**UNITED STATES OF AMERICA**

**DEPARTMENT OF ENERGY**

**BEFORE THE**

**BONNEVILLE POWER ADMINISTRATION**

**PROPOSED SAFETY-NET COST )**

**RECOVERY ADJUSTMENT CLAUSE ) BPA Docket No. SN-03**

**(SN CRAC) ADJUSTMENT TO 2002 )**

**WHOLESALE POWER RATES )**

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_)**

**INITIAL BRIEF OF THE**

**INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES AND**

**ALCOA INC.**

Melinda Davison

Irion A. Sanger

> Davison Van Cleve, P.C.

1000 S.W. Broadway, Suite 2460

Portland, OR 97205

\(503\) 241-7242 phone

\(503\) 241-8160 fax

## mail@dvclaw.com

## Of Attorneys for the Industrial Customers of Northwest Utilities

> Michael B. Early
>
> 1300 SW Fifth Avenue, Suite 1750
>
> Portland, OR 97204
>
> \(503\) 402-8705 phone
>
> \(503\) 402-8882 fax
>
> michaelearly@earthlink.net
>
> Of Attorneys for Alcoa Inc.

DATED: May 23, 2003

**TABLE OF CONTENTS**

**[Page]{.underline}**

STATEMENT OF THE CASE 1

ISSUES 2

I. Did BPA Improperly Trigger the SN CRAC? 2

II\. Was the SN CRAC Intended to Recover Foreseeable Cost Increases? 4

A. The SN CRAC was Designed to Address Emergency Conditions 4

B. BPA's Financial Situation is Largely Self-Created 5

III\. Is the SN CRAC Rate Increase Necessary? 9

A. BPA Must Demonstrate that the SN CRAC Initial Proposal Meets its
Statutory Requirements 9

B. BPA Has Overstated its Financial Problems 9

1\. Recent Changes Have Reduced BPA's Financial Problems 9

C. BPA's Proposed Standards and Rate Design Do Not Equitably

Balance BPA's Real Financial Needs with the Needs of the Regional
Economy 12

1\. The Northwest Economy is in a Deep Recession 12

2\. BPA Acknowledges the Fragile State of the Northwest

Economy and its Obligation to Balance its Financial Needs

With the Financial Needs of its End-Use Customers 13

3\. BPA's "Balance" is Arbitrary and Fails to Consider

All Factors 14

a\. BPA's SN CRAC Proposal Needlessly Harms the Economy and Fails to
Consider the Impact on

Customers 14

4\. BPA's Rate Design Favors its Own Financial Condition at the Expense
of the Regional Economy 16

a\. The Improvement in BPA's Financial Condition

Allows a Zero SN CRAC in FY 2004 16

b\. BPA Can Prudently Use More Liquidity Tools 17

IV\. Does BPA's Accumulated Net Revenue Standard Provide BPA with

Excess Recovery? 19

V. Should BPA Adopt a Multi-Year SN CRAC? 20

VI\. Has BPA Failed to Perform the Required 7(b)(2) Rate Ceiling Test?
24

SUMMARY OF CONCLUSIONS 27

APPENDIX: REVISED EXHIBIT LIST Appendix

**TABLE OF AUTHORITIES**

**[Page]{.underline}**

**[Cases]{.underline}**

[Public Power Council v. Johnson]{.underline}, 589 F. Supp. 198 (D. Or.
1984) 24

**[Statutes]{.underline}**

Administrative Procedure Act, 5 U.S.C. § 706(2)(A) 9

Federal Columbia River Transmission System Act, 16 U.S.C. § 838g 9

Federal Columbia River Transmission System Act, 16 U.S.C. § 838k(a) 2

Northwest Power Act, 16 U.S.C. § 839(2) 9

Northwest Power Act, 16 U.S.C. § 839e passim

**[Other Authorities]{.underline}**

2002 Amended Power Rate Proposal Study and Appendix, WP-02-E-BPA-58 23

BPA 2002 Supplemental Power Rate Proposal, Administrator's

Final Record of Decision, WP-02-A-09 5

H.R. Rep. No. 976 96th Cong., 2d Sess., Part I at 68 (1980)

(House Commerce Report) 24

**[Regulations]{.underline}**

[Legal Interpretation of Section 7(b)(2) of the Northwest Power
Act]{.underline},

49 Fed. Reg. 23998 (June 8, 1984) 24

[Bonneville Power Administration's Proposed Safety-Net Cost
Recovery]{.underline}

[Adjustment Clause Adjustment to 2002 Wholesale Power
Rates]{.underline}, 68 Fed. Reg.

12048 (March 13, 2003) 7

GRSPs § II.F.2 4

GRSPs § II.F.3 passim

Rules of Procedure Governing Rate Hearings § 1010.2 26

Pursuant to the Special Rules of Practice to Govern these Proceedings
and the Hearing Officer's Orders on Initial Briefs dated March 31, 2003
and May 16, 2003, the Industrial Customers of Northwest Utilities
("ICNU") and Alcoa Inc. ("Alcoa") respectfully submit this Initial
Brief.

**STATEMENT OF THE CASE**

The power rates that Bonneville Power Administration ("BPA") proposes in
this Safety Net ("SN") Cost Recovery Adjustment Clause ("CRAC")
proceeding are improper under BPA's governing statutes and General Rate
Case Schedule Provisions ("GRSPs"). The proposed power rates violate
BPA's statutory mandates and GRSPs for the following reasons: 1) BPA
inappropriately triggered the SN CRAC because it failed to account for
prepayments to the U.S. Treasury ("Treasury"); 2) BPA has failed to live
within the cost structure it established in the 2000 rate case; 3) the
SN CRAC is unnecessary because of improved circumstances, and the use of
prudent cost cuts and financial options; 4) BPA's use of Accumulated Net
Revenues ("ANR") allows BPA to recover amounts in excess of those needed
to repay the Treasury; 5) a multi-year SN CRAC is unnecessary to address
BPA's financial condition; and 6) BPA has failed to perform a required
rate ceiling test. Essentially, BPA's proposal would increase rates and
harm the fragile Northwest economy at a time when BPA is not faced with
an actual threat of missing its Treasury payment required in fiscal year
("FY") 2003 or FY 2004. The Administrator should decline to raise rates
in this proceeding and instead improve BPA's financial condition by
utilizing its financial tools, including cutting costs.

**ISSUES**

**I. Did BPA Improperly Trigger the SN CRAC?**

BPA can trigger an SN CRAC rate proceeding to raise rates only if: 1) it
has already missed a Treasury payment; or 2) it is faced with an
[actual]{.underline} risk of greater than a 50% probability that it will
fail to make its next scheduled Treasury payment or other payment.
Specifically, BPA's GRSPs allow BPA to trigger an SN CRAC rate
proceeding if:

> BPA forecasts a 50 percent or greater probability that it will
> nonetheless miss its next payment to Treasury or other creditor, or
> BPA has missed a payment to Treasury or has satisfied its obligation
> to Treasury but has missed a payment to any other creditor.

GRSPs § II.F.3. BPA has not met the requirements to trigger the SN CRAC
and, thus, should not increase rates in this proceeding.

BPA has not missed a Treasury payment nor is BPA faced with a 50% or
greater actual risk of failing to meet its next expected Treasury
payment. Despite these facts, BPA Administrator Steve Wright determined
that the SN CRAC triggered on February 7, 2003, claiming that BPA had
forecast a 50% or greater chance of missing a payment to the Treasury or
another creditor. This forecast was erroneous because BPA refused to
account for the funds from the Energy Northwest ("ENW") refinancings
that were available to BPA to pay the Treasury. SN-03-E-CC-01 at 6.

