# UNITED STATES OF AMERICA

### DEPARTMENT OF ENERGY

### BEFORE THE

### BONNEVILLE POWER ADMINISTRATION

**In the Matter of:** )

) BPA File No. SN-03

The Bonneville Power Administration )

Proposed Safety-Net Cost Recovery )

Adjustment Clause Adjustment to 2002 ) INITIAL BRIEF

Wholesale Power Rates )

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_)

## **INITIAL BRIEF** 

## **OF THE** 

## **WESTERN PUBLIC AGENCIES GROUP** 

## 

> **1. [INTRODUCTION]{.underline}**

#  This Initial Brief is submitted on behalf of the Western Public Agencies Group (WPAG) and in accordance with the Bonneville Power Administration's Rules of Procedures Governing Rate Hearings, 51 Fed. Reg. 7611(1985), and the applicable orders of the Hearing Officer governing this proceeding. The utilities that comprise WPAG provide electricity to over 630,000 residents and companies in the Northwest. They purchase about 21% of the power the Bonneville Power Administration (BPA) sells to preference customers. These utilities purchase power from BPA under the Block, Slice, Pre-Subscription and Full Requirements products, and as such represent a cross-section of BPA's preference customer class. As a consequence, the positions advanced in this testimony do not represent the special pleading of one subset of preference customers, but rather a balanced approach that takes into account the impacts of the proposed SN CRAC rate increase on all of BPA's preference customers.

2.  **[THE REGION STILL FACES DIRE]{.underline}**

> **[ECONOMIC CIRCUMSTANCES]{.underline}**

When BPA commenced this proceeding, the economy of the Northwest was
gripped by a severe economic recession. *Saleba, et al*., SN-03-E-WA-01,
pages 3-5. These circumstances have not improved during the intervening
three months. If anything, the plight of regional electric consumers and
industry has materially worsened. The unemployment rate in Washington
State increased to 7.3% in April, compared to an unemployment rate of
6.7% in January. The chief economist for Washington State expects the
unemployment rate to hit 7.8% by the end of this year. Seattle Times,
May 21, 2003, Section E, page 1. This severe recession has been
exacerbated by the wholesale power rate increases of nearly 50% that BPA
instituted prior to this proceeding. Any additional rate increase would
cause untold additional damage to the regional economy, and further
hardship to the electric consumers and industries of the Northwest. Rate
relief remains a vital element to the recovery of the regional economy,
and BPA is the only institution in the position to provide such rate
relief for the benefit of the regional economy.

It was these grim economic circumstances that prompted the WPAG
utilities to call for BPA to take extraordinary actions in all areas to
reduce costs and utilize cash tools to eliminate the need for a
wholesale power rate increase in FY04. These recommended actions
included:

-   Achieving additional internal BPA cost reductions to bring spending
    more in line with the assumptions used in the May 2000 BPA rate
    proceeding.

-   Renewing efforts to obtain credit from the Treasury for accelerated
    repayments made during this rate period.

-   Retaining a portion of the proceeds from the Energy Northwest
    refinancing activities undertaken this year to provide as an interim
    reserve of last resort to ensure Treasury payments are made.

-   Amortizing conservation augmentation costs over a 20-year period,
    which is BPA's general practice for amortizing conservation
    investments and is more consistent with the useful life of the
    resources being acquired.

-   Reflecting the recovery of Energy Northwest bearer bonds.

-   Pursuing vigorously cost reductions and revenue enhancements that
    may be available from modifying river operations, consistent with
    its statutory obligations. *Saleba, et al*., SN-03-E-WA-01,
    pages7-8.

Acting on these recommendations remains as crucial today as it was when
they were originally offered to BPA. As the regional economic situation
continues to deteriorate, BPA must assume a leadership role in providing
the rate relief needed to assist the region and its electric consumers
in recovering from this economic recession.

However, the actions listed above are now not the only tools with which
BPA has to work in its effort to help the region by avoiding a wholesale
rate increase in FY04. Due to a number of events have occurred in the
last three months, BPA is now in a much better position to aid the
region's ailing economy by foregoing a rate increase in FY04, while at
the same time putting BPA on the road to financial health.

