# I. INTRODUCTION

On December 21, 1998, the Administrator of the Bonneville Power
Administration (BPA) issued a Power Subscription Strategy and
accompanying Record of Decision (ROD) which set the agency's Power
Business Line on a course to establish power rates and offer power sale
contracts in anticipation of the expiration of current contracts and
rates on September 30, 2001. The Strategy and ROD were the culmination
of many public processes that came together to form the framework to
equitably distribute in the Pacific Northwest the electric power
generated by the Federal Columbia River Power System.

The 1998 Subscription Strategy has served to guide BPA in accomplishing
its goals. Since adoption of the Strategy, however, developments
occurred which prompted BPA to seek, in some instances, additional
comment from customers and constituents on these new issues. This
document contains evaluations and decisions regarding these new issues
and comments. These decisions refine the Subscription Strategy; they do
not revisit the wisdom of it.

The Strategy contemplated further public processes to implement its
goals. The 2002 Power Rate Case, ongoing since August 1999, is nearing
completion. BPA and its customers have continued discussions on power
products and power sales contract prototypes, and the Slice of System
product has been further defined. BPA also undertook a comment process
on the amount and allocation of power and financial benefits to provide
the investor-owned utilities (IOU) on behalf of their small farm and
residential consumers. Even as the decisions contained in this document
are made, work continues on these contract issues.

In a December 2, 1999, letter, BPA sought comment from customers and
constituents on some of these new issues, specifically, the length of
the Subscription window for power sales contract offers, the actions
required of new small utilities during this window to qualify for firm
power service, and new developments with respect to General Transfer
Agreements. Other issues arose independently, such as new large single
loads (NLSL) under the Northwest Power Act, duration of the new power
sales contracts, and a new contract clause regarding corporate
citizenship.

BPA will use the evaluations and decisions contained in this document to
further develop the contracts for offer to the customers. Subsequent
decision documents will be prepared for the IOU agreements under the
Residential Exchange Program and the settlement of Northwest Power Act
section 5(c) rights. A new Power Products Catalog will soon be available
on the agency's website.

**II. SUBSCRIPTION WINDOW**

**Issue:**

Is the "Subscription window" -- that time period during which BPA
intends to offer and sign new power sales contracts -- reasonable?

**Subscription Strategy:**

The Strategy ROD estimated that BPA would begin to offer contracts "from
February 1999 until 120 days after the ROD for the 1999 Power Rate Case
is signed." ROD at 7. BPA understood, however, that the 2002 Power Rate
Case, as it finally was named, may have had a different schedule than
predicted at that time. In the December 2, 1999, letter, based on the
then-current schedule for the 2002 Power Rate Case, BPA predicted an
April 2000 to September 30, 2000 "Subscription Window" and asked for any
additional comments on that schedule.

**Parties' Comments:**

Seven utilities and utility groups commented on the proposed schedule.
The Public Power Council, #019, Emerald People's Utility District, \#
026, and the Springfield Utility Board, #47, urged timing to be 30 days
after a final transmission rate became available. The Pacific Northwest
Generating Cooperative, #050, and the Clearwater Power Company, #034,
said the September 30, 2000, date appeared reasonable should the
original 120 days after completing the power rate case still be valid.
The IOUs, #043, urged BPA to tie the timing to both the power and
transmission rate cases, and provide the 120-day period. The Public
Generating Pool, #053, suggested the longest period of 120-days
following the power rate case, 30 days after final (new) transmission
rates or 180 days after contract negotiations were complete.

**Evaluation and Decision:**

Most of the comments reflect the utility customers' desires to know both
the power and transmission rates for the new rate period before deciding
to sign a power sales contract. All reflected in one way or another
approbation of at least 120 days after the power rate case concludes.

The BPA Power Business Line (PBL) is functionally separated from the BPA
Transmission Business Line (TBL) and is a party to the ratemaking
proceeding recently begun by the TBL to set new transmission rates and
terms and conditions for open access. If and when the TBL revises its
rates, the PBL, along with all of its customers, will purchase
transmission at the rates set. The PBL therefore believes that knowing
the transmission rates will have a very low impact on decisions to
purchase power, and that the decisions to sign power sales contracts
will be made on the basis of power product costs and available products
rather than on the combination of power and transmission costs. Further,
as of this date, parties in the TBL rate case are attempting to reach a
settlement agreement. If they do so, as appears likely, the TBL will
have developed a final rate proposal well before the close of the
Subscription window.

BPA believes it is reasonable to hold to the fundamental concept as
earlier proposed (the 120-day period following the conclusion of the
power rate case). Although the 2002 Power Rates Final Record of Decision
has been delayed and is now scheduled for release in the second week of
May 2000, BPA still expects to provide customers a 120-day "open for
business" Subscription window beginning April 27, 2000. The window will
close on September 30, 2000, regardless of the date of the Power Rates
Final Record of Decision.

**III. NEW LARGE SINGLE LOADS**

**Issue:**

Should BPA change its current treatment regarding service to New Large
Single Loads (NLSLs)?

**Subscription Strategy:**

BPA made no specific recommendation to change treatment of NLSLs and did
not seek public comment on this issue.

**Evaluation and Decision:**

BPA recognizes that public agency customers may be asked to serve new or
existing industrial load located within the customer's service territory
that they have not previously served. To serve NLSLs, public agency
customers may request to purchase additional power from BPA. BPA will
not, however, now modify its Strategy ROD to change its current policy
on serving NLSLs. Instead, BPA plans to conduct a separate public
process after the Subscription window closes to establish a new NLSL
policy that will address issues associated with the treatment of NLSLs
during the term of the Subscription contracts.

During the Subscription window, the customers will be permitted to
identify in their Subscription contracts specific loads as loads that
may be a NLSL. For those customers where product choice is not dependent
upon the outcome of the public process, BPA will allow the removal of
the load from the contract or change the declarations as appropriate
after BPA finalizes its NLSL Policy. For those customers where product
choice is dependent upon the outcome of the public NLSL Policy process,
BPA will allow the customer to remove the loads from their contract or
take an off-ramp to a predetermined standardized product. This
predetermination would be agreed upon during the negotiations of the
Subscription contract.

**IV. NEW SMALL UTILITIES**

**Issue 1:**

Should BPA provide flexibility regarding the actions needing to be
completed during the Subscription window by potential new, small public
agency or cooperative utilities, including tribal utilities?

**Subscription Strategy:**

In the 1998 Strategy, BPA indicated that new public agency and new
tribal utilities that formed and qualified for service by meeting BPA's
Standards for Service would need to sign a final take-or-pay power sales
contract within the Subscription window in order to receive power at the
Priority Firm (PF) rate.

In December 1999, BPA proposed that new, small public agency or
cooperative utilities, including Tribal utilities, would not need to
take final steps within the Subscription window in order to receive
power at the PF rate. Specifically, BPA proposed that within the
Subscription window such utilities would need to: (1) be legally formed;
(2) complete initial economic and other assessments; (3) be taking steps
to become an operating utility; and (4) make a contingent power purchase
commitment in order to receive power at the PF rate. BPA further
proposed that such utilities would have additional time to sign a final,
take-or-pay Subscription contact pending the outcome of their additional
efforts, including the acquisition of distribution facilities.

**Parties' Comments:**

Various types of public and private utilities, utility associations,
cities, Tribes and Tribal organizations commented on BPA's proposal.
Avista, Enron Power Marketing, Portland General Electric, Idaho Power
Company, PacifiCorp, and Puget Sound Energy (Avista, et al.) indicated
that BPA should not discriminate in favor of new utilities simply
because they are small and that only those utilities that actually own
distribution facilities are eligible to be offered a requirements
contract- contingent or otherwise. Avista, et al, 042. Others stated
that the effect of BPA's proposal would preclude an existing utility
from being able to effectively diversify its wholesale power supply
because of the uncertainty about whether a new utility would reduce the
future load of the existing utility. Benton REA, 030.

Other parties' commended BPA's proposal for its flexibility and for
recognizing and attempting to accommodate the hurdles and timing
considerations that must be dealt with when forming a new, small
electric utilities. City of Portland, 016; PPC, 018/019; Yakama Nation,
037, ATNI, 040; CERT, 021; Spokane Tribe, 012; Shoshone-Bannock Tribe,
020; RedEarth, 011; Margaret Schaff, 039. The Yakama Nation stated that
BPA should not impose any deadline regarding when a new utility would
need to acquire its distribution system because to do so would skew any
negotiations in favor of the existing utility. Yakama Nation, 037.

A group of public agency utilities or their associations indicated that
BPA has been too restrictive regarding the formation of new utilities
qualifying for service at the PF rate. Generally, they indicated that
BPA should set no time limits on when a utility otherwise qualified as a
preference customer could purchase power at BPA's PF rate. Emerald PUD,
026; SUB, 047; OURCA, 049.

**Evaluation and Decision:**

BPA's proposal for new, small utilities provides that the entity can
request service and commit to purchasing power from BPA via the terms of
a contingent power sales contract before the entity is fully qualified
for requirements service. Contrary to the assertion made by Avista, et
al., that it is discriminatory to offer contingent contracts to small,
new public utilities, BPA\'s offer to such entities is consistent with
BPA\'s statutory authority and direction to encourage the widest
possible use of Federal power. *See* 16 U.S.C. 832a(b). BPA's
performance under the contingent contract, including the sale of
requirements power, will not begin until the entity is a fully qualified
public agency or cooperative utility with the demonstrated ability to
take physical delivery of the power for distribution to its retail
consumer load. To be fully qualified, the Administrator must find that
an entity has satisfied BPA's Standards for Service. S*ee* Final Policy
on Standards for Service, Administrator's Record of Decision, 64 Fed Reg
24382 (1999). The prospective new, small utility would be entering into
a contingent contract that commits it to purchase a specified amount of
federal power from BPA should it become a qualified public agency,
cooperative or Tribal utility.

