The following discussion draft was written by Paul Murphy to summarize the discussion of this topic by the transmission work group. The goal of the discussion at this stage was to identify features of regulation of Bonneville by the FERC that would be equivalent to the FERC's regulation of investor-owned utilities. The working group's discussions have made it clear that there may be reasons for FERC regulation of Bonneville to deviate substantially from "IOU-equivalent." The next stage of the working group's discussions will attempt to identify to what degree and in what areas such deviations are appropriate.

FERC EQUIVALENT REGULATORY OVERSIGHT OF BPA

The following is a list of issues regarding regulation of the Bonneville Power Administration by the Federal Energy Regulatory Commission. The answer to each question was selected to produce a regulatory regime "equivalent" to FERC regulation of the investor owned utilities over which FERC has jurisdiction.

There are differences between BPA and IOUs that present practical problems to implementing full equivalency. For example, BPA has no shareholders that have agreed, in effect, to bear certain risks, (e.g., lower than expected earnings) in exchange for a planned "risk premium" as part of the planned return on equity. Thus "equivalency" might have to be supplemented with specific mechanisms to deal with issues such as variability of revenues, who pays for mistakes and how do old contracts fit into an "equivalent" regulatory regime. In general, the following equivalency rules do not attempt to address any such special mechanism.

1. To what degree must the BPA’s costs be functionalized to transmission and generation for rate purposes?

Answer: Unless otherwise allowed under the just and reasonable standard, transmission rates would be required to be based exclusively on transmission costs (which may in turn require specific definition).

2. How must BPA’s capital costs be calculated?

Answer: BPA’s capital recovery would include only depreciation and interest. [ BPA’s cost of capital currently only includes interest. For an IOU, the cost of capital includes a rate of return on equity. The equity return generally includes a risk premium, which in part compensates shareholders for the variability of earnings. Any regulatory regime for BPA would also have to address variability of costs and revenues.]

3. Does FERC have any role in determining the prudency of BPA’s expenditures so as to include or exclude them from transmission rates?

Answer: FERC would be required to approve recovery of past costs (including costs associated with historic commitments) but, FERC could disallow for rate purposes the costs associated with imprudent post-separation expenditures. [ There is no agreement that it is politically feasible to allow FERC to disallow "imprudent" expenditures because, by default, such imprudent expenditures would be borne by Treasury.]

4. How are BPA’s transmission rates set?

Answer: The 7(i) process could be eliminated, and BPA’s proposed transmission rates would be approved or modified based on a just and reasonable standard as determined in an evidentiary hearing before FERC in which BPA had the burden of proof.

5. For what period are BPA’s transmission rates valid?

Answer: FERC approves rates for an indefinite period, and it can investigate the continued reasonableness of existing rates on its own motion or in response to customer complaints. BPA may submit new rates for FERC approval at any time.

6. May BPA discontinue any class of service without FERC approval?

Answer: No.

7. Does FERC have jurisdiction over BPA transmission contracts?

Answer: Yes, FERC can review contracts for reasonableness prior to the effectiveness and can invalidate effective rate contracts in certain narrow circumstances (e.g., threatens the financial viability of the utility). [ In all probability, all existing BPA contracts would probably be grandfathered and not be subject to revision by FERC.] FERC has the authority to interpret and resolve disputes arising from approved contracts.

8. On what criteria should FERC judge requests for access to BPA’s transmission system?

Answer: Criteria identical to that applicable to IOUs.

9. What authority should the legislation give FERC regarding BPA’s joining an ISO?

Answer: The legislation should permit BPA to join an ISO and grant FERC the same authority over BPA that FERC has with respect to an IOU.

10. How should BPA recover stranded costs from bundled power customers that become transmission only customers?

Answer: Unless otherwise covered by contract, BPA should only recover legitimate, verifiable and prudent costs incurred with the reasonable expectation of continuing service to specific customers through targeted charges to such individual customers. Stranded costs are calculated as the difference between expected revenues from the reasonably expected sales and the market value of the power.