When this proceeding was initiated by BPA in February 2003, it estimated
that it had a \$920 million financial challenge to overcome during the
remainder of the rate period. *Keep, et al*., SN-03-E-BPA-04, page 10.
Over the course of the last three months, a number of events have
occurred that have materially reduced the size of the financial
challenge faced by BPA. At the present time, it appears that BPA's
financial problem has been reduced by one-half, or to about \$450
million over the remainder of the rate period. Further, as of the Second
Quarter Financial Review of May, 2003, BPA was forecasting financial
reserves for end of year FY03 of \$260 million. This is more than double
the amount of reserves BPA was forecasting in the First Quarter
Financial Review in February, 2003.

There are a number of reasons for this dramatic improvement in BPA's
financial situation in the last three months. They include efforts by
BPA to reduce its internal costs and to restructure obligations to third
parties such as Enron; efforts by BPA's generating partners, such as
Energy Northwest, to defer and reduce costs charged to BPA; efforts by
BPA customers to identify cost reductions and to restructure BPA payment
obligations where possible; and improved water conditions and market
prices that have increased revenues projected to be obtained by BPA from
the sale of surplus power. And lastly, a number of additional financial
tools have been identified and refined by BPA and its customers that
provide BPA with a broader range of options for dealing with unforeseen
events that may occur during the remainder of the rate period. *See*,
SN-03-M-BPA/WA-25, List of Liquidity Tools Available to BPA.

In addition to the foregoing improvements in BPA's financial situation
that have already occurred, there are a number of potential events that
may occur in the near future that would further reduce the financial
challenge faced by BPA. These include a potential settlement of pending
litigation challenging the Subscription contracts between BPA and the
investor owned utilities, continued improvement in water conditions and
surplus power sales revenues, decreases in expenses by BPA's generating
partners (Energy Northwest, Army Corps of Engineers and the Bureau of
Reclamation), and additional internal cost reductions by BPA. *McCoy, et
al.,* SN-03-E-BPA-17 (E1), page 3.

Not only have these developments reduced by half the size of the
financial problem faced by BPA over the remaining three years of this
rate period, they have also provided BPA with the opportunity to avoid
entirely any wholesale power rate increase to regional electric
consumers in FY04. Because of the nature of these developments, BPA now
has the ability to avoid a wholesale power rate increase in FY04 by
appropriately recognizing in FY04 the financial impacts of events that
have already occurred, and those that may be identified in the August
review process. Simply stated, BPA has been given a golden opportunity
to remove from the regional economy the specter of a wholesale power
rate increase, and to aid the region's electric consumers and the
regional economy in a manner that was unimaginable three months ago.

The precise nature of these actions is described in detail in sections 3
through 6of this Initial Brief. Given the current level of BPA's
wholesale power rates, and the severe recession gripping the region, BPA
must seize this opportunity and make the appropriate discretionary
decisions that will avoid a wholesale power rate increase in FY04.

3.  **[BPA MUST TAKE DISCRETIONARY ACTIONS]{.underline}**

**[TO AVOID AN FY04 RATE INCREASE]{.underline}**

The manner in which BPA elects to recognize for ratemaking purposes the
good financial news it has already received, and good financial news
that may be recognized the proposed August review process, will
determine whether there is an SN CRAC rate increase in FY04. BPA has
proposed an approach for the treatment of this good financial news that
will minimize the near-term benefits of this good financial news to
regional ratepayers, and maximize the wholesale power rate increase that
will be imposed on the region. *Keep, et al*., SN-03-E-BPA-11, page 52.
Given the dire economic situation in the region, the approach being
proposed by BPA makes little sense, and seems destined to exacerbate the
already difficult financial situation facing the region.

a.  **[Improvements in 2003 Surplus Power Revenues Must be Recognized in
    FY04]{.underline}**

> One of the major developments that has occurred since this proceeding
> was

initiated is the steady improvement in forecasts of stream-flows for
this year and the relatively high market prices that have persisted over
the last three months. When the initial rate proposal was released,
estimated stream-flows were about 75 million-acre feet (MAF). The most
recent stream-flow estimate, released this month, is over 90 MAF.
*Bliven, et al.,* SN-03-E-JC-01, page 11. While estimates vary on how
much this will increase BPA's surplus power sales revenues, with some
ranging as high as a \$150 million, no one questions the conclusion that
an increase of 15 MAF in estimated stream-flows has dramatically
improved BPA's financial outlook for FY03 and FY04. *Id.* Even BPA
conceded this point in its rebuttal testimony. *Oliver,* *et al*.,
SN-03-E-BPA-12, pages 4-5.