As provided in the Subscription Strategy, if the load to be served by
the new, small utility was previously served by a preference customer
purchasing requirements power from BPA, the preference customer losing
such load would not have a take-or-pay obligation to BPA for such lost
load. While the formation and operation of a new, small utility may
impact the diversified power supply arrangements of the existing
utility, as pointed out by Benton REA, any financial costs incurred by
the existing utility could be a consideration in the negotiations
between the existing utility and the new utility.

The modification establishes specific conditions or requirements with
respect to new, small utilities that must be satisfied in order for such
utilities to be assured of receiving power at the lowest cost-based PF
rate. New, small utility customers will be required to sign a contingent
take-or-pay Subscription contract within the Subscription window that
will provide that performance under such contract will only begin when
BPA and the utility agree that the utility is eligible to receive
service (i.e., has met BPA's Standards for Service). Before BPA will
sign a contingent contract a new, small utility must be legally formed
in compliance with applicable state or Tribal laws that authorize it to
purchase and sell power to serve retail electric consumers. In addition,
the new utility must have completed certain analytical and procedural
requirements. These requirements are: 1) form an authorized Board of
Directors/Governing Body if one does not already exist, 2) designate an
Acting Manager, 3) identify utility goals and objectives, 4) describe
intended area within the BPA service territory which the utility intends
to serve, 5) develop retail load data, 6) prepare a detailed economic
feasibility study, and 7) develop a public involvement plan.

The contingent contract will be limited to a term of ten years (ending
no later than September 30, 2011) and BPA will have the right to
terminate the contingent contract after September 30, 2005, if the
utility is not actually taking power from BPA by that date. Furthermore,
deliveries under the contract will commence no later than one year after
it is agreed that the utility is eligible to receive service.

BPA understands that the timing of aspects of the Subscription process,
particularly when a final prototype contingent contract will be
available, makes it difficult for a new, small utility to sign a
contingent contract as the means to receive a portion of the amount of
average megawatts (aMWs) planned for new, small utilities. BPA is,
therefore, willing to accept a Letter of Intent prior to the signing of
a contingent take-or-pay contract if the prospective new utility has
completed the analytical and procedural requirements enumerated above.
Such Letter of Intent will only be valid through July 31, 2000. All
Letters of Intent or executed contingent contracts will be treated on a
first come, first served basis and will only be accepted after the
Subscription window opens.

**Issue 2:**

Should BPA set an average megawatt limit for the new, small utilities
for which it is proposing to be flexible?

**Subscription Strategy:**

BPA proposed that the flexibility for new, small preference utilities be
limited to a total of 75 aMWs for all such utilities. There was no set
cap on the size of any one single new, small utility that is eligible to
purchase from the 75 aMW.

**Parties' Comments**

While supporting the concept of some limit on the amount of power
available for new, small utilities under contingent contracts, some
parties indicated that the 75 aMWs limit should be raised to 150 aMW or
some other level above 75 aMWs. City of Portland, 016; Yakama Nation,
037; ATNI, 040; CERT, 021; Spokane Tribe, 012; Sho-Bannock Tribe, 020;
RedEarth, 011; Margaret Schaff, 039. Some parties indicated that the 75
aMW limit was inconsistent with BPA initial Power Rate Proposal
regarding loads of new public entities and annexations or the limit
appeared arbitrary. City of Portland, 016; Yakama Nation, 037.

The IOUs basically indicated that setting a limit of 75 aMWs did not
justify BPA's proposal to provide flexibility for new, small utilities.
Avista et al., 042. Certain public utility parties stated that any cap
or limit was inappropriate and inconsistent with BPA's organic statutes.
PPC, 018/019; OURCA, 049, Emerald, 026; SUB, 047. NRU indicated support
for a limit such as the 75 average megawatt limit proposed by BPA. NRU,
048.

**Evaluation and Decision:**

BPA proposed that 75 aMWs of power will be made available for the
purpose of signing contingent contract with new, small public utilities.
This is consistent both with BPA's Subscription Strategy goal of
avoiding rate increases and with the need for BPA power rates to recover
the cost of the federal power BPA is committed to provide. Without a
limit BPA could neither forecast the load nor plan its cost for service
to such customers. It is, therefore, reasonable for BPA to set a limit
on the amount of load and the associated cost for service to new, small
utilities.

Some comments suggested that BPA increase the amount of the limit. BPA
appreciates the interest by some parties to make available more PF-02
priced power to serve more new, small utility load. However, BPA is
mindful that the current limit of 75 aMw was set after taking into
consideration BPA's load forecast used to develop BPA's proposed PF-02
rate. To increase the limit here could result in impacts to BPA's
ongoing power rate proceeding under section 7(i) of the Northwest Power
Act. BPA believes it is unreasonable to create unintended impacts to
BPA's rate setting through this modification. While not increasing the
limit, BPA is clarifying its policy such that only new utilities with a
forecast total retail load of 75 aMWs or less are eligible to make use
of this contingency contract option. This is to help assure that a new
large utility cannot reduce the availability of the program to smaller
utilities.

New utilities who, because of their size or because they desire to sign
a contingent contract after the 75 aMW limit has been reached, do not
qualify for this approach's flexibility will have to meet all of BPA's
standards for service before signing a Subscription contract. This would
mean, for example, that such utility would have to own the distribution
facilities before signing a Subscription contract. *See* Final Policy on
Standards for Service, Administrator's Record of Decision, 64 Fed. Reg.
24382 (1999).

**V. Increase in Residential Exchange Settlement Benefits and**

Allocation of Residential Exchange Settlement Benefits

Among Pacific Northwest Investor-Owned Utilities

A. Introduction

BPA's December 1998 Subscription Strategy proposes settlements of the
Residential Exchange Program with regional IOUs. The proposed
settlements were 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.
Issues related to rates for power sales under the proposed settlements,
as well as the forecast market price of power, are under consideration
in BPA's 2002 wholesale power rate case, BPA Docket No. WP-02. The Draft
Record of Decision on issues related to BPA's power rate case was
released on April 10, 2000. BPA expects to issue a Final ROD for the
rate case on May 8, 2000.

On November 17, 1999, BPA sent a letter to all interested parties
requesting comments on two specific issues: (1) whether the amount of
the proposed IOU settlement should be increased by 100 aMW from 1800 aMW
to 1900 aMW for the FY2002-2006 period, and (2) the manner in which the
settlement amount should be allocated among the individual IOUs.

**B. Section 5(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 electric utility may offer to sell power to
BPA at the utility's average system cost (ASC). 16 U.S.C. 839c(c)(1).
BPA purchases such power and, in exchange, sells the same amount of
power to the utility at BPA's PF Exchange rate. *Id*. The amount of the
power exchanged equals the utility's qualifying residential and small
farm load. *Id*. BPA's past practice did not require actual power sales.
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 and small farm load. These
monetary benefits must be passed through directly to the utility's
residential and small farm consumers. 16 U.S.C. 839c(c)(3). While
Residential Exchange Program 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. 16 U.S.C.
839c(c)(5). However, the cost of the acquisition must be less than the
cost of purchasing the electric power offered by the utility. *Id*. In
these circumstances, BPA acquires power from other sources 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 terms
extending beyond July 1, 2001.

**C. 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 1998 Subscription Strategy proposed was a settlement of
the Residential Exchange Program for regional IOUs for the post-2001
period. The Subscription Strategy proposed 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 1998 Subscription Strategy proposed that BPA offer five-year and
10-year Subscription settlement contracts for the IOUs. Under both
contracts, according to the Subscription Strategy, 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.

According to the 1998 Subscription Strategy, under the 10-year contract,
in addition to the benefits provided during the first five years, BPA
would 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 Residential Exchange 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 under consideration
in BPA's 2002 wholesale power rate case, BPA Docket No. WP-02. The Draft
Record of Decision on issues related to BPA's power rate case was
released on April 10, 2000. BPA expects to issue a Final ROD for the
rate case on May 8, 2000.

**D. Ensuring Benefits to Residential and Small Farm Consumers**

BPA has an obligation to ensure that the benefits of the Residential
Exchange Program 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. Recent negotiations have proposed revising this language to
"Federal Columbia River Benefits supplied by BPA."

**E. Increasing the Settlement Amount from 1800 aMW to 1900**

> **aMW for the FY2002-2006 Period**

**Issue:**

Whether BPA should increase the amount of power available to the IOUs
under the Subscription Strategy for settlement of the Residential
Exchange Program from 1800 aMW to 1900 aMW (both power and financial)
for the FY 2002-2006 period as long as BPA's goal 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 Direct Service
Industries (DSIs); and, there is no impact from the increase on BPA's
ability to meet its fish and wildlife commitments.

**Subscription Strategy:**

BPA's intent in the Subscription Strategy was to spread the benefits of
the FCRPS as broadly as possible, with special attention given to the
residential and rural customers of the region. The Subscription Strategy
enabled the benefits of the FCRPS to flow throughout the region, whether
currently served by publicly owned or privately owned utilities.

The Subscription Strategy provided that residential and small farm loads
of the IOUs, through settlement of the Residential Exchange Program,
would be provided access to the equivalent of 1800 aMW of Federal power
for the FY 2002-2006 period. At least 1000 aMW of the 1800 aMW would be
served with actual BPA power deliveries. The remainder would be provided
through either a financial arrangement or additional power deliveries
depending on which approach was most cost-effective for BPA.

