UNITED STATES OF AMERICA

U.S. DEPARTMENT OF ENERGY

BEFORE THE

BONNEVILLE POWER ADMINISTRATION

IN THE MATTER OF THE PROPOSED )

SAFETY-NET COST RECOVERY ) BPA DOCKET NO. ***SN-03***

ADJUSTMENT CLAUSE (SN CRAC) )

ADJUSTMENT TO 2002 )

WHOLESALE POWER RATES )

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

**INITIAL BRIEF**

OF THE

**SAVE OUR *WILD* SALMON COALITION**

And the

**NW ENERGY COALITION**

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

MAY 23, 2003

TABLE OF CONTENTS

TABLE OF AUTHORITIES [ii](#table-of-authorities)

CASES [ii](#cases)

STATUTES [ii](#statutes)

MISCELLANEOUS [iii](#miscellaneous)

FINAL REVISED EXHIBIT LIST [iii](#final-revised-exhibit-list)

1\. INTRODUCTION. [1](#number-range-chapterintroduction.)

2\. GENERAL LEGAL FRAMEWORK. [2](#general-legal-framework.)

3\. LEGAL STANDARDS OF PARTICULAR CONCERN
[4](#legal-standards-of-particular-concern)

A. SOUND BUSINESS PRACTICES [4](#a.-sound-business-practices)

B. COST-BASED RATES [4](#b.-cost-based-rates)

C. EQUITABLE TREATMENT [5](#c.-equitable-treatment)

4\. BPA\'s PROPOSAL DOES NOT COMPORT WITH SOUND BUSINESS PRINCIPLES.
[7](#bpas-proposal-does-not-comport-with-sound-business-principles.)

A. BONNEVILLE IGNORES SIGNIFICANT FORESEEABLE RISKS.
[7](#a.-bonneville-ignores-significant-foreseeable-risks.)

B. BPA\'S TPP AND TRP STANDARDS ARE BASED ON A DECEIT.
[10](#b.-bpas-tpp-and-trp-standards-are-based-on-a-deceit.)

5\. BPA\'S PROPOSAL FAILS TO INCLUDE ALL OF THE AGENCY\'S COSTS.
[10](#bpas-proposal-fails-to-include-all-of-the-agencys-costs.)

6\. FISH AND WILDLIFE FUNDING IS NOT ACCORDED EQUITABLE TREATMENT BY THE
PROPOSAL.
[11](#fish-and-wildlife-funding-is-not-accorded-equitable-treatment-by-the-proposal.)

A. THE INCREASED RISK IN BPA\'S PROPOSAL IMPACTS FISH MORE THAN OTHER
PURPOSES.
[11](#a.-the-increased-risk-in-bpas-proposal-impacts-fish-more-than-other-purposes.)

B. BPA\'S PROPOSAL FAILS TO SATISFY THE FISH AND WILDLIFE FUNDING
PRINCIPLES\--AND THUS FAILS THE REQUIREMENT TO PROVIDE EQUITABLE
TREATMENT.
[15](#b.-bpas-proposal-fails-to-satisfy-the-fish-and-wildlife-funding-principles--and-thus-fails-the-requirement-to-provide-equitable-treatment.)

7\. BPA HAS NOT CREATED A REVIEWABLE MECHANISM THAT DEMONSTRATES HOW THE
AGENCY HAS PROVIDED EQUITABLE TREATMENT FOR FISH AND WILDLIFE
[16](#bpa-has-not-created-a-reviewable-mechanism-that-demonstrates-how-the-agency-has-provided-equitable-treatment-for-fish-and-wildlife)

8\. BPA\'s PROPOSAL VIOLATES THE ENDANGERED SPECIES ACT BECAUSE THE
AGENCY DELIBERATELY PREVENTS ITSELF FROM PROVIDING ADEQUATE FUNDING.
[19](#bpas-proposal-violates-the-endangered-species-act-because-the-agency-deliberately-prevents-itself-from-providing-adequate-funding.)

9\. WE PROPOSE REMEDIES FOR THE PROBLEMS DESCRIBED ABOVE.
[21](#we-propose-remedies-for-the-problems-described-above.)

CONCLUSION [21](#conclusion)

#### 

# TABLE OF AUTHORITIES

## CASES

Aluminum Company of America v. Bonneville Power

Administration, 903 F.2d 585 . . . . . . . . . . . . . 2

Central Lincoln Peoples\' Utility District v, Johnson,

735 F.2d 1101; . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Citizens to Preserve Overton Park v. Volpe, 401 U.S.

402, 91 S.Ct 814, 28 L.Ed.2d 136 . . . . . . . . . . . 5

Confederated Tribes and Bands of the Yakima Indian

Nation v. FERC, 746 F.2d 466 . . . . . . . . . . . . . 5

Dunlop v. Bachowski, 421 U.S. 560, 95 S.Ct 1851, 44

L.Ed.2d 377 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Northwest Environmental Defense Ctr v. BPA, 117 F.3d

