**UNITED STATES OF AMERICA**

**U.S. DEPARTMENT OF ENERGY**

**BEFORE THE**

**BONNEVILLE POWER ADMINISTRATION**

2003 Proposed Safety-Net Cost Recovery )

Adjustment Clause (SN CRAC) Rate ) BPA Docket No. SN-03

Proceeding )

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

**BRIEF ON EXCEPTIONS OF THE**

**SPRINGFIELD UTILITY BOARD**

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

Peter R. Mersereau

Mersereau and Shannon, LLP

1600 Benj. Franklin Plaza

One S.W. Columbia Street

Portland, Oregon 97258

\(503\) 226-6400

FAX (503) 226-0383

Email - [pmersereau@mershanlaw.com](mailto:mershanlaw@aol.com)

Attorney for the

SPRINGFIELD UTILITY BOARD

June 20, 2003 Exhibit : SN-03-R-SP-01

TaBle of Contents

**Introduction [1](#introduction)**

Statement of the Case [2](#statement-of-the-case)

BPA Statutory Framework [3](#bpa-statutory-framework)

Substantive Issues [3](#substantive-issues)

I. The Toolkit Model [3](#the-toolkit-model)

A. Consistency with the WP-02 Record of Decision
[3](#a.-consistency-with-the-wp-02-record-of-decision)

B. Removal of The \$50 Million Floor and Understatement of TPP
[5](#b.-removal-of-the-50-million-floor-and-understatement-of-tpp)

II\. SN CRAC Refund [8](#sn-crac-refund)

III\. Use of Financial Tools [10](#iii.-use-of-financial-tools)

IV\. 80% 3-year TPP Parameter [10](#year-tpp-parameter)

V. The 7(b)(2) Test [11](#the-7b2-test)

A. The "Utterly False" Statement [12](#a.-the-utterly-false-statement)

B. Legislative History [14](#b.-legislative-history)

C. Adjustment Clauses [15](#c.-adjustment-clauses)

D. 7(i) Hearings [16](#d.-7i-hearings)

E. The GRSPs [17](#e.-the-grsps)

F. The Administrative Record of GRSPs
[18](#f.-the-administrative-record-of-grsps)

G. Prior Administrative Practices
[20](#g.-prior-administrative-practices)

H. An Additional 7(i) Hearing [20](#an-additional-7i-hearing)

VI\. Support of "The Evidence" [21](#vi.-support-of-the-evidence)

VII\. The GRSPs [22](#vii.-the-grsps)

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

Page(s)

[Cases]{.underline}

*Callanan Road Improvement Company v. United States, 345 U.S. 507,
512-13 (1953)* 12

*Arizona v. Shamrock Foods Co., 729 F.2d 1208, 1215 (9th Cir 1984)*. 12

*United States vs. Matheson, 532 F 2d 809, 819-20 (2d Cir. 1976)* 12

*Smith v. Montgomery Ward & Co., 388 F.2d 291, 292 (6th Cir. 1968)* 12

*Lewis v. Atlas Corporation, 159 F.2d 599, 602 (3rd Cir. 1946)* 12

[Statutes]{.underline}

16 U.S.C. §839e(b)(2) 10

[Other]{.underline}

Legal Interpretation of Section 7(b)(2) of the Pacific Northwest
Electric Power Planning and Conservation Act 15

Section 7(b)(2) Implementation Methodology Administrator's

Record of Decision 15

**UNITED STATES OF AMERICA**

**U.S. DEPARTMENT OF ENERGY**

**BEFORE THE**

**BONNEVILLE POWER ADMINISTRATION**

2003 Proposed Safety-Net Cost Recovery )

Adjustment Clause (SN CRAC) Rate ) BPA Docket No. SN-03

Proceeding )

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

**BRIEF ON EXCEPTIONS OF THE**

**SPRINGFIELD UTILITY BOARD**

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

# Introduction {#introduction .unnumbered}

The Springfield Utility Board ("SUB") submits this Brief on Exceptions
pursuant to Rule 1010.13 of the *Procedures Governing Bonneville Power
Administration Rate Hearings*, 51 Fed. Reg. 7611 (Mar 5, 1986). SUB is a
preference customer as defined by Bonneville Power Administration's
("BPA") organic statutes. SUB currently meets part of its wholesale
power requirements through purchases of power generated by federal
resources and priced at BPAs Priority Firm ("PF") rate.

SUB endorses and supports the issues, arguments, and conclusions
discussed in the Public Power Council's ("PPC") Initial Brief
(SN-03-B-PP-01) and Brief on Exceptions (SN-03-R-PP-01). SUB also
endorses the arguments and conclusions regarding the 7(b)(2) test
discussed in the Canby Utility Board's ("CUB") Initial Brief
(SN-03-B-CA-01) and Brief on Exceptions (SN-03-R-CA-01).

SUB reiterates and incorporates the issues, arguments, and conclusions
discussed in its Initial Brief (SN-03-B-SP-01).

Nothing in this brief should be interpreted as a waiver of SUB's
statutory rights. SUB preserves its preference and priority rights in
this and future rate cases.

