This paper reviews the relevant authorities to determine whether and to what extent the Bonneville Power Administration (BPA) may lawfully set rates for the transmission of non-Federal power that are designed to recover, in part, costs associated with the generation of Federal power, e.g., fish costs. As set forth below, explicit statutory provisions, consistent decisions of the Federal Energy Regulatory Commission (FERC) interpreting BPA’s transmission rate directive and generally accepted ratemaking principles all deny BPA any authority to set transmission rates to recover such costs in transmission rates.

• Pre-Northwest Power Act statutes concerning BPA’s ratemaking authority forbid cross-subsidization of generation by transmission.

• Pre-Northwest Power Act statutes also established that BPA must recover costs of generation and transmission over a reasonable time frame, and that shortfalls in BPA revenues arising from inability to sell power result in the deferral of BPA’s planned payments to the U.S. Treasury; the costs do not get shifted to transmission customers.

• The Northwest Power Act reaffirmed these ratemaking principles, which have been consistently applied by FERC since passage of that Act. The Act specifically requires that fish and wildlife costs, conservation costs, and revenue shortfalls of an inability to sell sufficient power are to be allocated to power rates.

• Generally accepted ratemaking principles require separate accounting for transmission costs, and forbid utilities from exploiting monopoly power in transmission markets to subsidize generation costs.

• FERC has reaffirmed in Order No. 888 the national policy that transmission monopolies are not to be used to subsidize generation losses.

I. STATUTORY RATE DIRECTIVES

Early Acts

The earliest ratemaking directives applicable to BPA gave only broad policy direction, and addressed only bundled power (i.e., rate standards to recover over time the cost of producing and transmitting Federal power to its point of sale). For example, in the Bonneville Project Act (as amended), the Secretary of Energy was directed to fix rates "with a view to encouraging the widest possible diversified use of electric energy" (16 U.S.C. § 832e) and "having regard to the recovery (upon the basis of the application of such rate schedules to the capacity of the electric facilities of the Bonneville project) of the cost of producing and transmitting such electric energy, including the amortization of the capital investment over a reasonable period of years." 16 U.S.C. § 832f.

In § 5 of the Flood Control Act of 1944 (as amended), Congress expanded this basic rate directive to cover power from all the Federal hydropower projects in the Northwest, but simply restated the broad rate guidance contained in the Project Act. 16 U.S.C. § 825s.

At the time of the Project Act and Flood Control Act, transmission was ancillary to BPA’s chief responsibility of selling electricity from the Federal hydroelectric projects. The first explicit directives from Congress concerning transmission rates came in the Regional Preference Act of 1964. The Preference Act authorized BPA to construct interregional transmission facilities and directed BPA to make excess capacity in such Federal transmission lines "available as a carrier for transmission of other electric energy . . . at equitable rates determined by the Secretary. . ." 16 U.S.C. § 837e. The Act provided no criteria on what constituted equitable rates for intertie transmission.

The Transmission System Act

In 1974, Congress adopted the Federal Columbia River Transmission System Act. Section 4 of the Transmission Act authorized BPA to construct and operate transmission facilities in the Pacific Northwest for the express purpose (among others) of transmitting "the electric power from existing or additional Federal or non-Federal generating units". 16 U.S.C. § 838b(a). Congress granted BPA explicit authority to construct additional transmission lines (16 U.S.C. § 838b) and to sell bonds to raise money to construct those lines. 16 U.S.C. § 838k(a). [ In § 8(d)(1) of the Regional Act, Congress added language to the Transmission Act to allow bonds to be issued to "implement the Administrator’s authority pursuant to the [Northwest Power Act] (including his authority to provide financial assistance for conservation measures, renewable resources, and fish and wildlife . . .)". 16 U.S.C. § 838k(a).] Congress also established the Bonneville Power Administration fund in the Treasury, to consist of all receipts, collections and recoveries of the Administrator in cash from all sources, including the sale of bonds. 16 U.S.C. § 838i(a).