**Parties' Comments:**

The Washington Utilities and Transportation Commission (WUTC), Avista
Corp. (Avista), Seattle City Light (Seattle), the Washington Department
of Community, Trade and Economic Development (WDCTED), the Portland City
Commission, and Jim DiPeso, support increasing the settlement amount for
the IOUs' Subscription settlements of the Residential Exchange Program
from 1800 aMW to 1900 aMW for the FY2002-2006 period. *See* WUTC,
IOU-004; Avista, IOU-005; Seattle, IOU-006; WDCTED, IOU-007; Portland
City Commission, IOU-010; DiPeso, IOU-003. WUTC argues that the increase
is a wise policy decision and it helps ensure that interest in the
system and preserving the system as a valuable benefit in the Northwest
will be shared as broadly among the region's voters as possible. WUTC,
IOU-004. Avista and WDCTED argue that BPA must adopt the increase in the
settlement amount in order to work toward the goal of BPA's Subscription
Strategy to "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." Avista, IOU-005, WDCTED,
IOU-007. Seattle argues that the increase and overall settlement
represents a reasonable settlement of the traditional Residential
Exchange Program. Seattle, IOU-006. Seattle also argues that the
settlement staves off contentious issues surrounding the traditional
Residential Exchange Program as well as provides a fair allocation of
power to the IOUs. *Id*. The Portland City Commission believes that this
increase will help ensure an appropriate sharing of benefits of Federal
power among the residential ratepayers in the Northwest. Portland City
Commission, IOU-010.

Avista, Portland General Electric (PGE), Idaho Power Company (IPC),
Montana Power Company (MPC), and PacifiCorp (collectively the "IOUs")
also support BPA's proposal to increase the Federal benefits to the
residential and small farm consumers of IOUs for the FY2002-2006 period
by 100 aMW. *See* IOUs, IOU-011. However, the IOUs argue that BPA's
proposal fails to provide an equitable level of benefits to the
residential and small farm customers of IOUs. *Id.* They contend that
BPA should further increase the benefits to provide value for IOU
residential customers proportionate to their load share. *Id*.

Puget Sound Energy (Puget) argues that BPA's proposal to increase the
Federal benefits to the residential and small farm customers of IOUs for
FY2002-2006 by 100 aMW still fails to provide an equitable level of
benefits to the residential and small farm customers of IOUs. Puget,
IOU-013. Further, Puget argues that the total level (1800 aMW plus
100 aMW) falls short of satisfying BPA's statutory obligations or
producing a fair settlement of the Residential Exchange Program or
producing a fair end result. *Id*. Puget argues that even with the
increase, Puget's residential customers would receive for the
FY2002-2006 period about \$50 million per year less than they did prior
to the 1996 BPA rate case. *Id*. Puget further contends that BPA's
proposed 2002 preference rate would result in a \$150 million reduction
in charges to its preference customers as compared with BPA's 1996
preference rate. *Id.* In summary, Puget argues that BPA is proposing a
decrease in benefits for residential customers of IOUs while increasing
benefits for BPA's preference customers. *Id*.

Nespelem Valley Electric Cooperative (Nespelem), Springfield Utility
Board (SUB), and Inland Power and Light Company (Inland) argue that BPA
should not increase the IOU Subscription settlement of the Residential
Exchange Program amount by 100 aMW. Nespelem, IOU-002; SUB, IOU-047;
Inland, IOU-009. Nespelem contends that rural public customers are
offsetting the higher costs of urban IOUs and thus it is not fair to
public power. Nespelem, IOU-002. SUB notes that its comments are
included in its direct testimony in BPA's current rate case. SUB,
IOU-047. SUB's direct testimony contends that the IOUs have no right to
purchase Federal base system (FBS) power and sales to IOUs erode SUB's
rights to purchase lowest cost base Priority Firm power. Nelson,
WP-02-E-SP-01 at 2. Tillamook People's Utility District (Tillamook) and
OURCA argue that BPA should not commit to allocating an additional 100
aMW of benefits to the IOUs unless BPA can assure that all preference
and priority rights of the public preference customers are secure.
Tillamook, IOU-008, Cable Huston, IOU-014. Tillamook and OURCA are
concerned that the proposed settlement of the Residential Exchange
Program with the IOUs may increase the rate charged to the public
preference customers. Tillamook, IOU-008; Cable Houston, IOU-014.
Tillamook is further concerned that the increase of 100 aMW may increase
the probability that the proposed CRAC or other risk mitigation tools
will trigger. Tillamook, IOU-008. Tillamook, OURCA, and Inland argue
that public preference customers should not be forced to pay a higher
rate than if BPA was not providing power or benefits to the IOUs.
Tillamook, IOU-008; Cable Houston, IOU-014; Inland, IOU-009. Tillamook
argues that the public preference and priority rights may be maintained
if BPA purchases the additional 100 aMW of benefits in the market and
requires the IOUs to bear the full cost of this augmentation. Tillamook,
IOU-008.

The IOUs and Puget are concerned that the conditions on which the
increase would be based disproportionately burden the residential
customers with BPA's other priorities (such as fish and wildlife, sales
to the DSIs, and preserving the spread between the market rate of energy
and the PF rate for public agencies and cooperatives). IOUs, IOU-011,
Puget, IOU-013. Mr. DiPeso argues that BPA should not condition the
proposed increase to the IOUs on the level of sales to the DSIs. DiPeso,
IOU-003. He contends that because BPA has no legal obligation to sell
power to the DSIs, it is unfair for the DSIs to be placed ahead of
residential and small farm consumers of IOUs in BPA's allocation of
power. *Id*.

The Portland City Commission does not agree with all of the conditions
of the proposed increase to the IOU Subscription settlement of the
Residential Exchange Program. Portland City Commission, IOU-010. The
Portland City Commission argues that it is reasonable that there should
be no increase in the PF rate, no decrease in Treasury Payment
Probability, and no reduction in BPA's ability to meet its Fish and
wildlife commitment. *Id*. However, the Portland City Commission argues
that there is no connection between sales to IOUs for their residential
consumers and sales to DSIs. *Id*. The Portland City Commission contends
that BPA should retain the flexibility to reduce service to the DSIs
from levels in the Initial Proposal if necessary to increase the service
to IOUs to 1900 aMW and meet other obligations. *Id*. The Portland City
Commission claims the settlement of the Residential Exchange Program for
the IOUs should not be contingent on any given level of service to the
DSIs. *Id*.

**Evaluation and Decision:**

The four Northwest state utility commissions (Commissions), in a letter
dated July 23, 1999, requested that BPA increase the amount of the
settlement from 1800 aMW to 1900 aMW for the FY 2002-2006 period. This
request was made in order for the Commissions to arrive at a joint
recommendation for allocating the settlement benefits among the IOUs for
both the FY2002-2006 and FY2007-2011 periods. Many parties support this
increase for many reasons, including: (1) the increase is a wise policy
decision and it helps to ensure that the regional interest in the system
and preserving the system as a valuable benefit in the Northwest will be
shared as broadly as possible among the region's voters; (2) the
increase is appropriate in order for BPA to achieve the stated
Subscription Strategy goal to "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,"
s*ee* Subscription Strategy at 5; (3) the increase creates a fair and
reasonable settlement to the Residential Exchange Program for the IOUs;
(4) the increase to the settlement staves off contentious issues
surrounding the traditional Residential Exchange Program as well as
provides a fair allocation of power to the IOUs; and (5) the increase
will help ensure an appropriate sharing of benefits of Federal power
among the residential ratepayers in the Northwest. *See* WUTC, IOU-004;
Avista Corp, IOU-005; Seattle, IOU-006; WDCTED, IOU-007; Portland City
Commission, IOU-010; DiPeso, IOU-003. Others parties support the
increase but would like an additional increase. IOUs, IOU-011, Puget,
IOU-013.

The IOUs and Puget argue that while they support the additional 100 aMW
in the settlement amount, BPA's proposal fails to provide an equitable
level of benefits to the residential and small farm customers of IOUs
because it would provide only 23-24 percent of Federal power benefits
for 60 percent of the region's households. IOUs, IOU-011; Puget,
IOU-013. They contend that BPA should further increase the benefits to
provide value for IOU residential customers proportionate to their load
share. *Id*. Further, Puget argues that the total level (1800 aMW plus
100 aMW) falls short of satisfying BPA's statutory obligations or
producing a fair settlement of the Residential Exchange or producing a
fair end result. *Id*. Puget argues that even with the increase, Puget's
residential customers would receive for the FY2002-2006 period about
\$50 million per year less than they did prior to the 1996 BPA rate
case. *Id*. Puget further contends that BPA's proposed 2002 preference
rate would result in a \$150 million reduction in charges to its
preference customers as compared with BPA's 1996 preference rate. *Id*.
In summary, Puget argues that BPA is proposing a decrease in benefits
for residential customers of IOUs while increasing benefits for BPA's
preference customers. *Id*.

First, the issue of whether the Subscription settlement benefits to IOUs
should be greater than those proposed in the Subscription Strategy (plus
100 aMW) is outside the scope of this public comment process. As noted
in BPA's November 17, 1999, letter, BPA requested comments on *only* two
issues: (1) whether the amount of the settlement should be increased by
100 aMW from 1800 aMW to 1900 aMW for the FY2002-2006 period, and (2)
how the settlement amounts should be allocated among the individual
IOUs. This process is not intended to address the larger issue of the
sufficiency of the overall settlement benefits. The issue of the overall
amount of benefits was addressed in the Subscription Strategy. *See*
Subscription Strategy at 9. Nevertheless, while BPA is not deciding this
issue in this comment process, BPA will respond briefly to the IOUs'
arguments.

The IOUs' arguments must be viewed in the context of the statutory
framework that provides benefits to all of BPA's customers. The primary
law establishing these obligations is the Northwest Power Act. The
implementation of the directives of the Northwest Power Act results in
benefits of the Federal power system that flow to BPA's customers and,
where applicable, to subsequent consumers of those customers. One of the
most fundamental requirements of the Northwest Power Act is that public
bodies and cooperatives have preference and priority to the purchase of
Federal power to meet their net requirements. 16 U.S.C. 832(a), 16
U.S.C. 839c(a). This power is used to serve all requirements loads of
such preference customers, including residential, commercial, and
industrial loads. Preference customers also pay the PF Preference rate
for their power purchases. BPA's rate directives establish the manner in
which BPA must allocate costs in establishing the PF rate, which applies
to BPA's preference customers and utilities participating in the
Residential Exchange Program. 16 U.S.C. 839e(b)(1). BPA's preference
customers, under law, are entitled to significant benefits from the
Federal system. IOUs also have significant benefits under law. Like
BPA's preference customers, IOUs may place their net requirements load
on BPA. 16 U.S.C. 839c(b)(1). Unlike BPA's preference customers,
however, the rate directives for IOUs' requirements power are governed
by section 7(f) of the Northwest Power Act, not section 7(b).