Unfortunately, it appears that the immediate benefit of this dramatic
change in BPA's financial fortunes are about to be squandered. Rather
than recognizing these additional surplus power sales revenues in the
year they will be earned (FY03 and FY04), BPA is proposing to prorate
these additional surplus revenues over the remaining three years of this
rate period. *McCoy, et al*., SN-03-E-BPA-17, pages 17-18. The
consequence of this proposed action is to deprive regional customers of
two-thirds of the benefit of this revenue increase in FY04, and to
unnecessarily increase the size of the SN CRAC rate adjustment in FY04.

BPA is neither compelled nor required to treat these additional surplus
power sales revenues in the manner they are proposing. There is no BPA
policy, no statutory provision nor any requirement contained in
generally accepted accounting principles that dictates this outcome. Tr.
at p. 70. In short, BPA has the unbridled discretion to recognize these
additional surplus power sales revenues in FY03 and FY04, or prorate
them over the remaining three years of the rate period. By selecting to
do the latter, BPA has chosen the course of action that will produce the
highest near-term rate increase, and have the most adverse impact on the
regional economy.

When queried as to why it had selected such a path, BPA indicated that
it was their judgment that spreading these additional revenues over
three years, as opposed to recognizing them in the fiscal year they are
received, would be of benefit to the region. Tr. at p. 71. The region,
at least as represented by BPA's public utility and industrial
customers, could not disagree more with this assessment.

The notion that the region's economy and its electric consumers are
somehow benefited by a discretionary decision that causes an SN CRAC
rate increase in FY04, when it could be easily avoided by a
discretionary decision by BPA, strains credulity. Simply stated, there
is no plausible reason that justifies spreading the benefits of these
additional surplus power sales revenues earned in FY03 over the
remaining three years of this rate period. BPA should recognize the
benefits of the additional surplus power sales revenues in FY03, the
fiscal year in which they will be earned. Depending on market prices,
doing so will likely eliminate the need for an SN CRAC rate adjustment
in FY04. Doing otherwise leaves the region with the impression that BPA
is going out of its way to increase its rates in the near-term, in spite
of the dire condition of the regional economy.

> **b. [The August 2003 Adjustment Should Appropriately Recognize
> Additional ]{.underline}**
>
> **[Cost Reductions and Revenue Increases]{.underline}**

BPA is proposing to include in the SN CRAC General Rate Schedule
Provisions (GRSPs) a review process in August of 2003, to take into
account events that have occurred since the conclusion of this
proceeding, and events that are reasonably expected to occur in the
future, that are likely to improve BPA's financial situation and would
reduce the size of any proposed SN CRAC rate adjustment. *McCoy,* *et
al*., SN-03-E-BPA-17, page 8; SN-03-E-BPA-17 (E1), pages 2-3. The WPAG
supported this concept in its direct and rebuttal testimony. *Saleba, et
al*., SN-03-E-WA-01, pages 24-26. Unfortunately, BPA is taking the same
approach to the recognition of good financial news identified in the
August 2003 review process that it is proposing for the additional
surplus sales revenues expected in FY03. In short, BPA has proposed that
any improvement identified in the August 2003 review process will be
prorated over the remaining three years of the rate period, regardless
of the nature of the cost reduction or revenue increase. *McCoy,* *et
al*., SN-03-E-BPA-17, pages 9-10. As with the treatment of the
additional surplus power sales revenues expected in FY03, this approach
seems likely to unnecessarily increase the near term BPA wholesale power
rates faced by its customers.

The BPA proposed approach of prorating cost reductions or revenue
increases over the remaining three years of the rate period may be
appropriate for some of the items identified in the August 2003 review
process. What is objectionable about this proposal is that it fails to
acknowledge that such a pro-ration approach may not be appropriate or
necessary for all of the cost reductions and revenue increases that may
be identified. For example, if a settlement of pending litigation
regarding certain BPA Subscription power sales contracts results in a
cost reduction for BPA in each of the remaining three years of the rate
period, it would be appropriate to prorate such cost reductions over
that period. Conversely, if such a settlement resulted in a single cost
reduction occurring only in FY04, it would be appropriate to recognize
that entire cost reduction in FY04, and not prorate it over the
remainder of the rate period.