1520, 1534 (9th Cir. 1997) . . . . . . . . . . . . . . . . 5

Northwest Resource Information Center v. Northwest

Power Planning Council, 35 F.3d 1371, 1375-77 (9th

Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

PUD No. 1 of Douglas County v. BPA, 947 F.2d 386 . . . 4

United States Department of Energy-Bonneville Power

Administration, 64 FERC ¶61,375 . . . . . . . . . . . 2

United States Department of Energy-Bonneville Power

Administration, 67 FERC ¶61,351 . . . . . . . . . . . 2

## STATUTES

5 U.S.C. § 706(2)(A),(C)&(E) . . . . . . . . . . . . . 2

Bonneville Project Act, 16 U.S.C. §§832-832l . . . . . 1

Federal Columbia River Transmission System Act, 16

U.S.C. §§ 838-838k . . . . . . . . . . . . . . . . . . 1

Flood Control Act of 1944, 16 U.S.C. § 825s . . . . . 1

16 U.S.C. § 839b(h)(11)(A)(i) (emphasis added) . 4

1216 U.S.C. §839e(a)(2) . . . . . . . . . . . . . . 2

16 U.S.C. §§ 1532(19) (1994) . . . . . . . . . 16

16 U.S.C. §§ 1532(19) (1994) . . . . . . . . . . . . . 16

## MISCELLANEOUS

S. Rep. No. 93-307, at 3 (1973) . . . . . . . . . . . 15

# FINAL REVISED EXHIBIT LIST

SOS/NWEC (SA) has introduced the following exhibits:

-   SN-03-E-SA-01 - Direct Testimony

-   SN-03-M-04A - Redacted version of Direct Testimony (SA-01) resulting
    from motions to strike.

-   SN-03-E-SA-01A - Attachment to Direct Testimony (rejected)

-   SN-03-Q-SA-01 - Qualification Statement of Steven Weiss

-   SN-03-E-SA-02 - Rebuttal Testimony

-   SA-WA-001 - Data Response

-   SA-GP-001 - Data Response

-   BPA-SP-001 - Data Response

-   SA-BPA-008a, b, and c - Data Responses

-   SN-03-P-SA-01(1) - Prehearing Brief

####  STATEMENT OF THE CASE

## 1. Number range CHAPTERINTRODUCTION.

NWEC and SOS have intervened in this expedited proceeding for the
purpose of assuring that the Bonneville Power Administration (\"BPA\" or
\"Bonneville\") fully implements the Fish and Wildlife Funding
Principles, supports other public purposes, provides equitable treatment
to fish and wildlife, and implements rates which are adequate to recover
its costs within the framework of both the foreseeable and unforeseeable
risks the agency faces. BPA\'s proposed revision of the adjustment
clause does not satisfy these basic mandates.

BPA is required by law to follow sound business principles. There are
foreseeable risks in the policy that BPA advances, as pointed out in
SOS/NWEC's testimony and that of CRITFC. Intentionally ignoring such
profound and foreseeable risk violates the prudency standard, and is
arbitrary ratesetting.

As a matter of law, equity and public policy, fish expenditures and
other public purpose expenditures must be accorded equitable status in a
rate proposal with other mandates such as the duty to assure
\"economical\" rates. BPA\'s proposal does not provide equitable
treatment for fish restoration, and its testimony does not offer the
required reviewable criteria and analysis for determining whether that
standard has been met. BPA\'s proposal also violates the ESA, because it
reduces spending levels, and allows for hydro emergencies, based on
financial considerations that are avoidable.

NWEC/SOS propose specific changes to repair the flaws in Bonneville\'s
proposal as regard to risk, rate stability, adequacy of rates and
equitable treatment of its obligations to the environment, to customers
and to the US Treasury.

## 2. GENERAL LEGAL FRAMEWORK.

Under the Regional Act, FERC\'s review of BPA\'s regional[^1] power and
transmission rates is limited to determining whether BPA\'s proposed
rates meet the specific requirements of §7(a)(2); 16 U.S.C. §839e(a)(2):

\(1\) they must be sufficient to assure repayment of the federal
investment in the Federal Columbia River Power System over a reasonable
number of years after first meeting the Administrator\'s other costs;

\(2\) they must be based upon the Administrator\'s total system costs;
and,

\(3\) insofar as transmission rates are concerned, they must equitably
allocate the costs of the Federal transmission system between federal
and non-Federal power.

(Additionally, BPA must comply with the financial, accounting, and
ratemaking requirements of USDOE Order RA 6120.2.) ***United States
Department of Energy-Bonneville Power Administration***, 64 FERC ¶61,375
at p. 63,606 (1993); ***United States Department of Energy-Bonneville
Power Administration***, 67 FERC ¶61,351 at p. 62,217 (1994).[^2] The
sum of the standards set forth in these three acts is that rates must be
derived:

\(1\) with regard to recovery of cost of generation and transmission of
such energy;

\(2\) so as to encourage the most widespread use of BPA power;

\(3\) to provide lowest rates to consumers consistent with sound
business principles; and,

\(4\) in a manner that protects the interests of the United States in
amortizing its investments in the project within a reasonable period of
time.

***Central Lincoln Peoples\' Utility District v, Johnson,*** 735 F.2d
1101, 1114 (9th Cir. 1984); ***Aluminum Company of America v. Bonneville
Power Administration***, 903 F.2d 585, 590-91 (9th Cir. 1989).