The Transmission Act requires BPA to repay the Treasury its federal
bonds at any time before the end of the FY, or BPA may be penalized with
higher interest rates. Federal Columbia River Transmission System Act,
16 U.S.C. § 838k(a) ("Transmission Act"). The repayment of BPA's federal
bonds is commonly referred to as BPA's Treasury payment. The
Transmission Act states that BPA must "repay by the end of the fiscal
year all amounts" due for a given year to the Treasury.
[Id.]{.underline} The Transmission Act provides BPA with the flexibility
in the payment of its Treasury obligations as long as they are paid
fully by the end of the FY. [Id.]{.underline} The repayment criteria
were determined in BPA's previous rate proceeding and BPA cannot be
penalized for missing its Treasury payment if the late payment results
from a decrease in power sale revenues because of low water conditions
or other reasons beyond the control of the Administrator.
[Id.]{.underline}

In FY 2003, BPA intends on paying the Treasury approximately \$315
million in addition to its already scheduled Treasury payment.
SN-03-E-CC-01 at 5. The additional \$315 million is commonly referred to
as the ENW "prepayment." BPA intends on paying the \$315 million because
it incurred the obligations for a similar amount of low-cost ENW debt
and BPA intends on paying off higher-cost Federal debt due in FY 2003.
BPA retains the option of paying more than the required Treasury
payment; however, BPA must count all prepayments as reducing its minimum
obligation to the Treasury. The BPA Administrator's statements, and
BPA's data responses in this proceeding, confirm that the Treasury
prepayments reduce its required Treasury payment from FY 2003 to FY
2006. SN-03-E-CC-01B at 5; SN-03-E-CC-01C; SN-03-E-CC-01D.

The GRSPs confirm that BPA must consider its [actual]{.underline} risk
of failure to pay the Treasury when forecasting its probability of
missing a Treasury payment under the SN CRAC. A comparison of the
Financial Based ("FB") CRAC GRSP and the SN CRAC GRSP illustrates this
point. The FB CRAC can trigger regardless of Treasury prepayments due to
ENW refinancings. Specifically, the FB CRAC provides that, for the
purposes of determining if the FB CRAC will trigger, "actual and
forecasted expenses will include BPA expenses associated with Energy
Northwest debt service as forecasted in" BPA's last rate power rate
proceeding. GRSP § II.F.2a. Therefore, the GRSPs specifically allow BPA
to ignore ENW prepayments when determining whether the FB CRAC will
trigger.

In contrast, the language of the SN CRAC looks to actual conditions
regarding BPA's ability to pay the Treasury. There is no provision in
the SN CRAC GRSP that allows BPA to ignore actual conditions, including
prepayments due to Energy Northwest refinancings. In other words, there
are no hypothetical offsets to BPA's actual Treasury payments that BPA
can use when determining if it has missed a Treasury payment or
forecasts a greater than 50% chance of missing a future Treasury
payment. The Administrator should refuse to increase rates in this
proceeding because the SN CRAC should not have triggered based on the
requirements in the GRSPs.

**II. Was the SN CRAC Intended to Recover Foreseeable Cost Increases?**

BPA's SN CRAC proposal does not recognize that its financial problems
are largely the result of BPA exceeding the costs contained in its May
2000 rates. The SN CRAC proposal also fails to implement responsible,
prudent remedies for BPA's failure to control its costs. BPA refuses to
recognize that the SN CRAC was designed only to recover extraordinary
costs, and that it is inappropriate to use the SN CRAC to recover
controllable and foreseeable cost increases.

> **A. The SN CRAC was Designed to Address Emergency Conditions**

As the name "safety net" implies, the SN CRAC was designed as a rate
increase of last resort to ensure that BPA makes future Treasury
payments. The SN CRAC was not designed to recover amounts that BPA
should already have been recovering in its current rates, including the
FB CRAC and Load Based ("LB") CRAC. Instead, the SN CRAC was intended to
provide BPA with a tool to address true "emergency conditions" or a
series of catastrophic events. BPA 2002 Supplemental Power Rate
Proposal, Administrator's Final Record of Decision, WP-02-A-09 at 4-24
("WP-02 ROD"); SN-03-E-CC-01 at 7.

In May 2000, BPA filed its rates for FY 2002 through FY 2006 with the
Federal Energy Regulatory Commission ("FERC"). Increased wholesale power
costs and additional load requirements caused BPA to withdraw its May
2000 FERC filing in order to review its rates. In June 2001, BPA filed
its supplemental rates with FERC, including new GRSPs for the LB CRAC,
FB CRAC and SN CRAC ("Supplemental Proposal"). The Supplemental Proposal
did not modify BPA's base rates because BPA concluded that the majority
of BPA's costs had not changed. Instead BPA proposed that the LB CRAC
would recover augmentation costs and the FB CRAC would recover costs
associated with "normal risks, such as water conditions, load changes,
Columbia Generating Station 2 ('CGS-2') outages, and cost overruns."
SN-03-E-CC-01 at 5.

The SN CRAC was designed to protect BPA from actual "extraordinary or
catastrophic events, such as an extended outage at CGS-2, the removal of
the Snake River dams, or a significant constraint on the power system
due to fish mitigation measures." SN-03-E-CC-01 at 7. The Administrator
agreed that the "purpose and function" of the SN CRAC was to allow BPA
to raise "additional revenues [under emergency conditions]{.underline}."
WP-02 ROD at 4-24 (emphasis added). In contrast, the SN CRAC was not
intended to allow BPA to increase rates "based on its failure to manage
its controllable costs and speculation in the energy markets."
SN-03-E-CC-01 at 7.

> **B. BPA's Financial Situation is Largely Self-Created**

BPA's actual and forecasted costs have dramatically exceeded, and
continue to exceed, the amount included in BPA's rates. The expense
forecasts in BPA's 2003 SN CRAC Initial Proposal, GRSPs and Direct
Testimony ("Initial Proposal") were about \$669 million per year higher
than its May 2000 rates for FY 2004 to FY 2006. SN‑03‑E-JC-01 at 5.
Total spending levels over the same period were forecast to be nearly
\$2 billion over its May 2000 rates. SN-03-E-BPA-06 at 2. The vast
majority of the more difficult-to-control costs related to augmentation
power purchases, investor-owned utility buy backs, and load reduction
costs are already recovered in the LB CRAC and FB CRAC. SN‑03‑E-JC-01 at
6. However, BPA's current FY 2003 to FY 2006 cost forecasts for
"controllable" cost categories account for nearly half of BPA's spending
increase, or approximately \$732 million over May 2000 rates.
[Id.]{.underline} BPA improperly seeks to recover these costs through
the SN CRAC. [Id.]{.underline} These cost increases are primarily
related to internal programs, corporate overhead, U.S. Army Corps of
Engineers and U.S. Bureau of Reclamation ("Corps and Bureau"), fish,
wildlife and conservation programs, and generation costs, including ENW.
[Id.]{.underline}

The primary causes of all of BPA's cost increases include: 1) BPA's
failure to anticipate load reductions; 2) BPA's commitment to purchase
expensive power and five year buydowns at the height of the 2000-2001
market price spike; 3) the "litigation settlement" or "Poison Pill"
agreement; 4) BPA's failures in the secondary sales market; 5) the lack
of a timely response by BPA to its financial problems; and 6) BPA's
failure to make any overall cost cuts. SN-03-E-CC-01 at 17-21. The
majority of the cost increases regarding controllable costs were not
caused by unforeseen or extraordinary events, but by exceeding the
budgets approved in the May 2000 rate case. For example, BPA's Initial
Proposal forecast spending an average additional \$171 million per year
for FY 2003 to FY 2006 on CGS-2, the Corps and Bureau, and BPA's Power
Business Line ("PBL"), Shared Services, Corporate and Administrative
departments. SN‑03‑E-JC-01 at 7. BPA also claims that its costs have
increased because of electric deregulation, maintenance of the aging
hydro system, biological opinion costs, the functional split between
power and transmission operations, FERC regulatory requirements, and
staffing and development related to the Northwest Regional Transmission
Organization. SN-03-E-BPA-11 at 7, 12, 15. All of these costs are
foreseeable and were included or should have been included in BPA's May
2000 rates. BPA has simply not justified why these costs should exceed
budgeted amounts.

BPA obfuscates its cost increase problem by comparing its current and
forecasted costs to its 2001 actuals rather than the May 2000 rate case
costs. BPA distances the agency from its May 2000 rates by claiming that
they were based on "aggressive targets" recommended by the 1998 Cost
Review. SN-03-E-BPA-11 at 9. BPA fails to recognize that it set rates
and submitted rates to FERC in June 2001 based on the claim that those
costs would cover BPA's total system costs. BPA cannot now distance
itself from its recent filings by characterizing the costs in rates as
"aggressive targets" simply because it did not take the actions
necessary to ensure that costs remained within rate case levels.

