+---+-----------+----------------------------+----------+-----------+---+
| ! |           | ## Department of Energy    |          |           |   |
| [ |           |                            |          |           |   |
| ] |           | Bonneville Power           |          |           |   |
| ( |           | Administration\            |          |           |   |
| m |           | P.O. Box 3621              |          |           |   |
| e |           |                            |          |           |   |
| d |           | Portland, Oregon           |          |           |   |
| i |           | 97208-3621                 |          |           |   |
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+---+-----------+----------------------------+----------+-----------+---+
|   |           |                            |          |           |   |
+---+-----------+----------------------------+----------+-----------+---+
|   | July 12,  |                            |          |           |   |
|   | 2004      |                            |          |           |   |
|   |           |                            |          |           |   |
|   | In reply  |                            |          |           |   |
|   | refer to: |                            |          |           |   |
|   | KEWS-4    |                            |          |           |   |
+---+-----------+----------------------------+----------+-----------+---+

Ms. Judi Danielson, Chair

Northwest Power and Conservation Council

851 S.W. Sixth Avenue, Suite 1100

Portland, OR 97204-1348

Dear Ms. Danielson:

In October 2003, Bonneville Power Administration's (BPA) Administrator
issued a general statement of agency practice describing how the expense
portion of the budget for the Fish and Wildlife Program will be managed
through FY 2006. The purpose of this letter is to share with you the
equivalent statement of agency practice and procedures for the capital
portion of the Program.

Our intent in developing these guidelines is to manage the capital
budget in a similar manner to the Program's expense budget. However, we
also must recognize that there is necessarily less flexibility for
increasing budgets in the capital category due to the agency's capital
budgeting requirements and the timing and constraints of the Federal
budget process for capital investment.

These guidelines allow for an average capital investment of \$36 million
per year for the

FY 2004-2006 period, and no more than \$108 million for the three years
cumulatively. If the program investment is lower than \$36 million in
any year, there are several alternatives to allow for rescheduling into
a future year, the selection of which will depend upon the agency's
utilization of its overall capital budget in that year. The guidelines
also require BPA's Corporate Finance office to make determinations in
advance of investment, based on information available at that time, on
whether projects qualify for capital treatment. This is to occur prior
to the next year's budget being set.

As you are aware, over the past several months we have been working to
communicate clearly BPA's long-standing general capitalization policy
and how it applies to the Council's 2003 request that we capitalize land
acquisitions. BPA's Corporate Finance group is re-releasing the Fish and
Wildlife Capitalization Policy document with new annotations to help
explain our internal practices and procedures for applying the policy to
land acquisitions for the Program.

Thank you for your comments and participation in discussions on both of
these documents. I anticipate that the greater clarity and specificity
we are trying to provide will assist us all in

planning and managing this Program in the future. You will find both the
Budgeting Practices and Procedures for the capital portion of the
Program and the F&W Capitalization Policy enclosed.

Sincerely,

Gregory K. Delwiche

Acting Vice President

Environment, Fish & Wildlife

Enclosures

cc:

Chairman Dean Adams, Burns Paiute Tribe

Chairman Ernest Stensgar, Coeur d'Alene Tribe

Chairman Joseph Pakootas, Confederated Tribes of the Colville
Reservation

Chairman Glen Nenema, Kalispel Tribe

Chairman Gary Aitken, Kootenai Tribe of Idaho

Chairman Tony Johnson, Nez Perce Tribe

Chairman Fred Matt, Confederated Salish & Kootenai Tribes

Chairperson Nancy Murillo, Shoshone Bannock Tribes of Fort Hall

Chairman Terry Gibson, Shoshone Paiute Tribes of the Duck Valley
Reservation

Chairman Warren Seyler, Spokane Tribe of Indians

Chairman Antone Minthorne, Confederated Tribes of the Umatilla Indian
Reservation