Section 9 of the Transmission Act restated the basic overall rate directive contained in the Project Act and Flood Control Act. 16 U.S.C. § 838g. However, under the Transmission Act, it was no longer adequate merely to address how the bundled product, delivered Federal power, was to be priced (to recover the cost of producing and transmitting such power). Now that BPA was expressly authorized to take on a new and distinct business operation, the wheeling of non-Federal power, the Transmission Act directly addressed the question of the costs to be recovered from transmission rates. Section 10 of the Transmission Act required that the "recovery of the cost of the Federal transmission system shall be equitably allocated between Federal and non-Federal power utilizing such system". 16 U.S.C. § 838h. As explained in section II herein, the Federal Energy Regulatory Commission has uniformly interpreted Section 10 of the Transmission System Act as prohibiting collection of power costs in wheeling rates. In short, the rates for wheeling non-Federal power were limited to an equitable share of BPA’s total transmission costs.

The Regional Act

With the passage of the Northwest Power Planning and Conservation Act of 1980, 16 U.S.C. § 839 et.seq. (Regional Act), Congress took a major step towards further specifying how BPA was to set power rates. In Section 7(a)(1), after noting the costs of additional responsibilities assigned to BPA under the Regional Act, Congress reiterated the overall rate directive, largely by referring to pre-existing law.

"The Administrator shall establish . . . rates for the sale and disposition of electric energy and capacity and for the transmission of non-Federal power. Such rates shall be established . . . 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 . . . over a reasonable period of years and other costs and expenses incurred by the Administrator pursuant to this chapter and other provisions of law. Such rates shall be established in accordance with sections 9 and 10 of the Federal Columbia River Transmission System Act (16 U.S.C. § 838), section 5 of the Flood Control Act of 1944, and the provisions of this chapter." 16 U.S.C. § 839e(a)(1).

The Regional Act went much further than previous Acts, and under Sections 7(b), 7(c) and 7(f), specified how BPA was to set power rates for various customer classes. More importantly for this analysis, one stated purpose of the Regional Act is

"to provide that the customers [defined in Section 3(7) of the Act to mean ‘anyone who contracts for the purchase of power from’ BPA] of the Bonneville Power Administration continue to pay all costs necessary to produce, transmit, and conserve resources to meet the regions power requirements, including amortization on a current basis of the Federal investment in the Federal Columbia River Power System . . . ." 16 U.S.C. § 839(4) (emphasis added).

Pursuant to the stated purpose of requiring power customers to pay all of BPA’s power costs under Section 7(g), Congress expressly required that certain costs be equitably allocated to power rates in accordance with generally accepted ratemaking principles.

"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 measures, uncontrollable events, reserves, the excess costs of experimental resources . . . , the cost of [billing] credits . . . , operating services, and the sale of or inability to sell excess electric power." 16 U.S.C. § 839e(g).

Section 7(g) explicitly requires that BPA allocate to power rates all conservation costs, fish and wildlife costs, and the benefits of the ability and cost of the inability to sell excess electric power. Moreover, 7(g) expressly recognizes that such allocation is (and must be) in accordance with "generally accepted ratemaking principles". Under such principles, costs are functionally separated and recovered from the customers that use specific facilities and thus cause the costs to be incurred. See infra fn. 4.

With respect to wheeling rates, however, Congress made no change to pre-existing law which, under Section 10 of the Transmission System Act, required that "[t]he recovery of the cost of the Federal transmission system shall be equitably allocated between Federal and non-Federal power utilizing such system."

II. FERC’S CONSISTENT INTERPRETATION OF
"EQUITABLY ALLOCATED"

FERC has consistently interpreted Section 10 of the Transmission System Act as restated in Sections 7(a)(1) and 7(a)(2)(C) of the Regional Act as prohibiting the use of transmission rates to collect revenues to pay power costs. In the very first rate case under the Transmission Act standards (1976 rates), FERC declared that its duty was to determine whether "the rate schedules have been constructed on a rational basis consistent with the statutory standards". Order Remanding Rates Without Prejudice, 13 FERC ¶ 61,185, at 61,383 (Dec. 1, 1980). FERC remanded BPA’s transmission rates to BPA for, among other things, "a demonstration of the rational basis for the [Administrator’s] determination of the annual cost of the transmission system."