BPA did not respond in a timely manner to its escalating cost problem.
By October 2001, BPA had lost over \$1 billion before accounting for
fish credits. SN-03-03-E-CC-01DD. BPA lost an additional \$437 million
by October 2002 before fish credits. [Id.]{.underline} Despite these
losses, BPA only began to cut the growth in future budgets in the spring
and fall of 2002. SN‑03-E-BPA-11 at 36; [BPA's Proposed SN CRAC
Adjustment to 2002 Wholesale Power Rates]{.underline}, 68 Fed. Reg.
12048, 12050 (March 13, 2003). Meetings with internal managers regarding
the adoption of "hard" spending limits did not occur until December 2002
and January 2003. SN-03-E-BPA-11 at 36.

BPA's response to its current financial problems contrasts dramatically
with actions it has taken in the past. In the mid-1990s, BPA's rates
were above market and BPA began losing load as customers sought cheaper
alternatives. SN-03-E-JC-01 at 24-26. BPA's response was to cut costs,
utilize cash management strategies, and limit fish and wildlife
expenditures. [Id.]{.underline} BPA had no other option but to cut
spending because BPA did not have take-or-pay contracts, nor did it have
automatic adjustment clauses to shift its financial problems to its
customers. [Id.]{.underline}

BPA's spending increase has been exacerbated by its high starting
reserves and reliance on automatic adjustment clauses. Providing BPA
with the flexibility to recover increased costs through CRACs, rather
than forcing BPA to cut costs, has reduced BPA's incentives to control
costs. SN-03-E-JC-01 at 25. The existence of CRACs has also insulated
BPA from the consequences of over spending. [Id.]{.underline}

Similarly, BPA's high starting reserves at the beginning of the current
rate period provided BPA with easy access to cash and led to
overspending. [Id.]{.underline} The large accumulation of cash reserves
allowed BPA to avoid dealing with its financial problems and cost
overruns until its expenses dramatically exceeded its revenues.
[Id.]{.underline} BPA could reduce this temptation to over spend by
lowering its reserve requirements or modifying its long-term Treasury
Payment Probability ("TPP") recommendation of 88%. [Id.]{.underline}

Any final proposal adopted by the Administrator in this proceeding must
recognize that BPA has contributed to its current financial
circumstances. BPA must reduce costs to the levels described in its May
2000 and June 2001 rates before it should consider increasing rates. The
Administrator can accomplish this goal by implementing aggressive
spending caps and cost reductions, including many of those proposed by
its customers. *See e.g.* SN-03-E-JC-01 at 9-21. The Administrator
should also avoid relying upon mechanisms like open-ended CRACs and high
reserves that provide BPA with disincentives to control its costs.

**III. Is the SN CRAC Rate Increase Necessary?**

# A. BPA Must Demonstrate that the SN CRAC Initial Proposal Meets its Statutory Requirements

BPA rates must recover its costs "over a reasonable period of
years . . . ." Northwest Power Act, 16 U.S.C. § 839e(a)(1). BPA's rates
should be set "at the lowest possible rates . . . consistent with sound
business principles . . . ." Transmission Act, 16 U.S.C. § 838g. BPA's
rates must also "assure the Pacific Northwest of an adequate, efficient,
economical, and reliable power supply." Northwest Power Act, 16 U.S.C. §
839(2). When deciding whether or how much to increase rates through the
SN CRAC, BPA must "[give priority to prudent cost
management]{.underline} and other options that enhance Treasury Payment
Probability while [minimizing]{.underline}" the amount of the SN CRAC.
GRSP § II.F.3 (emphasis added). The amount of the SN CRAC is intended to
enhance TPP but only "to the extent market and other risk factors
allow." [Id.]{.underline} BPA's rate decisions must not be arbitrary or
capricious. Administrative Procedure Act, 5 U.S.C. § 706(2)(A).

# BPA Has Overstated its Financial Problems

In its Initial Proposal, BPA states that its expected net revenue loss
for FY 2002 to FY 2006 is \$920 million. BPA shows an actual loss of
\$390 million in FY 2002, an estimated loss of \$191 million in FY 2003,
and an estimated loss of \$339 million in FY 2004 to FY 2006.
SN-03-E-BPA-11F.

**1. Recent Changes Have Reduced BPA's Financial Problems**

BPA acknowledges that its financial condition has improved since
preparation of its Initial Proposal. BPA identifies five main areas of
change. Hearing Transcript ("Tr.") at 40, 104. First, due to improved
water conditions and higher markets, secondary revenues will be higher
in FY 2003. [Id.]{.underline} at 40. The Joint Customers estimated this
improvement at \$103 million. SN-03-E-JC-01 at 11. BPA agrees that
conditions have improved and will revise its secondary revenue forecast
in the Final Proposal based on the April mid-month forecast.
SN-03-E-BPA-12 at 5. At hearing, BPA provided a conservative estimate of
a \$50-\$60 million increase in secondary revenues due to improved water
conditions. Tr. at 43.

Second, the Joint Customers recommended numerous changes to correct
errors in the Aurora input database used by BPA to estimate secondary
revenues for FY 2004 to 2006. SN-03-E-JC-01 at 32-42. BPA corrected at
least 20 of these errors, but will not update its secondary revenue
estimate until the final study. SN-03-E-BPA-14 at 3-10. While
acknowledging that these 20 changes may demonstrate that BPA's financial
condition was not as bad as originally estimated, BPA did not estimate
the expected increase in secondary revenues. Tr. at 46.

There are other Aurora changes that should be made. For example, BPA
made a 2,500 MW decrement to loads in Aurora to "adjust" for surplus
hydro. SN-03-E-BPA-08 at 5-6. However, this decrement does not need to
be made because surplus hydro is already accounted for in the Aurora
model. SN-03-E-JC-01 at 43. BPA used a different adjustment to "account"
for surplus hydro in the May 2000 rate case. SN-03-E-BPA-08 at 8. BPA
states that it may make a different adjustment for surplus secondary
revenues in the future. [Id.]{.underline} at 9. BPA's adjustment should
be rejected because it is arbitrary and capricious to make different
adjustments based on factors that have already been modeled.

Third, BPA's estimates of its Program Costs for FY 2003 to FY 2006, even
after the Financial Choices process, will exceed the forecast used in
setting May 2000 rates by \$183 million per year (\$732 million over FY
2003 to FY 2006). SN-03-E-JC-01 at 7. At the hearing, BPA estimated that
its expenses for FY 2003 to FY 2006 will be reduced by at least \$66 to
\$75 million from the estimate in the Initial Proposal. Tr. at 42,
129-30. However, there are additional cost reductions that BPA can
achieve without jeopardizing mission critical programs and reliability.
BPA has a laundry list of reasons why it cannot meet its own rate case
estimates. SN-03-E-BPA-08 at 14-16. For example, BPA argues that the
cost assumptions in setting rates did not reflect "the dramatic change
in the fundamental relationship between BPA and its customers when
compared with the assumptions made when developing the May 2000 forecast
. . . ." [Id.]{.underline} at 14. This relationship was known to BPA
when it decided its Supplemental Proposal in June 2001 because new power
sales contracts were signed in October 2000. BPA chose [not]{.underline}
to revisit these cost forecasts when setting rates in June 2001, even
though these changed circumstances were known.

Fourth, BPA will include in its Final Proposal additional savings
realized from settlement of the Enron contract estimated at \$100
million. SN-03-E-BPA-11 at 18; Tr. at 45. BPA will also include \$22
million in additional savings on ENW bearer bonds. SN-03-E-BPA-11 at 51.

Fifth, BPA acknowledges that its interest expenses would be reduced due
to its improved financial condition. However, BPA could not provide the
amount in interest expense reduction that would be included until its
Final Study. Tr. at 44, 129-32.

While BPA's Initial Proposal overstates its [current]{.underline}
financial problem, BPA has put customers at a disadvantage by
withholding many cost-specific estimates or any overall estimate of net
revenue loss reduction until the close of the testimony and hearing in
this proceeding. In addition, BPA insists on using an overly restrictive
standard in estimating these reductions.