The IOUs may receive additional benefits from the Northwest Power Act.
The primary manner in which IOUs receive these benefits is through the
Residential Exchange Program. 16 U.S.C. 839c(c). Under the Residential
Exchange Program, BPA "purchases" power from each participating utility
at that utility's ASC. The Administrator then offers, in exchange, to
"sell" an equivalent amount of electric power to the utility at BPA's
Priority Firm Exchange (PF Exchange) power rate. The amount of power
purchased and sold is the qualifying residential and small farm load of
each utility participating in the Residential Exchange Program. The
Northwest Power Act requires that the net benefits of the Residential
Exchange Program be passed on directly to the residential and small farm
customers of the participating utilities. Under the normal
implementation of the Residential Exchange Program, no actual power is
transferred either to or from BPA. The "exchange" has been referred to
as a "paper" transaction, where BPA provides the participating utility
cash payments that represent the difference between the power
"purchased" by BPA and the less expensive power "sold" to the
participating utility.

Under the Residential Exchange Program, exchanging utilities, including
the IOUs, pay the PF Exchange rate for power purchased from BPA. This
rate, however, may not be the same level as the PF Preference rate. The
Northwest Power Act established what is called the section 7(b)(2) rate
test. This test is designed to protect preference customers from certain
costs incurred under the Northwest Power Act, including Residential
Exchange costs. If the section 7(b)(2) rate test does not trigger, the
PF Preference rate and the PF Exchange rate are equal. If the section
7(b)(2) rate test triggers, however, the PF Exchange rate is subject to
a surcharge and is higher than the PF Preference rate. The lower the PF
Exchange rate, the higher the exchange benefits. The higher the PF
Exchange rate, the lower the exchange benefits. Where, as in the current
rate case, the section 7(b)(2) rate test triggers, there is an increase
in the PF Exchange rate and a reduction in Residential Exchange
benefits. This is the way that the Northwest Power Act works. In years
when the 7(b)(2) rate test did not trigger, as has occurred periodically
over the last 15 years, the IOUs received greater benefits. In years
when the 7(b)(2) rate test triggered, the IOUs received lesser benefits.
In summary, while different customer classes may receive greater or
lesser benefits of the Federal system in any particular rate period,
this is a result of the implementation of the power sale and rate
directives of the Northwest Power Act. While some customer classes may
receive greater benefits than other customer classes, BPA cannot
unilaterally change the law.

Puget argues that the total level (1800 aMW plus 100 aMW) of settlement
benefits falls short of satisfying BPA's statutory obligations or
producing a fair settlement of the Residential Exchange or producing a
fair end result. Puget, IOU-013. BPA disagrees. First, BPA has statutory
obligations with regard to the Residential Exchange Program. 16 U.S.C.
839c(c). As noted previously, BPA is properly developing rates in its
current rate case and proposes to properly implement the Residential
Exchange Program. In certain circumstances, however, implementation of
the Northwest Power Act's power sale and rate directives will result in
providing a limited amount of benefits to exchanging utilities in any
particular rate period. With regard to the proposed Residential Exchange
settlements, Puget has not cited any statutory obligations that BPA must
follow in developing the proposed settlements. BPA has broad discretion
to enter into settlements. 16 U.S.C. 832a(f); 16 U.S.C. 839f(a). *See*
*Utility Reform Project v. Bonneville Power Admin.*, 869 F.2d 437,
442-43 (9th Cir. 1989).

Puget argues that even with the increase, BPA is proposing a decrease in
benefits for residential customers of IOUs while increasing benefits for
BPA's preference customers. Puget, IOU-013. Again, as explained above,
the benefits provided to BPA's customer classes are based on the
directives of the Northwest Power Act. BPA believes that it is properly
implementing these directives. These directives, however, do not require
that the benefits provided to each customer class will be equal.
Benefits to each customer class will vary with the conditions that
affect the implementation of BPA's statutory directives. Also, the
Northwest Power Act does not specify any particular level of Residential
Exchange benefits for exchanging utilities. Congress recognized that
there were factors that could reduce or eliminate Residential Exchange
benefits.

BPA also believes that the amount of power and monetary payments
available in the Subscription settlement proposal is an appropriate
level for settlement of the Residential Exchange Program. BPA, its
customers, and other interested parties in the region worked
approximately two years in developing BPA's Subscription Strategy. From
the inception of discussions regarding Subscription sales to IOUs, such
sales involved the settlement of rights to the Residential Exchange
Program. BPA increased the proposed settlement amount from 1500 aMW to
1800 aMW in the final Subscription Strategy. In addition, BPA is
currently considering the addition of another 100 aMW. Furthermore, BPA
proposed its Subscription Strategy with a number of goals, including the
goal of spreading 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. *See* Subscription
Strategy at 3-4. BPA believes that its Subscription Strategy achieves
this goal. BPA's goal of spreading 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, is implemented in
the Subscription Strategy by BPA's proposed settlements of the
Residential Exchange Program with regional IOUs. BPA's rate case has
proposed rates that would implement the traditional Residential Exchange
Program and the proposed settlements. BPA's forecasted Residential
Exchange benefits to the IOUs comprise approximately \$37 million per
year during the rate period, although there are circumstances that could
increase these benefits. In providing special attention to residential
and small farm customers of the IOUs and giving them an additional
option in access to Federal benefits, BPA forecasted exchange settlement
benefits to the IOUs that comprise approximately \$140 million per year
during the rate period. To suggest that BPA is not providing a fair
settlement to the Residential Exchange Program for the IOUs is
incorrect. In addition, it is important to recall that BPA is not
requiring any regional IOU to execute the proposed settlement
agreements. Any IOU may continue with the traditional implementation of
the Residential Exchange Program.

Nespelem Valley Electric Cooperative (Nespelem), Inland Power and Light
Company (Inland), and Springfield Utility Board (SUB), argue that BPA
should not increase the amount of the IOU Subscription settlement of the
Residential Exchange Program by 100 aMW. Nespelem, IOU-002; Inland,
IOU-009; SUB, IOU-047. Nespelem contends that the proposed 1800 aMW of
settlement benefits was already too generous and that rural public
customers are paying money to offset the higher costs of urban IOUs and
thus it is not fair to public power. Nespelem, IOU-002. BPA notes that
under the Northwest Power Act, the cost of the Residential Exchange
Program has often been used in the development of the PF Preference
rate. The Northwest Power Act provides that the rate for general
requirements sales to preference customers and for sales to exchanging
utilities (subject to the 7(b)(2) rate test) "shall recover the costs of
that portion of the Federal base system resources needed to supply such
loads until such sales exceed the Federal base system resources.
Thereafter, such rate or rates shall recover the cost of additional
electric power as needed to supply such loads, first from the electric
power acquired by the Administrator under section 5(c) \[the Residential
Exchange Program\] and then from other sources." 16 U.S.C. 839e(b)(1).
The Residential Exchange Program was intended, in part, to provide
benefits to IOUs because such utilities incurred higher costs when their
access to firm power sales from BPA was limited. For these reasons, the
Residential Exchange Program and the proposed settlements of that
program are fair to preference customers.

SUB objects to the sale of power to the IOUs as part of a settlement
without such sales being in compliance with statutory requirements and
notes that its comments are included in its direct testimony in BPA's
current rate case. SUB, IOU-047. First, SUB's arguments are beyond the
scope of this public comment process. As noted in BPA's November 17,
1999, letter, BPA requested comments on *only* two issues: (1) whether
the amount of the settlement should be increased by 100 aMW from 1800
aMW to 1900 aMW for the FY 2002-2006 period, and (2) how the settlement
amounts should be allocated among the individual IOUs. This process is
not intended to address the issue of the nature of the power sales under
the proposed settlements. Nevertheless, while BPA is not deciding this
issue in this comment process, BPA will respond briefly to SUB's
arguments. BPA is authorized to make sales to IOUs under a number of
statutory provisions. BPA may sell requirements power to the IOUs under
section 5(b) of the Northwest Power Act. 16 U.S.C. 839c(b). BPA may sell
in lieu power to the IOUs under section 5(c)(5) of the Act. 16 U.S.C.
839c(c)(5). BPA may also sell power to the IOUs pursuant to section 5(f)
of the Act. 16 U.S.C. 839c(f). BPA determined that it is appropriate to
offer requirements power to the IOUs, because the IOUs have a right to
such power purchases, and such power sales were an appropriate part of
the consideration for the establishment of the proposed Residential
Exchange settlements. In addition, in the Subscription Strategy, BPA
concluded that net requirements power sales could be a component of a
settlement of the Residential Exchange Program with the IOUs. *See*
Subscription Strategy at 8, 16. BPA believes that the proposed
settlement sales are consistent with statutory requirements. In SUB's
direct rate case testimony, SUB contends that the IOUs have no right to
purchase FBS power and sales to IOUs erode SUB's rights to purchase
lowest cost based Priority Firm power. *See* Nelson, WP-02-E-SP-01, at
2. As this issue was raised in BPA's rate case, BPA defers to its rate
case resolution of this issue. In any event, however, SUB appears to
misread section 7(b)(1) of the Northwest Power Act. Section 7(b)(1)
provides:

> The Administrator shall establish a rate or rates of general
> application for electric power sold to meet the general requirements
> of public body, cooperative, and Federal agency customers within the
> Pacific Northwest, and loads of electric utilities under section 5(c).
> Such rate or rates shall recover the costs of that portion of the
> Federal base system resources needed to supply such loads until such
> sales exceed the Federal base system resources. Thereafter, such rate
> or rates shall recover the cost of additional electric power as needed
> to supply such loads, first from the electric power acquired by the
> Administrator under section 5(c) and then from other resources.

