# Presentation: 734080

## Intertie Project

- Public Information Forum
- February 8, 2007

## Agenda

- Overview of the Rate Adjustment Process
- Review Rate Drivers and Proposed Rates
- Discuss Approaches to Rate Adjustment
- Western’s Recommendation
- Next Steps
- Questions and Comments

## Rate Adjustment Process

- Informal Rate Meeting – June 15, 2006
- Formal Process for Rate Adjustment – July 12, 2006
- Publication of Federal Register Notice of Proposed Rates
- Beginning of Consultation and Comment Period
- Public Information Forum – August 17, 2006
- Public Comment Forum – August 24, 2006
- End of Consultation and Comment Period – October 10, 2006
- Extension of Rates & Public Process – December 28, 2006
- Publication of Federal Register Notice of Order Extending Rates and Extension of Public Process for Rate Adjustment

## Rate Drivers FY 2008-2012[FY99 Ratebase PRS]

## Rate Drivers FY 2008-2012[FY07 Ratebase PRS]

## Summary of Rate Drivers

- Significant increase in Repayment category as a percentage of the average total annual costs
- Moderate increase in O&M and minor increase in Other categories
- Overall, substantial increase in total annual costs to recover over short period of time

## Average Annual Expenses

|  | FY 2008-2012
[FY99 Ratebase PRS] | FY 2008-2012 
[FY07 Ratebase PRS] | Difference |
| --- | --- | --- | --- |
| O&M | $4.4M | $6.8M | $2.4M |
| Interest | $18.1M | $18.2M |   $0.1M |
| Other | $0.4M | $0.7M | $0.3M   |
| Repayment | $5.2M | $17.7M | $12.5M |
| Total | $28.1M | $43.4M | $15.3M |

## Annual  Expense Projections

- FY 2008 O&M expenses derived from budget  estimates submitted to DOE and OMB.
- FY 2009-2012 O&M expenses indexed off FY 2008 budget estimates @ 3.65%, consistent with budget submission
- Repayment applied towards an estimated FY 2006 unpaid capitalized deficit balance of $54.4M, of which $41.7M are required payments

## Annual Expense Summary 

- Largest contributor to proposed rates is the short-term  repayment obligation associated with capitalized deficits
- Why the increase in repayment obligation?
- Lower than projected sales of 500-kV transmission service
- Revenue shortfall resulted in capitalized deficits with short-term repayment periods

## Which Leads Us to Where We Are Today...

- Rate Adjustment necessary to ensure recovery of annual costs and repayment of project
- Rates must be “lowest possible consistent with sound business principles”
- Several approaches to Rate Adjustment

## Alternatives to Consider

- Standard Approach
- Alternative Approach
- Restructure 500-kV Sales Assumptions
- 230/345/500-kV System Rate
- Combination of the above

## Standard Approach 

- Update proposed rates presented during the Public Information Forum held August 17, 2006
- Pros:
- No additional deficits planned after FY 2007
- Most conservative approach—minimizes overall interest costs over project repayment
- Cons:
- Highest immediate rate increase
- Prices 500-kV transmission service significantly higher than other providers
- Higher risk of not achieving 500-kV sales assumptions

## Pinch Points

## Alternative Approach 

- Use certain repayment flexibilities when determining proposed rates
- Incur additional deficits to cover annual expenses and required payments
- Direct payments to reduce a future year pinch point repayment obligation after deficit repayment completed
- Pros:
- Lessens the impact of the immediate rate increase
- Still makes required payments each year in accordance with DOE Order RA 6120.2
- Ensures project repayment within maximum allowable time frame

## Alternative Approach, Cont’d 

- Cons:
- Increases interest costs during project repayment
- Potential future rate increases if sales assumptions do not materialize
- Directing payments is allowed under DOE Order RA 6120.2 only when no unpaid capitalized deficits exist
- All current and future capitalized deficits must be paid off by FY 2017 to begin directing payments

## Restructure 500-kV Sales Projections

- Existing rates were based on phasing-in sales of 500-kV transmission service
- Phase-in period began in FY 1999 with projected sales of 62.5 MW, incremental sales of 100 MW each fiscal year and ends in FY 2008 with total sales of 962.5 MW
- Current long-term sales are 612 MW
- Proposed rates from July 2006 proposal assume sales of 962.5 MW in FY 2008 and beyond, i.e. sales projections were not restructured