Chairman Ron Suppah, Confederated Tribes of the Warm Springs Reservation

Chairman Jerry Meninick, Yakama Indian Nation

Mr. Rod Sando, Columbia Basin Fish & Wildlife Authority

Ms. Mary Verner, Upper Columbia United Tribes

Mr. Olney Patt, Jr., Columbia River Intertribal Fish Commission

Mr. Steve Huffaker, Director, Idaho Department of Fish and Game

Mr. Jeff Hagener, Director, Montana Department of Fish, Wildlife and
Parks

Mr. Lindsay Ball, Director, Oregon Department of Fish and Wildlife

Dr. Jeff Koenings, Director, Washington Department of Fish & Wildlife

bcc:

S. Wright -- A-7

J. Stier -- DC-WASH

D. Mahar -- DM-7

K. Hunt -- DR-7

J. Smith -- DT-Spokane

B. Cobell -- KE-4

M. Kerr -- KE-4

B. Maslen -- KEW-4

B. Austin -- KEW-4

S. Hampton -- KEWB-4

V. Lefler -- KEWB-4

P. Krueger -- KEWR-4

J. Rowan -- KEWR-4

K. Cheney -- KEWS-4

M. Shaw -- KEWU-4

J. Curtis -- KF-2

R. Roach -- L-7

P. Key -- LC-7

P. Norman -- P-6

Official File -- KEW (EX-15-18)

vlefler:gak:3521:7/8/04 (W:\\KEW\\KEW04\\EX\\EX-15-18\\ltr for capital
budgeting guidelines.doc)

Guidance in this policy supercedes all other guidance that may have been
issued for BPA Financial Policy prior to the later of the effective date
or reviewed date.

## 1. CONTENTS OF THIS POLICY

[1. CONTENTS OF THIS POLICY 3](#contents-of-this-policy)

[2. BACKGROUND 3](#background)

[3. PURPOSE OF THIS POLICY 3](#purpose-of-this-policy)

[4. REVISIONS TO POLICY 3](#revisions-to-policy)

[5. DEFINITIONS 3](#definitions)

[6. POLICY 3](#policy)

[7. PROCEDURES 3](#procedures)

[8. RESPONSIBILITIES 3](#responsibilities)

[9. OTHER CONSIDERATIONS & REFERENCES
3](#other-considerations-references)

[10. REVIEW/UPDATE SCHEDULE 3](#reviewupdate-schedule)

## 2. BACKGROUND

> BPA's capitalization policy for Fish & Wildlife has been developed
> based on BPA's unique legislative authorities, including those
> contained in the Pacific Northwest Electric Power Planning And
> Conservation Act (Northwest Power Act). BPA's investment in fish and
> wildlife programs is unique to the utility industry. There is no
> precedent for capitalizing non-utility owned assets with no recognized
> future economic benefit to utility ratepayers. BPA is able to
> capitalize certain fish and wildlife costs based on our ability to
> recover the costs in future rates. Our ability to capitalize these
> costs is based solely on the recognition, under GAAP, of BPA as a
> "Rate Regulated Utility" with the ability to capitalize intangible
> asset costs since those costs will be recovered in future rates.
>
> The current policy for capitalizing fish and wildlife costs is based
> on guidance from the Northwest Power Act. The Northwest Power Act
> states in Sec. 4(h)(10)(b) that budgets for the construction of
> capital facilities with an estimated life of greater than 15 years and
> an estimated cost of at least \$1,000,000 shall be funded in the same
> manner and in accordance with the same procedures as major
> transmission facilities under the Federal Columbia River Transmission
> System Act. Based on this guidance and provisions under FAS 71, BPA
> capitalizes expenditures where expected future benefits are reasonably
> determinable for facilities that meet the criteria described above.
> Based on long-standing policy and practice, BPA capitalizes facilities
> only if they have an estimated life of greater than 15 years and an
> estimated cost of at least \$1,000,000.
>
> To capitalize costs under FAS 71, the following are required:

-   Rates are subject to review by an independent third party;

-   Rates are set to recover the costs of regulated services/products;
    and

-   The rates set to recover costs can reasonably be expected to be
    charged to and collected from customers.

FAS 71 also references and incorporates Accounting Principle Board (APB)
Opinion 17, which requires that to be considered a capitalized
intangible asset, an asset must have a measurable future benefit.