16 U.S.C. 839e(b)(1). BPA is expressly complying with this provision.
The FBS is a single resource pool and is not divided into separately
priced portions that serve any particular customer class. BPA has the
authority to replace reductions in the capability of the FBS resources.
16 U.S.C. 839a(10). BPA also has authority to purchase power to meet its
forecasted contractual obligations to its customers. 16 U.S.C. 839d. The
amount of BPA's proposed augmentation purchases is well below the amount
of the reductions in the capability of the FBS that BPA is authorized to
replace. BPA's purchases, as FBS replacements, increase the size of the
FBS. However, BPA's rates for preference customers and Federal agency
customers are still recovering the costs only of that portion of the FBS
resources needed to supply such loads. Remaining FBS resources are
allocated in accordance with the rate directives. The Northwest Power
Act expressly recognizes that the FBS may exceed the requirements of its
preference customers. For example, section 7(f) of the Northwest Power
Act notes that "all other firm power sold by the Administrator for use
in the Pacific Northwest shall be based upon the cost of the portions of
*Federal base system resources*, purchases of power under section 5(c)
of this Act and additional resources which, in the determination of the
Administrator, are applicable to such sales." 16 U.S.C. 839e(f)
(emphasis added). It is therefore clear that section 7(b)(1) does not
prohibit purchases to replace reductions in the capability of the FBS.
Once the FBS was determined, BPA properly allocated to the PF Preference
rate "the costs of that portion of the Federal base system resources
needed to supply such loads." 16 U.S.C. 839e(b)(1). An increase of 100
aMW for the IOU settlements will not erode preference customers' rights
to purchase Federal power to meet their net requirements at the PF
Preference rate but rather reflects BPA's compliance with the rate
directives of the Northwest Power Act.

Tillamook People's Utility District (Tillamook) and OURCA argue that BPA
should not commit to allocating an additional 100 aMW of benefits to the
IOUs unless BPA can assure that all preference and priority rights of
the public preference customers are secure. Tillamook, IOU-008; Cable
Houston, IOU-014. BPA has proposed to meet all preference customer net
requirements loads placed upon BPA at the PF Preference rate. BPA
believes that the 100 aMW increase in IOU settlement benefits will not
affect the preference and priority rights of BPA's preference customers.
BPA's preference customers will continue to have preference and priority
to BPA power and BPA's net requirements firm power sales will be at the
PF Preference rate.

Tillamook and OURCA are concerned that the proposed settlement of the
Residential Exchange Program with the IOUs may increase the rate charged
to the public preference customers. Tillamook, IOU-008; Cable Houston,
IOU-014. Tillamook is further concerned that the increase of 100 aMW may
increase the probability that the proposed CRAC or other risk mitigation
tools will trigger. Tillamook, IOU-008. Tillamook, OURCA, and Inland
argue that public preference customers should not be forced to pay a
higher rate than if BPA was not providing power or benefits to the IOUs.
Tillamook, IOU-008; Cable Houston, IOU-014; Inland, IOU-009. Tillamook
argues that public preference and priority rights may be maintained if
BPA purchases the additional 100 aMW of benefits in the market and
requires the IOUs to bear the full cost of this augmentation. Tillamook,
IOU-008. The foregoing issues are rate development issues. The current
public process on whether to increase the IOU settlement amount will not
decide how BPA will allocate costs for ratemaking purposes. This can
only be decided in a section 7(i) hearing. 16 U.S.C. 839e(i). In BPA's
Federal Register notice for its 2002 wholesale power rate case, BPA
noted that it would accept comment *in the rate case* regarding the
manner in which a 100 aMW increase in the IOU settlement amount would
affect BPA's rates for power sales to its customers. *See* 2002 Proposed
Wholesale Power Rate Adjustment, Public Hearing, and Opportunities for
Public Review and Comment, 64 Fed. Reg. 44318 (1999). In any event, in
BPA's rate case, in response to the suggestion that BPA should increase
the proposed settlement amount from 1,800 aMW to 1,900 aMW, BPA noted
that BPA would consider adding the additional 100 aMW as long as BPA's
goal of not increasing the average PF Preference rate over present
levels could be met, no change in Treasury Payment Probability is
required, no change in the DSI rate proposal is required, and there is
no impact on BPA's ability to meet its fish and wildlife commitments.
These conditions provide significant protection to BPA's preference
customers. To the extent that the increase could be achieved consistent
with the above-noted conditions, it would be appropriate to reflect
1,900 aMW, not 1,800 aMW, as the IOUs' proposed settlement benefits in
BPA's rate case in order to ensure that BPA's rates are established in a
manner that would recover BPA's costs. In other words, if BPA included
only 1,800 aMW for ratemaking purposes, but actually provided 1,900 aMW,
BPA would incur costs during the rate period that were not incorporated
in BPA's rates.

With regard to the suggestion that BPA should purchase power and require
the IOUs to bear the full cost of the additional 100 aMW, again, this is
clearly a ratemaking issue. In any event, this proposed treatment would
be inappropriate because BPA has proposed an appropriate method of
allocating the costs of the proposed IOU settlements in BPA's rate case.
Simply because the amount is increased by 100 aMW does not mean that
these costs should be treated differently. In BPA's rate case, the Rate
Analysis Model equitably allocates the Residential Exchange Program
settlement cost, a cost not otherwise allocated under section 7 of the
Northwest Power Act, of the cash payment associated with the 800 aMW
portion of the proposed settlement between the PF Preference class and
the RL class. *See* Doubleday, *et al*., WP-02-E-BPA-18, at 17-18. The
effect of this adjustment is to equate the two rates. *Id*. This initial
allocation of costs is consistent with the Subscription Strategy's
expectation that PF Preference class customers and Residential Load
(RL-02 rate) customers would pay similar rates for similar products.
*Id*. This is appropriate because this allocation results in a rate
level for the settlement sales that supports the proposed value of the
settlement of the Residential Exchange Program with regional IOUs. *See*
Doubleday, *et al*., WP-02-E-BPA-44, at 13. This allocation also helps
to promote the wide and diversified use and distribution of Federal
power. *Id*.

As noted previously, BPA proposed to agree to increase the IOU
settlement amount by 100 aMW to meet the Commission's request as long
as: BPA's goal 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. The IOUs and the
Portland City Commission argue that the conditions BPA placed on the
proposed 100 aMW increase disproportionately burden residential
customers with BPA's other priorities and that BPA should not condition
the proposed increase to the IOUs on the level of sales to the DSIs.
IOUs, IOU-011; City of Portland, IOU-010. BPA respects the IOUs' and the
City of Portland's concerns regarding these conditions. BPA believes,
however, that the proposed 100 aMW increase in settlement benefits must
be viewed in light of other stakeholders' interests in benefits from the
Federal system. With regard to BPA's sales to the DSIs, BPA believes
that the DSIs' interests are relevant for a number of reasons: (1) the
DSIs have been customers of BPA for more than 60 years, (2) they have
played a significant role in the development and health of the Northwest
economy, and (3) sales to the DSIs can sustain critical jobs in the
Northwest without significant impacts to other BPA customers' rates.
Thus, the consideration of future sales to the DSIs is reasonable.
Furthermore, one of BPA's Subscription goals is to spread "the benefits
of the Federal Columbia River Power System as broadly as possible ..."
In BPA's Draft ROD in the current BPA rate case, BPA concluded that its
draft rate proposal would satisfy the foregoing conditions.
Consequently, BPA's draft rate proposal also found it appropriate to
reflect an additional 100 aMW in the Residential Exchange settlement
benefits offered to BPA's regional IOU customers.

BPA respects certain parties' positions that the IOU settlement amount
should not be increased and, conversely, BPA respects certain parties'
positions that the settlement amount should be increased even more than
proposed. After review of the comments, however, BPA finds the arguments
for increasing the IOU settlement amount by 100 aMW to be compelling.
These reasons include the following: (1) the increase is a wise policy
decision and it helps to ensure that the regional interest in the system
and preserving the system as a valuable benefit in the Northwest will be
shared as broadly as possible among the region's voters; (2) the
increase is appropriate in order for BPA to achieve the stated
Subscription Strategy goal to "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,"
s*ee* Subscription Strategy at 5; (3) the increase creates a fair and
reasonable settlement to the Residential Exchange Program for the IOUs;
(4) the increase to the settlement staves off contentious issues
surrounding the traditional Residential Exchange Program as well as
provides a fair allocation of power to the IOUs; and (5) the increase
will help ensure an appropriate sharing of benefits of Federal power
among the residential ratepayers in the Northwest. These arguments are
reflected, in part, in the comments of the WUTC, WUTC, IOU-004; the
joint comments of Avista, PGE, IPC, MPC, and PacifiCorp, IOUs, IOU-011;
Avista, IOU-005; Puget, IOU-013; WDCTED, IOU-007; Seattle, IOU-006;
Portland City Commission, IOU-010; and Jim DiPeso, IOU-003. In addition,
as is noted in BPA's Draft Record of Decision for the wholesale power
rate case, the conditions surrounding the proposed increase to the
proposed Subscription settlement of the Residential Exchange for the
IOUs are expected to be met. Therefore, BPA will increase the amount of
total benefits for the proposed settlements of the Residential Exchange
Program with regional IOUs from 1800 aMW to 1900 aMW. However, BPA has
not yet offered or executed any of the proposed IOU Subscription
settlements. These proposed settlements will be negotiated with the
interested IOUs, and then there will be a 30-day public comment period
for all interested parties to advise BPA regarding the propriety of the
proposed settlements. 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 within the scope of the proposed settlements. Issues
outside the scope of the settlements will not be addressed in this
process, *e.g*., issues regarding rates that apply to the settlements,
which can only be established in a section 7(i) hearing. After reviewing
the parties' comments, the Administrator will determine whether it is
appropriate to enter into the proposed settlement agreements.

