Proposed Increase to Residential Exchange Settlement Benefits and
Allocation of Residential Exchange Settlement Benefits among

**Pacific Northwest Investor-Owned Utilities**

# INTRODUCTION

BPA's Power Subscription Strategy (Subscription Strategy) proposes
settlements of the Residential Exchange Program (also referred to as
"Program") with regional investor-owned utilities (IOUs). The proposed
settlements are based on benefits equivalent to power sales at the
Residential Load (RL-02) rate or the PF Exchange Subscription rate: 1800
aMW for the FY2002-2006 period, and 2200 aMW for the FY2007-2011 period.
(The rates for the FY2002-2006 period are currently being developed in
BPA's FY2002‑2006 rate case.) This request for public comment regards
two issues: (1) whether the amount of the settlement should be increased
by 100 aMW from 1800 aMW to 1900 aMW, and (2) the manner in which the
settlement amounts should be allocated among the individual IOUs.

After receiving public comment on the proposed increase in the
settlement benefits, BPA will issue a decision on the proposed increase
at the time a decision is made on other proposed revisions to the
Subscription Strategy. After receiving public comment on the proposed
allocation of settlement benefits among the IOUs, BPA will determine an
allocation that will be taken into the negotiations of the proposed
Residential Exchange Program settlements. The proposed allocation
resulting from the current public comment process will not be a final
action. Rather, the allocation will become part of the issues that will
be addressed in a later public process conducted by BPA regarding the
Residential Exchange Program settlement agreements, culminating in
issuance of a Record of Decision.

***Section5(c) of the Northwest Power Act***

Section 5(c) of the Northwest Power Act established the Residential
Exchange Program. 16 U.S.C. 839c(c). Under the Residential Exchange
Program, a Pacific Northwest utility (either a public utility or an
investor-owned utility) may offer to sell power to BPA at the utility's
average system cost (ASC). BPA purchases such power and, in exchange,
sells the same amount of power to the utility at BPA's PF Exchange rate.
The amount of the power exchanged equals the utility's residential and
small farm load. In past practice, no actual power sales have taken
place. Instead, BPA provided monetary benefits to the utility based on
the difference between the utility's ASC and the applicable PF Exchange
Rate multiplied by the utility's residential load. These monetary
benefits must be passed through directly to the utility's residential
and small farm consumers. While Residential Exchange benefits have
previously been monetary, the Northwest Power Act also provides for the
sale of actual power to exchanging utilities in specific circumstances.
Pursuant to section 5(c)(5) of the Northwest Power Act, in lieu of
purchasing any amount of electric power offered by an exchanging
utility, the Administrator may acquire an equivalent amount of electric
power from other sources to replace power sold to the utility as part of
an exchange sale. However, the cost of the acquisition must be less than
the cost of purchasing the electric power offered by the utility. In
these circumstances, BPA acquires power from an in lieu resource and
sells actual power to the exchanging utility.

The Residential Exchange Program has traditionally been implemented
through Residential Purchase and Sale Agreements (RPSAs), which were
executed in 1981. Between 1981 and the present, all of the RPSAs have
been settled except for one, which is in "deemer" status. (Deemer status
is where a utility sets its ASC equal to BPA's PF Exchange rate and does
not receive positive benefits but accrues a negative balance that must
be worked off before resuming the receipt of positive benefits.)
Regional utilities are eligible to participate in the Residential
Exchange Program again beginning July 1, 2001, except for those
utilities that have previously executed settlement agreements for longer
terms.

Issues related to forecasts of the elements of the Residential Exchange
Program are currently being discussed in BPA's FY2002-2006 power rate
case. For information about BPA's power rate case, please go to BPA's
website at http://www.bpa.gov/Power/psp/rates/ratecase/index.shtml.

***BPA's Power Subscription Strategy***

During the spring and summer of 1998, BPA conducted extensive public
meetings with all interested parties regarding the development of a
"Power Subscription Strategy." At the conclusion of these lengthy
discussions, on September 18, 1998, BPA released a "Power Subscription
Strategy Proposal" for public review. During the comment period BPA
received nearly 200 responses to the proposal comprising nearly 600
pages of comments. After review and analysis of these comments, BPA
published its final "Power Subscription Strategy" on December 21, 1998.
See "Power Subscription Strategy" and "Power Subscription Strategy,
Administrator's Record of Decision." The purpose of the Subscription
Strategy is to enable the people of the Pacific Northwest to share the
benefits of the Federal Columbia River Power System after 2001 while
retaining those benefits within the region for future generations.

The Subscription Strategy also addresses how those who receive the
benefits of the region's low-cost federal power should share a
corresponding measure of the risks. The Subscription Strategy seeks to
implement the subscription concept created by the Comprehensive Review
in 1996 through contracts for the sale of power and the distribution of
federal power benefits in the deregulated wholesale electricity market.
The success of the Subscription process is fundamental to BPA's overall
business purpose to provide public benefits to the Northwest through
commercially successful businesses.