FERC must review under Section 839f(e)(2) of the Act under 5 U.S.C. §
706(2)(A),(C)&(E) and set aside and remand such rates if the decision is
arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law; in excess of statutory jurisdiction, authority, or
limitations; or short of statutory right. ***United States Department of
Energy-Bonneville Power Administration***, 64 FERC, *supra*; ***United
States Department of Energy-Bonneville Power Administration***, 67 FERC,
*supra*. In order to determine the adequacy of treasury repayment FERC
has traditionally conducted an independent review of rates to assure the
rates are in accordance with law. In 1993, the Commission made a point
of stating that it had conducted an analysis of the power and
transmission rates confirm that the revenues collected would be
sufficient. ***United States Department of Energy-Bonneville Power
Administration***, 67 FERC, *supra*, at p. 62,217.

The Commission compared the actual investment repayment to date with a
bench mark level of payment based upon a compound interest amortization
schedule. As of September 30, 1992, Bonneville had repaid \$2.1 billion
of the Federal investment. This comprises 70.0% of the benchmark amount
of \$3 billion, compared with 66.4% for 1988, and 68.8% for 1990. While
Bonneville has not yet reached the benchmark level, the Commission
considers the level of intermediate repayment reasonable, given that
Bonneville\'s repayment record has steadily improved in recent years.

67 FERC, *supra*, at p. 62,217 n. 11.

In order to review under the separate \"arbitrary and capricious\"
standard, BPA\'s decision must supply reasoned analysis of relevant
criteria and show rational connection between the facts and the
conclusions based upon such facts. In addition to its framework criteria
for rate-setting, Bonneville has adopted additional objective standards,
such as Treasury Payment Probability (\"TPP\") and Treasury Repayment
Probability (\"TRP\") levels, for review of the adequacy of its rates to
meet its obligations.

## 3. LEGAL STANDARDS OF PARTICULAR CONCERN

###  A. SOUND BUSINESS PRACTICES

Bonneville\'s requirement to follow sound business practices is of
particular concern in this proceeding. First, the agency has an
obligation not to ignore foreseeable costs. It is not sound business
practice to deliberately ignore information on future costs nor to tie
ones hands to act on such information, Second, BPA should not be allowed
disregard sound business principles by setting rates so low as to put it
at extraordinary risk of not being able to deal with its many
foreseeable, but unpredictable costs. These include normal and expected
variations in precipitation and market prices.

###  B. COST-BASED RATES 

Cost-based ratemaking requires that all costs be included in rates.
Specific provisions of the Act require that the costs be spread
equitably--both in fairness to customers with different geographic and
time period usage patterns, and as a public policy requirement, so that
purposes are funded and costs are actually spread and collected in
rates, assuring long-term and stable planning for the projects and
programs. The mandatory duty to allocate costs and benefits within rates
assumes that the costs will actually be included in rates to allow
recoupment of such costs. Reasonable rates *include* fair treatment of
all such costs and expenditures. To adopt rates which fail to capture
all costs is unlawful, and to provide mechanisms which do not adequately
assure compliance with all statutory duties is arbitrary and capricious.
A paper plan to accomplish a goal is sham unless the underlying
possibility is objectively reasonable. Bonneville\'s proposed rates must
recover all of its foreseeable costs.

###  C. EQUITABLE TREATMENT

***Northwest Resource Information Center v. Northwest Power Planning
Council***, 35 F.3d 1371, 1375-77 (9^th^ Cir. 1994) (hereinafter
"***NRIC***") and ***NEDC***, 117 F.3d at 1525-26, contain extensive
discussions of the biology of salmon and steelhead in the Columbia
Basin, as well as explanations of the role that dams and dam operations
have played in the decline of these fish. Moreover, these two opinions
also contain extensive discussions of the history, purposes, and
requirements of the Regional Act. ***NRIC**,* 35 F.3d at 1377-79;
***NEDC***, 117 F.3d at 1528-32.

Congress, in the Regional Act, required that BPA and other federal
agencies responsible for managing the federal dams in the Columbia and
Snake Rivers

exercise \[their\] responsibilities consistent with the purposes of this
Act and other applicable laws, to adequately protect, mitigate, and
enhance fish and wildlife, including related spawning grounds and
habitat, affected by such projects or facilities in a manner that
provides *equitable treatment* for such fish and wildlife with the other
purposes for which such system and facilities are managed and operated.

16 U.S.C. § 839b(h)(11)(A)(i) (emphasis added).

The Ninth Circuit set forth its most comprehensive interpretation of
this mandate in *NEDC*, 117 F.3d at 1528-34. That case involved
Bonneville's acquisition of rights to control water storage space in
reservoirs on the Columbia River in Canada, known as non-Treaty storage.
The Court held that the Regional Act\'s equitable treatment mandate
creates a substantive obligation on the part of the federal agencies, a
duty that stands separate from the agencies' responsibility to consider
the Program adopted by the Council. See ***NEDC**,* 117 F.3d at 1531;
see also, ***PUD No. 1 of Douglas County v. BPA***, 947 F.2d 386, 392-94
(9^th^ Cir. 1991); ***Confederated Tribes and Bands of the Yakima Indian
Nation v. FERC***, 746 F.2d 466, 473 (9^th^ Cir.1984). Bonneville\'s
equitable treatment obligation requires that this rate proceeding not
set up a mechanism whereby its fish and wildlife obligations are put at
greater risk of not being fulfilled than the agency\'s other
obligations.