BPA is too conservative in its cost reduction estimates. BPA intends to
include cost reductions only if there is a "complete plan on how to
achieve those cost cuts." SN-03-E-BPA-04 at 9. BPA will include in the
Final Proposal only the cost cuts "that have been identified with a high
level of certainty . . . ." SN-03-E-BPA-11 at 52; *see also*
SN-03-E-BPA-17 at 16 ("including the savings before they are completed
is not financially prudent"). BPA's statutory obligations and the GRSPs
require it to include all reasonably achievable cost reductions and/or
revenue increases in the SN CRAC calculation.

BPA claims that its conservative approach is reasonable because the SN
CRAC is variable and, thus, any further cost reductions will flow
through to ratepayers. SN-03-E-BPA-11 at 53. This response is inadequate
because BPA's costs will likely grow if BPA has an automatic means to
recover them. BPA needs rate discipline to control its costs. *See*
Section II.

> C. BPA's Proposed Standards and Rate Design Do Not Equitably Balance
> BPA's Real Financial Needs with the Needs of the Regional Economy

**1. The Northwest Economy is in a Deep Recession**

Many customers emphasized the stagnant Northwest economy and the harm
that a further BPA rate increase would impose on the Region. *See, e.g.*
SN-03-E-CC-01 at 3-4; SN-03-E-PP-01 at 1, 13-20. For example: 1) Oregon
and Washington have the highest unemployment rates in the nation; 2) the
Pacific Northwest economy is not recovering and is getting worse; 3)
Oregon and Washington are losing manufacturing jobs at a dramatic rate
(Washington has lost one out of every six manufacturing jobs since July
2000 and Oregon has lost one out of every fourteen); 4) power costs at
Kimberly-Clark's Everett Mill have increased 82% and are among the very
highest power costs for Kimberly-Clark's North America facilities; and
5) BPA's power rate to Alcoa in its Initial Proposal would be more than
twice the average power cost to aluminum smelters worldwide.
SN-03-E-CC-01 at 12-13, SN-03-E-CC-01I-P; SN-03-E-CC-01T;
SN-03-E-CC-01U.

**2. BPA Acknowledges the Fragile State of the Northwest Economy and its
Obligation to Balance its Financial Needs With the Financial Needs of
its End-Use Customers**

BPA does not dispute that the Northwest economy is in a recession or the
legitimacy of the customers' concerns. BPA states that it "shares"
customers' "concerns regarding the state of the Pacific Northwest
economy." SN-03-E-BPA-11 at 18. BPA also claims to be "very concerned
about the financial situation that these parties describe."
SN-03-E-BPA-11 at 22. Specifically, BPA acknowledges that, under the SN
CRAC GRSP, it must consider the Northwest economy and the impact of any
rate increase on end-use customers in establishing the SN CRAC:

> BPA is obligated to set rates to recover its costs consistent with
> sound business principles. Meeting this obligation entails the
> consideration of many factors, including impacts to end use consumers
> of BPA's utility customers. . . .  BPA's 2002 GRSPs specifically
> provide that "BPA will propose changes to the FB CRAC parameters that
> will, [to the extent market and other risk factors allow]{.underline},
> achieve a high probability that the remainder of Treasury payments
> during the FY 2002-2006 rate period will be made in full." 2002 GRSPs,
> section II.F.3 (emphasis added). . . .

SN-03-E-BPA-11 at 31-32. BPA also agrees that it must consider the
impact on customers and the economy in designing the SN CRAC: "direction
was given to staff that the rate design should mitigate the level of any
rate increase, to the extent possible" SN-03-E-BPA-04 at 13.

**3. BPA's "Balance" is Arbitrary and Fails to Consider All Factors**

**a. BPA's SN CRAC Proposal Needlessly Harms the Economy and Fails to
Consider the Impact on Customers**

BPA concluded that use of the 80-88% five-year TPP standard to establish
the SN CRAC "is not sustainable in the current economy." SN-03-E-BPA-04
at 14. This standard would have required an SN CRAC that collected
\$1.95 [billion]{.underline} in FY 2004 to FY 2006 when BPA estimated
its net revenue loss during the same time period was only about \$340
million. SN-03-E-CC-01 at 11-12, SN-03-E-CC-01G. Because the 80-88%
standard is not consistent with "market and other risk factors," BPA
proposes three new standards. Specifically, BPA proposes: 1) zero net
revenues over the rate period; 2) TPP of 50% for FY 2004 to FY 2006; and
3) an 80% probability that all Treasury payments will be made by 2006.
SN-03-E-BPA-04 at 13-14.

BPA contends that these three standards address BPA's obligation to
recover its costs "as well as minimize, to the extent possible, the
impact of a BPA rate increase on the Northwest economy and BPA's
customers." SN-03-E-BPA-11 at 24. BPA implicitly concludes that the
three standards produce a rate that is sustainable by the Northwest
economy because an unsustainable rate would not produce revenues that
recover BPA's costs.

In response to a data request, BPA stated that an SN CRAC rate increase
based on its original standard would not have been sustainable in the
current economy. BPA's conclusion was based on: 1) customers' input at
the SN CRAC workshops; 2) customers' input in the Financial Choices
process; 3) customers' input to their account executives and to members
of the BPA Policy Panel; 4) the poor state of the Northwest economy; and
5) the financial pressure on customers to address their own cost
increases or revenue shortfalls. SN-03-E-CC-01 at 12; SN-03-E-CC-01H.
The customer concerns regarding the state of the economy were directed
at any SN CRAC increase, not just the rate increase that would result
from an 88% TPP. Thus, relying on the same factors that led BPA to
conclude that the original SN CRAC increase was not sustainable should
also lead BPA to conclude that its current SN CRAC proposal is also not
sustainable. *See* SN-03-E-CC-01 at 12-13.

While BPA acknowledges that it must consider impacts of a rate increase
to end-use customers of BPA's utility customers, the evidence
demonstrates that BPA failed to do so.

> Data Request No. SN-03-IN/BPA-015 inquired:
>
> Did BPA analyze or examine the financial impact and customer load
> response to the proposed SN-CRAC increases on its customers? If so,
> please provide all documents regarding such examination.
>
> BPA Response:
>
> BPA did no analysis on the financial impact or customer load response
> to the proposed SN CRAC. *See* Response Nos. CR&YA/BPA: 95 and
> CR&YA/BOA: 115.

SN-03-E-CC-01Q.

In BPA's response to the Columbia River Inter-Tribal Fish Commission and
the Yakama Nation ("CR/YA") Data Request No. 095, BPA states that:

> BPA has not performed a formal analysis regarding the effects of a BPA
> rate increase on the Northwest economy.  . . .

SN-03-E-CC-01R.

In response to CR/YA Data Request No. 115, BPA states that it did not
analyze price elasticity effects primarily because most of its power
that is subject to the CRAC is under take-or-pay Slice or Block
Contracts with fixed contract amounts. SN-03-E-CC-01S. This does not
satisfy BPA's obligation to set the lowest possible rates consistent
with sound business principles. BPA has an obligation that includes
consideration of the impacts on "end use customers of BPA's utility
customers." SN-03-E-BPA-11 at 32. BPA failed to consider the impact of
the SN CRAC rate increase on the end-use customers of BPA's utility
customers.

In addition to rate impacts on customer loads, BPA also failed to
consider other customer-related impacts. For example, BPA did not
consider the impact of a BPA rate increase on a customer's bond rating
or on its ability to pay. *See* SN-03-E-CC-01 at 11; SN-03-E-CC-01V.