The Subscription Strategy is premised on BPA's partnership with the
people of the Pacific Northwest. BPA is dedicated to reflecting their
values, to providing them benefits and to expanding and spreading the
value of the Columbia River throughout the region. In this respect, the
Strategy has four goals:

(1) Spread the benefits of the Federal Columbia River Power System as
    broadly as possible, with special attention given to the residential
    and rural customers of the region;

(2) Avoid rate increases through a creative and businesslike response to
    markets and additional aggressive cost reductions;

(3) Allow BPA to fulfill its fish and wildlife obligations while
    assuring a high probability of U.S. Treasury payment; and

(4) Provide market incentives for the development of conservation and
    renewables as part of a broader BPA leadership role in the regional
    effort to capture the value of these and other emerging
    technologies.

One element the Subscription Strategy proposes is a settlement of the
Residential Exchange Program for regional IOUs for the post-2001 period.
The Strategy proposes that IOUs may agree to a settlement of the
Residential Exchange Program in which they would be able to receive
benefits equivalent to a purchase of a specified amount of power under
Subscription for their residential and small farm consumers at a rate
expected to be approximately equivalent to the PF Preference rate. Under
the proposed settlement, residential and small farm loads of the IOUs
would be assured access to the equivalent of 1,800 aMW of federal power
for the FY2002-2006 period and 2,200 aMW of federal power for the
FY2007-2011 period.

BPA will set the physical and financial components of the Subscription
amount, by year, in the negotiated Subscription settlement contracts.
Any cash payment will reflect the difference between the market price of
power forecast in the rate case and the rate used to make such
Subscription sales. The actual power deliveries for these loads will be
in equal hourly amounts over the period.

The Subscription Strategy proposes that BPA will offer five-year and
10-year Subscription settlement contracts for the IOUs. Under both
contracts, the Subscription Strategy proposes that BPA will offer and
guarantee 1,800 aMW of power and/or financial benefits for the
FY2002-2006 period. At least 1,000 aMW will be met with actual BPA power
deliveries. The remainder may be provided through either a financial
arrangement or additional power deliveries, depending on which approach
is most cost-effective for BPA. The IOUs' settlement of rights to
request Residential Exchange Program benefits under section 5(c) of the
Northwest Power Act will be in effect until the end of the contract
term.

Under the 10-year contract, in addition to the benefits provided during
the first five years, BPA proposes to offer and guarantee 2,200 aMW of
power or financial benefits for the FY2007-2011 period. BPA intends for
this 2,200 aMW to be comprised solely of power deliveries. The IOUs'
settlement of rights to request Residential Exchange Program benefits
under section 5(c) will be in effect until the end of the 10-year term
of the contract. In the event of reduction of federal system capability
and/or the recall of power to serve its public preference customers
during the terms of the five-year and 10-year contracts, BPA will either
provide monetary compensation or purchase power to guarantee power
deliveries.

In summary, residential and small farm loads of the IOUs may receive
benefits from the federal system through one of two ways. An IOU may
participate in the established Residential Exchange Program or it may
participate in a settlement of the Program through Subscription. If an
IOU chooses to request Residential Exchange Program benefits under
section 5(c), then the Subscription settlement amount for all the IOUs
would be reduced by the amount that would have gone to the exchanging
utility.

Issues related to rates for power sales under the proposed settlements,
as well as the forecast market price of power, are currently being
discussed in BPA's power rate case. For information about BPA's power
rate case, please go to BPA's website at
http://www.bpa.gov/Power/psp/rates/ratecase/index.shtml.

***Ensuring Benefits to the Residential and Small Farm Consumers***

BPA has an obligation to ensure that the benefits of the Residential
Exchange settlements are provided to the intended recipients -- the
residential and small farm consumers of regional IOUs. For this reason,
the Subscription contracts with IOUs will include a provision permitting
BPA to review the manner in which these benefits are provided to the
intended beneficiaries.

Also, the Subscription Strategy states that Subscription settlement
benefits (both the physical and financial components) will be
transferable, under the same general terms and conditions as the
Subscription purchase by the original IOU, to an eligible entity that
serves the residential and small farm load. BPA intends that a provision
for assignment in the Subscription contracts will provide the IOUs and
state regulatory agencies with sufficient flexibility to accomplish this
goal.

The consumer bills of participating IOUs will designate "Benefits of the
Federal Columbia River Power System Provided by the Bonneville Power
Administration" to describe the amount of benefits their consumers
receive.

***Allocation of the Settlement Amounts***

In the Subscription Strategy, BPA notes the intent to request comments
from interested parties regarding the amounts of Subscription settlement
benefits that should be provided to individual IOUs. BPA also notes that
the four Northwest state utility commissions (Commissions) indicated
that they would collaborate on an allocation recommendation. After
review of all comments, BPA will determine the appropriate amounts to be
allocated to the individual IOUs.