#  {#section .unnumbered}

# Statement of the Case {#statement-of-the-case .unnumbered}

SUB's goal is a reduction in BPA's rates. To that end, SUB seeks to have
no SN CRAC rate increase. SUB appreciates BPA's positions in the SN-03
Draft Record of Decision (SN-03-A-01) ("Draft ROD") which move towards
this goal. These positions include internal cost reductions, recognition
of improved hydro conditions and associated secondary revenues, and
maintaining caps on the SN CRAC. While BPA's discussion and decision
regarding the SN CRAC refund is in error, SUB appreciates the movement
toward a viable SN CRAC refund.

However, SUB requires the ability to evaluate and provide comment on new
evidence BPA has introduced in its Draft ROD. Specifically, in the Draft
ROD BPA cites the output from updated models and associated supporting
analysis and data which have not been provided to the parties in the
case, nor have the updated models and analysis been subject to review
within the evidentiary phase of this proceeding. BPA's Toolkit model, as
an example, has historically contained errors and any updates to the
Toolkit model, or any other analysis used in the decision requires
parties to have a full and complete review within the proceeding --
otherwise the record remains incomplete.[^1] On June 17, 2003, parties
requested the updated Toolkit model and supporting analysis. BPA denied
the request.

Setting aside the inability to verify the accuracy of the figures
presented by BPA or to provide alternative SN CRAC parameters, SUB's
primary objective in its Brief on Exceptions is to address errors in
BPA's Draft ROD. SUB's include:

A)  Discussion of the Toolkit Model

B)  The SN CRAC Refund

C)  The 80% 3-Year TPP

D)  The 7(b)(2) Test

E)  BPA's Positions Regarding Evidence

F)  The GRSPs

# BPA Statutory Framework {#bpa-statutory-framework .unnumbered}

By this reference, SUB cites SUB's discussion of BPA's Statutory
Framework and the associated table of authorities detailed in SUB's
Initial Brief (SN-03-B-SP-01).

# Substantive Issues {#substantive-issues .unnumbered}

## The Toolkit Model

### A. Consistency with the WP-02 Record of Decision {#a.-consistency-with-the-wp-02-record-of-decision .unnumbered}

BPA states that SUB first raised the issue of incompatibility with the
WP-02 ROD in SUB's Initial Brief.[^2] This is incorrect. SUB first
raised the issue of the removal of the \$50 million floor in toolkit and
inconsistency with the WP-02 ROD case in its direct testimony. [^3] In
rebuttal, BPA agreed that it used new deferral logic.

> *"Q. SUB argues that the WP-02 rate case deferral logic in the Toolkit
> model had an error in it, because the difference between the WP-02
> rate case TPP and the SN-03 rate case TPP, is much less than what was
> expected (10-20 percent as opposed to less than 2 percent). Nelson,
> SN-03-E-SP-01, at 14-15. Do you agree?*
>
> A. SUB is correct that the logic in the SN-03 version of the ToolKit
> for modeling "traditional deferral logic" contained an error. Since
> BPA used the alternative "new deferral logic," this error had no
> effect on BPA's Initial SN CRAC Proposal. BPA has corrected this
> error; versions 1.80 and later have the correct traditional deferral
> logic."[^4]

BPA states that the WP-02 ROD decision that "BPA does not need to remove
the 'floor' in the ToolKit" does not imply that BPA may not remove the
floor."[^5] SUB included the entire decision in its Initial Brief, which
states:

> "BPA does not need to remove the "floor" in Toolkit. It is reasonable
> for BPA to expect that the \$250 million Treasury note can be used to
> solve some very short-term cash-flow problems. *BPA will continue to
> employ models in its rate case that use the assumption that BPA ends
> each year with a minimum of \$50 million in cash reserves.* This
> assumption has not caused and overstatement of TPP values."[^6]
> \[emphasis added\]

In addition to stating that the BPA does not need to remove the "floor"
in Toolkit, BPA specifically decided to continue to use the \$50 million
floor in its models in the WP-02 ROD.

In SUB's Initial Brief, SUB states that BPA deviation from the WP-02 ROD
"demonstrates that BPA has the position that it is entitled to make
changes which conflict with the Federal Register Notice while preventing
other parties' attempts to revisit issues in the WP-02 rate case"[^7].
BPA states "BPA is not bound by previous rate cases to use older models
and never update them."[^8] In this specific instance, BPA is incorrect.
BPA's Federal Register Notice for this proceeding specifically stated
that decisions in the WP-02 proceeding would not be revisited.[^9]
Because the use of the \$50 million floor in Toolkit models was decided
in the WP-02 rate case, BPA cannot deviate from that specific decision
without conflicting with the Federal Register Notice and compromising
this SN-03 proceeding. As long as the floor is not modified and changes
do not conflict with other decisions in the WP-02 ROD, BPA may update
the Toolkit model.

### B. Removal of The \$50 Million Floor and Understatement of TPP {#b.-removal-of-the-50-million-floor-and-understatement-of-tpp .unnumbered}

BPA states that it believes removal of the floor -- the fundamental
change in the "new deferal logic" compared to the "traditional deferral
logic" -- matters only if there is a deferral in 2003. BPA states that
this is moot because the SN-03 final studies data does not contain any
games with a deferral in 2003. [^10]

First, because SUB has no access to the model or supporting studies upon
which BPA makes its statements in the Draft ROD, SUB cannot verify that
the SN-03 final studies do not contain any games with a deferral in
2003. The studies in the record do show games with deferrals in 2003.

