Northwest Energy Review Transition Board
Transmission Workgroup

RE: Payment of the Net-Billed Debt by Bonneville

Dear Sirs:

As Special Counsel for the Eugene Water & Electric Board (EWEB), I reviewed the legal analyses recently furnished the Transmission Workgroup by Bonneville and Paul Murphy. I presume Mr. Murphy writes on behalf of the Direct Service Industries (DSI).

I have been involved in the legal representation of EWEB in connection with its thirty percent ownership of Trojan for almost twenty-five years. During that period Trojan was financed, refinanced, repaired, closed and decommissioned. The Transmission Act and the Regional Act were enacted. Both of these legislative actions had direct or indirect repercussions on the security afforded the net-billed bonds by the net-billing agreements and Bonneville's resulting obligation to make cash payments to meet all net-billed costs, including the amortization of the debt.

Having reviewed both the Bonneville and DSI legal papers, I provide the following input.

1. Under current law, Bonneville is required to charge sufficient sums for all Bonneville goods and services, including transmission, to reasonably ensure that it will meet its revenue requirement.
2. The Transmission Act established a continuing legislative appropriation in the form of the Bonneville Fund and provides that all of Bonneville’s receipts, collections and other recoveries of cash from all sources must flow into the Fund.
3. Pursuant to statutory and contractual provisions, Bonneville is obligated to make cash payments out of the Bonneville Fund to meet all net-billing costs not otherwise met by net-billing credits. Bonneville is obligated to make these cash payments on a priority basis with its operation and maintenance expenses, and in advance of repayment of Treasury obligations.
4. The entire Bonneville Fund is pledged to the payment of Bonneville obligations, thereby making transmission as well as power sales revenues available, on the priority basis noted in point 3., above, to the payment of the net-billed debt.
5. The net-billed bonds were marketed and rated on the basis of the security afforded by Bonneville, as above-described.
6. Bonneville does retain the legal right to defer on payments to the Treasury, as noted in the DSI paper. However, the ability to defer does not relieve Bonneville of the legal obligation to secure the payment of the net-billed debt by priority payments from the Bonneville Fund.
7. Any reduction in the security afforded by Bonneville to the payment of the net-billed debt resulting from the manner in which a separation of the Bonneville power and transmission functions occurs will expose the Region and Bonneville to legal actions by bond fund trustees and other entities. Such lawsuits will seek to determine whether the separation is lawful in light of the commitments of Bonneville to the net-billing participants, the net-billed bond holders and the owners of the net-billed portions of the net-billed facilities.

I believe various conceptual methods exist that could lawfully result in a separation of the Bonneville power sales and transmission functions greater than that which currently exists. However, I also believe that any separation of function or control cannot result in a reduction of the existing security afforded the payment of the net-billed debt by the net-billing arrangements. It is counter-productive in my view to design a method of separation that invites protracted and probably meritorious legal actions when other lawful concepts may be available.

Thank you for your consideration of these comments. I would be pleased to answer any questions raised by this input or to provide more detailed comments if that would be helpful to your deliberations. Essentially, the Bonneville paper is correct and the DSI paper is incorrect insofar as the latter implies that Bonneville's only recourse in the event of a revenue shortfall is to raise power rates or defer Treasury payments. Bonneville has an absolute obligation to pay the net-billed debt and must ensure through its power and transmission rate-setting and collection process that sufficient revenues flow into the Bonneville Fund to meet this obligation. Deferral of Treasury payments is an altogether different subject and should not be considered a replacement for the ability to adjust transmission rates as needed to meet Bonneville's net-billed obligations.

Sincerely,

J. Laurence Cable