BPA must exercise its discretion in assuring equitable treatment in a
reasonable manner according to such standards, as that is the \"law to
apply\" to claims of arbitrary conduct. Any exceptions to such
reviewability are narrowly construed. ***Dunlop v. Bachowski***, 421
U.S. 560, 95 S.Ct 1851, 44 L.Ed.2d 377 (1975); ***Citizens to Preserve
Overton Park v. Volpe***, 401 U.S. 402, 91 S.Ct 814, 28 L.Ed.2d 136
(1971).

One issue clearly troubling the ***NEDC*** Court was the standard to
employ on review in determining whether BPA had "properly exercised its
equitable treatment responsibilities.\" The Regional Act mandates
\"equitable treatment" for fish and wildlife, and the Court required
that BPA "demonstrate, by means that allow for meaningful review, that
it has treated fish and wildlife equitably" in reaching ratemaking
priorities. See ***Northwest Environmental Defense Ctr v. BPA***, 117
F.3d 1520, 1534 (9^th^ Cir. 1997) The Court thus insisted on a procedure
to facilitate future judicial review of BPA actions under the Regional
Act's equitable treatment mandate. Though it noted that BPA "need not
undertake an equitable treatment analysis for every discrete power
marketing decision," the Court required that "BPA should nonetheless
develop a mechanism for fulfilling its obligation" to treat fish and
wildlife equitably, including providing it the ability to actually test
if that were true. In this proceeding, BPA must provide, in a way that
allows for meaningful review, a demonstration that it has treated fish
and wildlife equitably. Id.

We summarize the standards to which Bonneville must adhere in setting
rates that we will focus on. BPA must: (1) follow sound business
principles; (2) include all its costs in its rates; (3) treat fish and
wildlife equitable with its other purposes; and, (4) demonstrate
equitable treatment in a way that allows for meaningful review.

## 4. BPA\'s PROPOSAL DOES NOT COMPORT WITH SOUND BUSINESS PRINCIPLES.

###  A. BONNEVILLE IGNORES SIGNIFICANT FORESEEABLE RISKS.

BPA\'s proposal sets rates based on a very low (50-60%) TPP. (This fact
alone causes the proposal to violate a number of the Fish and Wildlife
Principles that still apply in this proceeding specifically, and their
intent generally. We address this issue below.) Such a low TPP is quite
troubling, in and of itself, but is especially so when one realizes the
ToolKit model that generated this number ignored several significant
foreseeable risks of future increased funding obligations. These risks
include likely possible increases in Bonneville\'s funding obligations
over the next few years due to ongoing litigation and other processes
that will directly impact the agency\'s fish and wildlife funding
obligations. The most notable risk, of course, is the possibility that
US District Court Judge Redden\'s recent declaration that the Biological
Opinion is fatally flawed and must be redone will result in increased
direct obligations for BPA, and/or indirect obligations through the
Bureau of Reclamation and the Corps of Engineers. A quite foreseeable
risk is that there will be an increase in Bonneville\'s funding
obligation for conservation and renewable resource development as a
result of the NW Power Planning Council\'s completion of its 5^th^ Power
Plan (scheduled for early next year). Another large and fairly likely
risk is that FERC\'s \"SMD\" or now its \"Wholesale Power Market
Platform\" process will result in a requirement to acquire more
resources to meet a new \"adequacy standard.\"

While it is impossible to precisely quantify the impact any of these
events might have on BPA\'s costs, it violates sound business practices
to deliberately ignore them as Bonneville has done. Recognizing and
accounting for these risks does not require Bonneville to include higher
costs in its rates now. It only requires that BPA not unduly restrict
its ability to raise its rates in a timely manner if any of these risks
comes to fruition. Instead, BPA\'s proposal both elects to deliberately
ignore these risks in calculating the TPP and limits the ability of its
variable rate mechanism to raise rates in time to ensure Treasury
payment. Bonneville\'s proposal accomplishes this limitation through the
use of a \$470 million annual cap (which provides only enough revenue to
result in a 50-60% TPP) and restricting the adjustment mechanism to only
a backward look at the agency\'s results in August of each fiscal year,
rather than a forward look at looming costs. Together these flaws
require the conclusion that BPA is not following sound business
practices as required by statute.

Bonneville also reaffirms its intention to blind itself deliberately to
foreseeable problems in its proposal for a *contingent* SN CRAC
mechanism. BPA proposes to adjust the SN CRAC amount depending upon a
forecast of future events if they are highly likely to occur. However,
the agency proposes to ignore events, such as those described earlier,
which would raise costs, and only use the information about the future
if it results in lower costs. This proposal must be modified to allow
the contingent mechanism to adjust *either up or down*, otherwise it is
clearly a violation of sound business principles and must be rejected.
No prudent business would deliberately ignore critical information just
because it was negative, nor would it tie its hands in advance to
prevent itself from acting upon that information.

Bonneville and some of the customers have responded to this critique by
arguing that the agency can retrigger the 7(i) SN CRAC process to cover
the types of risks we discussed above. However that argument fails to
recognize the serious limitations to that policy. Unless the trigger
criteria are changed, which has not been suggested by these parties,
retriggering the SN CRAC is not a very practical solution. The reason
for this is that it can only be retriggered by a forecast, *restricted
to the same fiscal year,* that BPA expects to have less than a 50%
chance of meeting its Treasury obligation in the year it is triggered.
Thus the earliest it can be retriggered is October 1^st^ of each fiscal
year. Given the length of the 7(i) process, including FERC approval, and
the fact that much of BPA\'s customers summer and fall payments go to
ENW, it is very unlikely that BPA can avoid a problem until the next
year. Ultimately, because of the restrictions on retriggering, the 7(i)
SN CRAC process cannot be used as an effective enough risk-management
strategy to avoid the shortcomings of BPA\'s proposal.