Second, This issue of the impact of the floor was first raised by SUB in
the WP-02 proceeding. In the WP-02 proceeding, SUB showed that the
impact of the SN and FB CRAC were understated with the inclusion of the
floor -- particularly when ending reserves would otherwise be
significantly negative. The negative balance was not carried forward
when a floor was used in the model. The issue was discussed in SUB's
rebuttal and briefs in the WP-02 rate case.

> *Q. Are there other apparent errors in the calculation of the impact
> of the SN and FB CRAC as they relate to cost shift analysis*?
>
> A. Yes. Toolkit artificially places a lower ending limit of \$50
> million for reserves in each year. This understates the impact of the
> SN CRAC and the FB CRAC on non-Slice customers. For example, if in
> year 2 of a particular game, ending reserves were actually -\$500
> million, the Toolkit file forces the ending reserves to be \$50
> million and carries this figure forward into the following year. The
> difference (\$550 million) is recovered through the SN CRAC which is
> not evaluated when determining the rate impact to non-Slice customers.
> If in year 2 the ending reserves are -\$500 million and the net change
> in BPA's finances in year 3 is +\$ 500 million, the ending reserves in
> Toolkit for year 3 would equal \$550 million (since year 2 reserves
> were forced to \$50 million) and the FB CRAC would not trigger. If
> actual calculated ending reserves in year 2 were used, the ending
> reserves in year 3 would equal (-\$500 million + \$500 million =) \$0
> million and the FB CRAC would trigger. When this occurs, the frequency
> of the FB CRAC is understated.[^11]

A deferral is counted each year if BPA does not have enough money to pay
Treasury and still have at least as much cash as the working capital
amount. This is described in the version notes of BPA's ToolKit model
provided in the SN-03 initial proposal.

"v.1.71, 2-11-03: Added a switch to contral \[sic\] whether traditional
or new deferral logic is used. Traditional: at the end of each year, a
deferral is counted if BPA does not have enough money to pay Treasury
and still have at least as much cash as the working capital amount.
Reserves are set equal to working capital. Missed amortization into the
next rate period for repayment, but interest is calculated on it and due
each year; missed interest is due the next year. New logic: a deferral
is counted if BPA does not have enough money to pay Treasury and still
have at least as much cash as the working capital amount. Reserves are
allowed to go negative, so there is no deferred amortization or deferred
interest. In effect, amortization and interest are both due next year.
This means that the one-year TPP for the final year is a measure of the
likelihood that BPA will be able to make its scheduled payments for that
year, having made up any prior misses in the rate period."[^12]

When calculating the TPP, the Toolkit file provided in BPA's initial
proposal in the SN-03 proceeding counts all deferrals. The total number
of games in each year is 3,000. The TPP in each year is calculated by
taking difference between 3,000 and the number of deferrals and dividing
the result by 3,000. The magnitude of the deferral in any year is the
difference between ending reserves and the working capital.[^13] If
there is a deferral in 2004 due to very negative reserves there may
continue to be deferrals in 2005 and 2006 even though BPA has positive
net revenue for 2005 and 2006 because the negative reserves are carried
forward into future years. In the same scenario, with a \$50 million
ending reserve floor decided in the WP-02 rate case, deferrals in 2005
and 2006 would not occur because BPA would have made its Treasury
payments in 2005 and 2006 with positive net revenue and positive
starting reserves. With fewer deferrals, Treasury Payment Probability is
higher with a floor.

SUB provided an evaluation of the impact of the \$50 million floor in
its direct testimony followed by a detailed analysis in its rebuttal
testimony. BPA did not rebut SUB's direct testimony which stated that
with a \$50 million floor the TPP would increase by 10-20%.[^14] SUB's
rebuttal testimony showed an actual increase in the TPP of 24.5% with
the floor.[^15] SUB repeatedly pursued that BPA pursue the error and
provide the corrected ToolKit model.[^16] SUB argued against a floor in
the WP-02 rate proceeding because the concern of cost shifts risk to
customers subject to the FB and SN CRACs. BPA decided that the \$50
million floor was appropriate and based its determination of the equity
of the CRAC structure, in no small part, on the outputs of the ToolKit
model. For BPA to now determine that the \$50 million floor is not
appropriate would unravel the rate design for the 2002 -- 2006 rate
period.

The record shows that both the 1-year and the 3-year TPP is understated
without "floor" decided in the WP-02 rate case. The record is also clear
that the removal of the floor increases the size and magnitude of the
SN-CRAC, increases the magnitude of rates charged to non-Slice
customers, and creates cost shifts as a result.

BPA states that because it is adopting a SN CRAC Rebate as part of the
Draft ROD, it meets SUB's objectives regarding cost shift concerns and
SUB's CRAC design which included a refund mechanism and the use of the
\$250 million Treasury Note. For reasons discussed below, BPA's proposed
rebate falls significantly short of SUB's SN CRAC design and, as a
result, rate design remains compromised under BPA's proposal.