Upon its review of BPA’s response to its remand order, FERC concluded that BPA’s transmission rates fell far short of its transmission revenue requirement. Nonetheless, FERC approved BPA’s transmission rates for the now-past "locked in" period with the understanding that BPA would file rates that recovered the deficit from transmission rates developed in its next transmission rate case. FERC then observed that BPA

"does not maintain a separate accounting of costs, revenues and deficits of the transmission system attributable to the Federal and non-Federal users. In order to assure that this deficit over the locked-in period [a deficit arising from past transmission rates that were too low] is properly accounted for, we shall require that Bonneville provide a separate accounting for its transmission system separate and apart from its accounting for its generating system. Bonneville shall be required to provide a readily identifiable accounting of its transmission system costs and the revenues generated from its use, along with the status of repayment of each major segment of investment in transmission facilities. Only by providing such an accounting can the Commission assure that the statutory standards of sections 9 and 10 of the Transmission Act have been met, and that Bonneville’s rate schedules will provide a sufficient level of revenues to Bonneville to repay the U.S. investment in the system over a reasonable period of time. Such an accounting will also allow the Commission to more easily determine whether transmission costs have been equitably allocated between Federal and non-Federal users." Order Confirming and Approving Transmission Rates, 20 FERC ¶ 61,142, at 61,314-15 (Aug. 3, 1982) (emphasis added).

FERC then ordered BPA to maintain a separate accounting of the "costs, revenues and deficits of the transmission system attributable to the Federal and non-Federal wheeling customers. . . ." Id.

That transmission rates are to be set to cover only transmission costs, consistent with generally accepted ratemaking principles, is implicit in this Order. More explicitly, FERC required that deficits in one function must be recovered in later rates applicable to that same function. Otherwise, the requirement that transmission costs be equitably allocated would not be met. [ That same decision also made it clear that customers are to be assigned costs only for those services they use, and not other services. For example, when certain transmission customers complained that they "pay for approximately 20 percent of the transmission system but then are not allowed full use of the share that they have paid for", the Commission declared that it was "in general agreement that the customers should be provided access to the full portion of the services for which they are being assigned costs". Order Confirming and Approving Transmission Rates , 20 FERC ¶ 61,142, at 61,314 (Aug. 3, 1982). This holding is again inconsistent with any notion that transmission customers might be charged on account of costs arising from generation plants that they do not use.]

FERC has applied the equitable allocation standard under the Regional Act (which incorporates Section 10 of the Transmission Act) exactly as it applied that standard under the Transmission Act. FERC approved the initial transmission rates that BPA promulgated after the Regional Act notwithstanding challenges to the assignment of costs between transmission and generation, because "potential errors from over assignment of costs to this function [transmission] are not expected to be significant", and "in light of Bonneville’s assurance that a separate accounting will be forthcoming in its 1983 rate filing . . .". Order Confirming and Approving Rates on a Final Basis, 23 FERC ¶ 61,377, at 61,800 (June 15, 1983).

Notwithstanding BPA’s promises to FERC, during FERC review of the 1983 rates, BPA sought reconsideration of FERC’s directive to prepare a separate accounting for costs, revenues and deficits of transmission and generation. FERC denied interim approval of BPA’s rates because of BPA’s failure to provide the accounting, stating that:

"BPA’s refusal to comply with our order precludes any kind of tracking system which demonstrates that (1) transmission revenues are only being used to pay transmission costs; (2) costs assigned to transmission are only transmission related costs; and (3) any deficiencies or surpluses in transmission revenues are being tracked and collected or credited to the appropriate customer class. Without this information, we cannot determine whether BPA’s transmission rates satisfy the statutory requirements of the Regional Act, as well as similar provisions in sections 9 and 10 of the Federal Columbia River Transmission Act." Order Granting Interim Approval of Rates in Part, Etc., 25 FERC ¶ 61,140, at 61,375 (Oct. 26, 1983) (footnote omitted). [ In the footnote, the Commission warned that "to the extent that something other than transmission costs is recovered from non-Federal users under the transmission rate, the allocation between Federal and non-Federal users is directly at issue." Id . n.9.]

