**WESTERN AREA POWER ADMINISTRATION**

**PACIFIC NORTHWEST - PACIFIC SOUTHWEST**

**INTERTIE PROJECT**

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height="4.1715277777777775in"}

**TRANSMISSION SERVICE RATES BROCHURE**

**JULY 2006**

**TABLE OF CONTENTS**

**I. Summary 1**

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

**A. Announcement of Proposed Rates 1**

**B. Public Process 1**

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

**D. Written Comments 2**

**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 3**

**III. Proposed Rates for Transmission Service 4**

**IV. Supporting Data 4**

**A. Firm Transmission Sales 5**

**1. Firm 230/345-kV Transmission Service 5**

**2. Firm 500-kV Transmission Service 5**

**B. Revenues \... 5**

**1. Firm 230/345-kV Transmission Service 5**

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

**3. Other Revenues 6**

**C. Expenses 6**

**1. Operation and Maintenance 6**

**2. Purchased Transmission 7**

**3. Abandoned Project 7**

**4. Other 7**

**5. Interest 8**

**D. Investments 8**

**1. Original Project 8**

**2. Additions 8**

**3. Replacements 8**

**4. Capitalized Deficits 9**

**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). This 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 January 1, 2007, and remain in effect through December 31, 2011.

**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 2006 ratebase PRS indicates the need for rates of \$15.36 per
> kilowatt-year (kW-yr) for firm transmission service on the
> 230/345-kilovolt (kV) transmission system, \$21.96 /kW-yr for firm
> transmission service on the 500-kV transmission system, and a
> subsequent rate of 2.50 mills per kilowatthour (kWh) for nonfirm
> transmission service on the 230/345/500-kV transmission system. This
> represents an increase of 28 percent over the existing transmission
> service rates.

**B. Public Process**

> The published procedures for rate adjustments, as amended, are
> included in Appendix B of the 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 consultation and comment period and is
> included in Appendix A of this brochure. This brochure, along with its
> appendices, is being distributed in conjunction with the Federal
> Register notice. It provides additional information and a discussion
> on investments, revenues, expenses and methodologies used to develop
> the proposed rates for transmission service.
>
> The 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 PRS as well
> as data contained in all supporting documents. Copies of the 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**
>
> A public information forum will be held on August 17, 2006, 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 increase 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.
>
> A public comment forum will be held on August 24, 2006, 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 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 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, an 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 consultation and comment period, Western may
> forward the 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
> January 1, 2007 through December 30, 2011. 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 Proposed | July 12, 2006          |
| 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        |                        |
+---------------------------------------------+------------------------+

**III. PROPOSED RATES FOR TRANSMISSION SERVICE**

> Based upon the latest data available, the FY 2005 final PRS for the
> Intertie showed 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. The FY 2006 ratebase PRS indicates that
> the proposed rates for transmission service on the 230/345-kV and
> 500-kV transmission systems are 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 2006 ratebase
> PRS is shown in Appendix C of this brochure. The proposed rates for
> long-term firm point-to-point 230/345-kV and 500-kV transmission
> service are \$15.36/kW and \$21.96/kW-yr, respectively. This
> represents an increase of 28 percent over the existing transmission
> service rates. The following issues have prompted the proposed rates.
>
> First, 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.
>
> Second, purchased transmission costs have increased by approximately
> \$0.7 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.
>
> Third, sales of firm 500-kV transmission service are less than
> projected. While Western was following an industry accepted practice
> of phasing in revenues from firm 500-kV transmission service over a
> 10-year period, the anticipated revenue contributions have fallen
> behind the projected schedule, resulting in decreased revenues.

**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 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 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 2007 is projected to be 1,068,450 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.
> Western estimates that it will take approximately 10 years for the
> 500-kV transmission system to be subscribed to a level sufficient to
> satisfy revenue requirements. The marketing commenced in FY 1996 with
> a sales estimate of 62,500 kW and increased by 100,000 kW each year
> during the 10-year period. The sales estimates for FY 2007 and FY 2008
> are 862,500 kW and 962,500 kW, respectively.

**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 2007-2057                            

  Facilities Use Charges                            \$1,544,957

  Nonfirm Transmission Sales                        710,715

  Transmission Line Losses                          904,928

  Multi-Project Cost Distributions                  225,337

  Miscellaneous Operations Income                   58,798

  Total Other Revenues                              \$3,444,735
  ------------------------------------------------- ---------------------

**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 2007-2012) are based on Western's
> current budget documents. Projections for future O&M expense after the
> cost evaluation period (FY 2013 --2057) 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                    

  2007        \$976,258   \$2,353,186    \$2,609,959   \$1,218,303      \$7,157,706

  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 2007-2057               

  Firm Transmission Service            \$349,920

  Transmission Losses                  302,821

  Scheduling & Dispatch Services       6,900

  Purchased Transmission               \$659,641
  ------------------------------------ ----------------------------------

**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 2021 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
> 2021 under the proposed rates.
>
> There are no investments in additions projected during the cost
> evaluation period (FY 2007-2011).

**3. Replacements**

> The investments in replacements total \$15.7 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
> \$14.4 million. The interest rates range from 4.875% to 10.750%. The
> unpaid balance is scheduled to be repaid by FY 2019 under the proposed
> rates.
>
> The projected investments for replacements during the cost evaluation
> period (FY 2007-2011) 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
> (FY2012-2057) 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 \$69.4 million and are
> repayable over a 10-year period at various interest rates. The unpaid
> balance of capitalized deficits is \$52.5 million. The interest rates
> range from 4.875% to 7.625%. The unpaid balance is scheduled to be
> repaid by FY 2011 under the proposed rates. The table below reflects
> the annual deficits that were incurred under the existing rates.

+-------------+-------------+-------------+-------------+-------------+
| Fiscal Year | Capitalized | Interest    | Unpaid      | Fiscal Year |
|             | Deficit     |             |             | Due         |
|             |             | Rate        | Balance     |             |
+-------------+-------------+-------------+-------------+-------------+
| 1996        | \$2,797,847 | 7.625%      | \$1,957,376 | 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        |
+-------------+-------------+-------------+-------------+-------------+