**4. BPA's Rate Design Favors its Own Financial Condition at the Expense
of the Regional Economy**

BPA's initial proposal is a three-year SN CRAC with levelized SN CRAC
charges over the period, [i.e.]{.underline}, the cap is \$470 million in
each year. In effect, BPA contends that the economy can sustain an SN
CRAC of up to \$470 million per year. But a larger CRAC in any year
would not be sustainable. *See* SN-03-E-BPA-04 at 15-16. Thus, the SN
CRAC design depends on the size of BPA's financial problem.

a.  **The Improvement in BPA's Financial Condition Allows a Zero SN CRAC
    in FY 2004**

BPA has declined to revise its estimate of its net revenue loss due to
changed circumstances, including improved hydro conditions, improved
markets, and the Enron settlement. Despite BPA's refusal to provide
updated information to customers, BPA's second quarter report estimates
FY 2003 end of year reserves at \$260 million (before the announcement
of the Enron settlement), and shows actual FY 2002 reserves at \$188
million. SN-03-E-IN-05; SN-03-E-IN-06. This results in a
[gain]{.underline} in FY 2003 of \$72 million. When other cost savings
and FY 2004 to 2006 improvements are taken into account, ICNU and Alcoa
expect the overall improvement will be a one-third to one-half reduction
in BPA's net revenue loss over the entire rate period. BPA should not
use the SN CRAC to increase rates in FY 2004 when it is estimating a
[gain]{.underline} in FY 2003.

Improvements in BPA's cash position also demonstrate that BPA does not
need an SN CRAC rate increase in FY 2004. For example, BPA's Initial
Proposal forecast an annual change in cash balance for FY 2003 of
negative \$95 million and for FY 2004 of negative \$121 million.
SN-03-E-JC-01K. BPA's gain of \$72 million in FY 2003 results in a \$167
million cash position improvement for FY 2003. SN-03-E-IN-05;
SN-03-E-IN-06. The \$167 million cash position improvement for FY 2003
places BPA in an improved position for FY 2004 and actually exceeds the
forecasted cash loss of \$121 million for FY 2004.

BPA proposes to spread the FY 2003 gains over the three years of FY 2004
to FY 2006. SN-03-E-BPA-17 at 9. However, in view of BPA's improved
financial condition, this is inconsistent with the direction to design
the SN CRAC to minimize the impact on customers and the economy. A zero
SN CRAC in FY 2004 could be combined with caps in FY 2005 and FY 2006
that do not exceed the \$470 million per year cap that BPA initially
found acceptable. The Joint Customers show several alternatives under
which it is possible for BPA to adopt a zero SN CRAC for FY 2004 and, in
conjunction with prudent cost cuts and financial tools, avoid an SN CRAC
in FY 2005 and FY 2006. *See* SN-03-E-JC-01 at 17-18.

> **b. BPA Can Prudently Use More Liquidity Tools**

BPA used a limited number of cash tools to reduce its SN CRAC Initial
Proposal, including use of a surety bond to release ENW cash reserves
and borrowing to fund new ENW capital programs that previously would
have been expensed. SN-03-E-BPA-11 at 45 and 62. BPA has also structured
the Enron settlement to move cost savings forward. [Id.]{.underline}
Even with these measures, BPA has a [substantial]{.underline} amount of
cash tools in reserve, but declined to use them to further reduce the SN
CRAC: 1) ENW refinancings of \$315 million in FY 2003; 2) \$55 million
in FY 2004, \$45 million in FY 2005, and \$60 million in FY 2006 from
earlier refinancing; 3) \$250 million in short-term Treasury notes; 4)
\$170 million in roll-over of short term borrowing on long-lived assets;
and 5) \$262 million of prepayments made in FY 2002. SN-03-O-20;
SN-03-E-CC-01 at 5; SN-03-IN-CC-01A; SN-03-E-CC-02A; SN-03-IN-01F. It
may have been prudent for BPA to hold these financial options in reserve
when BPA's perceived risk was \$920 million because the bigger the risk,
the more cash tools to hold in reserve. However, when the risk has been
reduced between one-third to one-half, it is prudent for BPA to use more
of these tools to reduce the SN CRAC.

In particular, BPA should use the \$170 million of short-term Treasury
notes issued for long-lived assets. In conjunction with the \$315
million of ENW refinancing funds available in FY 2003, BPA can: 1) make
all scheduled Treasury payments in FY 2003, including the short-term
debt; and 2) refinance the now unencumbered long-lived assets, using the
proceeds to reduce the SN CRAC. BPA will still make all scheduled
Treasury payments and pay additional amounts.

ENW funds will all have been used to prepay Treasury. ENW expected the
increase in Treasury borrowing authority that was created by prepayments
that were intended to be used to increase BPA's borrowing. Borrowing the
\$170 million of longer-term Treasury notes on the freed up assets will
simply borrow funds sooner than was originally expected. It is prudent
to use this liquidity tool because it is borrowing against assets in
service over the actual period they will be in use. Using this liquidity
tool will still leave BPA with substantial cash tools to cover its
reduced risks in FY 2004 to FY 2006 and allow a zero SN CRAC.

**IV. Does BPA's Accumulated Net Revenue Standard Provide BPA with
Excess Recovery?**

BPA's SN CRAC proposal is inconsistent with the SN CRAC GRSP and BPA's
enabling statutes because it is designed to rebuild BPA's reserves by
recovering both past losses and current and future costs. BPA should
focus on actual current and future financial issues and not force the
region's ratepayers to recoup BPA's losses associated with its failure
to control its costs and speculation in the energy markets.

BPA's proposal in this proceeding in based on a:

> forecasted rate-period accumulated net revenue problem of \$920
> million. That is, the design of the SN CRAC should produce PBL net
> revenues that are at least zero over the rate period.

SN-03-E-BPA-04 at 13-14. BPA intends to increase rates through the SN
CRAC to ensure that its net revenues are equal to zero over the entire
five-year rate period. BPA's reserves in the early years of this rate
period were reduced to the point that BPA forecast, ending FY 2003 with
net reserves of \$51.7 million. BPA's ANR proposal would allow BPA to
rebuild those reserves by recovering for both its actual losses from FY
2002 and FY 2003 and its forecasted losses from FY 2004 to FY 2006.
Recouping past losses and rebuilding reserves is in violation of the SN
CRAC GRSP when there has not been to actual failure to make any payment.
This also places the burden of returning BPA to its pre-2001 financial
condition squarely upon the back of BPA's customers.

BPA would recover more than it needs to make its remaining Treasury
payments under its ANR proposal. Based on the cost estimates for FY 2004
to FY 2006 in its Initial Proposal, BPA needs \$339 million to cover its
costs over the remainder of the rate period. SN-03-E-BPA-04 at 8;
SN-03-E-CC-01 at 9. Despite forecasting that it would need \$339 million
to cover its costs, BPA proposed raising \$920 million.[^1]^/^
SN-03-E-BPA-04 at 13-14. Therefore, BPA's proposed SN CRAC rate increase
was designed to recover nearly \$600 million more than BPA claimed it
needed to cover its costs.

Recovery of BPA's past losses is not permitted by the SN CRAC GRSP. BPA
initiated this proceeding to avoid a future Treasury payment shortfall,
not to recover past losses or address an already missed Treasury
payment. The GRSP language does not allow BPA to raise rates to recover
past losses, but only to increase BPA's power rates to "achieve a high
probability that the remainder of Treasury payments during the FY
2002-2006 rate period will be made in full." GRSP § II.F.3. BPA ignored
this focus on making future payments and, instead of proposing a rate
increase that is tied to its risk of failing to make its future Treasury
payments, proposed a "backward looking" rate increase to recover past
losses.

# V. Should BPA Adopt a Multi-Year SN CRAC?

BPA is proposing a three-year SN CRAC rate increase despite the fact
that improved water conditions and cost cutting have eliminated BPA's
immediate financial problems for FY 2003 and FY 2004. BPA's three-year
SN CRAC proposal also allows BPA to continue collecting amounts after
BPA has raised substantial reserves. BPA should recognize that its
three-year SN CRAC proposal is not necessary and unduly burdens the
region in order to address speculative, potentially nonexistent future
problems.

BPA's Initial Proposal requested to increase rates an average of 30% and
a high of 41% over May 2000 rates. SN-03-E-BPA-01 at 7-1. The actual
yearly SN CRAC increase will disguise the overall impact of the rate
increase by fluctuating to correspond with planned reductions in the LB
CRAC and FB CRAC. The current proposal, adjusting for conservative
assumptions regarding cost savings and improved water conditions,
reduces the SN CRAC rate increase by approximately one-third to
one-half.