By proposing to prorate all cost reductions and revenue increases over
the remaining three years of the rate period regardless of their timing
or nature, BPA will deprive itself of the opportunity to judge each item
on a case-by-case basis, and to recognize each revenue increase or cost
reduction in a manner appropriate to its character. Even more
disturbing, BPA's proposed approach will preclude it from recognizing in
the near term cost reductions and revenue increases that could provide
near term rate relief to the beleaguered regional economy. There is no
plausible reason why BPA should go out of its way to limit its
discretion in this manner, especially when the likely outcome of this
approach will be to unnecessarily increase BPA's near term rates.

Given the level of BPA's current rates and the state of the regional
economy, the only defensible approach is for BPA to retain the
discretion to recognize the financial improvements identified in the
August 2003 review process in a manner consistent with the nature of
each improvement. Under current circumstances, the one-size fits all
approach of pro-rating all revenue increases and cost reductions
proposed by BPA will unnecessarily restrict BPA's discretion, and work
to the detriment of its customers, and the region.

4.  **[THE SN CRAC MUST CONTAIN A REFUND MECHANISM]{.underline}**

> The events of the last three years have provided a number of lessons,
> many of

them learned the hard way. Perhaps the two most prominent of these
lessons is that circumstances change with great speed, and that which we
least expect is the most likely to the occur. The change in BPA's
financial situation over the last two years is an object lesson on both
points. Another case in point is the unexpected price changes, both up
and down, that have been experienced recently in the wholesale power
market.

These lessons should be incorporated into the way the proposed SN CRAC
will operate. If conditions change so fast that within the rate period
BPA's accumulated net revenues are well above the SN CRAC threshold,
then the SN CRAC was set higher than turned out to be necessary. In
short, the SN CRAC should contain provisions that operate when BPA is
experience robust financial health, as well as when it is doing poorly.
To date, BPA has failed to include in the SN CRAC provisions that would
operate under both adverse and beneficial circumstances.

As currently proposed, the SN CRAC is designed to raise rates to collect
sufficient sums to ensure BPA's financial health over a broad range of
adverse circumstances. This construct is based on the view that BPA's
current financial health is poor, and is likely to remain so for the
remainder of this rate period. It does not consider, let alone make
provision for, how the clause should operate in the circumstances where
BPA has collected SN CRAC revenues in excess of those needed to restore
its financial health. Given the rapidity with which BPA's financial
situation has gone from good to bad and back to good again over the last
two years, there is no reason to think that the same reversals of
fortune could not reoccur in the remaining three years of this rate
period.

The BPA's customers and the regional economy have borne the brunt of
substantial wholesale power rate increases during a severe regional
economic recession. In the event that BPA is restored to financial
health during this rate period, it is only appropriate that in such
circumstances BPA should share with its customers a portion of reserves
it collects in excess of the target reserve amounts established in the
SN CRAC mechanism.

In its direct case, the WPAG witnesses proposed a mechanism for
inclusion in the SN CRAC that would automatically rebate to the
customers one-half of financial reserves accumulated by BPA in excess of
the SN CRAC Threshold by more than \$15 million, up to the trigger point
of the Dividend Distribution Clause (DDC). *Saleba,* *et al*.,
SN-03-E-WA-01, pages 26-28. The basic notion behind this proposal is
that if BPA achieves all of its financial goals as set out in the SN
CRAC, and continues to accumulate financial reserves in excess of these
amounts, one-half of such excess collections should be returned to the
customers promptly and automatically. To do so would not only help the
fragile Northwest economy recover, but would demonstrate to BPA's
customers that the SN CRAC mechanism will reward them in good times, as
well as increasing BPA's rates in lean times.