> Fish and wildlife assets are capitalized with a 15 year life, which is
> the same period those expenditures are being recovered in future
> rates. BPA appears to be the only utility capitalizing costs
> associated with fish and wildlife programs that purchase assets not
> owned by the utility.

## 3. PURPOSE OF THIS POLICY

> The purpose of this policy is to guide BPA Managers and staff in
> determining whether to capitalize or expense a fish and wildlife
> project.  This accounting policy applies only to BPA expenditures; it
> does not affect expenditures of the Army Corps of Engineers or the
> Bureau of Reclamation.

## 4. REVISIONS TO POLICY

The following changes were made to the policy document on April 1, 2004
and this update replaces the last policy document dated November 28,
2003.

> This revision provides clarification concerning functional units
> related to Land Acquisition capitalization. Functional units are
> separate properties that are considered co-dependent or the
> relationship is such that the desired outcome is not achieved without
> being considered holistically.
>
> This revision is also being made to conform to the current policy
> format.

## 5. DEFINITIONS

A.  GAAP -- Generally Accepted Accounting Principles; principles
    promulgated by all the relevant standard-setting bodies -- currently
    the FASB and the AICPA\'s Accounting Standards Executive Committee.

B.  FASB -- Financial Accounting Standards Board

### AICPA -- American Institute of Certified Public Accountants

C.  Accounting Standards Executive Committee - the senior technical body
    of the AICPA who are authorized to speak for the Institute in the
    areas of financial accounting and reporting.

D.  FAS 71 -- Statement of Financial Accounting Standard 71; Accounting
    for the Effects of Certain Types of Regulation

E.  FAS 2 -- Statement of Financial Accounting Standard 2; Accounting
    for Research and Development Costs.

F.  FCRPS -- Federal Columbia River Power System

## 6. POLICY

All BPA organizations and individuals **shall** adhere to the following
policy regarding Fish and Wildlife Accounting.

A.  General Facility Construction

> BPA capitalizes investments in facilities for fish and wildlife that
> are made to fulfill its obligations under the Northwest Power Act or
> other authorities, consistent with the Northwest Power Act. In order
> to be capitalized these investments must meet the criteria outlined
> below:

1)  Rates must have been set to recover the costs over time.

2)  The facility must provide a measurable future benefit. This benefit
    is defined as fulfilling a legal obligation of the FCRPS.

3)  The facility must have a 15 year life or greater.

4)  Facilities must cost \$1 million or more. If the project includes
    facilities at multiple locations, the project may be capitalized if
    it meets the following additional criteria:

    -   The facilities together must have a total cost of at least \$1
        million; AND