BPA requested relief from the portion of the 1983 interim rate Order which required BPA to submit an accounting for tracking transmission and generation costs. The Commission objected that the alternative accounting proposal BPA offered would not be adequate for the Commission to perform its regulatory function.

"BPA would separately track its transmission and generation costs, it would subsequently roll all of these costs together into its next repayment study and ultimately into the design of its rates. We would therefore be unable to determine which costs were or were not being recovered in BPA’s rates. Because revenue deficiencies are not experienced uniformly over the generation and transmission components of the system, an adequate tracking system must ensure that the deficient revenues from one component are not being subsidized by the other component." Order Granting Request for Temporary Interim Rates, Etc., 26 FERC ¶ 61,096, at 61,237 (Jan. 27, 1984) (emphasis supplied).

Accordingly, the Commission ordered BPA to "develop separate repayment studies for its generation and transmission systems". Id. BPA subsequently filed a report on its compliance with this directive. BPA’s report provoked another order from FERC finding that additional specificity was needed to allocate deferrals (i.e., payments to the U.S. Treasury falling below planned amounts) between generation and transmission and between customer classes to show that the costs were allocated equitably. Order Accepting Filing, Etc., 28 FERC ¶ 61,325 (Sept. 14, 1984). By the time FERC was asked to approve the 1985 rates, BPA had provided considerably more information, but FERC still called for greater precision as to "how costs and revenues have been assigned between the Federal and non-Federal users of the transmission system based on repayment accounting". Order Confirming and Approving Rates, Etc., 39 FERC ¶ 61,078, at 61,209 (April 29, 1987). FERC has never wavered from its requirement that BPA avoid cross-subsidizing generation or transmission with revenues collected from rates applicable to the other function.

In review of the 1987 rates, BPA "assert[ed] the right to apply revenues from one function, such as transmission, to temporarily support unrecovered costs of the other function". Order Confirming and Approving Rates on a Final Basis, 54 FERC ¶ 61,235, at 61,693 (March 5, 1991). The Commission voiced "no objection" to this, but warned that

"the Commission has previously recommended that, if Bonneville chooses to temporarily apply revenues from one function to the unrecovered costs of the other function, Bonneville account for these funds, repay them from the appropriate revenues, and charge the costs to the appropriate customers. We note that in the 1989 submittal, Bonneville has, in fact, made an effort to do just this." Id.

It must be noted that the BPA did not request authority to set transmission rates to recover power cost, nor did the Commission approve such a proposal. The Commission simply allowed BPA to manage its cash prudently as long as the funds generated by the unintended overcollection of transmission revenues was accounted for in a manner so as not to shift any costs to transmission rates.

In its order reviewing 1993 BPA rates, FERC again reaffirmed "the same basic approach to implement the equitability standard". Order Confirming and Approving Rates, Etc., Docket Nos. EF93-2011-001 et al., slip op. at 7 (FERC June 20, 1994).

Following this string of FERC decisions, it is clear that not only must BPA separate transmission and generation costs in setting rates, but must also account separately for revenues thereafter collected as between transmission and generation. BPA has limited discretion to spend funds collected in transmission rates for purposes other than covering transmission costs on a "temporary" basis, but once BPA collects revenues to cover a particular transmission cost, it cannot set transmission rates to recover those costs again. Transmission rates simply cannot be set to cover non-transmission costs. Under the Regional Act, Congress specified that power customers are "to continue to pay all" power-related costs. 16 U.S.C. § 839(4).