It is important to note that the purpose of this proceeding is to
develop an allocation proposal that will be taken into the negotiations
for the settlement agreements. Therefore, BPA's determination at the
conclusion of the public comment process will not be a final action. BPA
will conduct a separate public process on the proposed settlement
agreements. This later forum will be where parties can direct their
comments regarding whether BPA should enter into the proposed settlement
agreements, whether the proposed settlements are reasonable, or any
other issue regarding the proposed settlements.

# ISSUES FOR PUBLIC COMMENT

***Increasing the Settlement Amount from 1800 aMW to 1900 aMW for the
FY2002‑FY2006 Period***

As noted previously, the Subscription Strategy describes that BPA will
offer and guarantee 1,800 aMW of power and/or financial benefits for the
FY2002-2006 period. The four Northwest state utility commissions
(Commissions), in a letter dated July 23, 1999, requested that BPA
increase the amount of the settlement to 1900 aMW for the FY2002- 2006
period. This request was made in order for the Commissions to arrive at
a joint recommendation for allocating the settlement benefits for both
the FY2002‑2006 and FY2007-2011 periods. BPA is proposing to agree to
increase the settlement amount to meet the Commission's request as long
as BPA's pledge not to increase the average PF rate over present levels
can be met; the increase does not require BPA to reduce its Treasury
Payment Probability; the increase does not require a change in proposed
sales to the DSIs; and, there is no impact from the increase on BPA's
ability to meet its fish and wildlife commitments. BPA is seeking
comment on the proposal to increase the settlement by 100 aMW as
requested by the Commissions.

***Allocation Proposal***

As noted above, BPA solicited the Commissions' views on the proposed
allocation of settlement benefits. This was appropriate because the
Commissions have traditionally been responsible for establishing retail
electric rates for residential consumers of the regional IOUs',
including the credit applied to those rates to reflect benefits of the
Residential Exchange Program as determined by BPA. The Commissions also
have a statutory responsibility to the residential consumers of the IOUs
in their particular state jurisdiction. Furthermore, because of these
responsibilities, a joint recommendation by the Commissions would likely
reflect a fair allocation of benefits among the residential consumers of
the Northwest states and would enhance the likelihood of BPA delivering
the benefits in a way that will work for each state and its consumers.

The Commissions collaborated and submitted a joint recommendation on the
proposed allocation of the settlement benefits. They noted that their
recommendation reflects many different considerations, including the
amount of residential and small farm load eligible for the Residential
Exchange, the historical provision of Residential Exchange benefits, the
Exchange benefits received in the last five-year period ending October
1, 2001, rate impacts on qualifying customers, and the individual needs
and objectives of each state.

Below is the allocation that was proposed by the Commissions. BPA
believes that this proposal is a reasonable approach upon which to take
public comment.

+-----------------------------+------------------+--------------------+
|                             | **Amount of**    | **Amount of**      |
|                             |                  |                    |
|                             | **Settlement     | **Settlement       |
|                             | (aMW)**          | (aMW)**            |
|                             |                  |                    |
|                             | **FY2002-2006**  | **FY2007-2011**    |
+-----------------------------+------------------+--------------------+
| Avista Corp. (1)            | 90               | 149                |
+-----------------------------+------------------+--------------------+
| Idaho Power Company (1)     | 120              | 225                |
+-----------------------------+------------------+--------------------+
| Montana Power Company       | 24               | 28                 |
+-----------------------------+------------------+--------------------+
| PacifiCorp (Total)          | 476              | 590                |
+-----------------------------+------------------+--------------------+
| > *PacifiCorp (UP&L)*       | *140*            | *140*              |
+-----------------------------+------------------+--------------------+
| > *PacifiCorp (PP&L -- WA)  | *83*             | *109*              |
| > (1)*                      |                  |                    |
+-----------------------------+------------------+--------------------+
| > *PacifiCorp (UP&L -- OR)  | *253*            | *341*              |
| > (1)*                      |                  |                    |
+-----------------------------+------------------+--------------------+
| Portland General Electric   | 490              | 560                |
+-----------------------------+------------------+--------------------+
| Puget Sound Energy          | 700              | 648                |
+-----------------------------+------------------+--------------------+
| Total                       | 1900             | 2200               |
+-----------------------------+------------------+--------------------+

(1) The allocation of benefits among the states served by these
    multi-state utilities will be based on the forecasts of the
    respective state residential and small farm loads at the time the
    IOU signs its settlement agreement.

# COMMENT OPPORTUNITY

Comments on the Proposed Increase to Residential Exchange Settlement
Benefits and Allocation of Residential Exchange Settlement Benefits
among Pacific Northwest Investor-Owned Utilities will be accepted
through close of business on January 7, 2000. Written comments should be
sent to:

Bonneville Power Administration

P.O. Box 12999

Portland, Oregon 97232

You can also send comments electronically to: <comment@bpa.gov>

Additional copies of this proposal may be obtained by calling BPA's
Public Information Office at 1-800-622-4520 or by contacting your BPA
Account Executive. This proposal is also available on BPA's Subscription
website: http://www.bpa.gov/Power/subscription

If you have specific questions on this proposal, please contact the
Project Manager, Kimberly Leathley, at 503-230-3163.