    -   The facilities must be shown to be functionally interdependent
        (i.e. in order for the benefit of the project to be achieved,
        all of the facilities must be constructed.)

```{=html}
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```
B.  Land Acquisitions

> BPA intends to include in its capital program its investment in land
> acquisitions for fish and wildlife (i.e., securing a real property
> interest for the primary benefit of fish or wildlife), consistent with
> the Northwest Power and Conservation Council's Columbia River Basin
> Fish and Wildlife Program, provided such costs exceed \$1 million, and
> such investment provides a creditable and quantifiable benefit against
> a defined obligation for BPA. Acquisitions must meet the
> capitalization criteria outlined below:

1)  Rates must have been set to recover the costs over time (i.e., land
    acquisitions have been included in the current rate case).

2)  The property interest must provide a measurable benefit and
    irrevocable credit against the FCRPS' legal obligations. As an
    example, in the case of wildlife habitat acquisitions, the receipt
    of \"Habitat Units\"[^1] accomplishes this requirement.

> The minimum credit obtained (e.g., HUs for wildlife) must be
> identified at the time of acquisition.

3)  Acquisitions must have a 15-year life or greater.

    a.  The 15-year threshold is met if the Habitat Units for wildlife
        acquisitions, or other units of credit for resident and
        anadromous fish acquisitions, are permanently protected (e.g.,
        the land itself is permanently protected for maintaining the
        habitat units and the "credit" of the units is not reducible).

4)  Acquisitions must cost \$1 million or more. If an acquisition
    includes more than one parcel[^2] the acquisition may be capitalized
    if it meets the following additional criteria:

    -   The parcels together must total at least \$1 million in
        acquisition cost; AND

    -   The parcels must all be providing mitigation for a single FCRPS
        hydroelectric project; AND

    -   The parcels must all be purchased within a single fiscal year;
        AND

    -   The parcels must be in the same Council-defined sub-basin; AND

    -   The parcels must be shown to be functionally interdependent by
        meeting one of the following elements:

        -   Title will be held by the same entity;

        -   Parcels are contiguous;

        -   If not contiguous with each other, but each parcel is
            contiguous with a unified block of lands that are already
            permanently managed for protection of fish or wildlife
            (e.g., a wildlife refuge, a former ranch now permanently
            managed for wildlife, etc);

        -   If not contiguous, would establish a properly functioning
            habitat unit appropriate to the species life history needs
            addressed by the acquisition project; e.g., a migration
            corridor, winter range, or genetic refuge.

## 7. PROCEDURES

A project may consist of one or more contracts with various entities.
Only the contracts, or portion of a contract, that relates to the
capital portion of the project may be capitalized. Operating &
Maintenance and Research, Monitoring and Evaluation costs are always
expense.

#### Preliminary Project Stage

> The Accounting Standards Executive Committee (AcSEC) views activities
> performed during the preliminary project stage as being similar to
> Research & Development costs (SFAS 2), as there is no assurance that a
> project will become a capital asset. AcSEC also refers to FASB
> Interpretation No. 6 for a determination of when a project will become
> capital. Both standards should be applied when determining when to
> begin capitalizing as it relates to preliminary project costs. Until
> that determination is made, preliminary costs must be expensed.
>
> Capitalization of costs would begin when both of the following occur:
>
> a\. The preliminary project stage is completed.
>
> b\. Management, with the relevant authority, implicitly or explicitly
> authorizes and commits to funding a capital project.

#### Project Implementation

A.  General Facility Construction

> For fish and wildlife construction projects that meet the
> capitalization policy listed under Section 5.A. above, project costs
> can be capitalized.

B.  Land Acquisitions

> 1\. For single parcel land acquisitions that meet the capitalization
> policy listed under Section 5.B. above, project costs can be
> capitalized.

2.  Projects with multiple parcels will most likely have a longer
    preliminary project stage and result in a greater amount of the
    preliminary costs being expensed prior to the determination being
    made that a project meets the policy for capitalization. Once a
    project is determined to meet the capitalization policy, project
    costs from that point on can be capitalized; prior costs must remain
    as expense costs.

3.  Projects with multiple parcels must be documented, reviewed and
    approved as consistent with this policy in advance of acquisition.

> **If at any time there is a change in the project such that the terms
> of the capitalization policy are no longer met, the costs previously
> capitalized and all future costs must be expensed.**

## 8. RESPONSIBILITIES

A.  The BPA **Vice President, Finance** and **Chief Financial Officer
    (CFO)** is delegated the authority by the Chief Executive