III. THE ENERGY POLICY ACT OF 1992

The Energy Policy Act of 1992 clarified and expanded FERC’s authority to order transmission utilities to offer wholesale transmission services, and provided that rates for such services would "permit the recovery by such utility [providing the service] of all the costs incurred in connection with the transmission services and necessary associated services . . .". 16 U.S.C. § 824k(a). With respect to BPA, the Act granted FERC authority, pursuant to 16 U.S.C. §§ 824i and 824j, to order BPA to provide transmission services under terms and conditions FERC would establish. In applying this section to BPA, Congress instructed FERC that:

"(i) the provisions of otherwise applicable Federal laws shall continue in full force and effect and shall continue to be applicable to the system; and

"(ii) the rates for the transmission of such electric power on the system shall be governed only by such otherwise applicable provisions of law and not by any provision of [the Energy Policy Act] except that no rate for the transmission of power on the system shall be unjust, unreasonable, or unduly discriminatory or preferential, as determined by the Commission." 16 U.S.C. § 824k(i)(1)(B)(ii).

Congress’ reaffirmation of the "provisions of otherwise applicable Federal laws", following FERC’s consistent interpretation of the Transmission Act and the Northwest Power Act as prohibiting cross-functional subsidies between transmission and generation, is significant. The legislative history specifically discusses how these Acts had been previously applied. This is strong evidence that FERC’s interpretation of Section 10 of the Transmission Act was consistent with the intent of Congress under that Act and suggests strongly that Congress intended such policies to continue under the Energy Policy Act.

The use of the terms "unjust, unreasonable, or unduly discriminatory or preferential" by Congress is also instructive. These are the exact criteria that FERC has always been required to apply in setting rates for the investor owned utilities that if regulates. 16 U.S.C. §§ 824d and 824e. They are also the statutory criteria from which FERC has developed its generally accepted ratemaking principles. [ Utility rate regulation strives to assign to each customer class the costs associated with serving the customer class. There are three major steps in this analysis: (1) functionalization; (2) classification; and (3) allocation. Under FERC regulation for public utilities generally, functionalization requires assigning costs to one of five major categories, including production, transmission, distribution, general and intangible, and common and other. Thus private utilities filing for rate approval from FERC are explicitly required to segregate costs in accordance with these functional classifications. 18 C.F.R. § 35.13(h). After functionalization, costs are classified as being associated with either demand, energy, or other. The final step is allocating these costs to customer classes. Under these rules, and under utility regulation generally, each function must be supported by the revenues it generates, and not by subsidization from other functions. As FERC has emphasized, "the fundamental theory of Commission ratemaking is that costs should be recovered in the rates of those customers who utilize the facilities and thus cause the cost to be incurred". Northern States Power Co. , Order No. 383, 64 FERC ¶ 61,324, at 63,379 (Sept. 21, 1993) (emphasis added). For this reason, "in designing a rate for a transmission-only customer, a utility must unbundle the components of its cost of service in order to identify specifically those costs which relate to the provision of transmission service". Id.]

These principles have always prohibited the recovery of power costs in transmission rates. When Congress declared that pre-existing law shall continue in full force and effect and simultaneously directed FERC to assure that BPA’s transmission rates shall not be "unjust, unreasonable or unduly discriminatory or preferential", Congress plainly expressed its understanding that the prior law applicable to BPA is consistent with the Federal Power Act rate directives that prohibit cross-subsidies of power customers with revenues collected from wheeling customers.

IV. THE ARGUMENTS ADVANCED FOR MANDATORY OR PERMISSION CROSS-SUBSIDIZATION LACK MERIT

We have heard two arguments advanced to support the theory the BPA is free to charge wheeling customers for costs incurred to generate power or costs incurred to ameliorate the environmental effects of such generation. The first argument simply points to the broader ratemaking standards in Section 5(a) of the Bonneville Project Act, Section 5 of the Flood Control Act, Section 9 of the Transmission System Act and Section 7(a)(1) of the Regional Act and the existence of a single BPA fund under the Transmission System Act, to suggest BPA may recover anticipated or unanticipated deficits in power revenues by overcharging wheeling customers. Second, parties point to Section 4(h)(10)(A) of the Regional Act which directs BPA to use the BPA fund and the authorities available to BPA under law to protect, mitigate and enhance fish and wildlife. 16 U.S.C. § 839b(h)(10)(A). Both arguments imply that, because BPA has certain responsibilities, it may discharge these responsibilities as it sees fit. These arguments lack merit and they are directly contrary to specific rate directives and the uniform interpretation given by FERC to those rate directives.

