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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# 

# INITIAL BRIEF 

# OF 

# NORTHWEST REQUIREMENTS UTILITIES

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Susan K. Ackerman

Attorney for

NORTHWEST REQUIREMENTS UTILITIES

825 NE Multnomah, Suite 1135

Portland, OR 97232

Email: susan.k.ackerman@attbi.net

May 23, 2003

### 

### INITIAL BRIEF OF NORTHWEST REQUIREMENTS UTILITIES

#### TABLE OF CONTENTS ii

####### TABLE OF AUTHORITIES iii

#### INITIAL BRIEF 1

I. INTRODUCTION 1

II\. STATEMENT OF THE CASE 1

III\. ISSUES IDENTIFIED AND ARGUMENT 2

A.  Is an SN CRAC adjustment needed for 2004? 2

B.  Should the Administrator Eliminate or Substantially Mitigate

> Any SN CRAC Adjustment to its Rates? 4
>
> C. The Evidentiary Record Demonstrates How the Administrator Can
> Eliminate or Substantially Mitigate any SN CRAC Adjustment 5
>
> D. Should the Administrator Adopt Additional Structural
>
> Changes to the SN CRAC? 6
>
> E. Was the SN CRAC Adjustment Properly Invoked? 7

IV\. SUMMARY OF CONCLUSIONS 7

V. FINAL REVISED EXHIBIT LIST 8

VI\. CONCLUSION 9

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

Statutes:

Pacific Northwest Electric Power Planning and Conservation

Act, 16 U.S.C. § 839e(i) 1

Miscellaneous:

BPA's 2002 General Rate Schedule Provisions

§ II.F.3 (Rev. Dec. 2001) 3, 7

Procedures Governing Bonneville Power Administration Rate

Hearings, 51 Fed. Reg. 7611 (1986) 1, 4

Special Rules of Practice to Govern These Proceedings,

SN-03-O-01 1

Order Enforcing Post-Hearing Exhibit List, SN-03-O-18 1

Order on Initial Briefs, SN-03-O-19 1

Order Granting Motion of the Bonneville Power Administration and

the Western Public Agencies Group to Admit a Document to

Supplement the Record, SN-03-O-20 (Appendix A) 5

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 )

INITIAL BRIEF OF

NORTHWEST REQUIREMENTS UTILITIES

II. INTRODUCTION.

This proceeding is brought pursuant to the Section 7(i) procedures of
the Pacific Northwest Electric Power Planning and Conservation Act, 16
U.S.C. § 839e(i). Northwest Requirements Utilities (NRU) submits this
Initial Brief pursuant to the Special Rules of Practice to Govern These
Proceedings (Special Rules) issued on March 31, 2003 (SN-03-O-01), Rule
1010.13 of the Procedures Governing Bonneville Power Administration Rate
Hearings*,* 51 Fed. Reg. 7611 (1986) (Procedures), the Order on Initial
Briefs (SN-03-O-19), and the Order Enforcing Post-Hearing Exhibit List
(SN-03-O-18).

II. STATEMENT OF NRU's CASE

BPA's Safety Net Cost Recovery Adjustment Clause (SN CRAC) Initial
Proposal, if adopted by the Administrator, would take over one billion
dollars out of the Northwest's regional economy over a three year
period, fiscal years (FY) 2004 through 2006. SN-03-E-BPA-10, p. 6. Yet,
the record is replete with testimony about the negative consequences
such an action would have on an already depressed economy and on
utilities, industries and individual end-use customers already
struggling with high energy costs. SN-03-NR-01, p. 5; SN-03-CC-01, pp.
15 and 16; SN-03-WA-01, pp. 3 - 6. The record also demonstrates the
following: (1) a SN CRAC adjustment is not needed at all in FY 2004, and
(2) any SN CRAC required in FY 2005 and 2006 can be substantially
mitigated, if not eliminated outright, if the Administrator makes
prudent cost cuts and takes advantage of available cash tools. NRU urges
the Administrator to take these steps and mitigate or eliminate
altogether an SN CRAC for FY 04.

NRU recognizes that BPA must collect sufficient revenues to preserve its
financial health, as measured by its ability to pay bills and make
Treasury payments and to assure a minimum threshold level of financial
reserves. However, this important objective *must* be balanced in the
short term against the depressed regional economy.

