Outline of Administrator’s Authority Under BPA’s Organic Statutes to Allocate Power Costs To Transmission Rates

Introduction

A strong argument exists that the Administrator has the authority, when necessary to meet his statutory obligation to recover costs and repay the treasury, to allocate to transmission rates generation costs that cannot otherwise be recovered through power rates. This may become necessary where BPA is unable to recover, for whatever reason, costs it has historically recognized as power costs from power rates. BPA expects, however, that transmission customers facing such charges would challenge this position in court. While BPA believes it would ultimately prevail in any such litigation, it cannot predict how a court would rule. The discussion that follows is not intended to be an exhaustive treatment of the Administrator’s authority to recover generation costs through transmission rates, but rather an overview highlighting the principal basis for that authority.

Discussion

Section 7(a)(1) of the Pacific Northwest Electric Power Planning and Conservation Act (Northwest Power Act), 16 USC § 839 et seq., provides, in pertinent part, that BPA's rates for the sale and disposition of electric energy and capacity and for the transmission of non-Federal power shall be established and, as appropriate, revised to recover, in accordance with sound business principles, the costs associated with the acquisition, conservation, and transmission of electric power, including the amortization of the Federal investment in the Federal Columbia River Power System (including irrigation costs required to be repaid out of power revenues) over a reasonable period of years and the other costs and expenses incurred by the Administrator pursuant to this Act and other provisions of law. 16 USC § 839e(a)(1).

Similarly, section 7(a)(2) of the Northwest Power Act provides that the Federal Energy Regulatory Commission shall review BPA's wholesale power and transmission rates to ensure that they are "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" and are "based upon the Administrator's total system costs." 16 USC § 839e(a)(2)(A)-(B). Section 7 also contains detailed rate directives describing how rates for individual customer groups are to be derived--statutory cost entitlements and allocations, not cost causation, are the operative themes of these statutory directives. Id. § 839(e); see also The Federal Columbia River Transmission System Act of 1974, 16 USC § 838g-h (Transmission System Act); Flood Control Act of 1944, 16 USC § 825s. Congress intended, however, that these BPA rate directives be "[s]ubject to the general requirements (contained in section 7(a)) that BPA must continue to set its rates so that its total revenues continue to recover its total cost, . . ." H.R. Rep. No. 96-976, 96th Cong., 2nd Sess., pt. 2, at 36 (1980). Numerous other statutory rate setting standards are applicable to BPA's power and transmission rates. See, e.g., Transmission System Act, 16 USC § 838g-h; Flood Control Act of 1944, 16 USC § 825s.

Congress' expectation that BPA would "continue to set its rates so that its total revenues continue to recover its total cost" harkens back to the Transmission System Act, 16 USC § 838. While Congress in passing the Transmission System Act contemplated that the transmission and power functions would each ordinarily pay its own way, Congress nevertheless was clearly aware that BPA's entire revenues--power and transmission--would (a) be available as security for all BPA costs, and (b) be available, if necessary, to pay all BPA costs. E.g., 16 USC §§ 838g, 838i, and 838k(b); Bonneville Power Administration Financing, Hearing on S. 3362 before the Subcomm. on Water and Power Resources of the Committee on Interior and Insular Affairs, 93rd Congress, 2d Sess, 95-96 (June 6, 1974) (Statement of C. King Mallory, Acting Assistant Sec., Energy and Minerals, Department of the Interior). Indeed, Mr. Mallory made clear in his statement that complete cost recovery has been an overriding principle of the Federal power program in the Pacific Northwest and it will continue to be an inviolate rule of conduct after enactment of the proposed Federal Columbia River Transmission System Act. Id.

BPA was, thus, directed to establish power and transmission rates that produced, in the aggregate, sufficient revenues to pay all BPA's costs. Section 9 of the Transmission System Act provides in pertinent part that rates for the sale of power and for the transmission of non-Federal electric power over the Federal transmission system shall be fixed and established having regard to the recovery of the cost of producing and transmitting such electric power, including the amortization of the capital investment allocated to power over a reasonable period of years, and at levels to produce such additional revenues as may be required, in the aggregate with all other revenues of the Administrator, to pay when due the principal of, premiums, discounts, and expenses in connection with the issuance of and interest on all bonds issued and outstanding pursuant to this Act, and amounts required to establish and maintain reserve and other funds and accounts established in connection therewith. 16 USC § 838g; see also 16 USC § 838i(a)(establishing single Bonneville fund). All BPA revenues are to be placed in the single Bonneville fund, 16 USC § 838i, and paid in the priorities directed by section 13 of the Transmission System Act, 16 USC § 838k(b).

In the legislative hearings leading to passage of the Transmission System Act, in response to a question from Senator McClure regarding whether the "transmission obligation is a merged obligation" of the entire Federal Columbia River power system, BPA Administrator Hodel clarified that all BPA revenues could be available for payment of costs of the transmission system, that BPA treated its obligations on a system basis, and that revenues from one function would be available to pay costs of another function when necessary, such as "[i]n a year where the revenues are not adequate to meet our obligations." Bonneville Power Administration Financing, 1974: Hearings on S. 3362 Before the Subcomm. on Water and Power Resources, 93rd Cong., 2d Sess., 108 (1974).

Consequently, strict cost causation has not been the operative principle of either BPA ratemaking or its provision of security for debt. As discussed above, there was no expectation that someday transmission rates and revenues could not be looked to if necessary to cover other than transmission costs, or that power rates and revenues could not be looked to if necessary to cover transmission costs, but the reasonable expectation--indeed, the demand and the directive of BPA's Congressional overseers--was to the contrary. The outstanding Supply System net-billed project debt and other third party debt ($7.106 billion), and the massive conservation and fish and wildlife Treasury debt ($629 million and $80 million respectively) are a system-wide BPA undertaking and responsibility.

Transmission customers faced with charges for costs associated with the power function would likely challenge the Administrator’s authority to assess such a charge against them. The precise arguments supporting such a challenge would depend on the nature of charge developed by BPA. In general, however, customers may argue that an allocation of power costs to transmission rates, in particular any costs associated with fish and wildlife, conservation programs, or the sale of inability to sell excess electric power, may be allocated only to power rates pursuant to section 7(g) of the Northwest Power Act. Section 7(g) provides in pertinent part:

Except to the extent that the allocation of costs and benefits is governed by provisions of law in effect on December 5, 1980, or by other provisions of this section, the Administrator shall equitably allocate to power rates, in accordance with generally accepted ratemaking principles and the provisions of this chapter, all costs and benefits not otherwise allocated under this section, including, but not limited to, conservation, fish and wildlife . . . and the sale of or inability to sell excess electric power.

16 USC § 839e(g).

Transmission customers facing such a charge also may be expected to argue that any allocation of power costs to transmission rates violates the directives in the Transmission System Act and the Northwest Power Act that transmission rates be equitably allocated between Federal and non-Federal power utilizing the transmission system. See, Northwest Power Act, § 839e(a)(2)(C); Transmission System Act, § 838h.

In addition, customers seeking transmission from BPA through an order from the Federal Energy Regulatory Commission pursuant to sections 211/212 of the Federal Power Act may argue that any stranded cost charge BPA proposes, as part of the rate for such service, violates the just and reasonable standard contained in section 212; or that BPA has not otherwise met the tests established by FERC in Orders 888 and 888-A for the recovery of stranded costs.

Finally, using the transmission system to recover costs traditionally allocated to power rates may be limited by practical economic and technical considerations, such as bypass, self-generation, and whether and how BPA stranded costs could be recovered through an IGO.