In rebuttal, BPA argued that such a clause was unnecessary. BPA argued
that since the SN CRAC automatically reduces the SN CRAC rates increases
as BPA's financial condition improves, making an additional rebate
mechanism unnecessary. BPA also suggested that such a refund mechanism
would be duplicative of the DDC contained in the GRSPs. *McCoy,* *et
al*., SN-03-E-BPA-17, page 11. These arguments do not address the issue
at hand.

In the first instance, the ability of the SN CRAC to automatically
provide customers with a refund is limited. Once the SN CRAC rate level
reaches zero, there is no further ability to rebate to customers excess
reserves that BPA may have or subsequently collect. The refund mechanism
proposed in the WPAG testimony would operate to refund such excess SN
CRAC revenues after the SN and FB CRACs had been reduced to zero. Hence,
it would operate after the ability of the SN CRAC to provide a refund to
customers has been exhausted. In this regard it is complimentary to, and
not duplicative of, any reduction that may be provided through the
operation of the variable SN CRAC.

With respect to the potential conflict with the operation of the DDC,
once again the proposed refund is crafted to avoid such an outcome. As
described in the WPAG direct testimony, the proposed refund mechanism
commences operation after the variable SN CRAC refund capability has
been exhausted, and ceases operation when the DDC trigger point for a
rebate under the DDC is reached. See, SN-03-E-WA-01B, pages 7-8. As a
consequence, the operation of the proposed SN CRAC refund mechanism does
not conflict with the operation of the DDC.

Recent history demonstrates that the events we think most unlikely have
an uncanny knack of occurring. Failure to provide for the unexpected in
the operation of the SN CRAC mechanism will work to the detriment BPA's
customers. Incorporating into the SN CRAC a refund mechanism that will
automatically share with its customers one-half of the reserves BPA
achieves in excess of the SN CRAC targets (plus \$15 million cushion)
will constitute a positive gesture by BPA to its customers during
difficult times. It will also provide tangible evidence that BPA is
willing to share with its customers the benefits, as well as the
burdens, of the Federal power system.

5.  **[THE SN CRAC MUST CONTAIN EFFECTIVE LIMITS]{.underline}**

> While there is conflicting testimony regarding why it occurred, all
> parties in this

proceeding acknowledge that one of the major causes of the financial
challenge currently faced by BPA is the fact that spending during the
last two fiscal years far exceeded the forecast levels used to set BPA's
base rates in the May 2000 rate case. *Keep,* *et al*., SN-03-E-BPA-04,
pages 5-7; *Saleba, et al*., SN-03-E-WA-01, pages 10-12; *Faddis, et
al.,* SN-03-E-CC-01, pages 17-20; *Bliven, et al.,* SN-03-E-JC-01, pages
3-18. What is clear is that neither BPA nor its customers can withstand
a repeat of the disconnect between spending forecasts used to set rates
and actual spending levels that occurred in the last three years. Part
of the solution to this problem will necessitate actions outside this
rate proceeding, and will require both the participation and cooperation
of BPA and its customers. However, a major part of the solution to this
problem can be achieved in this proceeding by the manner in which the SN
CRAC mechanism is structured. To prevent a repeat of the disconnect
between rate case spending assumptions and actual spending levels, the
SN CRAC mechanism must contain effective limits on the costs that can be
collected automatically by the SN CRAC.

a.  **[The SN CRAC Should Contain Meaningful Spending
    Caps]{.underline}**

> In its direct case, the WPAG witnesses proposed a comprehensive set of
> spending

limits to be included in the SN CRAC. This proposal addressed all
spending categories, and by doing so precluded BPA from automatically
collecting through the SN CRAC actual spending in excess of the spending
levels it is forecasting in this rate proceeding. *Saleba, et al*.,
SN-03-E-WA-01, pages 17-20; SN-03-E-WA-01B. This proposal would not
prohibit BPA from collecting spending in excess of forecast levels, but
would require BPA to go through a section 7(i) rate proceeding, and the
public scrutiny such a process entails, if it wished for any reason to
collect costs in excess of forecast levels. The rationale for this
proposal is two-fold: first, that there must be more accountability
between rate case spending forecasts and actual spending activity, not
only for BPA but for its generating partners as well (Energy Northwest,
the Army Corps of Engineers and the Bureau of Reclamation); and second,
while public scrutiny of spending in excess of rate case forecast levels
will permit BPA to collect additional costs when they are justified, and
it will operate discourage excess spending that is not truly necessary.