Therefore, NRU urges that BPA not impose an SN CRAC for FY 2004. If one
is imposed, it should be limited to no longer than one year in duration,
and should not be used to recover revenue losses previously incurred by
BPA's Power Business Line (PBL) in FY 2002 and initially projected for
2003, or for losses projected for FY 2004 and 2006. Instead, BPA needs
to emphasize cost reductions, both internally and with other
governmental agencies. BPA should use financial tools that assure
sufficiently high Treasury Payment Probability (TPP) in FY 2004 without
shifting costs into future rate periods. If an SN CRAC is added to rates
for FY 2004, its size should be limited such that overall power rates
for FY 2004 are not higher than they were in FY 2003.

III\. ISSUES IDENTIFIED AND ARGUMENT

> A. [Is an SN CRAC adjustment needed for 2004]{.underline}?

The Joint Customers have shown that the conditions for triggering SN
CRAC are not present. Under the three scenarios analyzed by Joint
Customers, Treasury repayment in 2003 is virtually certain, and the
probability of a full U.S. Treasury payment in 2004 is 94% or greater.
SN-03-E-JC-01, p. 18. The high TPP for 2004 vastly exceeds the 50%
threshold standard in BPA's 2002 General Rate Schedule Provisions
(GRSPs) for triggering SN CRAC. *Id.*

In addition, Joint Customer analysis of BPA's Treasury risk was
performed before the Joint Customers had knowledge of a number of other
factors that work in favor of improved financial performance for BPA in
2003 and 2004. As discussed in the Initial Brief of the Public Power
Council (PPC), these include the recently announced Enron settlement a
five percent higher projection of run-off than was assumed in the Joint
Customer testimony and a nineteen percent higher than assumed in BPA's
Initial Proposal.

The run-off estimate is particularly important. BPA's Initial Proposal
estimated run-off to be 75 million acre feet (MAF) at The Dalles. By the
time the Joint Customers filed their testimony, the new April 8, 2003
forecast was at 85.3 MAF. SN-03-E-JC-01, p. 11. As cited in PPC's
Initial Brief SN-03-B-PP-01, § III.A.3 by the time of cross examination
occurred hydro conditions were better than the April 8^th^ forecast at
90.2 MAF. Since cross examination the forecasts have changed again.
Current forecasts are for 89.3 MAF at The Dalles. *See,* NOAA's May
forecast for The Dalles,
[http://www.nwrfc.noaa.gov/water_supply/ws_fcst.cgi]{.underline}[^1][.]{.underline}
While lower, this is still significantly better than the April forecast.

All of these factors contribute to a much higher probability of Treasury
payment in 2003 and 2004 than in BPA's Initial Proposal. The tariff
conditions for triggering the SN CRAC adjustment have not been
satisfied. In light of the new evidence since the Initial Proposal, the
Administrator should not trigger SN CRAC in FY 2004.

> B. [Should the Administrator Eliminate or Substantially Mitigate Any
> SN CRAC Adjustment to its Rates]{.underline}?

NRU does not believe that an SN CRAC adjustment is necessary to protect
the agency financially in 2004. Nevertheless, if the Administrator
determines to proceed with the adjustment despite the evidence that it
is not needed in FY 2004, then NRU urges the Administrator to mitigate
the effect of such an adjustment. BPA should reduce the size of the SN
CRAC adjustment so that 2004 rates are no higher than 2003 rates.
SN-03-NR-01, p. 18. NRU's testimony and the testimony of other parties
demonstrated the negative impact of further rate increases on the
Northwest economy. BPA's customers have shown that, at both the utility
and end use customer level, another rate increase would further harm an
already poor economy. SN-03-NR-01, p. 5; SN-03-CC-01, pp. 15 and 16;
SN-03-WA-01, pp. 3 - 6. In addition, as described in Section III.A.,
above, an adjustment in 2004 is simply unnecessary at this time. By
minimizing or eliminating the SN CRAC adjustment, BPA can assist in
recovery of the regional economy, not contribute further to its decline.

NRU further recommends that the Administrator can and should minimize
the SN CRAC adjustment *without* shifting costs into the next rate
period. It is NRU's objective to maintain BPA's financial integrity over
the long term so that customers are not exposed to large rate increases
at any one time. For this reason, NRU recommends that BPA maintain a
target reserve of \$150 to \$200 million. SN-03-E-NR-01, p. 17.

> C. [The Evidentiary Record Demonstrates How the Administrator Can
> Eliminate or Substantially Mitigate any SN CRAC
> Adjustment]{.underline}.