BPA now plans to dramatically increase rates, despite the fact that BPA
has no immediate need for a rate increase for FY 2003 or FY 2004. BPA
does not need to increase rates immediately because its financial
condition has improved to the point that it has virtually no chance of
missing its FY 2003 Treasury payment. Section III; SN-03-E-CC-010 at 20;
SN-03-E-IN-05; SN-03-E-IN-06. Similarly, current financial conditions
and moderate cost cuts for FY 2003 and FY 2004 result in BPA having a
high probability of making its FY 2004 Treasury payment as well.
[Id.]{.underline}; SN-03-E-JC-01J. The record in this proceeding
actually understates BPA's chance of repaying the Treasury because it
does not include BPA's final, updated forecasts regarding improved water
conditions and cost savings.

While BPA does not need additional revenues to make its next two
Treasury payments, BPA forecasts that it may have difficultly in making
its Treasury payments for FY 2005 and FY 2006. BPA's SN CRAC proposal
estimates the potential revenue shortfall for FY 2005 and FY 2006 and
spreads the rate increase over the time period from FY 2004 to FY 2006.
Therefore, BPA plans on increasing rates in FY 2004 to address a
potential problem in FY 2005 and FY 2006.

BPA's projected revenue shortfall in FY 2005 and FY 2006 may not
materialize because circumstances can improve quickly. SN-03-E-CC-01 at
24-25. BPA's projections of its future TPP include costs that are above
the costs included in May 2000 rates and currently exclude some of the
prudent cost cuts recommended by customers. SN-03-E-CC-01 at 24. Making
these prudent cost reductions could prevent BPA's predicted revenue
shortfall. [Id.]{.underline}; SN-03-E-JC-01 at 20-29. In addition, BPA's
TPP estimates are "sensitive to extreme water years that are disastrous
but rare. . . . It is not prudent or reasonable to require customers to
make advance payments over a three-year period to insure BPA against
these rare events." SN-03-E-CC-01 at 24. Finally, this rate proceeding
demonstrates how inaccurate even short-term forecasts can be. In
February 2003, BPA claimed that it would have a 50% or lower chance of
making its next Treasury payment. However, in less than four months,
BPA's financial condition has improved so much that it currently has
virtually no chance of missing its next Treasury payment. SN-03-E-CC-010
at 20; SN-03-E-IN-05; SN-03-E-IN-06; SN-03-E-JC-01J. BPA should not
require the region to pay for a rate increase that is based on
inherently flawed and wildly inaccurate revenue and cost projections.

BPA's proposal to raise rates significantly now in order avoid a
projected problem in the future is particularly irresponsible in the
context of the current economic conditions in the Pacific Northwest. The
recession has hit the Pacific Northwest harder than any other region in
the nation, with high unemployment and a substantial loss of
manufacturing jobs. SN-03-E-CC-01 at 12; SN-03-E-CC-01I to
SN-03-E-CC-01P. BPA's proposal to increase rates immediately to address
a potential later problem on might be acceptable if the region's economy
was booming and could support a rate increase. However, now is not the
time for BPA to burden the region's ratepayers unnecessarily to address
a potentially nonexistent future problem. SN‑03‑E‑CC‑01 at 24.

A three-year SN CRAC is unnecessary to address BPA's potential financial
problems. BPA's rebuttal testimony stated that "\[i\]f PBL only needed
to collect additional revenues to cover . . . the projected shortfall
over FY 2004-2006, a one-year SN CRAC adjustment may have been
sufficient." SN‑03-E‑BPA‑11 at 47. However, BPA is unwilling to adopt a
one-year SN CRAC because it believes it must recover "the actual losses
from FY 2002 and expected losses in FY 2003." [Id.]{.underline}
Essentially, BPA is justifying a three-year SN CRAC in order to recover
past losses and rebuild the high level reserves. As previously mentioned
in Section IV of this Brief, it is inappropriate for BPA to use the SN
CRAC to recover past losses and rebuild reserves in a manner that is
unrelated to BPA's actual ability to make future Treasury payments.

The multi-year SN CRAC also transforms a temporary rate increase into a
permanent part of BPA's rates for this rate period. In proposing the SN
CRAC, BPA stated that it would provide "BPA with a tool to
[temporarily]{.underline} adjust posted power rates for Subscription
sales upward . . . ." 2002 Amended Power Rate Proposal Study and
Appendix, WP-02-E-BPA-58 at 1-7 (emphasis added). BPA's proposal to
increase rates over all remaining years of the rate period does not
constitute a "temporary" rate increase.

BPA also fails to acknowledge that it already has sufficient tools to
address any potential revenue shortfalls in the last years of the rate
period. BPA can implement prudent cost reductions in order to reduce
costs to May 2000 levels, thus eliminating the need for any SN CRAC rate
increase. In addition, BPA can rely upon prudent financial tools and
liquidity options as measures of last resort to avoid a rate increase.
*See* Section III; SN-03-O-20..

BPA can also trigger another SN CRAC rate case to address any potential
problems in FY 2005 or FY 2006, if it becomes necessary later on. BPA
has specifically retained the possibility of retriggering the SN CRAC in
the event that its 41% rate increase is not sufficient to address its
present financial condition. SN-03-E-JC-01 at 22. Therefore, BPA can
trigger a new SN CRAC proceeding to increase rates in order to make its
future Treasury payments at any point later in the rate period, reducing
the need to increase rates now.

**VI. Has BPA Failed to Perform the Required 7(b)(2) Rate Ceiling
Test?**

BPA's SN CRAC proposal is in violation of law because BPA has refused to
perform the rate test required by section 7(b)(2) of the Northwest Power
Act. Northwest Power Act, 16 U.S.C. § 839e(b)(2) ("7(b)(2) rate test").
The 7(b)(2) rate test requires BPA to determine if the rates charged to
its preference customers exceed the amount they would have been charged
if BPA had not been required to provide power to certain non-preference
customers and meet other specified obligations. [Id.]{.underline} The
7(b)(2) rate test is a mandatory requirement "that the BPA Administrator
must consider in establishing rates for the sale of electric energy and
capacity and for the transmission of non-Federal power." [Legal
Interpretation of Section 7(b)(2) of the Northwest Power
Act]{.underline}, 49 Fed. Reg. 23998 (June 8, 1984). For this reason,
the Administrator should suspend this proceeding until the 7(b)(2) rate
test has been performed. SN-03-E-SP-01 at 7-11; SN-03-E-CC-02 at 5.

The 7(b)(2) test establishes a rate ceiling for BPA's preference
customers (public body, cooperative and federal agency customers).
[Public Power Council v. Johnson]{.underline}, 589 F. Supp. 198, 200 (D.
Or. 1984). The rate ceiling for preference customers is designed to
ensure that preference customers' "rates will be no higher than they
would have been had the Administrator not been required to participate
in power sales or purchase transactions with non-preference customers
under \[the Northwest Power\] Act." [Id.]{.underline} *citing* H.R. Rep.
No. 976 96th Cong., 2d Sess., Part I at 68 (1980) (House Commerce
Report). If the rate ceiling is triggered in a rate period, then BPA is
required to raise additional revenues from BPA's non-preference
customers to stabilize the rates of BPA's preference customers.
[Id.]{.underline}

BPA argues that it does not need to perform a 7(b)(2) rate test in this
proceeding because the rate test only applies to "base rates" and not
cost recovery adjustment clauses. SN-03-E-BPA-11 at 73-78. BPA also
claims that it is unable to perform the rate test because of the short
schedule in the SN CRAC proceeding. [Id.]{.underline} at 75. BPA's
arguments fail because they ignore the language in section 7(b)(2),
BPA's own definition of rates, and the requirements imposed on BPA by
section 7(i) of the Northwest Power Act.

The 7(b)(2) test is not limited to BPA's "base" rates, but reviews the
total rates or power costs charged to BPA's public customers.
Specifically, the language of the Northwest Power Act requires BPA to
determine whether the "the projected amounts to be charged for [firm
power for the combined general requirements]{.underline}" of preference
customers exceed "[the power costs]{.underline}" they would pay if BPA
was not required to provide power to certain non-preference customers.
Northwest Power Act, 16 U.S.C. § 839e(b)(2) (emphasis added). This
language requires BPA to perform a 7(b)(2) rate test for the total
[power costs]{.underline} of preference customers and prevents BPA from
arbitrarily separating its power costs into base rates and CRACs in
order to avoid a 7(b)(2) rate test.