## SN CRAC Refund

In SUB's testimony and initial brief, SUB discusses how the CRACs are
not functioning as intended, that BPA's current Toolkit model has been
modified to the extent that it conflicts with a specific decision in the
WP-02 Record of Decision, and suggests alternative rate design which
included an SN CRAC refund.

SUB's testimony and initial brief clearly state that SUB's proposed
refund would occur if ending reserves are greater than \$350 million [at
the end of the rate period]{.underline}.[^17] In the Draft ROD, BPA
states:

> "Unlike the SUB proposal, where BPA could in theory be entering a year
> when it is collecting revenues under either the SN or the FB CRAC and
> at the same time refunding money to those same customers, WPAG's
> proposal recommends initiating the refund only when BPA has reached
> some financial stability and it is no longer collecting revenues under
> the SN or FB CRAC."[^18]

BPA is incorrect. BPA appears to incorrectly conclude that SUB's refund
proposal would trigger if any remaining year of the rate period resulted
in ending reserves greater than \$350 million. SUB's proposal would
involve a refund if ending reserves for 2006 exceeded \$350 million.
There would not be a scenario as BPA described because SUB's refund
mechanism would refund money to customer [after]{.underline} FB and SN
CRAC revenue would have already been collected. In addition, SUB's
proposal specifically stated that the SN CRAC refund would trigger after
paying off any balance due on the borrowing of the \$250 million
Treasury note and replenishing any temporary use of Energy Northwest
2002 refinancing benefits used to mitigate rates.[^19]

BPA states that SUB's \$350 million reserve level threshold is arbitrary
because it is based on the expected ending value of reserves in BPA's
initial proposal with no analysis to support whether the reserve levels
were adequate. SUB argues that \$350 million is adequate, because if it
were inadequate BPA would not have deemed it acceptable in its initial
proposal.[^20] BPA also states that using the proposal in the Draft ROD
results in expected ending reserves of \$354 million. It is arbitrary
and illogical for BPA to present ending reserves of \$347.8 million as
reasonable while arguing \$350 million is not reasonable. To do so would
support the argument that lower reserves are better. In addition, BPA's
argument that SUB's figure is somehow "arbitrary" is also illogical
because, while SUB has presented its proposal supported by evidence, BPA
has presented facts in the Draft ROD which are not supported by evidence
in the proceeding.

Without the models used to generate the figures in the Draft ROD (along
with supporting studies and analysis), it is impossible to measure the
frequency of BPA's proposed refund mechanism, one cannot evaluate how it
is modeled in ToolKit, and therefor one cannot conclude BPA's proposed
mechanism is reasonable.

## III. Use of Financial Tools {#iii.-use-of-financial-tools .unnumbered}

SUB's testimony and initial brief advocated the use of cash tools when
determining SN CRAC to minimize SN CRAC thresholds and limits. SUB did
not require the use of the cash tools -- only that the assumption that
they could be used when determining Treasury Payment Probability which,
in turn, determines SN CRAC parameters.[^21] In SUB's testimony and
initial brief, SUB specifically advocates the assumption of the use of
the \$250 million Treasury note during FY 2006 to reduce the SN CRAC
threshold for 2006. This is consistent with both BPA's stated concern
regarding the adverse economic impact of a SN CRAC and the use of the
Treasury note for short-term liquidity purposes. SUB's proposal would
only assume (but not require) the use of the \$250 million Treasury note
for 2006, giving BPA the ability to recover any shortfall and repay
Treasury in 2007 (in the following rate period).

## 80% 3-year TPP Parameter

Because SUB lacks the model and supporting analysis used to develop the
new 80% 3-year TPP parameter, SUB cannot fully address BPA's new
proposal. Because this criteria fundamentally drives BPA's new proposed
CRAC design, SUB cannot adequately address BPA's new proposed CRAC
design.

That being said, SUB notes that if BPA does not have the \$50 million
floor (discussed above), the 80% TPP is too high because the model
results are understated. In addition, BPA states that a three-year TPP
of 80 percent is equivalent to a five year TPP of 69 percent. This is
incorrect. BPA enters into a new rate period in FY 2007. TPP in beyond
2006 is 100%. BPA acknowledges that the 5-year TPP from 2002-2006 is
understated when one considers that BPA made its treasury payment in
2002 and is projected to make for 2003.[^22]

## The 7(b)(2) Test

Pages 2.1-39 through 2.1-62 of the Draft ROD are devoted to the issue of
whether or not the SN-03 proceeding requires a 7(b)(2) test, in
accordance with 16 U.S.C. § 839e(b)(2) of the Northwest Power Act. BPA's
arguments contain a series of errors, discussed below which reinforce
the arguments raised by SUB in its Initial Brief regarding the 7(b)(2)
test. As stated above, SUB reiterates and incorporates the issues,
arguments, and conclusions discussed in its Initial Brief.[^23] SUB
notes that throughout the section in the Draft ROD regarding the 7(b)(2)
test, as discussed below, BPA incorrectly addresses arguments based on
the incorrect premise that the 7(b)(2) test only applies to "base
rates".