###  B. BPA\'S TPP AND TRP STANDARDS ARE BASED ON A DECEIT.

Bonneville purports to set its rates in a manner that accepts a large
probability that the agency will not be able to meet its Treasury
payments in full and on time. But it is evident that Bonneville and the
region are simply not willing to actually miss a payment. (We will
address below how this deceit causes BPA to violate its equitable
treatment mandate.) So what does the acceptance of a low TPP really
mean? It might mean that Bonneville is willing to use various
\"financial tools\" (borrowing) to bridge this gap, or it might mean
that the agency is willing to cut certain budgets in a financial crisis
if that were required to balance the books. BPA indicates in its
rebuttal testimony a strong unwillingness to use borrowing. It is
therefore more likely that BPA will be forced to cut spending in a
crisis mode, when its back is against the wall, rather than through
careful planning. This constitutes a violation of sound business
principles. It is not prudent business practice for Bonneville to set
rates based upon code words like TPP which really do not mean what they
say, since it distorts the public\'s ability to weigh fairly the choices
that will result from a particular policy. Bonneville should clearly
state that it is not prepared to miss a Treasury payment when it sets
rates with a low TPP, and make it known which financial tools it will
use, or which budgets will be cut, if events go sour. Only through an
honest discussion can good policy choices be made.

## 5. BPA\'S PROPOSAL FAILS TO INCLUDE ALL OF THE AGENCY\'S COSTS.

BPA\'s rates are required to be \"cost-based.\" They should be no higher
than necessary to meet the agency\'s costs; nor should they be so low as
to shift costs to future ratepayers. One significant cost that must be
included in any utility\'s revenue requirement is the cost of risk. This
cost may take the form of adequate reserves or what Bonneville has in
the past called Planned Net Revenues for Risk. It is evident from the
previous discussion that because Bonneville\'s proposal fails to account
for foreseeable risk, its rates are not fully recovering the costs of
risk. With a TPP of 50-60% and a deliberate policy to ignore risk, BPA
is evidently relying on financial tools (or actually missing its
Treasury payment), \--i.e., borrowing\--to cover the costs of its risks.
However borrowing simply shifts costs to future ratepayers. This policy
therefore fails to meet the standard of cost-based rates.

## 6. FISH AND WILDLIFE FUNDING IS NOT ACCORDED EQUITABLE TREATMENT BY THE PROPOSAL.

### A. THE INCREASED RISK IN BPA\'S PROPOSAL IMPACTS FISH MORE THAN OTHER PURPOSES. 

We discuss above how Bonneville\'s proposal to set rates to achieve an
historically low TPP and to ignore foreseeable costs violates the
agency\'s mandate to follow sound business practices and to provide
cost-based rates. In addition, however, these policies, if unchanged,
would provide inequitable treatment of BPA\'s fish and wildlife
obligations *vis a vis* its power obligations. The reason for this is
that taking on increased risk potentially affects BPA\'s fish programs
much more seriously than it impacts other responsibilities.

The large multi-purpose dams on the Columbia and Snake Rivers built and
operated by the U.S. Army Corps of Engineers ("Corps") and U.S. Bureau
of Reclamation ("Bureau") are primary causes of the drastic decline in
populations of salmon and steelhead that once inhabited the Columbia
River Basin. ***NRIC***, 35 F.3d at 1376 (approximately eighty percent
of salmon and steelhead mortality is attributable to hydropower
development and operation) (citing 56 Fed. Reg. 14055, 14058 (Apr. 5,
1991)).

As the Administrator is aware, current efforts to restore these fish
generally include attempting to operate the dams to minimize their
impact on migrating juvenile fish. Such operations include releasing
large amounts of water from upstream reservoirs in the spring and summer
in order to increase river flows, as well as "spilling" water past the
dams, *i.e.*, allowing water to pass through the dams' spillways -- a
safer path for juvenile salmon -- rather than through the dams'
hydroelectric turbines. However, these measures are often not optimal
from the standpoint of power generation because power in the Northwest
is more valuable in the fall and winter rather than in the spring and
summer, and because water that passes through the dams' spillways does
not produce electricity.

Given this background, one must ask how fish restoration efforts are
affected when BPA\'s risk-taking results in financial difficulties for
the agency, and how that compares to impacts on BPA\'s other
obligations. Since BPA is taking a huge gamble in accepting a low TPP
(and thus low reserves) and ignoring various foreseeable risks, what
happens if those bets fail?

To answer those questions, one must first describe what tools Bonneville
has available under its proposal to deal with problems. BPA\'s proposal
contains a number of actions to cope with financial difficulties. Such
difficulties fall into two general categories: within-a-fiscal year
problems (e.g., drought, low prices for surplus sales, CGS outage), and
outside-a-fiscal year problems (e.g., changes to the BiOp, SMD
requirements, new Power Plan requirements).