The record developed by the customers in this case gives the
Administrator specific tools that can be used to substantially mitigate
if not outright eliminate a SN CRAC Adjustment outright in 2004. NRU
urges the Administrator to adopt the following recommendations.

1\. BPA must continue tight cost control. The customers will work with
BPA to persuade other entities that impose costs on BPA to reduce their
costs as well. Additionally, NRU recommends that BPA incorporate a
mechanism in its GRSPs regarding the SN CRAC to assure that internal
operations and corporate overhead costs do not exceed 2001 levels.
SN-03-NR-01, p. 9.

2\. BPA has a number of cash tools that it can use to assure a high TPP.
These include the \$250 million Treasury Letter of Credit (LOC), and
limited use of the Energy Northwest (ENW) debt optimization proceeds.
SN-03-NR-01, pp. 11-15.

3\. BPA also has other cash tools that can be used at less political and
financial cost and may be easier to access than the \$250 million LOC or
the use of the ENW debt optimization proceeds. These should be
investigated and used as necessary to ensure a high TPP. *See,*
SN-03-O-20, Appendix A (List of Liquidity Tools).

4\. BPA should incorporate into its final (August) SN CRAC calculation
any positive results of the ongoing IOU/public power negotiations so as
to mitigate the SN CRAC adjustment, if any. SN-03-NR-01, p. 15.

5\. NRU urges BPA to reject the "zero net revenue" goal and the 80% TRP
measure and instead adopt a 50 percent TPP measure. Cash balances of
\$150 million to \$200 million should be sufficient going into the next
rate period. SN-03-NR-01, pp. 16-17.

6\. As identified and discussed in PPC's Initial Brief (*See,* §III.A,
*above)*, BPA's financial condition has improved markedly since the
Initial Proposal. These events will increase BPA's Treasury payment
probability and significantly reduce BPA's need for a SN CRAC rate
adjustment. These factors must be included in BPA's final 2004 SN CRAC
calculation.

7\. Finally, BPA should not spread the revenues from higher MAF in 2003
over the rest of the rate period. This would be an unnecessarily
conservative treatment of current water conditions, because it assumes
that low water levels incorporated in BPA's Initial Proposal will
persist for the entire 2004-2006 rate period. Instead of spreading
improved revenues from better stream flows over three years as BPA
proposes in SN-03-E-BPA-17, p. 9, improved revenues should be reflected
in 2003 and 2004 net revenues.

> D. [Should the Administrator Adopt Additional Structural Changes to
> the SN CRAC]{.underline}?

NRU urges BPA to adopt recommendations developed in the record to make
the SN CRAC mechanism more equitable and fair for customers, and to
assure that the Agency continues to have the correct incentives. The
additional policy matters to incorporate in a restructured SN CRAC
mechanism are as follows:

1\. The SN CRAC should not be fixed for the rate period but rather
should be contingent and year-to-year. A contingent SN CRAC that
triggers year-to-year will present BPA with the correct incentives to
control its costs and will allow for continued customer involvement in
BPA's rate actions. It will also allow for modifications to the level of
the SN CRAC if favorable events occur prior to the date the SN CRAC
adjustment is established. SN-03-NR-01, p. 10.

2\. The SN CRAC should not be used either to solve the rate period net
revenue problem or to achieve an 80 percent Treasury Recovery
Probability goal. These financial policies are unnecessary. Further,
they give BPA too much flexibility to use the SN CRAC to recover losses
already experienced and to build in an excessive financial cushion to
mitigate any potential deferrals during the remainder of the rate
period. SN-03-NR-01, p. 16. NRU believes that the likelihood of
deferrals has been significantly reduced.

E. [Was the SN CRAC Adjustment Properly Invoked]{.underline}?

BPA's GRSPs impose conditions for triggering a SN CRAC adjustment to
power rates:

> The SN CRAC will be available if the Administrator determines that,
> after implementation of the FB CRAC and any Augmentation True-Ups
> \[...\] BPA forecasts a 50% or greater probability that it will
> nonetheless miss its next payment to Treasury or other creditor \[.\]

GRSPs, § II.F.3. As outlined in section III.A., above, however, BPA was
not at risk of missing its scheduled 2003 Treasury payment. The
conditions of BPA's tariff have not been met, and therefore no SN CRAC
should have triggered. Given the evidence in the record about the
regional economy and improving conditions since BPA's Initial Proposal,
BPA should exercise the greatest care and decide against implementation
of the SN CRAC in FY 2004, and limit any future SN CRACs as described in
this brief and in NRU's testimony.