**F. Allocation of Residential Exchange Settlement Benefits**

> **Among Pacific Northwest Investor-Owned Utilities**

**Issue:**

Whether the amount of power available to the IOUs under Subscription for
settlement of the Residential Exchange Program should be allocated among
the individual IOUs as follows:

+--------------------------------+----------------+-------------------+
|                                | **Amount of**  | **Amount of**     |
|                                |                |                   |
|                                | **Settlement   | **Settlement      |
|                                | (aMW)**        | (aMW)**           |
|                                |                |                   |
|                                | *              | **FY2007-2011**   |
|                                | *FY2002-2006** |                   |
+--------------------------------+----------------+-------------------+
| 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.

**Subscription Strategy:**

With regard to the allocation of settlement benefits among the IOUs, the
1998 Subscription Strategy states that "BPA will request comments from
interested parties regarding the amounts of subscription power and
benefits that should be provided to individual IOUs. The Pacific
Northwest State utility commissions (Commissions) have indicated that
they will collaborate on a recommendation on this topic, which BPA would
welcome. BPA will then determine the appropriate amounts." *See*
Subscription Strategy at 9. BPA solicited the Commissions' views on the
proposed allocation of settlement benefits and received a proposal from
the Commissions. BPA adopted that proposal as BPA's proposal for
purposes of seeking public comment, as described in greater detail
below.

**Parties' Comments:**

The WUTC, Avista, Seattle, WDCTED, and the Portland City Commission
support BPA's proposed allocation. WUTC, IOU-004; Avista Corp., IOU-005;
Seattle, IOU-006; WDCTED, IOU-007; Portland City Commission, IOU-010.
Avista, PGE, IPC, MPC, and PacifiCorp (the "IOUs") also support BPA's
proposed allocation and support the involvement of the Commissions in
the determination the allocation of settlement benefits among the
individual IOUs. IOUs, IOU-011. The IOUs argue it is appropriate for BPA
to weigh heavily the Commissions' joint recommendation concerning the
allocation of benefits. *Id*. Seattle views the Commissions as being the
best arbiters of the settlement among the IOUs. Seattle, IOU-006. WDCTED
contends that the proposed allocation establishes access to a level of
benefits that recognizes changed market conditions while at the same
time addresses the needs and issues important to each of the four
states. WDCTED, IOU-007. Avista supports BPA's proposed allocation but
notes that if the settlement amounts were allocated based upon pro rata
residential exchange load in the FY2002-FY 2006 and FY2007-FY2011
periods, the settlement amounts to Avista's customers would be 174 aMW
and 202 aMW, respectively, as compared with the Commissions'
recommendation of 90 aMW and 149 aMW. Avista, IOU-005.

Puget argues that the allocation of settlement benefits among the
individual IOUs should be based on each IOU's average system cost (ASC).
Puget, IOU-013. Puget reasons that this approach is more equitable
because Puget experienced very high load growth when replacement
resource costs were high and therefore Puget has a relatively high ASC.
*Id*. Puget argues that a fundamental concept of the Northwest Power Act
was to allocate benefits of Federal power to the customers of those
utilities experiencing increased costs as they acquire expensive new
resources to meet load growth in the region. Id. Puget argues that this
manner of allocation benefits should continue through the FY 2011
period. *Id*.

The WUTC recommends changing the sentence "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," to "If an IOU
chooses to request Residential Exchange Program benefits under section
5(c), then the *[total IOU]{.underline}* Subscription settlement amount
~~for all the IOUs~~ would be reduced by the amount *originally
allocated* ~~that would have gone~~ to the exchanging utility*, with the
settlement amounts allocated to the other utilities remaining
unchanged*." WUTC, IOU-004.

The WUTC also recommends that BPA clarify that the Residential Exchange
settlement amounts in total and for individual IOUs will not be affected
by BPA's 5(b) net requirements policy. WUTC, IOU-004. Further, WUTC
contends that changes in non-residential (commercial or industrial)
loads of IOUs should not affect the allocations. *Id*.

**Evaluation and Decision:**

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 Program, the historical provision of Residential Exchange
benefits, the Residential Exchange benefits received in the last
five-year period ending June 30, 2001, rate impacts on qualifying
customers, and the individual needs and objectives of each state. BPA
reviewed the Commissions' recommendation and determined that this
proposal was a reasonable approach upon which to take public comment.
The specific allocations proposed by the Commissions are noted in the
table above.

Virtually all commenters supported the allocation recommended by the
Commissions and proposed by BPA. *See* WUTC, IOU-004; Avista, IOU-005;
Seattle, IOU-006; WDCTED, IOU-007; Portland City Commission, IOU-010;
and Avista, PGE, IPC, MPC, and PacifiCorp, IOUs, IOU-011. The reasons
for such support include: (1) it is appropriate for BPA to weigh heavily
the Commissions' joint recommendation concerning the allocation of
benefits, (2) the Commissions are the best arbiters of the settlement
among the IOUs, and (3) the proposed allocation establishes access to a
level of benefits that recognizes changed market conditions while at the
same time addresses the needs and issues important to each of the four
states. It is worthy of note that BPA's allocation has received support
from diverse customer and interest groups: publicly owned utilities,
IOUs, state commissions, state agencies, and a city commission.

Puget argues that the allocation of settlement benefits among the
individual IOUs should be based on each IOU's ASC. Puget, IOU-013. Puget
argues that its ASC is relatively high due to purchasing high cost
replacement resources. *Id*. Puget also argues that because of its high
costs, Puget's allocation should not be decreased in the second
five-year settlement period. *Id*. BPA recognizes Puget's proposal as
one of many ways in which an allocation of benefits among the IOUs might
be determined. Puget's proposal, however, focuses on a single element:
utilities' ASCs. The Commissions' recommendation and BPA's proposal,
however, rely on many different considerations, including the amount of
residential and small farm load eligible for the Residential Exchange
Program, the historical provision of Residential Exchange benefits, the
Exchange benefits received in the last five-year period ending June 30,
2001, rate impacts on qualifying customers, and the individual needs and
objectives of each state. BPA believes this is a more comprehensive
basis on which to base an allocation. In addition, Puget's suggestion to
rely on utilities' ASCs is troublesome. Residential Exchange Termination
Agreements have been negotiated with all but one of the previously
active exchanging utilities. Previously, an exchanging utility's ASC
forecast was typically based on the costs included in its last approved
ASC Report signed by the Administrator. Such costs were then adjusted to
account for inflation, power purchases, and resource additions, and were
then applied to forecasted loads for future periods to calculate the
forecasted ASC. Because of the Residential Exchange Termination
Agreements noted above, BPA no longer receives cost and load data from
utilities through ASC filings as was previously required and provided
under the RPSAs. BPA therefore does not have information for precise
determinations of ASCs available. For example, the test years of the
most recent ASC filings for Avista and IPC are 1983 and 1984,
respectively. With such old data, BPA would be wary of basing an
allocation solely upon ASCs.

In addition, if BPA were to adopt Puget's proposed methodology, only a
few IOUs would be allocated the large majority of the total settlement
amount. This conflicts with BPA's stated Subscription Strategy goal to
"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." Further, the Commissions noted that
their joint recommendation was based on many considerations, including
historical Residential Exchange Program benefits, which would reflect
those IOUs with higher ASCs. Finally, Puget acknowledges that BPA's
allocation proposal allocates 7/19ths of the proposed benefits to
Puget's residential consumers for the FY2002-2006 period, which is a
substantial portion of the total benefits. The Commission's
recommendation and BPA's proposal to slightly reduce Puget's benefits in
the FY2007-2011 period is based on the same consideration of the many
factors identified by the Commissions in their proposal, and still
retains substantial benefits for Puget during that period.

The WUTC recommends changing the sentence "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," to "If an IOU
chooses to request Residential Exchange Program benefits under section
5(c), then the *total IOU* Subscription settlement amount would be
reduced by the amount *originally allocated* to the exchanging utility*,
with the settlement amounts allocated to the other utilities remaining
unchanged*." WUTC, IOU-004. The WUTC has articulated with greater
clarity BPA's original intent regarding the noted language. BPA agrees
with the WUTC's suggested revision.

The WUTC recommends that the settlement allocation amounts should not be
affected by BPA's Section 5(b)/9(c) Policy. BPA's Section 5(b)/9(c)
Policy was published on March 16, 2000. *See* Section 5(b)/9(c) Policy,
65 Fed. Reg. 52, 14259-65 (2000). The WUTC argues that the Residential
Exchange settlement allocations should not be affected by the policy
because they are settlements of BPA's obligations under section 5(c) of
the Northwest Power Act that would otherwise be met by exchanges, not by
net requirements sales. WUTC, IOU-004. The WUTC suggests that BPA
clarify that the Residential Exchange settlement amounts in total and
for individual IOUs will not be affected by changes in non-residential
customer loads. *Id*. The WUTC has raised some important points, but
these points raise a number of different issues. First, the total amount
of settlement benefits provided to the IOUs will not be reduced by the
Section 5(b)/9(c) Policy. However, the policy may affect the form of the
benefits provided to any particular IOU. For example, if an IOU simply
takes monetary benefits under the proposed settlements, such benefits
are not affected by BPA's Section 5(b)/9(c) Policy. If, however, all or
a portion of an IOU's benefits are comprised of net requirements sales
under section 5(b) of the Northwest Power Act at the RL rate, such
requirements sales are subject to BPA's Section 5(b)/9(c) Policy. While
the WUTC notes that absent the settlement there would have been
exchanges and not net requirements sales, one type of power product
available under the proposed settlements is a net requirements product.
Sales of this product are subject to BPA's policy. However, even in the
event that BPA's policy reduced an IOU's net requirements purchases,
such former purchases could be converted into cash benefits and the
IOU's benefits would remain whole. In addition, if the power sales to an
IOU that comprised the power portion of the settlement were in lieu
sales under section 5(c) of the Northwest Power Act at the PF Exchange
Subscription rate, such sales would not be subject to section 5(b)
calculations of net requirements. 16 U.S.C. 839c(c)(6).