Overall Cost Recovery

In one form or another, each of the major statutes that addresses ratemaking, direct BPA to set rates with regard to recovery of the cost of producing and transmitting electric energy. Project Act at 16 U.S.C. § 832f; Flood Control Act at 16 U.S.C. § 825s; Transmission System Act at 16 U.S.C. § 838g; and Regional Act at 16 U.S.C. § 839e(a)(1). The more recent two Acts direct BPA to set rates for the disposition of electric power and the transmission of non-Federal power and provide that such rate shall be established "having regard to recovery" (in the Transmission Act) or "to recover" (in the Regional Act) BPA’s costs. BPA and others have argued recently that because rates in aggregate should be established to recover costs in aggregate, BPA must make up shortages from one rate class (e.g., power rates) by surcharging other rate classes (e.g., transmission). They also claim that this view is reinforced by the fact that BPA places all of its receipts into a single BPA fund at Treasury.

This argument is contrary to specific provisions in the Transmission System Act and the Regional Act that define how various rates are to be set. As noted above, the "equitably allocated" language in Section 10 of the Transmission Act, which is expressly referenced in Section 7(a)(1) of the Regional Act, prohibits the very cross-subsidies that BPA claims are permitted. Section 7(g) of the Regional Act provides one vehicle the for flexibility BPA to needs to meet its overall cost recovery goal, by directing BPA to "equitably allocate to power rates" various costs and benefits, including those resulting from the ability or inability to sell excess power. But, by its express terms, the Section 7(g) flexibility is limited to power rates.

BPA does not enjoy similar discretion when it comes to wheeling rates. Not only did Congress reaffirm the Transmission Act equitable allocation of transmission costs directive to BPA, Congress also required FERC to find that "insofar as transmission rates are concerned, [the rates] equitably allocate the costs of the Federal transmission system between Federal and non-Federal power utilizing the system. . ." before rates could become effective. 16 U.S.C. § 839e(a)(2)(C). In short, in the Regional Act, Congress reiterates that the sum of the parts (i.e., the rates for various classes of service) must equal the whole (i.e., that total rates must be based on total costs), but it also specified how each of the major parts was to be defined. Within the flexibility granted to BPA to recover capital costs (see below), BPA is bound to meet all of these statutory directives.

By the same token, the existence of a single BPA fund at the Treasury says nothing about how BPA is to establish rates. The BPA fund is analogous to a bank account, and BPA is authorized to use monies in that account for a number of statutory purposes. 16 U.S.C. § 838i(b)(1)-(12). The Transmission Act does not purport to define how much may be spent on any particular authorized purpose nor to specify the proper way to account for the use of money from the fund. Whatever may be the implication for BPA cash management, the existence of a single fund does not in any way suggest that BPA may set transmission rates to recover power costs. This contention is directly contrary to the consistent interpretation of the ratemaking directives in the Transmission Act adopted by FERC since the very first transmission rate case under that Act. FERC requires that any temporary use of transmission revenues for power purposes be treated as a loan and repaid with interest from power revenues.

Repayment Flexibility

The primary mechanism available to BPA to address revenue shortfalls is the inherent flexibility in its obligations to pay the U.S. Treasury for the investment in the Federal Systems. The Project Act, Flood Control Act and Transmission Act each direct that BPA establish rates "having regard to the recovery (upon the basis of the application of such rate schedules to the capacity of the electric facilities of the projects) of the cost of producing and transmitting such electricity, including the amortization of the capital investment allocated to power over a reasonable period of years. . ." When first constructed (and for some time thereafter), the projects had considerable excess capacity, and BPA was directed to set the rates so that consumers need only to pay for the portion of capacity they were using, not to cover all costs of the projects. In other words, BPA was required to set rates with regard to recovery of costs but there was no absolute obligation on BPA’s part to actually recover all costs on a current basis if, for example, only half of the capability of the system could be sold at cost-based rates. If customers had to cover all costs of the projects under all circumstances, rates could be prohibitively high.