IV\. SUMMARY OF CONCLUSIONS

BPA has alternatives to imposing a Safety Net CRAC for FY 2004. If one
is imposed, it should be limited to no longer than one year in duration,
and should not be used to recover revenue losses previously incurred by
the PBL in FY 2002 and 2003, or projected for FY 2005 and 2006. BPA
needs to emphasize cost reductions, both internally and with other
governmental agencies. BPA should pursue the use of financial tools that
assure sufficiently high TPP in FY 2004, but that do not shift costs
into future rate periods. If an SN CRAC is added to rates for FY 2004,
its maximum size should be limited such that overall power rates for FY
2004 are not higher in FY 2003. BPA must balance the needs of the region
while taking actions to preserve the current financial health of the
agency.

V. FINAL REVISED EXHIBIT LIST

The following pre-filed testimony and exhibits of NRU were offered and
admitted into the record at the Hearing held for purposes of
cross-examination on May 16, 2003. Cross-examination was waived, and the
witnesses were excused from appearing.

  --------------------- -------------------------------------------------
  SN-03-Q-NR-01         Qualification Statements for John Saven

  SN-03-Q-NR-02         Qualification Statement for Kris Mikkelsen

  SN-03-Q-NR-03         Qualification Statement for Fergus Pilon

  SN-03-E-NR-01         Direct Testimony of Northwest Requirements
                        Utilities
  --------------------- -------------------------------------------------

NRU also participated in and sponsored the prefiled testimony and
exhibits of the Joint Customers; the following were offered and admitted
into the record by the Hearing Officer on May 16, 2003:

  --------------------- -------------------------------------------------
  SN-03-Q-JC-01-03      Qualification Statements of Raymond Bliven,
                        Geoffrey Carr, Kevin O\'Meara

  SN-03-E-JC-01         Direct Testimony of the Joint Customers

  SN-03-E-JC-01A        Data Response- Data Request SP-BPA-001A

  SN-03-E-JC-01B-D      Data Response- Data Request SP-BPA-001A

  SN-03-E-JC-01E        Nov. 22, 2002 Letter to BPA customers, tribes,
                        and interested parties

  SN-03-E-JC-01F        March 7, 2003 Workshop Handout

  SN-03-E-JC-01G        Dec. 11, 2000 Letter to Energy NW

  SN-03-E-JC-01H        Debt Restructuring Results to Date

  SN-03-E-JC-01I        Data Response-Data Request NR-BPA:001

  SN-03-E-JC-01J        Toolkit Results

  SN-03-E-JC-01K        Data Response- Data Request NR-BPA:002

  SN-03-E-JC-01L        Data Response - Data Request PP-BPA-011

  SN-03-E-JC-01M        SN CRAC ANR - Reserve Level Thresholds

  SN-03-E-JC-01(E1)     Errata to the Direct Testimony of the Joint
                        Customers

  SN-03-E-JC-02         Rebuttal Testimony of the Joint Customers
  --------------------- -------------------------------------------------

VI\. CONCLUSION

BPA must demonstrate through its actions that it is cognizant of the
very difficult financial health of the region. While NRU supports
preserving BPA's financial health, it is also clear to NRU that by
taking the prudent actions recommended in NRU's testimony and in this
brief, the agency can preserve its financial health while not
contributing to a worsening economy. For all the reasons stated in this
brief, NRU requests that the Administrator (1) decline to adopt a SN
CRAC adjustment for FY 2004, or, if adopting a FY 2004 SN CRAC, minimize
the adjustment so that rates overall are no higher than they were in
2003; (2) decline to adopt a three-year CRAC adjustment and instead
adjust rates on a year-to-year basis and only then as needed; (3) take
all prudent steps to control internal costs and those costs imposed by
other agencies; and (4) use prudent financial tools to improve TPP.

DATED this 23^rd^ day of May, 2003.

Respectfully submitted,

/s/

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

Susan K. Ackerman

Attorney for

Northwest Requirements Utilities

825 NE Multnomah, Suite 1135

Portland, OR 97232

Email: susan.k.ackerman@attbi.net

[^1]: Pursuant to Rule 1010.11 of the Procedures, NRU requests that the
    Hearing Officer or the Administrator take official notice of the
    recent forecasts, which are statistics published by a federal agency
    and are matters about which BPA is expert.