In its rebuttal testimony, BPA adopted this proposal in concept, but
proposed to implement it in a manner that will substantially limit the
spending categories subject to the spending limits, and will create
major exceptions to the spending caps. *Keep, et al*., SN-03-E-BPA-11,
pages 67-68. Both of these proposals will materially reduce the
effectiveness of these spending caps, and increase the likelihood of a
repeat of the spending in excess of rate case forecast levels that
occurred in the last three fiscal years.

With regard to the costs categories that will be subject to the spending
limits, BPA proposes to exclude from any limitation the following:
Residential Exchange Monetary Payments, Power Generation, Renewable
Projects, Transmission Acquisition, Civil Service Retirement Payments,
Terminated Projects, Fish and Wildlife, Non-Federal Debt Service and
Conservation Initiatives. In support of these proposed exclusions, BPA
asserts that these costs are not controllable or variable in the near
term by BPA without potentially violating its mission and legal
responsibilities. *Id.* at p. 68.

In the first instance, it is not clear why BPA does not exercise control
over some of these cost categories, such as Renewable Projects,
Terminated Projects and Conservation Initiatives. But more to the point,
whether BPA has "control" over a particular cost category is not
determinative as to whether it should be subject to a spending limit in
the SN CRAC.

The concept underlying the inclusion of cost caps in the SN CRAC is for
BPA to make a reasonable forecast of the costs it expects to incur in
these areas for purposes of setting rates, and then do all that it can
to stay within those spending forecasts when it actually spends the
money. The penalty for exceeding the rate case spending forecast,
whether the exceedence is caused by BPA or by a third party, is not a
prohibition on collecting the additional amounts if are really needed.
Rather, it is a requirement that the excess spending sought be publicly
justified through a section 7(i) rate process, rather than being
collected automatically, and without public scrutiny, through the SN
CRAC process. As a consequence, these spending limits serve to bring
transparency to the spending activities of both BPA and its generating
partners, and to create a direct relationship between rate case spending
forecasts and actual spending behavior.

Under this approach, inclusion of cost categories not under the control
of BPA will not impinge on BPA's ability to complete its mission or
fulfill its legal responsibilities. This is because at the end of the
day, additional costs needed to fulfill BPA's legal obligations or
complete its mission, whether caused by a third party, a legal
obligation or an unforeseen event, can be collected through a rate
increase after conducting a section 7(i) rate process. The only
requirement is that the collection of such additional amounts may only
occur after they have been subject to public scrutiny. It is difficult
to understand why BPA would object to including more public scrutiny of
spending in excess of rate case forecast levels.

BPA's rebuttal testimony also proposed exclusions from the cost caps for
items that BPA described as *force majeure*-type events, such as court
rulings, litigation settlements, changes in legal requirements, changes
in security requirements, mandated regulatory requirements, and natural
or man-made disasters. *Id.* at p. 67. Since BPA has not provided the
parties with a revised set of GRSPs reflecting this proposal, it is
difficult to assess precisely how expansive this exception is likely to
be, and how it will actually operate. However, based on the information
provided to date, it is reasonable to assume that BPA intends for cost
increases that fall within this exception to be collected automatically
and without public scrutiny, and that the exception will be read so
expansively that events such as litigation settlements voluntarily
entered into by BPA will be considered *force majeure* events. If the
proposed exception operates in such a fashion, it will render the
proposed spending limits essentially meaningless.

The so-called *force majeure* exception to the spending limits proposed
by BPA is unnecessary, and will do lasting damage to BPA's credibility
with its customers. The proposed exception is unnecessary for two
reasons. First, a true *force majeure* event, such as a generators
damaged in a severe earthquake, will likely be such a major financial
event that it will result in a retrigger of the SN CRAC based on current
criteria. Since such a retriggering of the SN CRAC will permit BPA to
recover the costs of such an event, the proposed *force majeure*
exception is redundant and unnecessary. And even if such an event is
insufficient to retrigger the SN CRAC, BPA would be able to initiate a
section 7(i) rate proceeding to collect additional amounts under such
circumstances.