BPA's argument that the SN CRAC is not a rate is also contradicted by
BPA's own definition of a rate. The Northwest Power Act does not define
"rate," but BPA's Rules of Procedure Governing Rate Hearings define a
"rate" as:

> the monetary charge, discount, credit, surcharge, pricing formula, or
> pricing algorithm for any electric power or transmission service
> provided by BPA, including charges for capacity and energy.

Rules of Procedure Governing Rate Hearings § 1010.2. This definition
specifically limits the term "rate" to exclude "transmission line
losses, leasing fees, facility-use charge\[s\] other than for BPA
transmission services, or charges for operation and maintenance of
customer-owned facilities." [Id.]{.underline}

The SN CRAC rate increase fits within this definition because it is a
monetary charge, surcharge and/or new pricing formula for power costs
that will be charged to BPA's customers. Specifically, "\[t\]he SN CRAC
will be an upward adjustment to posted power rates." GRSPs § II.F.3. The
SN CRAC also differs from other CRACs because it does not specify the
exact monetary charge, pricing formula or pricing algorithm. The LB CRAC
and FB CRAC include pricing formulas and algorithms that only need to be
applied to actual circumstances to determine BPA's power costs. In
contrast, BPA must conduct a new proceeding to determine the new "upward
adjustment" or surcharge that will result from the triggering of the SN
CRAC.

The specific monetary amount or surcharge that will be charged through
the SN CRAC may be imposed only after BPA has completed a rate hearing
under section 7(i) of the Northwest Power Act. Northwest Power Act, 16
U.S.C. § 839e(i). Section 7(i) requires that BPA follow specific
procedures when "establishing rates." [Id.]{.underline} BPA cannot claim
that it is not establishing rates once it has formally initiated the
section 7(i) process to increase the power costs paid by its customers.

BPA also claims that it cannot perform a 7(b)(2) rate test because the
SN CRAC section 7(i) rate proceeding should be completed within 40 days.
SN-03-E-BPA-11 at 75. BPA knew as early as February 7, 2003, that it was
intending to conduct an SN CRAC rate proceeding. In addition, BPA had
been considering initiating an SN CRAC proceeding as early as August 9,
2002. Nothing prevented BPA from initiating and attempting to complete a
7(b)(2) rate test prior to filing its Initial Proposal. BPA cannot avoid
its statutory responsibilities merely because it failed to conduct a
timely 7(b)(2) rate test. In addition, BPA's GRSPs expressly allow BPA
and the rate case parties to agree to extend the SN CRAC rate hearing
beyond 40 days. GRSP § II.F.3b. BPA has not asked any parties to extend
the rate hearing, and, thus, cannot claim that the 40-day time
limitation prevents its from performing a 7(b)(2) rate test. Finally,
BPA cannot avoid its statutory obligation to perform a 7(b)(2) rate test
through a narrow reading of its GRSPs.

**SUMMARY OF CONCLUSIONS**

BPA's governing statutes and GRSPs do not permit BPA to increase rates
in this proceeding. First, this proceeding should be withdrawn because
the SN CRAC was improperly triggered. Second, the Administrator should
acknowledge that the SN CRAC was not intended to recover costs related
to BPA's inability to keep costs at the level set in its May 2000 rates.
Third, BPA's financial condition has improved to the point that it will
make its FY 2003 Treasury payment and has a high probability of making
its FY 2004 payment. BPA must aggressively reduce costs back to the
levels in May 2000 rates and rely upon prudent financial options and
liquidity tools to cover any shortfalls. Fourth, the Administrator must
focus on BPA's actual financial condition for FY 2004 to FY 2006 and not
to use its ANR proposal to recoup losses BPA experienced in the early
years of the rate period. Fifth, the Administrator should also reject
the multi-year SN CRAC and decline to increase rates now to address a
potentially non-existent problem in FY 2005 or FY 2006. Finally, the
Administrator must acknowledge that BPA must conduct a 7(b)(2) rate test
before increasing the power costs of its preference customers.

WHEREFORE, for the reasons discussed above, the Administrator should
reject the proposed SN CRAC rate increase.

DATED this 23rd day of May, 2003.

Respectfully submitted,

\_*[/s/ Melinda
Davison]{.underline}*\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Melinda Davison

Irion A. Sanger

> Davison Van Cleve, P.C.

1000 S.W. Broadway, Suite 2460

Portland, OR 97205

\(503\) 241-7242 phone

\(503\) 241-8160 fax

## mail@dvclaw.com

## Of Attorneys for the Industrial Customers of Northwest Utilities

> \_*[/s/ Michael B.
> Early]{.underline}*\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
>
> Michael B. Early
>
> 1300 SW Fifth Avenue, Suite 1750
>
> Portland, OR 97204
>
> \(503\) 402-8705 phone
>
> \(503\) 402-8882 fax
>
> michaelearly@earthlink.net
>
> Of Attorneys for Alcoa Inc.

+--------------+-------------------------------------------+----------+
| # APPENDIX:  |                                           |          |
| REVISED ICNU |                                           |          |
|  AND ALCOA E |                                           |          |
| XHIBIT LIST  |                                           |          |
+--------------+-------------------------------------------+----------+
| #            |                                           |          |
+--------------+-------------------------------------------+----------+
| # COALITI    |                                           |          |
| ON CUSTOMERS |                                           |          |
| ' TESTIMONY  |                                           |          |
| AND EXHIBITS |                                           |          |
+--------------+-------------------------------------------+----------+
|              |                                           |          |
+--------------+-------------------------------------------+----------+
| **Exhibit    | ## **Description**                        | ## **    |
| No.**        |                                           | Status** |
+--------------+-------------------------------------------+----------+
| S            | Qualification Statement of Jack Speer     | Admitted |
| N-03-Q-AI-01 |                                           |          |
+--------------+-------------------------------------------+----------+
| S            | Qualification Statement of David J.       | Admitted |
| N-03-Q-IN-01 | Faddis                                    |          |
+--------------+-------------------------------------------+----------+
| S            | Qualification Statement of Lincoln        | Admitted |
| N-03-Q-IN-02 | Wolverton                                 |          |
+--------------+-------------------------------------------+----------+
| S            | Qualification Statement of Steve Eldrige  | Admitted |
| N-03-Q-PN-01 |                                           |          |
+--------------+-------------------------------------------+----------+
| S            | Direct Testimony of Davis Faddis, Steve   | Admitted |
| N-03-E-CC-01 | Eldrige, Jack Speer, and Lincoln          |          |
|              | Wolverton                                 |          |
+--------------+-------------------------------------------+----------+
| SN           | ENW Debt Restructuring Results dated      | Admitted |
| -03-E-CC-01A | February 13, 2003                         |          |
+--------------+-------------------------------------------+----------+
| SN           | Letter From the BPA Administrator to      | Admitted |
| -03-E-CC-01B | Customers dated March 26, 2003            |          |
+--------------+-------------------------------------------+----------+
| SN           | BPA Response to Data Request              | Admitted |
| -03-E-CC-01C | SN-03-GE-BPA-005                          |          |
+--------------+-------------------------------------------+----------+
| SN           | BPA Response to Data Request              | Admitted |
| -03-E-CC-01D | SN-03-GE-BPA-005C, excerpts from Energy   |          |
|              | Northwest Official Statement              |          |
+--------------+-------------------------------------------+----------+
| SN           | Trigger Case With \$315 Million (Excel)   | Admitted |
| -03-E-CC-01E |                                           |          |
+--------------+-------------------------------------------+----------+
| SN           | May 2000 Rate Documentation,              | Admitted |
| -03-E-CC-01F | WP-02-FS-BPA-05A at 366                   |          |
+--------------+-------------------------------------------+----------+
| SN           | BPA Response to Data Request              | Admitted |
| -03-E-CC-01G | SN-03-AL-GN-BPA-005                       |          |
+--------------+-------------------------------------------+----------+
| SN           | BPA Response to Data Request              | Admitted |
| -03-E-CC-01H | SN-03-AL-GN-BPA-006                       |          |
+--------------+-------------------------------------------+----------+
| SN           | Oregonian Article dated April 4, 2003     | Admitted |
| -03-E-CC-01I |                                           |          |
+--------------+-------------------------------------------+----------+
| SN           | Oregonian Article dated April 17, 2003    | Admitted |
| -03-E-CC-01J |                                           |          |
+--------------+-------------------------------------------+----------+
| SN           | Press Release from the Oregon Employment  | Admitted |
| -03-E-CC-01K | Department dated April 11, 2003           |          |
+--------------+-------------------------------------------+----------+
| SN           | Clearing Up Article dated April 14,       | Admitted |
| -03-E-CC-01L | 2003\--Bearing Down                       |          |
+--------------+-------------------------------------------+----------+
| SN           | National Association of Manufacturers     | Admitted |
| -03-E-CC-01M | Report---Montana                          |          |
+--------------+-------------------------------------------+----------+
| SN           | National Association of Manufacturers     | Admitted |
| -03-E-CC-01N | Report-Oregon                             |          |
+--------------+-------------------------------------------+----------+
| SN           | National Association of Manufactures      | Admitted |
| -03-E-CC-01O | Report-Idaho                              |          |
+--------------+-------------------------------------------+----------+
| SN           | National Association of Manufacturers     | Admitted |
| -03-E-CC-01P | Report---Washington                       |          |
+--------------+-------------------------------------------+----------+
| SN           | BPA Response to Data Request              | Admitted |
| -03-E-CC-01Q | SN-03-IN-BPA-015                          |          |
+--------------+-------------------------------------------+----------+
| SN           | BPA Response to Data Request              | Admitted |
| -03-E-CC-01R | SN-03-CR-BPA-095                          |          |
+--------------+-------------------------------------------+----------+
| SN           | BPA Response to Data Request              | Admitted |
| -03-E-CC-01S | SN-03-CR-BPA-115                          |          |
+--------------+-------------------------------------------+----------+