BPA's allocation proposal (based on the Commissions' recommendation) is
a reasonable approach to distribute the benefits of the IOU Subscription
settlements of the Residential Exchange Program. The allocation supports
the stated Subscription Strategy goal to "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."
These allocation amounts will be incorporated into the proposed
settlement contracts with the individual IOUs that choose to settle the
Residential Exchange Program. However, BPA has not yet offered or
executed any of the proposed IOU Subscription settlements. These
proposed settlements will be negotiated with the interested IOUs, and
then there will be a 30-day public comment period for all interested
parties to advise BPA regarding the propriety of the proposed
settlements. 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 within the scope of the proposed settlements. Issue outside
the scope of the settlements will be addressed in this process, *e.g.,*
issues regarding rates that apply to the settlements, which can only be
established in a section 7(i) hearing. After reviewing the parties'
comments, the Administrator will determine whether it is appropriate to
enter into the proposed settlement agreements.

These following allocation amounts will be incorporated into the
proposed settlement contracts with the individual IOUs that choose to
settle the Residential Exchange Program:

+--------------------------------+----------------+-------------------+
|                                | **Amount of**  | **Amount of**     |
|                                |                |                   |
|                                | **Settlement   | **Settlement      |
|                                | (aMW)**        | (aMW)**           |
|                                |                |                   |
|                                | *              | **FY2007-2011**   |
|                                | *FY2002-2006** |                   |
+--------------------------------+----------------+-------------------+
| 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.

In order to clarify the meaning of the Subscription Strategy, the
sentence that currently reads "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," will be changed to read "If
an IOU chooses to request Residential Exchange Program benefits under
section 5(c), then the total IOU Subscription settlement amount would be
reduced by the amount originally allocated to the exchanging utility,
with the settlement amounts allocated to the other utilities remaining
unchanged."

**VI. SLICE OF SYSTEM**

**Issue:**

Should the Slice of System product be limited in quantity?

**Subscription Strategy:**

The 1998 Strategy presented the Slice of System product in a very early
stage of development. Much work has been accomplished since then to
refine the product.

**Evaluation and Decision:**

The Slice product is a new and innovative way of carrying out BPA's
longstanding mission of selling power from the Federal Columbia River
Power System at cost to Pacific Northwest customers. As with any
innovation, there were initially significant questions about Slice. For
the past three years, BPA has been examining the costs, benefits, and
risks of this new approach to selling federal power. We have conducted
this examination through a public process, which has extended over
nearly three years, a process which has been open to all interested
parties. We have concluded that a limited amount of Slice sales is a
reasonable addition to the overall mix of power products that BPA should
offer in Subscription.

BPA believes that the Slice product most likely has neutral-to-positive
impacts on the rates of BPA's other power customers, on BPA's ability to
cover future cost uncertainties, on BPA's ability to meet fish recovery
obligations, and on BPA's assurance of making Treasury payments.

Since the Slice product is a significantly different product for BPA,
BPA intends to limit the amount of Slice product sales to between 1150
and 2000 aMW, a relatively small fraction of BPA's total power sales.
Thus, if any unanticipated problems with the Slice product arise, their
impact will be limited. A final amount, within this range, will be
decided in June 2000 and will be reflected in the Slice contracts that
BPA will execute with customers before October 1, 2000.

**VII. GENERAL TRANSFER AGREEMENTS**

**Issue:**

Should PBL revise the Subscription Strategy to cover the costs
associated with existing General Transfer Agreements for delivery of
Federal power until the earlier of the term of the Subscription contract
signed by the customer, or the formation of a Regional Transmission
Organization?

**Subscription Strategy:**

In the Subscription Strategy, BPA stated that PBL would cover the costs
associated with existing GTA s for delivery of Federal power through
2006. BPA's proposal is to cover these costs for existing customers
until either the earlier of the term of the Subscription contracts or
the formation of a Regional Transmission Organization.

**Parties Comments:**

The PPC stated that it "supports BPA's proposed payment of the general
transfer agreement (GTA) costs associated with the transfer of federal
power to existing BPA customers." PPC, 019, at 5. In joint comments
filed by Avista, Enron, PGE, Idaho Power, Montana Power, Pacificorp, and
Puget, these parties stated "we support the amendment," noting that "PBL
should as a matter of policy continue to pay the GTA costs for federal
power deliveries," but that "BPA should not, however, determine how the
PBL will treat the GTA costs for rate design purposes beyond the current
rate period ending in 2006." Avista et al., 042, at 3. Parkland Light
and Water Company stated that it "strongly supports this change in the
Subscription Strategy" Parkland, 032. Emerald PUD expressed support for
" the on-going payment of all General Transfer Agreement costs for all
preference customers." Emerald PUD, 026.

Clearwater Power Company stated that it supports BPA's general approach
of allocating GTA costs to PBL, but added that PBL should agree "to
continue to absorb these GTA costs for the entire 5-year rate period
beginning October 1, 2001 in the event that an RTO is formed that does
not adequately address the issue of pancaking." Clearwater, 034.
Similarly, PNGC voiced its support, but stated "\[i\]n the event an RTO
is formed but does not adequately address the issue of pancaking, PBL
should continue this treatment for the full Subscription period." PNGC,
050.

PGP has stated that "BPA should extend/replace the GTAs as they expire,
but any extensions and replacements should only last for the 2002-06
transition period." PGP, Comments on GTAs, Jan. 2000. PGP notes that
"arranging for transfer service is a contract option for BPA, not a
statutory requirement" and, "\[i\]n the face of increasing competition,
BPA should eliminate optional activities." PGP notes that BPA's
customers "do not all benefit from GTA service" and therefore should not
all be required to pay for such service. *Id*. at 2.

NRU stated that the Subscription Strategy approach to GTAs was "a
compromise that should not be lightly altered." NRU, 048, at 3. "If a
change is necessary because BPA's Power Business Line is concerned about
a commitment of up to 20 years in duration through a new power sales
contract, \[NRU\] would be willing to support a limit of 10 years."
*Id*.

BPA received virtually identical comments from many of the Tribes
commenting on this proposal. Affiliated Tribes of Northwest Indians,
040; Spokane Tribe of Indians, 041; Shoshone --Bannock Tribes, 020; Cow
Creek Band of Umpqua Tribe of Indians, 010. These parties noted that
they have submitted "strong comments in the BPA power rate case
supporting GTA service for new customers, putting them on par with your
proposal for existing customers." *Id*. They further noted their concern
with BPA's rate case proposal "for small new utilities qualifying for
the PF rate" and their proposal "to increase the 75 MW limit" described
in the PBL rate case for service to newly formed public utilities. Id. A
comment letter from Margaret Schaff, "an interested individual that is
familiar with issues of tribal utilities," as well as Red Earth Energy,
is in accord. Schaf, 039; Red Earth Energy, 011. The Yakama Nation
addressed the perceived inequities caused by "pancaking charges" and
states that the rationale giving rise to GTAs originally should be
extended to rectify this inequity as it would apply to newly formed
tribal utilities." Yakama Nation, 037.

**Evaluation and Decision:**

The vast majority of comments appear supportive of BPA's proposal.
Subsequent to issuance of BPA's Subscription Strategy ROD, many
developments have occurred with respect to the formation of an RTO.
While an RTO is still in very preliminary and formative stages, BPA
believes it is appropriate at this juncture to account for the
contingency that an RTO of some sort will be established.

In the Subscription Strategy, BPA stated it would continue existing GTA
service through 2006 or the term of a customer's subscription contract.
As many parties point out, the primary concern that is addressed by the
GTA's is "pancaked" transmission service and "pancaked" rates. The term
"pancaked" generally refers to separate and distinct transmission rates
paid by a customer to wheel power across transmission systems owned by
different transmission providers. If an RTO is formed, it may provide a
more uniform rate for transmission service that addresses and resolves
the issue of "pancaked" transmission rates.

Accordingly, BPA believes it is reasonable to clarify that BPA will
continue existing GTA service until either the earlier of 2011 or the
formation of an RTO. However, given uncertainties and concerns expressed
with respect to the nature of the RTO, the GTAs would terminate upon
formation of an RTO only if the RTO meets the following criteria: (1)
the RTO is operational; (2) the transmission facilities under the
control and tariff of the RTO include the Federal Columbia River
Transmission System, and all of the non-Federal transmission facilities
necessary to deliver BPA's power to the customer, and (3) the RTO offers
access at rates that are not pancaked. BPA believes these criteria
should help alleviate some of the concerns raised by NRU, PNGC and PGP.

Lastly, numerous tribes have raised the issue of the availability of
service to 75 aMW of new preference customer load. This issue was not
part of BPA's revised subscription strategy proposal respecting GTAs.
However, after consideration of these comments, BPA will make service
under GTAs or open access tariffs available to new preference customers
up to a limit of 75 average megawatts total increase.

BPA will continue to provide existing GTA service to customers for
delivery of federal power through 2011 or the term of the customer's
subscription contracts, unless a RTO forms that meet the meet the
following criteria: (1) the RTO is operational; (2) the transmission
facilities under the control and tariff of the RTO include the Federal
Columbia River Transmission System, and all of the non-Federal
transmission facilities necessary to deliver BPA's power to the
customer, and (3) the RTO offers access at rates that are not pancaked.
PBL does not intend to compensate GTA customers for any cost shifts
which may result from the formation of an RTO. Costs related to
providing GTA service and allocated to PBL will be specifically
described in BPA's final rate proposal in the WP-02 proceeding.