And second, as BPA has acknowledged, the level of trust between BPA and
its customers is currently at a low point. *Id.* at p. 13. To propose
spending limits for inclusion in the SN CRAC, and then include an
exception that could be interpreted to make virtually any overspending
eligible for automatic collection under the SN CRAC, will only confirm
the worst fears of some customers regarding BPA's commitment to
meaningful cost control.

The structure of the SN CRAC adopted in this proceeding will be a
telling indication to BPA's customers about how committed BPA really is
to learning the lessons of the past, and engaging in meaningful cost
control in the future. Adopting an SN CRAC that includes spending limits
on all of BPA's major spending categories, and foregoing the opportunity
to include an expansive exception to these spending limits, will do much
to re-establish the trust between BPA and its customers in this
important area for both the present and the future.

b.  **[The SN CRAC Retrigger Mechanism Should Contain Limits
    on]{.underline}**

> **[Prepayments and Revenue Financed Capital Projects]{.underline}**

The use of rate revenues to finance capital projects and to prepay
Treasury obligations and/or appropriations can increase the likelihood
of an SN CRAC rate increase. They do so by reducing the amount of cash
that BPA has as financial reserves, thereby reducing the Treasury
Payment Probability (TPP) and increasing the likelihood that the SN CRAC
retrigger thresholds will be exceeded. *Saleba, et al*., SN-03-E-WA-01,
pages 21-22. Since the amount of rate revenues used to finance capital
projects and to repay Treasury obligations and/or appropriation is not
limited by any BPA policy or statute, and is within the control of BPA,
this is another area where actions taken by BPA that diverge from rate
case forecasts should not automatically result in a retriggering of the
SN CRAC.

The WPAG direct testimony proposed that BPA's forecasts of revenue
financed capital projects and prepayments to the Treasury (beyond that
funded by the Debt Optimization Program) be specifically set out in the
SN CRAC, so that any revenue financing of capital projects and
prepayment of Treasury obligations in excess of those levels be excluded
from the calculation of TPP for purposes of retriggering the SN CRAC.
*Id.;* SN-03-E-WA-01B. The effect of this proposal is to preclude using
cash in these two areas in excess of levels forecast in this rate
proceeding from contributing to a retrigger of the SN CRAC. As with the
proposal discussed in section 5(a) of this brief, the purpose is to
create a meaningful link between the spending assumptions used to set
the BPA rates, and the actual spending undertaken by BPA.

In its rebuttal testimony, BPA rejected these two proposals. *Keep, et
al.*, SN-03-E-BPA-11, page 61. BPA argued that since it did not intend
to use rate revenues to finance capital items, nor to make prepayments
of Treasury obligations or appropriations in excess of the levels
forecast in this rate proceeding, not such limitation is necessary.
*Id.; Lefler, et al*., SN-03-E-BPA-13, page 7.

If BPA's response is that it has no intention of exceeding the rate case
forecasts levels in these areas is correct, it is difficult to
understand why BPA is reluctant to agree in writing to forego an action
they have not intention of taking. Or put another way, limiting to rate
case forecast levels the amount of revenue financed capital projects and
prepayments that can be considered in the retrigger calculation will not
deprive BPA of the ability to take any action it intends to take. And
including such limits will give BPA's customers tangible assurance that
BPA's intentions in this area are backed by a written commitment. Doing
this would be a major step forward in raising the level of trust between
BPA and its customers

6.  **[The Proposed SN CRAC Exceeds BPA's Authority]{.underline}**

The manner in which BPA is authorized to institute an SN CRAC is limited
by the SN CRAC provision contained in the GRSPs currently in effect.
This provision states in part:

"The SN CRAC will be an upward adjustment to posted power rates subject
to the FB CRAC by modifying the FB CRAC parameters. BPA will propose
changes to the FB CRAC parameters that will, to the extent market and
other risk factors allow, achieve a high probability that the remainder
of Treasury payments during the FY 2002-2006 rate period will be made in
full." BPA's 2002 General Rate Schedule Provisions For Power Rates,
Section II(A)(3), p. 115.