In 1979, the Department of Energy issued Order No. RA 6120.2 to clarify how BPA should meet its obligation to repay the U.S. investment in a "reasonable amount of time", establishing the general rule that "[u]nless otherwise prescribed by law, each dollar of investment is to be repaid with interest within a period not-to-exceed 50 years". Order No. RA 6120.2, at 8. The Order also established that the U.S. Treasury was lowest in "priority of revenue application" after "operation and maintenance (O&M), purchased and exchange power, transmission service and other, and interest expense and any appropriation amortization of revenue bonds". Id. at 5. BPA is required to prepare repayment studies that show its ability to cover the foregoing costs during the year they are incurred (barring "unusual circumstances"); the repayment studies need only demonstrate that future revenues will cover repayments of the Federal investment within 50 years. Id. at 14. This Order, consistent with the statutes, underscores BPA’s flexibility in scheduling Treasury repayments.

Prior to adoption of the Regional Act, BPA had on several occasions failed to make scheduled payments to the U.S. Treasury, even though its power rates were well below market. As a result, one purpose of the Regional Act was "to provide that the customers . . . continue to pay all costs necessary to produce, transmit, and conserve resources to meet the region’s electric power requirements, including the amortization on a current basis of the Federal investment in the Federal Columbia River Power System". 16 U.S.C. § 839(4). Nonetheless, the Northwest Power Act made no change in the general rule: Under the Northwest Power Act, and under Order No. RA 6120.2 (which remains in effect), BPA need only repay the Federal investment in generation and transmission facilities over a reasonable number of years, and repayments to the U.S. Treasury are the lowest priority for the Administrator in the event of revenue shortfalls. See also Order Confirming and Approving Rate Schedules on a Final Basis, 75 FERC ¶ 62,010, at 64,015 (April 4, 1996) (". . .the Northwest Act only requires that the Federal investment be repaid sometime within the repayment period (which, as a general practice, is 50 years)") (Division Director approves 1995 PNCA rates).

Although it did not change BPA’s repayment obligation, the Regional Act provided an economic incentive for BPA to meet scheduled, but not obligatory, payments to the Treasury. Section 8(d)(4) of the Regional Act amended § 13(a) of the Transmission Act and authorized the Secretary of Energy to increase the interest payable on BPA’s obligations to the Treasury in the event that BPA missed scheduled payments as calculated under RA 6120.2. However, the interest rate would only be increased if the revenue shortfalls occurred for reasons not beyond the control of the Administrator. 16 U.S.C. § 838k(a) Shortfalls in power sales from adverse market conditions would not trigger this penalty.

Moreover, the Act specifically recognized potential limitations on BPA’s ability to sell power at higher rates. "Before such rate is increased, the Secretary of the Treasury, in consultation with the Administrator and the Federal Energy Regulatory Commission, must be satisfied that the Administrator will have the ability to pay such interest rate, taking into account the Administrator’s obligations." 16 U.S.C. § 838k(a) (as amended). The penalty would terminate once BPA’s payments became current. Id.

Thus to the extent that repayment of WPPSS bonds and salmon costs create a risk of revenue shortfalls at BPA, the law provides that BPA raise power rates or defer Treasury repayments to cover those shortfalls; it has no authority to increase wheeling rates. [ Such a result is particularly appropriate in that the Administration has determined to pursue national Endangered Species Act goals by reducing power production from the Federal Columbia River Power System, although the generating capacity (and revenue generating capacity) remain much higher. Under the early statutes, rates were always supposed to be reduced to the extent that full capacity utilization was not realized. Then, the cause was an inability to market the full capacity of the projects, a problem now re-created by the spring "fish flush".]