    Officer/Administrator to oversee the financial operations of the
    Agency. The CFO in turn has delegated certain authorities to the
    Manager, Financial Operations, to fulfill his/her delegated
    responsibilities.

B.  The **Manager, Financial Operations**, is delegated the authority by
    Section 21.5 of the Bonneville Power Administration (BPA) Manual,
    "to provide, on a BPA-wide basis, those financial management
    systems, policies, and procedures deemed necessary to keep complete
    and accurate accounts of operations, including all funds expended
    and received in connection with acquisition, transmission and sale
    of electric energy and other BPA services."

C.  **BPA Managers** are responsible to ensure that the financial
    policies described in this Fish and Wildlife Capitalization Policy
    are followed by their organizations.

D.  **BPA Staff** are responsible for following the financial policies
    described in this Fish and Wildlife Capitalization Policy.

## 9. OTHER CONSIDERATIONS & REFERENCES

A.  Pacific Northwest Electric Power Planning And Conservation Act

B.  FAS 71 -- "Accounting for the Effects of Certain Types of
    Regulation" which specifically address regulation created assets

C.  Accounting Operations website:
    <http://webip1/Corporate/DFR/dfro/accounting.htm>

## 10. REVIEW/UPDATE SCHEDULE

> This policy will be reviewed annually no later than the anniversary of
> the effective date unless conditions dictate that a more frequent
> review is needed. The policy will be updated as necessary following
> each review.

/media/pszemraj/PeterTrove/project-files/DATA/ms-word-files/big-DOC/846739.doc

Budgeting Guidelines for the Capital Portion of BPA's

Fish and Wildlife Program

# Overview

For the FY 2004-2006 period, the Northwest Power and Conservation
Council (Council) will develop a multi-year project budget for BPA's
Fish and Wildlife Program. The project budget will reflect an amount of
work that each project can accomplish between October 1 and September 30
of each year, and the associated spending plan for that year. The
capital portion of this budget will not exceed an average of \$36
million per year, or \$108 million for the three-year period.

These guidelines define how BPA, in consultation with the Council and
others in the region, will budget and manage Fish and Wildlife Program
investments that meet capital criteria. These guidelines were based on,
and are consistent with long-standing BPA policy and practice regarding
management of capital. The guidelines are intended to apply to BPA, but
the guidelines will also assist the Council in its budgeting efforts.
These guidelines do not define BPA's capitalization policy or criteria.

## Identification/Confirmation of Capital Projects

## 

## The Council will provide its recommendations for capital project budgets, totaling an average of \$36 million per year and not exceeding \$108 million for the three-year period. These recommendations are based on a regional project selection process. Upon receipt of those recommendations, BPA F&W staff will provide BPA Corporate Finance staff with the recommendations. Corporate Finance staff will review the list of projects, and confirm those projects that meet the criteria for capitalization based on current information, identify those that do not, or ask for additional information if they deem it necessary. This information will be communicated back to the Council.

## Rescheduling

To the extent F&W capital investments do not get accomplished in one
year, BPA will allow the program funding to be rescheduled. However,
because of constraints imposed by BPA's capital budgeting requirements,
BPA cannot commit to allowing the program capital funding to move
automatically from one fiscal year to the subsequent fiscal year; it may
have to be moved beyond the subsequent year. This is because BPA
establishes its capital spending levels through the federal budget
process. Subsequent year capital budgets are included in the President's
Budget submitted to Congress in February of each year. (For example,
BPA's FY 2005 Budget was included in the President's Budget submitted to
Congress in February 2004.) BPA will not increase its capital
expenditures beyond those submitted to and reviewed by Congress in the
President's Budget.

Under some circumstances, to address a specific critical business need,
BPA may increase the capital budget for the upcoming fiscal year. In
that case, after rigorous internal review, and considering the Agency's
current financial circumstances, BPA Executives may make the decision to
increase the capital budget for the year and include this amount in the
next Congressional Budget submission. This decision must be made by the
end of July prior to the fiscal year at issue, to meet the schedule for
BPA's internal capital budgeting process.

Thus, if rescheduling of capital work and expenditures is requested,
there are three budget alternatives that BPA may consider:

1)  Under most circumstances, the Fish and Wildlife capital budget for
    the upcoming year cannot be increased to exceed \$36 million.
    However, BPA could choose to reschedule the amount under-spent in
    the current year into the year after the upcoming fiscal year (e.g.,
    from FY 2004 to FY 2006).

2)  If other categories of BPA capital expenditures, i.e., for PBL or
    TBL, concurrently recognize their capital expenditures for the
    upcoming year will be lower than that included in the Congressional