**VIII. CONTRACT ELEMENTS**

**A. Contract Duration**

**Issue:**

Should BPA place a ten-year limit on the maximum duration of power sales
contracts?

**Subscription Strategy:**

BPA made no specific recommendation to change the assumption of power
sales contracts having a statutory maximum allowable duration of twenty
years.

**Parties' Comments:**

BPA received significant, unsolicited petitions on this subject. Three
Northwest Governors, Governor Gary Locke of Washington (Administrator's
Office Log (AOL) #20000-0113), Governor Marc Racicot of Montana (AOL
#2000-0139), and Governor John Kitzhaber of Oregon (AOL #2000-0071) sent
letters to the Administrator on this subject. Governors Racicot and
Kitzhaber both expressed their concern that BPA power contracts of
longer than five years duration may complicate efforts to alter
(Columbia) river governance and/or create changes in administration of
the Federal Columbia River Power System. Governor Locke expressed his
belief that longer-term contracts would be beneficial to the region by
demonstrating to the rest of the country the region's commitment to pay
the full cost of federal power, including the environmental obligations.
Governor Kempthorne sent a letter to Governor Kitzhaber in which
Kempthorne expressed his reluctance to ask the Administrator to limit
contract lengths to five years. AOL #2000-0165.

Four letters on this subject were received from U.S. Congressmen and
Senators. Letters from Representative Jennifer Dunn (AOL #2000-0153) and
Senator Ron Wyden (AOL #2000-0120) urged BPA to limit new power sales
contracts duration to five years. Representative Dunn stated a belief
that limiting new contracts to five years would not present future
financial harm, citing BPA's strong financial position and predictions
of continued below-market priced power. Senator Wyden argued that
contracts of longer than five years could make electricity market
restructuring more difficult, and urged that contracts not contain
provisions that would make restructuring legislation more difficult. A
joint letter from Senators Slade Gorton and Patty Murray argued that the
speculative nature of restructuring and governance issues do not warrant
the potential financial risk and that limiting the term of power sales
contracts would only serve to further polarize the region on these
issues. AOL #2000-0119. Senator Gordon Smith stated his belief that
federal legislation would be the appropriate vehicle to address any
issues regarding an orderly transition to a new system. AOL #2000-0164.

In addition, BPA received letters from the Pierce County Cooperative
Power Association (SS-001), the Columbia Basin Electric Cooperative,
Inc. (SS-002), and the City of Hermiston (SS-003), all urging at least
ten-year contracts be offered. Earlier unsolicited comments included
Avista, et. al (S018), Puget Power (S009), PGE (S007) Stoel Rives et. al
(043), Murphy et. al (S006 and S009), and Mr. Eachus (045), all
recommending contract terms not to exceed five years. Wells Electric
(007), the PPC (018) the NRU (048) noted that contracts longer than five
years should have an off-ramp (Wells), that BPA should limit the DSI
block sales to five years (PPC) and that BPA should be clear about the
term of contracts it wants (NRU).

**Evaluation and Decision:**

While BPA understands there are some concerns about the potential for
power sales contracts impacting restructuring options, BPA also believes
this concern must be balanced against BPA's need to create financial
stability and to meet BPA's commitments. It is the agency's assessment
that the potential for these contracts having an impact on future
restructuring efforts is modest. For example, the BPA title within the
Administration\'s current electricity restructuring draft bill is almost
entirely focused on transmission. The length of power sales contracts
would have little or no impact on this particular legislation.

However, BPA recognizes the concerns raised by some members of the
Northwest congressional delegation and certain governors of states in
the Pacific Northwest. After considering the concerns raised by these
parties, BPA will modify its current decision to offer contracts for up
to twenty years. BPA will offer contracts to its preference and IOU
customers with terms up to ten years. DSI contracts will be for a
five-year term.

For public agency customers signing a Subscription contract, the
contract will "lock in" the terms of the BPA Appropriations Refinance
clause through September 30, 2011. The provision will preserve BPA's
existing ratesetting discretion to allocate costs and design rates,
including assuring cost recovery, but constrain the amount that BPA can
recover through rates on the refinanced investments.

This modification to establish a ten year term limit on Subscription
contracts with utility customers is consistent with the Fish and
Wildlife Funding Principles agreed to within the Administration and
endorsed by Vice President Gore. BPA expects that it will result in
power sales contracts of staggered duration that will provide a more
certain and stable funding source for BPA's fish and wildlife and
Treasury payment obligations. This approach helps provide financial
stability for BPA.

Another reason for the ten-year contract term is that BPA is concluding
that 1900 aMW of benefits be included in contracts offered provided to
regional IOUs for settlement of the Residential Exchange Program for FY
2002-2006 and 2200 aMW for FY 2007-2011. This level of benefits is
consistent with a recommendation of the four Pacific Northwest State
public utility commissions. The commissions urged that the 2200 aMW
post-2006 level be a firm commitment, which it is. BPA will modify it
post-2006 public agency prototype contracts to assure that if BPA\'s
costs rise due to additional benefits to other customers, contract
signatories are not insulated from those costs. This \$140 million
annual commitment to IOU residential and rural customers during the
initial five-year period more than doubles the benefits IOUs are
receiving under current contracts.

BPA believes that contracts of staggered duration will balance the needs
of BPA and its customers while still allowing policy changes upon which
the region may agree during the period of the contracts.

> **B. Take-or-Pay**

**Issue:**

Should BPA retain the take-or-pay nature of Subscription power sales
contracts?

**Subscription Strategy:**

BPA made no specific recommendation to change the take-or-pay nature of
Subscription power sales contracts.

**Evaluation and Decision:**

BPA\'s contracts continue to be take-or-pay under most circumstances
although the approach to accomplish this and specific mitigation
approaches have changed. As in the original strategy BPA continues to
offer Full Service customers targeted retail access benefits. BPA has
now decided to take on the risk of retail access load loss under state
or Federally mandated retail access for all such customer's load and to
offer this benefit to Dedicated Resource Partial customers. Consistent
with the 1998 Subscription Strategy to encourage staggered purchases
during Subscription, BPA also offers mandated retail access protection
for amounts a customer commits to purchase at three-year rates to Simple
Partial, Complex Partial and Block customers. BPA does not take on the
risk of voluntary retail access under any of the business relationships.

With the exceptions noted above, the contracts are generally take-or
pay. BPA\'s prototype contracts include a provision that requires the
customer to cover BPA\'s financial losses if the customer loses load and
BPA receives less from remarketing the power that would have been
otherwise purchased by the customer under the customer's contracted BPA
rates. This take-or-pay provision thus ensures that BPA\'s revenues will
be maintained in the event that market prices move below BPA\'s rates.

> **C. Good Corporate Citizenship Clause**

**Issue:**

Should BPA require a Good Corporate Citizenship Clause provision in
contracts for the sale of power to all BPA customers?

**Subscription Strategy:**

BPA made no specific recommendation to include such a provision in
contracts for the sale of power to its customers.

**Evaluation and Decision:**

The United Steelworkers of America requested BPA to include a Good
Corporate Citizenship (GCC) clause as part of BPA's Subscription power
sales contracts. BPA has reviewed and analyzed this request and decided
not to include a GCC clause in Subscription contracts with utilities.
However, BPA may include some type of GCC clause in power sales
contracts with DSI customers. On April 21, BPA began a public process to
determine whether to include such a provision in DSI contracts and, if
so, the wording of such a clause.

> **D. Contract Right to Terminate if Rates Remanded and Changed**

**Issue:**

If, as a result of a Federal Energy Regulatory Commission remand or
court ruling, BPA subsequently establishes a rate for a customer that is
higher than the rate proposed in the Final Rates Record of Decision,
should customers be allowed to terminate the Subscription contract?

**Subscription Strategy:**

BPA made no specific recommendation to include such a provision in
contracts for the sale of power to its customers.

**Evaluation and Decision:**

Customers commented that they will be basing their purchase decisions
for the initial period covered by the contract on the rates proposed in
BPA Final Rates Record of Decision. They felt that if BPA finds it
necessary to change upward the specific rates that applied to the
service supplied under the Subscription contract after the contract is
signed, they should have the right to revisit the contract.

It is reasonable to allow the customers (including DSIs) to terminate
the contract if the price is ultimately higher for a particular customer
than was proposed in the Final Rates Record of Decision.

A termination provision has been added to the Subscription contract to
address this issue. The provision will allow a specific customer to
terminate within a limited period of time only if, as a response to the
FERC remand or court ruling, BPA establishes a rate that is higher for
that specific customer than was established in the May 2000 Rates Final
Record of Decision. Under that circumstance, the customer will have a
limited period of time within which to terminate its contract.

**IX. ENVIRONMENTAL COMPLIANCE**

The evaluations and decisions contained in this document are consistent
with the environmental analysis conducted for the 1998 Power
Subscription Strategy, as documented in the National Environmental
Policy Act, Administrator's Record of Decision, Power Subscription
Strategy, December 21, 1998 (NEPA ROD). The NEPA ROD is a direct
application of BPA's earlier decision to adopt a Market-Driven approach
for participation in the increasingly competitive electric power market
and is consistent with BPA's Business Plan, the Business Plan
Environmental Impact Statement (DOE/EIS-0183, June 1995) and the
Business Plan ROD (August 15, 1995).

**X. CONCLUSION**

I have reviewed and evaluated the comments received by BPA on the
foregoing issues received after the adoption of the December 1998 Power
Subscription Strategy. These evaluations and decisions will be used in
upcoming contract processes prior to the offer of Subscription
contracts. These evaluations and decisions are consistent with the
environmental analysis conducted for the 1998 Subscription Strategy.

Issued in Portland, Oregon, on April 26, 2000.

[/s/ J. A. Johansen]{.underline}\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Administrator and Chief Executive Officer