### A. The "Utterly False" Statement {#a.-the-utterly-false-statement .unnumbered}

On page 2.1-50, BPA states that the Hearing Officer's order (SN-03-O-12)
which denied BPA's and the Investor Owned Utilities' motions to strike
was based on misstatements of fact by the "public agencies":

> "For example, the public agencies told the Hearing Officer that BPA
> had never held a section 7(i) hearing without conducting the section
> 7(b)(2) rate test. See Order SN-03-O-12; BPA Response to Motion to
> Compel, SN-03-M-22. This statement is utterly false."

What the "public agencies" told the Hearing Officer, as carefully
referenced in responses, motions, and in SUB's Initial Brief referenced
*direct quotations of BPA from the WP-02 Initial ROD*:

"BPA has also conducted a 7(b)(2) rate test in every rate case since
1985, except in the cases where the rate case was settled and the test
was not performed." (WP-02-A-02, page 13-60, May 2000)

"The 7(b)(2) test has been used by BPA in every rate case since 1985,
when the 7(b)(2) test was first run, and was used in the development of
BPA's 2002 rate case." (WP-02-A-02, 13-7, May 2000)

If SUB's quotations from BPA are utterly false, the WP-02 ROD contained
utterly false statements made by BPA and FERC's interim approval of the
WP-02 rates was based on false statements. This is illogical because the
WP-02 rates themselves would be jeopardized as a result as the FERC's
interim approval was based on false statements from BPA. Any final
approval by FERC would be substantially weakened.

The alternative is that BPA's statements in the WP-02 ROD were true, in
which case BPA's arguments that the 7(b)(2) test is not required in the
SN-03 rate proceeding are moot. SUB notes that in the Draft ROD, BPA
argues that the PPC cannot change its position regarding the 7(b)(2)
test from the position it took as a signatory to the Joint Customer
Group ("JCG") brief in the WP-02 supplemental rate proceeding due to the
rule of judicial estoppel.[^24] BPA states that "this prevents a party
from blowing 'hot and cold' in different forums".[^25] BPA is bound by
judicial estoppel in this instance.

SUB did not sign the Settlement Agreement in the WP-02 supplemental
proceeding. SUB, in addition to Canby Utility Board, was specifically
excluded from the Joint Customer Group briefs.[^26] SUB was a separate
and distinct party in the WP-02 rate proceedings, just as it is a
separate and distinct party in this proceeding.

Similarly, BPA states:

> "The 'public agencies' failed to advise the Hearing Officer that the
> issue of the conduct of the 7(b)(2) rate test with regard to the SN
> CRAC was addressed in the WP-02 record. This was established at length
> in the Joint Customer Group's ("JCG") brief in BPA's supplemental
> WP-02 rate proceeding, as documented below."

First, BPA did not specifically decide this issue in the WP-02
Supplemental Record of Decisions. Second, The 7(i) Rules specifically
state that Brief on Exceptions may only address errors in the Draft ROD
or to provide support to tentative decisions in the Draft ROD.[^27]
While SUB may have disagreed with the legal positions put forward by the
JCG in its WP-02 brief, SUB's silence on the issue in was a function of
the 7(i) rules and did not imply concurrence or acquiescence on the
issue. Third, in accordance with the rules of judicial estoppel, BPA
couldn't endorse anything that conflicted with its position in the WP-02
Initial Proceeding. Since, in the WP-02 Initial Proceeding, BPA stated
that the 7(b)(2) test has been conducted in every rate proceeding that
had not been settled, BPA couldn't then turn around in its WP-02 Record
of Decision and agree with the JCG on the issue that the 7(b)(2) test is
not required in any SN CRAC rate case. SUB did not disclose the JCG's
arguments raised in the JCG Initial Brief from the WP-02 supplemental
proceeding because they are irrelevant for the reasons stated above.

BPA incorrectly suggests that SUB made misstatements to the Hearing
Officer. In the Hearing Officer's order denying the BPA's and IOU's
motions to strike, disagreed with the BPA's and IOUs claims that the
issue was decided the WP-02 supplemental proceeding. Clearly, the
Hearing Officer took the time to read the decisions, BPA's position on
the issues, and other parties positions that were distinct from BPA in
the WP-02 Record ROD. When reaching the conclusion in the order denying
the motions to strike, the Hearing Officer realized that SUB was blowing
neither hot nor cold and that SUB's position was "just right".

### B. Legislative History {#b.-legislative-history .unnumbered}

BPA states that the legislative history confirms that the 7(b)(2) rate
test is conducted in the establishment of the base PF rate and does not
address adjustment clauses. BPA is incorrect. SUB refers BPA to its
quotes from the legislative record in the WP-02 Initial Record of
Decision and SUB's Initial Brief.[^28] As an example, SUB notes the
following:

> "Section 7(b)---This section establishes a rate or rates for electric
> power sold to meet the general requirements (defined in this section)
> of public body cooperative and Federal agency customers and utilities
> under section 5(b)(2); a rate test to limit the charges that may be
> recovered by such ***rates*** applicable to public body, cooperative,
> and Federal agency customers after July 1, 1985; and a supplemental
> rate charge to recover any costs not recovered as a result of the rate
> test, to be applied through rates to all other power sales of the
> Administrator which are not limited by the rate test..."
> Administrator's Record of Decision, Final Power Rate Proposal (May
> 2000), WP-02-A-02 at 13-5, quoting from S. Rep. No. 272, 96^th^ Cong.
> 1^st^ Sess. 20 (1979). \[emphasis added\]
>
> "...Consumers of preference utilities will not suffer any adverse
> economic consequences as a result of this exchange..." (May 2000),
> WP-02-A-02 at 13-4, quoting from H. R. Rep. No. 976, Part II, 96^th^
> Cong., 2^nd^ Sess. 35 (1980). \[emphasis added\]