For problems within a fiscal year, BPA has three tools: (a) borrowing,
(b) Treasury deferral, (c) retriggering of the 7(i) SN CRAC.
Additionally, in 2001, BPA released a Decision Document \[cite\] in
which the agency claimed it has authority to declare hydrosystem
"emergencies" for financial or other reasons. During such an
"emergency," BPA asserts authority to require or demand modifications in
hydro operations, including authority to request or demand such
modifications in order to assist in resolving BPA's financial
shortfalls. For example, in 2001, BPA declared a series of power
"emergencies" and ordered reductions in spill and modifications of river
flow levels in order to generate additional power and thus reduce the
need for BPA to purchase power on the open market in order to meet its
loads. In a challenge to BPA's 2001 Decision Document currently pending
before the Ninth Circuit Court of Appeals, a number of organizations
within the SOS coalition have pointed out that BPA lacks authority to
declare power "emergencies" that require changes to hydro operations.
Moreover, Petitoners in this case have also noted that even if BPA has
authority to declare such emergencies, the agency's use of that
authority to make up for financial risks violates the Northwest Power
Act's charge that BPA treat fish equitably with power. SOS/NWEC
incorporate these arguments into this appeal by reference. In its
Decision Document, BPA specified that "emergencies" similar to those
declared by the agency in 2001 were "likely." The record here points to
a similar conclusion. As we noted earlier, BPA is extremely reluctant to
miss its Treasury payment (e.g., SN-03-E-BPA-11 pp 59-64) or to borrow
to pay for operating costs. In addition the 7(i) SN CRAC is really too
slow to deal with a within a fiscal year problem and it is restricted
from looking past the end of each fiscal year. Plus, the 7(i) SN CRAC
trigger requires a 50% probability of missing the next Treasury payment,
whereby the hydro emergency Criteria employed by BPA only requires a 20%
probability to trigger. The very fact that BPA, when negotiating the
Criteria in 2001, [insisted]{.underline} on being able to trigger a
hydro emergency before its own SN CRAC is *prima facie* evidence of the
agency\'s intention to lean on the river before tapping its customers,
and is thus a violation of equitable treatment. BPA has not specified
the criteria it will employ in deciding whether to declare future power
"emergencies." Assuming for the sake of argument that BPA has the legal
authority to declare power "emergencies," to the extent that BPA
declares an "emergency" and relies on hydro modifications for financial
relief rather than relying on modifications to the agency's rates, BPA
would stand in violation of its duty to treat fish equitably.

For problems outside the immediate fiscal year. BPA has two potential
tools to head off a crisis before the year begins, because its proposal
deliberately ties its hands. For a problem forecast to occur in the next
fiscal year, BPA\'s GRSPs restrict the re- triggerring of its 7(i) SN
CRAC, and BPA\'s contingent SN CRAC adjustment proposal purposely
ignores bad forecasts. Bonneville is thus left with being able to: (a)
borrow, or (b) employ its alleged authority to declare a hydro emergency
for financial purposes. This latter is possible because Bonneville
insisted, in negotiating the Criteria in 2001, that unlike its own SN
CRAC, it could trigger a hydro emergency for financial purposes based on
a forward 12-month rolling forecast which can therefore look beyond the
current fiscal year end. To the extent BPA employs similar criteria to
declare future "emergencies" -- as the agency expressly said it would do
in its Decision Document -- BPA is not giving fish equitable treatment.

The very existence and alleged availability of BPA\'s ability to declare
a hydro emergency for financial reasons must lead to the conclusion that
Bonneville is violating its equitable treatment mandate. This is because
the agency\'s policy to take on increased risk in this proceeding (e.g.,
lower TPP, blindness to foreseeable risks), coupled with BPA's explicit
warning of future power "emergencies" for reasons similar to those cited
by the agency in 2001, means that BPA is more likely to attempt to
curtail hydro operations beneficial to fish than trigger a financial
solution to financial shortfalls by raising power rates.

Bonneville could easily correct this defect by making two changes to its
proposal. First, BPA should foreswear the use of a hydro emergency for
financial purposes. An unwillingness to do so is proof that Bonneville
means to use fish as a source of financial reserves. Second, BPA should
change its contingent adjustment proposal so as to allow changes for
*both increased or decreased* costs that it can forecast occurring with
relative certainty. These changes are necessary\--though not sufficient,
as we discuss below\--to correct the proposal\'s violation of the
equitable treatment requirement.

### B. BPA\'S PROPOSAL FAILS TO SATISFY THE FISH AND WILDLIFE FUNDING PRINCIPLES\--AND THUS FAILS THE REQUIREMENT TO PROVIDE EQUITABLE TREATMENT.

Bonneville admits its proposal does not meet the standards set in the
Fish and Wildlife Funding Principles (\"Principles\"). Instead the
proposal will only \"\...put BPA on a path to meet the intent of the the
Fish and Wildlife Funding Principles.\" (SN-03-E-BPA-04, p.15) Despite
BPA\'s protestations that the Principles are discretionary (SA-BPA: 006,
appended to SN-03-E-SA-01, p.32), it is evident that the intent of the
Principles was to ensure that BPA did not do exactly what the agency is
now proposing to do: set rates with so much risk as to threaten the
ability of BPA to honor its fish and wildlife commitments. The need and
relevance of the Principles is demonstrated now more than ever.