Section 4(h)(10)(A) of the Regional Act

When Congress enacted the Regional Act, it made mitigation of fish and wildlife an express purpose of the Act (16 U.S.C. § 839(6)); it made carrying out the purposes of the Regional Act an authorized expenditure from the BPA fund (16 U.S.C. § 838i(b)(12)); and, it directed BPA to use the BPA fund and the "authorities available to the Administrator" to mitigate fish and wildlife. 16 U.S.C. § 839b(h)(10)(A). It has been argued that this quoted language from Section 4(h)(10)(A) of the Regional Act authorized BPA to exercise its ratemaking authority, however necessary, to obtain funds for fish and wildlife.

This argument is erroneous. Section 4(h)(10)(A) is not a grant of authority; it instructs BPA on how to use its existing authorities. [ The Northwest Power Act was "not intended to create any new obligations with respect to fish and wildlife". H. Rep. No. 96-976, Pt. II, 96th Cong., 2d Sess. 37 (Sept. 16, 1980).] Section 10 of the Transmission System Act prohibits BPA from setting wheeling rates to recover power related costs and Section 7(g) of the Regional Act directs BPA to allocate fish and wildlife costs to power rates. Thus, there are no "authorities available" to the Administrator under the Regional Act or any other act to shift fish costs to transmission rates.

V. NATIONAL POLICY CONSIDERATION

In Order No. 888, FERC found very substantial benefits would accrue from providing non-discriminatory open access to transmission services. Promoting Wholesale Competition through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, at 50 (FERC April 24, 1996). FERC found that functional unbundling of transmission and generation services was necessary to avoid cross-subsidies between transmission and generation. See Order No. 888, at 52-61. FERC also ordered "utilities to account for all uses of the transmission system and to demonstrate that all customers (including the transmission provider’s native load) bear the cost responsibility associated with their respective uses". Order No. 888, at 198.

FERC was anxious in particular to avoid efforts by utilities to use their transmission monopolies to subsidize generation:

"It is in the economic self-interest of transmission monopolists, particularly those with high cost generation assets, to deny transmission or offer transmission on a basis that is inferior to that which they provide themselves. The inherent characteristics of monopolists make it inevitable that they will act in their own self-interest to the detriment of others by refusing transmission and/or providing inferior transmission to competitors in the bulk power markets to favor their own generation, and it is our duty to eradicate unduly discriminatory practices". Order No. 888, at 136-37 (emphasis added).

BPA is, of course, a transmission monopolist with precisely these incentives. Under the laws discussed above, FERC’s duty to eradicate discrimination through excessive transmission charges crafted to subsidize generation losses extends to its review of BPA rates. See, e.g., 16 U.S.C. 824k(i)(1)(B)(ii) and 16 U.S.C. 839e(a)(2)(C).

FERC did permit utilities to recover "legitimate, prudent and verifiable stranded costs" occurring "as a result of customers leaving the utilities’ generation systems through Commission-jurisdictional open access tariffs or FPA section 211 orders". Order No. 888, at 451. However, FERC rejected any notion that transmission customers generally should bear generation costs arising from the transition to open access. Rather, FERC determined that "extra-contractual wholesale stranded cost recovery is allowed for only a discrete set of requirements contracts for which the utility can demonstrate that it had a reasonable expectation of continuing service . . .". Id. at 457. Thus FERC will allow utilities to recover stranded costs only through "direct assignment of stranded costs to the departing wholesale generation customer", not from remaining customers generally—a conclusion FERC characterized as the "preferable approach for both legal and policy reasons". Order No. 888, at 477.

Thus suggestions to address BPA’s possible short-term cost recovery problem by surcharges on transmission customers generally are inconsistent with FERC’s approach to stranded costs generally, as well as being contrary to the BPA-specific statutes discussed above. The rest of the country is moving toward an open market in electricity in order to secure the substantial benefits of competition in the sale of electricity. It would be an extraordinary contravention of national policy if Federal involvement in transmission were utilized to deprive citizens of the Pacific Northwest of those benefits, and to saddle the region with monopoly transmission pricing that could move it from being a low-cost energy region to a high-cost energy region.