    budget, the Fish and Wildlife capital budget may be allowed to
    increase in the upcoming year. It may only increase up to the lower
    of: a) the amount by which F&W capital is under-spent in the current
    year or b) the amount that gets the subsequent year's total BPA
    capital budget up to the total included in the Congressional budget.

3)  If a major F&W capital project is delayed in one fiscal year, BPA
    may consider allowing rescheduling of the program funding into the
    subsequent year through the federal budget process. The F&W Division
    must provide such a proposal, along with justification, to Corporate
    Finance by July 31 of the year prior to the increase being
    requested, consistent with the Agency practice. This approach is
    intended only for major projects of critical business need, to
    prevent a major disruption of the program. Any decision by BPA could
    include delaying other projects in the capital program as a whole in
    order to accommodate rescheduling the specific project work.

As an example, if BPA recognized in June of FY 2004 that it would only
spend \$30 million of the \$36 million capital budget for the year,
there are the following alternative approaches:

\(1\) If the agency determines its capital expenditures in FY 2005 will
be at least \$6 million lower than the amount included in the
Congressional budget or other legislatively determined threshold, the FY
2005 F&W capital budget could be allowed to be as high as \$42 million
subject to available borrowing authority. (2) Alternatively, the \$6
million would be added to the FY 2006 budget. (3) If a delay in a major
capital project is creating the FY 2004 under-spending, BPA may consider
increasing the agency capital budget for FY 2005 as reported to Congress
to accommodate rescheduling if BPA decides it is necessary.

If the first of these occurs, the Council will provide recommendations
for an FY 2005 budget that is \$36 million plus the amount by which the
F&W capital budget is expected to under-spend in FY 2004. If the FY 2004
capital actual expenditures are higher than the amount assumed in the FY
2005 recommendations, the recommendations must be revised accordingly.
BPA will work with Council and contractors to maximize achievement of
capital investment during the year.

**Available Contract Funds**: Funds not used for a project, or not yet
committed to a project (for example, as "rescheduling" funds to be
available in a subsequent year), may be made available to fund other
projects. They could be spent on other projects in the current or future
years, as long as the annual program budget remains within the \$36
million average and \$108 million for the three-year period, and the
projects are included in BPA's Congressional budget.

**Quarterly Program Status Review Meetings**: A key part of managing the
Fish and Wildlife Program budget effectively will be holding Quarterly
Program Status Review meetings. These meetings will provide the
opportunity for BPA, Council and CBFWA staff to discuss the progress of
projects, with BPA's Project Managers/COTRs and contractors attending as
necessary. It may be determined that these meetings should be held more
often than quarterly. The meetings will be used to:

-   discuss projects that appear to be considerably ahead of or behind
    schedule;

-   report rescheduling or changes to project budgets that COTRs have
    approved within their authorization parameters;

-   consider requests for rescheduling outside COTR authorized
    parameters;

-   decide on the appropriate process and level of review for requests
    for additional funding or changes in scope;

-   identify the amount of Available Contract Funds;

> \- reaffirm consistency with BPA capital program requirements

-   identify and discuss other budget-related issues.

These actions will be identified and reported at Quarterly Program
Status Review meetings, and necessary action to maximize performance in
the Program will be taken. The expectation is that through this process,
projects will be managed such that the combination of Available Contract
Funds and Rescheduled Funds applied to the following year will be
managed within \$36 million average annual budget. In support of this
process, BPA will provide project-level reports on a regular basis
showing project budgets and accrued expenditures to date.

[^1]: Each FCRPS hydropower project was evaluated to identify the
    habitat lost due to the construction and inundation created by the
    project. These "loss assessments" describe the losses in Habitat
    Units, which are a means of measuring the habitat values lost in
    terms of habitat quantity, type, and quality. The United States Fish
    and Wildlife Service established Habitat Units and the Habitat
    Evaluation Procedure used to identify them. The Northwest Power and
    Conservation Council formally adopted the wildlife habitat loss
    assessments and the corresponding Habitat Units into the Fish &
    Wildlife Program, which are summarized in Technical Appendix Table
    11-4. BPA uses Table 11-4 to help define the mitigation for which it
    is responsible. As BPA acquires Habitat Units through the
    acquisition of appropriate lands or interests in lands, BPA is able
    to extinguish a corresponding obligation noted on the ledger.

[^2]: For the purposes of this policy "parcel" or "parcels" means a real
    property interest including, but not limited to, fee title and
    conservation easements.