The clear intent of the Principles was to make sure that BPA could meet
its future fish and wildlife obligations. As stated in its preamble:
\"These principles will ensure that Bonneville\'s rates and power
contracts give a very high probability of meeting all post-2001
financial obligations, including the future fish and wildlife budget
commitment\....\" (SN-03-E-CR-01MMM) It is obvious from this statement
that BPA and the Administration, in committing to the Principles,
believed that there was a good chance that without them, BPA\'s rates
and power contracts would *not* give a very high probability of meeting
all future fish and wildlife obligations. *Otherwise, there would be no
need for the Principles.* Therefore, in not satisfying the Principles in
its proposal, Bonneville is clearly putting fish at increased risk. BPA
should not be allowed any discretion in relaxing the Principles unless
it provides some other adequate assurance that it will meet its
responsibilities to fish.

## 7. BPA HAS NOT CREATED A REVIEWABLE MECHANISM THAT DEMONSTRATES HOW THE AGENCY HAS PROVIDED EQUITABLE TREATMENT FOR FISH AND WILDLIFE

Five years ago, the Court ordered BPA to "develop a mechanism for
fulfilling its obligation under paragraph (i)," the NPA's equitable
treatment mandate, 16 U.S.C. § 839b(h)(11)(A)(i)). *NEDC*, 117 F.3d at
1534. Specifically, the Court found it "difficult . . . \[from the
record before it in *NEDC*\] to determine whether BPA has properly
exercised its equitable treatment responsibilities," and thus instructed
the agency "to demonstrate, by means that allow for meaningful review,
that it has treated fish and wildlife equitably." [Id]{.underline}*.*
This ratecase presents a particularly egregious example of BPA's
continuing failure to create a reviewable mechanism by which to
demonstrate its compliance with the NPA's equitable treatment mandate.
Under the Ninth Circuit's holding in *NEDC*, Bonneville must
demonstrate, in a manner that allows for meaningful judicial review,
that it has provided salmon and steelhead equitable treatment with power
and other uses of the hydrosystem. This was the Ninth Circuit's way to
emphasize BPA's APA-based duty to explain the basis for its decisions.
See NRIC v. NPPC, 35 F.3d at 1385 ("\[a court\] must be able to
ascertain the reasons for an agency\'s decision. \[It\] cannot determine
whether an agency has acted correctly unless \[it is\] told what factors
are important and why they are relevant. Therefore, an agency must
provide a reasoned explanation for its actions and articulate with some
clarity the standards that governed its decision").

BPA has made no effort to make such a showing in its direct testimony.
Bonneville merely asserts in its Rebuttal in response to a question that
it is providing equitable treatment by implementing the Council\'s
Program, the BiOp and the Basinwide Recovery Strategy. (SN-03-E-BPA-18,
p.17) Bonneville then states that, \"BPA has placed its fish and
wildlife mission on par with its other obligations, possibly somewhat
above them as evidenced in the steady funding levels\--instead of
reductions\--compared to other program areas.\" (SN-03-E-BPA-18, p.18)

This explanation fails on several levels. First, it ignores the Court's
consistent finding that equitable treatment is a substantive duty that
is "'independent' of BPA's responsibility to take into account the
Council's Program." [NEDC]{.underline}, 117 F.3d at 1532
([citing]{.underline} [Public Utility District No.1 of Douglas County v.
Bonneville Power Administration]{.underline}, 941 F.2d 386, 392 (9^th^
Cir.1991). Moreover, the agency provides no analysis to substantiate the
contention that its actions provide equitable treatment and the
contention itself appears only in its Rebuttal Testimony. There is no
other document or analysis in the record in which BPA even discusses how
its actions are consistent with the agency's equitable treatment duty,
much less demonstrates, in a manner that allows for meaningful judicial
review, that it has met this standard.

However, the Ninth Circuit in [NEDC]{.underline} required that BPA
develop a mechanism for demonstrating its compliance with the NPA's
*equitable* *treatment* mandate to avoid precisely this sort of
after-the-fact guess-work about whether and how the agency has
determined to meet its statutory duties. The Court required that BPA
[itself]{.underline} explain how the actions it decides to take give
fish equitable treatment in order to provide "guidance" to a reviewing
court. [NEDC]{.underline}, 117 F. 3d at 1534.

Bonneville has simply failed to do this. The agency does not explain how
increasing its risks will put fish on a par with power and other system
purposes. More specifically, the agency failed to explain how it is
equitable for BPA to rely on changes to dam operations (i.e., declaring
a hydro emergency for financial purposes) to assist the agency in
responding to the financial difficulties it may well face as a result of
its risky proposal. Similarly, BPA has made no effort to detail why we
should assume that when it faces another crisis made more likely by its
risk-laden proposal, that it will not decline to employ the strategies
for dealing with revenue shortfalls that it seems to be relying upon
here and instead lean on the river as it did in 2001.

## 8. BPA\'s PROPOSAL VIOLATES THE ENDANGERED SPECIES ACT BECAUSE THE AGENCY DELIBERATELY PREVENTS ITSELF FROM PROVIDING ADEQUATE FUNDING. 

As we discussed in the preceding sections, BPA has agreed to hydro
emergency Criteria and proposed rates and SN CRAC trigger parameters
that together are designed so that fish will bear the brunt of the
agency\'s financial problems. If BPA sees a problem coming up in the
next 12 months, but after the end of its fiscal year, it can, and has
demonstrated in the past that it is quite willing to, trigger a hydro
emergency because it cannot trigger its SN CRACs (either the contingent
adjustment or a new 7(i) SN CRAC). Even within a fiscal year, if
Bonneville estimates a greater than 20% but less than 50% probability of
having no reserves at the end of the year, it will trigger a hydro
emergency because it cannot trigger its SN CRAC.