## Restructure 500-kV Sales Projections

- Extending the phase-in period by five years will allow Western additional time to market long-term 500-kV transmission service
- Restructuring the sales projections over the next  five years will give Western flexibility to achieve the phase-in total sales of 962.5 MW
- Aligns sales projections based on performance to date and future outlook

## 230/345/500-kV System Rate

- Legislatively, and from a financial accounting and repayment standpoint, the Intertie is one project
- Indirect costs are allocated to the Intertie Project, not to the 230/345-kV and 500-kV transmission systems
- Slower than projected sales of 500-kV transmission service does not relieve Western from Intertie Project repayment responsibility.
- A 230/345/500-kV rate is consistent with “sound business principles”

## Western’s Recommendation

- Combination of the above
- Alternative Approach
- 230/345/500-kV System Rate
- Restructure the 500-kV Sales Assumptions
- Alternative Approach
- Makes required payments in all years in accordance with DOE Order RA6120.2
- Incurs additional deficits in FY 2007-2010
- Pays deficits first, then begins directing payments in FY 2017

## Recommendation, Cont’d

- 230/345/500-kV System Rate
- The same rate for entire transmission system regardless of voltage level
- Potential for additional sales by moving reservations from the 230/345-kV to the 500-kV or vice versa
- Beneficial for all customers by keeping the 500-kV transmission system competitively priced
- Restructure 500-kV Sales Assumptions
- Extend phase-in period by five years to achieve sales
- Attain 962.5 MW sales level by FY2013

## 230/345/500 System Rate

- $15.24 kW-Yr, regardless of voltage
- Assumes additional deficits incurred FY 2007-2010 and all deficits paid by FY 2017
- Begins directing payments in FY 2017
- Extends phase-in period of 500-kV sales projections to FY 2013

## Transmission Service Rates

|  | Current  Rates | Proposed Rates |  |
| --- | --- | --- | --- |
|  |  | Initial | Revised |
|  |  | Effective 1/1/07 | Effective 10/1/07 |
| Firm Point-to-Point
230/345-kV
500-kV | 
$12.00 kW-Yr
$17.23 kW-Yr  | 
$15.36 kW-Yr
$21.96 kW-Yr  | 
$15.24 kW-Yr
$15.24 kW-Yr |
| Nonfirm Point-to-Point
230/345/500-kV | 
2.00 mills/kWh | 
2.50 mills/kWh | 
1.74 mills/kWh |

## Credit Risk Mitigation for Transmission Service Sales

- Current business practice requires customers to pay for transmission service after the fact, usually one month in arrears
- Western can be at risk for up to 4 months’ revenue in event of default
- All customers will be required to pay in advance for long-term transmission service
- New business practice of pre-payment will reduce the revenue risk exposure to one month

## Credit Risk MitigationExample

- Calpine—filed for Bankruptcy protection late in 2005
- Monthly transmission service bills approx. $500k
- When bankruptcy filing done, Western was owed approx. $1M (two months’ service)
- Loss of revenue impacts all rate payers
- Payment in advance could have reduced exposure

## Credit Risk Mitigation

- Current environment - companies financial and credit status can change quickly
- Many of Western’s customers have no credit rating
- Payment in advance mitigates risks
- Many customers already pay for long-term transmission service in advance
- Firm Electric Service customers pay in advance

## Schedule 

- Revised rate brochure will be available on Western’s website by 2/12/07 at: http://www.wapa.gov/dsw/pwrmkt/Intertie/RateAdjust
- Public Comment Forum scheduled for February 27, 2007 at 10:00 a.m. MST
- Consultation and comment period ends March 28, 2007
- Questions not answered today will be answered in writing no later than 15 days prior to the end of the comment period.

## Comments & Questions 

- Send written comments to J. Tyler Carlson, Regional Manager
- Comments may also be faxed to 602-605-2490, Attn: Jack Murray, Rates Team Lead
- E-mail to Tyler Carlson, _[carlson@wapa.gov](mailto:carlson@wapa.gov)__ or               Jack Murray, __[jmurray@wapa.gov](mailto:jmurray@wapa.gov)_
- All written comments must be received by the end of the comment period