+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01T  | Kimberly Clark Comparison of Power Costs | Ad     |
|                 | (PowerPoint)                             | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01U  | Worldwide Comparison of Power Costs to   | Ad     |
|                 | Aluminum Smelters (Excel)                | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01V  | Clearing Up Article dated March 31, 2003 | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01W  | BPA Journal dated April 2003             | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-1X   | Summary Augmentation Data from February  | Ad     |
|                 | 18, 2003 Workshop                        | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01Y  | BPA Response to Data Request             | Ad     |
|                 | SN-03-Al-GN-BPA-002                      | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01Z  | BPA Response to Data Request             | Ad     |
|                 | SN-03-IN-BPA-045                         | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01AA | BPA Response to Data Request             | Ad     |
|                 | SN-03-IN-BPA-045A                        | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01BB | BPA Response to Data Request             | Ad     |
|                 | SN-03-IN-BPA-045B                        | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01CC | BPA Response to Data Request             | Ad     |
|                 | SN-03-IN-BPA-021                         | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01DD | BPA Response to Data Request             | Ad     |
|                 | SN-03-IN-BPA-021A (Excel)                | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-01EE | Excerpt from ToolKit Model Run for SN    | Ad     |
|                 | CRAC proposal tab CRAC_DATA, summary     | mitted |
|                 | sheet which is at SN-03-E-BPA-02 at page |        |
|                 | 7 -1                                     |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-02   | Rebuttal Testimony of David Faddis,      | Ad     |
|                 | Steve Eldrige, Jack Speer, and Lincoln   | mitted |
|                 | Wolverton                                |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-CC-02A  | Exhibit 1                                | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
|                 |                                          |        |
+-----------------+------------------------------------------+--------+
| # JOINT CUS     |                                          |        |
| TOMERS' TESTIMO |                                          |        |
| NY AND EXHIBITS |                                          |        |
+-----------------+------------------------------------------+--------+
|                 |                                          |        |
+-----------------+------------------------------------------+--------+
| SN-03-Q-JC-01   | Witness Qualification Statement of       | Ad     |
|                 | Raymond J. Bliven                        | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-Q-JC-02   | Witness Qualification Statement of       | Ad     |
|                 | Geoffrey H. Carr                         | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-Q-JC-03   | Witness Qualification Statement of Kevin | Ad     |
|                 | P. O'Meara                               | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01   | Direct Testimony of the Joint Customers  | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| S               | BPA Response to Data Request SP-BPA-001A | Ad     |
| N-03-E-JC-01A-D |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01E  | Nov. 22, 2002 Letter to BPA customers,   | Ad     |
|                 | tribes, and interested parties           | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01F  | March 7, 2003 Workshop Handout           | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01G  | Dec. 11, 2000 Letter to Energy NW        | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01H  | Debt Restructuring Results to Date       | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01I  | BPA Response to Data Request NR-BPA-001  | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01J  | Toolkit Results                          | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01K  | BPA Response to Data Request NR-BPA-002  | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01L  | BPA Response to Data Request PP-BPA-011  | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-01M  | SN CRAC ANR - Reserve Level Thresholds   | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN              | Errata to the Direct Testimony of the    | Ad     |
| -03-E-JC-01(E1) | Joint Customers                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-JC-02   | Rebuttal Testimony of the Joint          | Ad     |
|                 | Customers                                | mitted |
+-----------------+------------------------------------------+--------+
|                 |                                          |        |
+-----------------+------------------------------------------+--------+
| **ICNU'S CROSS  |                                          |        |
| EXHIBITS**      |                                          |        |
+-----------------+------------------------------------------+--------+
|                 |                                          |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01   | Data Response IN-BPA-037                 | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01A  | Attachment A to Data Response            | Ad     |
|                 | IN-BPA-037: BPA FY 2003 Financial        | mitted |
|                 | Condition Update (Excel)                 |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01B  | Attachment B to Data Response            | Ad     |
|                 | IN-BPA-037: Advanced Amortization        | mitted |
|                 | Recognition                              |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01C  | Attachment C to Data Response            | Ad     |
|                 | IN-BPA-037: Example for Application of   | mitted |
|                 | the Advance Amortization Recognition     |        |
|                 | Balance                                  |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01D  | Attachment D to Data Response            | Ad     |
|                 | IN-BPA-037: Example for Application of   | mitted |
|                 | the AAR Balance (Excel)                  |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01E  | Attachment E to Data Response            | Ad     |
|                 | IN-BPA-037: Treasury/BPA Conference Call | mitted |
|                 | (Nov. 6, 2002) (PowerPoint)              |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01F  | Attachment F to Data Response            | Ad     |
|                 | IN-BPA-037: Email from Treasury          | mitted |
|                 | regarding AAR                            |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-01G  | Attachment G to Data Response            | Ad     |
|                 | IN-BPA-037: BPA Amortization Detail      | mitted |
|                 | (Excel)                                  |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-02   | Data Response IN-BPA-038                 | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-02A  | Attachment A to Data Response            | Ad     |
|                 | IN-BPA-038: Power Business Line Summary  | mitted |
|                 | of Net Revenues FY 2001-06 (Excel)       |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-03   | Data Response AL -BPA-006                | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-03A  | Attachment A to Data Response            | Ad     |
|                 | AL-BPA-006: Summary of Written Comments  | mitted |
|                 | on the Financial Choices                 |        |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-04   | Data Response WA-BPA-002                 | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-05   | FY 2003 2^nd^ Quarter Financial Report   | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-06   | FCRPS FY 2003 2^nd^ Quarter Review       | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+
| SN-03-E-IN-07   | Data Response IN-BPA-016                 | Ad     |
|                 |                                          | mitted |
+-----------------+------------------------------------------+--------+

[^1]: ^/^ As previously mentioned in Section III, the total amount BPA
    intends to recover and the amount BPA claims it needs to make its
    Treasury payments for FY 2003 through FY 2006 has been reduced
    between one-third to one-half because BPA has achieved additional
    cost savings and improved hydro conditions. However, at hearing BPA
    refused to provide the rate case parties with updated numbers. Tr.
    at 41-56; 91-93; 102-107. BPA claims that its final proposal will
    include all updated numbers. *E.g.* [Id.]{.underline} BPA's
    withholding of this information has significantly harmed the parties
    due process rights under Section 7(i). Northwest Power Act, 16
    U.S.C. § 839e(i).