The legislative record is clear that the 7(b)(2) test protects public
body, cooperative, and Federal agency customers for any rate charged for
general requirements service. First, the SN CRAC is a rate charged to
public bodies, cooperatives, and Federal Agency customers for general
requirements service. Second, the SN CRAC increases the cost of
preference power charged to preference customers, is an adverse economic
consequence, and BPA must run the 7(b)(2) test in the SN-03 rate
proceeding to determine whether preference customers are adversely
impacted as a result of the exchange.

### C. Adjustment Clauses {#c.-adjustment-clauses .unnumbered}

BPA states that if BPA had to implement section 7 rate directives when
establishing or implementing adjustment clauses, BPA would never
establish adjustment clauses, but would only establish base rates. BPA
also states that this is flatly inconsistent with BPA's ratemaking
history and the SN CRAC.[^29] BPA is incorrect that it must comply with
section 7 rate directives when implementing all adjustment clauses. The
7(b)(2) test was not run when implementing the Load Based (LB) and
Financial Based (FB) CRAC's. Unlike the SN CRAC, the LB and FB CRACs
were modeled in the WP-02 rate case. In addition, when establishing or
implementing adjustment clauses which is not for the general
requirements of preference customers, BPA may not need to implement
section 7. The application of 7(b)(2) is entirely consistent with the SN
CRAC rate case since BPA's ROD for the WP-02 supplemental proceeding was
silent to the issue and BPA specifically stated that it conducts the
7(b)(2) in rate cases in the ROD for the WP initial proceeding.

### D. 7(i) Hearings {#d.-7i-hearings .unnumbered}

BPA argues that 7(b)(2) refers to the PF rate. This is incorrect. The
Northwest Power Act does not distinguish between base rates or
adjustment clauses when describing rates charged to preference customers
for general requirements.

BPA states that the 7(b)(2) Legal Interpretation and Implementation
Methodology do not state that BPA must conduct the rate test in
implementing adjustment clauses. BPA is incorrect. As cited in SUB's
Initial Brief, both documents refer to the "relevant rate case" as:

"The wholesale power rate adjustment proceeding being conducted at the
time projections for 7(b)(2) are made, and in which ***any*** adjustment
to rates in accordance with section 7(b)(2) may be reflected."
\[emphasis added\]

BPA incorrectly states that because no 7(b)(2) projections have been
made that the first part of the definition is not applicable. This
rational would illogically allow BPA to forget, or neglect, to run a
7(b)(2) test in any rate proceeding and therefore ignore the Legal
Interpretation and Implementation Methodology.

The SN CRAC rate proceeding establishes a rate that adjusts rates
charged to preference customers for general requirements. BPA states in
the Draft ROD that it does not deny that adjustment clauses are
adjustments of BPA's rates.[^30] The 7(b)(2) test is therefore
applicable. If BPA held a rate proceeding that did not adjust rates
charged to preference customers for general requirements, the 7(b)(2)
test may not be applicable.

### E. The GRSPs {#e.-the-grsps .unnumbered}

BPA notes that the GRSPs are silent to this issue of whether or not a
7(b)(2) test is required in a 7(i) proceeding. BPA states that the 40
day expedited rate hearing is inconsistent with conducting a 7(b)(2)
test. BPA also states that it was BPA's intent that BPA not conduct the
section 7(b)(2) rate test in the SN CRAC process and that this intent is
confirmed by specific language that indicates conducting the rate test
is inappropriate when implementing the SN CRAC. BPA is incorrect.

After declaring ex-parte and prior to the initiation of the formal SN-03
proceeding, BPA held a number of publicly held SN CRAC workshops. While
it could have held a number of workshops on the 7(b)(2) test, it elected
not to do so. As stated in SUB's Initial Brief, BPA conducted extensive
work on the use of financial tools outside the formal SN-03 process,
including the holding of two publicly held workshops.[^31] BPA has had
time prior to the start of the formal case to develop the 7(b)(2) test
and has extensive effort outside the formal rate process working on
issues that are not required by statute. As a result, BPA is incorrect
in stating that the expedited schedule is somehow inconsistent with the
running of the 7(b)(2) test.

BPA first expressed its intent that it is not required to conduct the
7(b)(2) test for the SN CRAC in this SN-03 proceeding. In the SN-03
Draft ROD, BPA states that there is specific language that indicates the
rate test is inappropriate. No such specific language exists in the
WP-02 ROD that states that the 7(b)(2) test is inappropriate in a SN
CRAC rate proceeding. Again, as stated above, due to judicial estoppel,
BPA cannot state in this proceeding that the 7(b)(2) test is not
required when BPA stated in the WP-02 initial proposal that it has
conducted a 7(b)(2) test in every rate proceeding since 1985 (unless the
rate case was settled). Setting aside the issue of judicial estoppel,
BPA cannot waive the statutory rights of preference customers as BPA
suggests by now declaring its intent that the 7(b)(2) is not required.