In essence, Bonneville is proposing to use its ability to trigger a
hydro emergency as its financial reserves. This is an astounding policy:
Treasury default will no longer be the last priority for the agency.
Bonneville will declare a financial emergency and lean on fish before
default will ever happen. This policy, if allowed to go forward, is in
direct and profound violation of the Endangered Species Act

By way of overview, tNumber range CHAPTERhe ESA is meant \"to provide
for conservation, protection and propagation Number range CHAPTERof
endangered species of fish and wildlife by Federal action." The 1973 Act
includes within its protection species of fish, wildlife, and plants. We
are so familiar with the principles of the ESA that it is common
knowledge that \"endangered species\" or \"threatened species\" are
those faced with extinction in all or part of their natural range in the
foreseeable future. Number range CHAPTER\
Section 7 of the ESA requires federal agencies to ensure any action they
authorize, fund, or carry out is not likely to jeopardize a listed
species or adversely modify its critical habitat. All Federal
departments and agencies are required to further the purposes of the Act
by carrying out programs for the conservation of endangered species. BPA
is further required to take "such action necessary to insure that
actions authorized, funded, or carried out by \[it\] do not jeopardize
the continued existence of such endangered species and threatened
species or result in the destruction or modification of \[critical\]
habitat of such species . . . ." It is not disputed that Number range
CHAPTERPacific Northwest rivers are the home range to seven anadromous
fish species within the family Salmonidae and the genus Oncorhynchus.
See, for example, Jim Lichatowich, [Salmon Without Rivers: A History of
the Pacific Salmon Crisis]{.smallcaps} 9 (1999).

Congress intended federal agencies to cooperate in the implementation of
the goals of the Act. Number range CHAPTER \"All agencies, departments,
and other instrumentalities of the Federal government are directed to
cooperate in the implementation of the goals of this Act\". See S. Rep.
No. 93-307, at 3 (1973). This express mandate to confer and consult for
species and habitat protection has been completely turned on its head by
the emergency Criteria. As noted, the Criteria alter BPA's
fish-protective criteria and would require species and habitat
reductions to meet fiscal needs.\
BPA has ESA duties to assure that its ratecase decisions do not
jeopardize listed species. To the extent that BPA adopts a strategy of
declaring power system "emergencies" and relying on curtailments to
hydrosystem operations beneficial to fish in order to ameliorate BPA's
financial shortfalls, BPA violates its duty to insure against jeopardy
to listed salmon. Bonneville cannot be allowed to artificially create in
this proceeding the very financial conditions that can then be used by
the agency to justify a hydro emergency to the detriment of endangered
stocks. Number range CHAPTER

## 9. WE PROPOSE REMEDIES FOR THE PROBLEMS DESCRIBED ABOVE.

A detailed discussion of our remedies is provided in our Direct
Testimony (SN-03-E-SA-01, pp. 21-28), which we summarize here.

-   BPA should adopt its contingent SN CRAC mechanism but with the
    proviso that it can adjust rates either up or down depending upon
    the forecast of future events of high certainty.

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-   Bonneville must foreswear the use of hydro emergencies to solve its
    financial problems. A low TPP and other risk-laden provisions of
    BPA\'s proposal must not move risk to fish.

-   Bonneville must produce the reviewable record it needs to comport
    with the requirements of its equitable treatment mandate as ordered
    in *NEDC.* Doing so may require other changes to BPA\'s proposal.

-   Bonneville must either raise rates sufficient to satisfy the Fish
    and Wildlife Funding Principles \-- i.e., 80-88%\--
    [or]{.underline}, effectively insulate its salmon and clean energy
    obligations from the risks of the power business. We suggest in our
    Direct Testimony various ways this could be done.

# CONCLUSION

For the reasons stated above, NWEC and SOS on behalf of its members urge
the Administrator to adopt our recommendations.

+--------------------------------------+-------------------------------+
| Dated, May 23, 2003                  | ^Respectfully\ Submitted,^    |
+--------------------------------------+-------------------------------+
|                                      | ^LINDA\ K.\ WILLIAMS^         |
|                                      |                               |
|                                      | ^OSB\ No.\ 78425^             |
|                                      |                               |
|                                      | ^                             |
|                                      | 10266\ S.W.\ Lancaster\ Road^ |
|                                      |                               |
|                                      | ^Portland,\ OR\ 97219^        |
|                                      |                               |
|                                      | ^(5                           |
|                                      | 03)\ 293-0399\ fax\ 245-2772^ |
|                                      |                               |
|                                      | <lawyer@teleport.com>         |
|                                      |                               |
|                                      | ^A                            |
|                                      | ttorney\ for\ NWEC\ and\ SOS^ |
+--------------------------------------+-------------------------------+

[^1]: For extra-regional sales (such as non-firm sales to California) §
    7(k) requires that the rates for nonfirm energy sold outside the
    Pacific Northwest be in conformance with standards announced in the
    Bonneville Project Act, 16 U.S.C. §§832-832*l*, the Flood Control
    Act of 1944, 16 U.S.C. § 825s, and the Federal Columbia River
    Transmission System Act, 16 U.S.C. §§ 838-838k.

[^2]: ^1^