M
expenses as shown in the PRS.

**OPERATIONS AND MAINTENANCE EXPENSES**

**AC INTERTIE PROJECT**

**[RETIREMENTS, REPLACEMENTS, & ADDITIONS (RR&A)]{.underline}:**

  ------------------------ --------------- --------------- ------------ ------------ --------------
  **ITEMS**                **2005**        **2006**        **2007**     **2008**     **2009-EOS**

  **230/345/500-kV**       **\$381,888**   **\$393.364**   **\$0.00**   **\$0.00**   **\$0.00**
  ------------------------ --------------- --------------- ------------ ------------ --------------

**FACILITY EXPENSES:**

  ------------------------ ----------------- ----------------- ----------------- ----------------- -----------------
  **ITEMS**                **2005**          **2006**          **2007**          **2008**          **2009-EOS**

  **230/345/500-kV         **\$3,168,725**   **\$3,373,130**   **\$3,373,130**   **\$3,373,130**   **\$3,373,130**
  Transmission Lines**                                                                             

                                                                                                   
  ------------------------ ----------------- ----------------- ----------------- ----------------- -----------------

**SYSTEM WIDE EXPESES:**

  ------------------------ ----------------- ----------------- ----------------- ----------------- -----------------
  **ITEMS**                **2005**          **2006**          **2007**          **2008**          **2009-EOS**

                                                                                                   

  **230/345/500-kV         **\$2,547,970**   **\$2,823,656**   **\$2,823,656**   **\$2,823,656**   **\$2,823,656**
  Transmission Lines**                                                                             

                                                                                                   
  ------------------------ ----------------- ----------------- ----------------- ----------------- -----------------

**TOTAL OPERATION AND MAINTENANCE EXPENSES:**

  ------------------------ ----------------- ----------------- ----------------- ----------------- -----------------
  **ITEMS**                **2005**          **2006**          **2007**          **2008**          **2009-EOS**

                                                                                                   

  **230/345/500-kV         **\$5,716,695**   **\$6,196,786**   **\$6,196,786**   **\$6,196,786**   **\$6,196,786**
  Transmission Lines**                                                                             

                                                                                                   
  ------------------------ ----------------- ----------------- ----------------- ----------------- -----------------

[Interest]{.underline}

Interest expense on the unpaid balance of the federal investments is
calculated annually and incorporated into the proposed PRS. The proposed
230/345/500-kV system PRS shows a total interest expense of
\$487,265,897 over the repayment period (1970 -- 2052). Interest is
calculated each fiscal year on the interest-bearing investments
remaining to be repaid at the end of the previous year and plant placed
in service during the current year. All interest rates are in accordance
with RA 6120.2. A 3 percent rate was used to compute the interest for
the initial AC Intertie investment. Interest on historical capitalized
deficits, additions and replacements are calculated at the RA 6120.2
rate for the year in which the dollar is spent or deficit was incurred.
Interest on future additions and replacements is calculated at the
current annual interest rate of 4.875%.

[Capitalized Deficits]{.underline}

Capitalized Deficits occur when the total annual revenues are
insufficient to meet the annual expenses plus the annual debt repayment.
All deficits for the AC Intertie are estimated to be paid by FY 2012.

[Investments]{.underline}

Investment costs are comprised investments budgeted and managed through
Western's and Reclamation's construction. For the investments thru
Western, investments are planned in an Engineering Ten-Year Planning
process which involves working with the customers to plan replacements
and addition activities included in the Engineering & Construction Ten
Year Plan (Ten Year Plan). The Ten Year Plan is an outline of
construction activities and is the source document for the construction
additions and replacements in the proposed PRS.

[Additions]{.underline}

Additions are projected through the cost evaluation period (2005-2009)
and are derived from the FY 2006 Ten-Year Plan. The interest during
construction (IDC) calculation for each addition is determined by the
interest rate in the year the first dollar is spent. The capitalized
costs for future additions also include IDC. The annual interest expense
for each addition is based on the same interest rate used to calculate
IDC. Additions are amortized over a 50 year period and the annual
payments are part of the scheduled principal payments in the PRS.

[Replacements]{.underline}

Replacements are projected through the cost evaluation period
(2005-2009) and are derived from the FY 2006 Ten-Year Plan. The
capitalized costs for future replacements in the cost evaluation period
include IDC. The IDC calculation for each replacement is determined by
the interest rate in the year the first dollar is spent. The annual
interest expense for replacements is based on the interest rate used to
calculate IDC. Replacements are amortized over the service life of the
specific asset and the annual payments are part of the scheduled
principal payments in the PRS.

[Capitalized Movable Equipment]{.underline}

CME is capitalized in the existing PRS. It has two components. The first
component is the annual cost of depreciation and the second component is
the interest expense on the unamortized balance. CME expense currently
being used in the PRS is an estimate, but Western is continuing to
refine the number and is subject to a minor change upon completion of
the research.