BPA states that because the GRPS are silent to the issue of the 7(b)(2)
test, that BPA is required to run the 7(b)(2) test. This is incorrect
because using this logic BPA could ignore any statutory obligation.

### F. The Administrative Record of GRSPs {#f.-the-administrative-record-of-grsps .unnumbered}

BPA cites the initial brief submitted the Joint Customer Group in the
WP-02 supplemental proceeding. Contrary to BPA's wording in the Draft
ROD, the Joint Customer Group in the WP-02 proceeding is not the Joint
Customers in the SN-03 proceeding. For reasons discussed above, this is
irrelevant to SUB's standing on this issue and is counter to BPA's
position in the WP-02 initial proceeding. While SUB did not sign, and
was specifically excluded from, the JCG brief in the WP-02 proceeding,
the JCG's arguments dealt with the [prospective]{.underline} calculation
of a 7(b)(2) test in a theoretical SN CRAC proceeding prior to the
implementation of an actual SN CRAC rate proceeding.[^32] SUB finds no
language in the JCG brief that is contrary to the position that the
7(b)(2) test must be run when a SN CRAC actually
[implemented]{.underline} through a rate process.

BPA states SUB argues that BPA should not have signed the settlement
agreement if BPA did not want to run the 7(b)(2) test because the
settlement agreement was silent to the 7(b)(2) test and that the GRSPs
are silent to the issue. BPA states that SUB's argument is weak because
it would be equally true that BPA should have signed the settlement
agreement because it did not require BPA to run the 7(b)(2) test when
implementing the SN CRAC. This is in error because it illogically
assumes that BPA has the authority to invalidate statutory obligations
at its discretion. Using BPA's logic, BPA could sign any piece of paper
that did not mention statutes and, using that piece of paper, argue that
it need not comply with the law.

###  G. Prior Administrative Practices {#g.-prior-administrative-practices .unnumbered}

BPA cites seven 7(i) rate proceedings that do not adjust rates for
general service to public body, cooperative, or federal agency
customers. BPA argues that because it did not run a 7(b)(2) test in
those proceedings, it is not required to do so now. As stated in SUB's
initial brief, this argument is in error because these cases did not
adjust rates to public body, cooperative, or federal agency customers
for which the 7(b)(2) test protects. Again, it bears repeating that BPA
took the position in the WP-02 rate case that the 7(b)(2) rate test has
been applied in every rate case since 1985.

### An Additional 7(i) Hearing

BPA incorrectly tentatively decided that it is inappropriate for BPA to
request an additional 7(i) hearing for the 7(b)(2) test. The Hearing
Official is statutorily required to develop a full and complete record,
using both procedural means through the framework of the 7(i) rules and
substantive means to comply with statute. BPA cannot make a decision
regarding the SN-03 rate proceeding without conducting the 7(b)(2) test.
While BPA states that the motion to compel BPA to run the 7(b)(2) test,
SUB noted in its Initial Brief that the Hearing Officer did not address
the merits of the argument. While SUB is constrained by the 7(i) rules,
BPA and the Hearing Officer have additional responsibilities and
authority regarding the development of the record.[^33] BPA states that
SUB and seeks review of the Hearing Officer's order denying SUB's motion
to compel BPA to conduct a section 7(b)(2) rate test in the SN-03 rate
proceeding. As addressed above, the 7(b)(2) test is required in this
proceeding. SUB first attempted to address the issue of the 7(b)(2) test
in a SN-03 workshop after BPA stated that a 7(b)(2) test was not
required. SUB's request to address the issue further was acknowledged
and subsequently ignored by BPA. BPA repeatedly denied that the 7(b)(2)
test is required in its data response, motions, testimony, and in the
Draft ROD.[^34] In response to the Motion to Compel BPA run the 7(b)(2)
test, BPA argues:

"BPA's Procedures provide the Hearing Officer authority to grant or deny
interventions, establish a procedural schedule, grant or deny motions to
*strike* evidence, grant or deny motions to compel the production of
*existing* evidence, and other matters, the Procedures do not provide
the Hearing Officer with authority to compel any litigant to create and
file specific substantive evidence."[^35]

BPA's argument strengthens SUB's argument that BPA and the Hearing
Officer must exercise their authority outside the 7(i) rules to properly
develop the case.

BPA's denial of an additional SN-03 rate case for the 7(b)(2) test, is
incorrect, arbitrary, and results in an incomplete record.

## VI. Support of "The Evidence" {#vi.-support-of-the-evidence .unnumbered}

In responding to ICNU's and Alcoa's argument that no SN CRAC is
necessary, BPA states that it does not believe the evidence supports
this conclusion.[^36] In is incorrect and arbitrary for BPA to state
that a party's position is not supported by evidence when BPA has not
provided evidence used to generate numbers in the Draft ROD. Using BPA's
logic, ICNU's and Alcoa's arguments are as valid as BPA's (or any
party's arguments not based on evidence for that matter) since BPA
purports that ICNU's and Alcoa's argument is not supported by evidence
while BPA's tentative decisions regarding figures for the proposed rate
structure in the Draft ROD lack any evidence on the record.