> Pursuant to this language, BPA's authority in this proceeding is
> limited to

proposing and adopting adjustments to achieve a high probability of
making future Treasury payments. BPA's proposed Treasury Recovery
Probability (TRP) and TPP standards for the SN CRAC are appropriate
standards to apply because they measure the probability of making
Treasury payments during the remainder of the rate period. The third
standard of "period cost recovery" (zero or better 2002-2006 net
revenues) is not appropriate because it is not a measure of the
probability of making Treasury payments during the remainder of the rate
period. It is beyond the scope of the current GRSP's to use the SN CRAC
to collect past losses if a high probability of making future Treasury
payment is achieved. BPA's argument that it must recover its costs
whenever it sets rates applies only for the remainder of the rate
period. *Keep, et al.,* SN-03-E-BPA-11, pages 29-31.

7.  **[The Proposed SN CRAC GRSP has not been Provided to
    Parties]{.underline}**

> The purpose of this proceeding is to consider the adoption of an
> adjustment clause

that, as proposed by BPA, could increase BPA's wholesale power rates by
over \$400 million in each of the remaining three years of the rate
period. SN-03-E-BPA-03, page 3. The terms and conditions under which
such rate increases will be imposed on BPA's customers for the remainder
of this rate period will be contained in the GRSPs that establish the SN
CRAC mechanism. Needless to say, the precise language of these GRSPS is
of vital interest to BPA's customers, since the choice of words
literally determines the liability of customers for hundreds of millions
of dollars.

In its initial proposal in this proceeding, BPA included a detailed
proposed GRSP setting forth all of the elements of the SN CRAC proposal.
*Id.* In its rebuttal testimony, BPA proposed a large number of
substantive revisions to the SN CRAC contained in BPA's initial rate
proposal. This revisions included the inclusion of cost caps, making the
SN CRAC operate in a variable manner, having customer meetings each
August before implementing any SN CRAC rate increase, including a *force
majeure* provision, and revising the SN CRAC Threshold Amounts prior to
September 30^th^, 2003 to name a few. *McCoy,* *et al.,* SN-03-E-BPA-17,
pages 7-14. How each of these new provisions is crafted in the final
GRSPs that implement the SN CRAC for the remainder of this rate period
will literally move millions of dollars between BPA and its customers.

In spite of the surpassing importance of this document, BPA has failed
to provide the customers with a revised draft of the GRSPs incorporating
these proposed changes. As a consequence of this failure, the customers
have been deprived of any meaningful opportunity to review and comment
on the GRSP provisions under which BPA will have the authority to
increase rates to its customers by over \$400 million. Depriving the
customers of the opportunity to review and comment on the GRSPs and SN
CRAC that they will be subject to for the next three years violates both
the spirit and intent of section 7(i) of the Pacific Northwest Electric
Power Planning and Conservation Act.

Even more unsettling than the legal insufficiency of this approach is
the fact that it is bad public policy. The notion that a public
institution such as BPA could adopt a rate schedule under which it will
have the ability to increase its customers' rates by over \$400 million
without even sharing a draft with these customers is indefensible. While
it may be late in the day to do so, BPA should act immediately to
prepare and release to the parties to this proceeding draft GRSPs that
reflect the changes it has proposed in its rebuttal testimony. Doing so
will permit the parties to offer comments on this draft in oral argument
and in their briefs on exceptions. While this is not an ideal solution,
it is far superior to BPA depriving the customers of any opportunity to
comment on this important document.

> **8. [CONCLUSION]{.underline}**
>
> The continuing deterioration of the regional economy makes it even
> more

imperative that BPA rededicate itself to the aggressive cost cutting and
revenue enhancing actions recommended in this Initial Brief. Further,
these conditions underscore the need for BPA to take the steps necessary
of avoid a wholesale power rate increase in FY04. Recent improvements in
BPA's financial situation make this goal attainable in a manner that is
consistent with putting BPA back on the path to financial health. These
dual objectives can be achieved by BPA taking the discretionary actions
recommended herein to recognize in FY04 the recent improvements in BPA's
financial situation. Finally, adopting the suggested revisions to the SN
CRAC mechanism proposed in this Initial Brief will be a good first step
to restoring trust and confidence between BPA and its preference
customers, and will provide a solid foundation for dealing with the
challenges that we are likely to face during the remainder of the rate
period.

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

> Respectfully submitted,
>
> Terence L. Mundorf
>
> Attorney for the Western
>
> Public Agencies Group