## VII. The GRSPs {#vii.-the-grsps .unnumbered}

BPA presented the proposed GRSPs in the Draft ROD this past Monday, July
16^th^, 2003. The GRSPs differ significantly from the GRSPs presented by
BPA in testimony and SUB proposes, along with other parties, that BPA
schedule a separate public meeting (or meetings, as necessary) to
adequately review the proposed GRSPs and allow for comments to be
considered prior to BPA's final ROD for the SN-03 rate proceeding.

DATED this 20^th^ of June, 2003.

Respectfully submitted,

\_\_\_\_\_\_\_/s/\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Peter R. Mersereau

Attorney for the

Springfield Utility Board

[^1]: For example, the Toolkit model failed to account for load loss in
    the WP-02 Supplemental Proposal (WP-02-A-09, page 4-45). The Toolkit
    model in this proceeding did not correctly model traditional
    deferral logic (SN-03-E-BPA-17, page 22-23 at 24).

[^2]: SN-03-A-01, page 2.7-32

[^3]: SN-03-E-SP-01, pages 14 - 17

[^4]: SN-03-E-BPA-17, page 22-23 at 24

[^5]: SN-03-A-01, page 2.7-33

[^6]: WP-02-A-09, page 4-48

[^7]: SN-03-B-SP-01, page 16 at 1

[^8]: SN-03-A-1, page 2.7-32

[^9]: SN-03-B-SP-01, page 14 at 14

[^10]: SN-03-A-1, page 2.7-33, 34

[^11]: WP-02-E-SP-03, page 10-11, at 21

[^12]: BPA ToolKit model provided in its initial proposal for the SN-03
    rate proceeding. TK_178_CaseE3ud_030225.xls, "Revisions" sheet.

[^13]: See TK_178_CaseE3ud_030225.xls, "Debugging" sheet and macro
    logic.

[^14]: SN-03-E-SP-01, page 15 at 5

[^15]: SN-03-E-SP-02, page 2, at 5

[^16]: SUB first raised this issue at clarification of BPA's initial
    proposal (4/2/03). This was followed by additional requests via data
    requests . The first was denied by BPA on the grounds that it would
    require additional analysis and is precluded in accordance with §
    1010.8 of the 7(i) rules. The second was denied because BPA stated
    that it actually didn't correct the error as stated in its rebuttal
    testimony. SUB also requested that BPA make publicly available a
    corrected version during clarification of Non-BPA parties' direct
    testimony (4/22/03). BPA has had ample opportunity to analyze the
    impact of the TPP with the \$50 million floor.

[^17]: SN-03-B-SP-01, page 18 at 1, and SN-03-E-SP-01 page 17

[^18]: SN-03-A-01, page 2.7-6

[^19]: SN-03-B-SP-01, page 18 at 1

[^20]: BPA's expected ending reserves in its initial proposal was
    \$347.8 million.

[^21]: BPA has removed the Treasury Repayment Probability requirement in
    its Draft ROD. SUB agrees with the removal of this parameter and of
    the removal of the zero net revenue requirement.

[^22]: SN-03-A-01, page 2.7-13

[^23]: Specifically, see SN-03-B-SP-01, pages 3 through 14 regarding the
    7(b)(2) test.

[^24]: Citing Callanan Road Improvement Company v. United States, 345
    U.S. 507, 512-13 (1953); Arizona v. Shamrock Foods Co., 729 F.2d
    1208, 1215 (9^th^ Cir 1984); United States vs. Matheson, 532 F 2d
    809, 819-20 (2d Cir. 1976); Smith v. Montgomery Ward & Co., 388 F.2d
    291, 292 (6^th^ Cir. 1968); Lewis v. Atlas Corporation, 159 F.2d
    599, 602 (3^rd^ Cir. 1946). *See* SN-03-A-01, page 2.1-56

[^25]: SN-03-A-01, page 2.1-56

[^26]: WP-02-B-JCG-01, page 1, footnote 1

[^27]: 7(i) Rules, §1010.13(d)

[^28]: See WP-02-A-02, page 13-5 pages 13-1 through 13-6 and
    SN-03-B-SP-01, page 8.

[^29]: SN-03-A-01, page 2.1-43

[^30]: SN-03-A-01, page 2.1-58

[^31]: BPA suggests that SUB's point regarding the two publicly held
    workshops was that the 7(b)(2) test could be done in two days.
    (SN-03-A-01, page 2.1-52) BPA ignores the extensive work was done by
    BPA staff prior to the public workshops. This work did not
    "magically" appear at the workshops as BPA suggests.

[^32]: For example, the JCG brief states "...And since it is only the
    contingent cost recovery clauses contained in the GRSPs, and not the
    base rates contained in the rate schedules, that are being modified
    *in the second phase of this proceeding*, there is no legal
    requirment that these rate tests be performed a second time."
    Because the SN CRAC rate case is being implemented in accordance
    with statute, the legal requirement now exists. The JCG clearly
    delineated the WP-02 supplemental proceeding from any SN CRAC
    proceeding.

[^33]: SN-03-B-SP-01, pages 5-6

[^34]: SN-03-B-SP-01, page 5

[^35]: SN-03-M-22, page 8

[^36]: SN-03-A-01, page 2.7-24