BPA should be required to account for its costs (both investments and expenses) pursuant to the FERC Uniform System of Accounts. BPA should substantially improve its accounting for corporate overheads associated with transmission and generation such that most such cost can be directly assigned to the appropriate function when incurred and the need for after-the-fact allocations are kept to an irreducible minimum.

BPA’s transmission rates should be set in accordance with FERC’s transmission pricing policies. [See Item 5]

Cash Management. BPA should not be permitted to use its available cash to meet its overall (i.e., power) cash requirements unless BPA properly accounts for the use of cash. BPA’s cash management practices should not be allowed to adversely affect transmission rates. [ The proposal for "cash management" is based on the assumption that it will be deemed appropriate to provide for full recovery of transmission costs with transmission rates, no matter what ( i.e. , that the U.S. Treasury accepts no risk for transmission cost recovery). An alternative would be to adopt a risk premium approach to capital recovery that provides the Federal government with the equivalent of an equity return, and to have the Federal Treasury bear the risks that from time to time, revenues will fall short of expectations. The "equity return" approach would allow for the adoption of strict FERC equivalency on all ratemaking issues (Issue Nos. 1, 2, 3, and 4). For example, if BPA chose to use some of the cash associated with the equity return on transmission assets to pay power bills ( i.e. , if Treasury agreed to subsidize a loss in the power business by foregoing some or all of its return), that would be acceptable.]

In the event of an actual shortfall (as opposed to forecasting a shortfall as part of setting rates) between revenues and cost (expenses plus planned payments to Treasury) in either the generation or transmission function, primary reliance should be on using all lines of credit, such as unused borrowing authority, and all repayment flexibility available to the function experiencing the revenue shortage.

After exhausting all other sources of credit, an interfunctional loan payable with market based interest on a specific schedule could be allowed for nonrecurring shortfalls. The loan repayment should be reflected in future rates of both functions (i.e., a cost to the borrowing function and a revenue source to the lending function). Any future surplus in the borrowing function would be dedicated first to prepayment of the loan. Any such interfunctional loan would be a last resort and would be subject to strict controls to protect transmission customers. In the event an interfunctional load is triggered, a complete independent audit of the function suffering the deficiency should be mandated.

As noted above, anticipated or chronic shortfall of revenues in one function to cover the cost of that function should be addressed as an extraordinary event subject to special rules.

The capital recovery portion of BPA’s rates should be set to recover interest plus depreciation (instead of interest plus the higher of depreciation or amortization) plus a "risk premium" that could be modeled after FERC’s treatment of non-IOU capital needs. An upper bound must be set on the cash reserve that BPA would be allowed to accumulate by charging a risk premium based on the actual needs of the transmission business.

Under no circumstances should normal transmission rates be raised to address shortfalls incurred by the power business line.

Equivalency:

b. Substantive Standards. BPA’s rates must meet the just, reasonable, nondiscriminatory and nonpreferential standards applicable to IOU rates, and, subject to issues #2, 3, and 4 above, such standards must be given the same meaning for BPA as those terms have for IOUs. (We believe this is now the law under the "equitable allocation" standard in the Transmission System Act and the prohibition against unjust, unreasonable, or unduly preferential or discriminatory transmission rates in EPA-92.) Any ambiguity that the obligation to "recover total costs" produces a result different from the normal just and reasonable standard must be eliminated.

c. Relevant Issues. FERC has regulatory jurisdiction over all issues relevant to BPA’s transmission rates.

d: Who Decides and What Standards of Deference Are Applicable. After BPA has tendered proposed rates to FERC for review, with the evidentiary record to support the rates (as developed under 7(i)), in FERC’s review:

• FERC would not be permitted to substitute its judgment for BPA’s on policy and discretionary issues as long as BPA’s proposed rates were based on reliable facts and meet the minimum requirements of applicable law (as interpreted by FERC). (Deference to BPA’s judgment.) In order to ensure that BPA could always exercise its discretion, any deficiencies in BPA’s rates would be remanded to BPA for correction. The law should be clear that a reviewing court could reverse FERC if FERC substituted its judgment for that of BPA.

• FERC would decide all issues of law, specifically that the proposed rates are not unjust, unreasonable, unduly discriminatory or preferential. (No deference to BPA.)

• FERC would review BPA’s decision and decide all disputed issues of fact raised by the parties at FERC based on the record developed in BPA’s full hearing. If FERC deems the record to be inadequate, it would remand to BPA to supplement. (No deference to BPA.)

• FERC’s decision (not BPA’s) would be reviewable under the Federal Power Act in the Ninth Circuit or D.C. Circuit Courts of Appeals. BPA and interested parties could appeal FERC’s decision. FERC’s decision would be reviewed under the 5 USC § 706 standards (e.g., arbitrary, capricious, unsupported by the record, not in accordance with law) which implies substantial deference to FERC’s decision.

This approach provides BPA with full discretion to establish its transmission rates in any fashion consistent with the outer boundaries established by law. Moreover, the continued use of the 7(i) process by BPA in the region assure that there would be no diminution of customers’ input into how those discretionary choices are made. Allowing FERC to interpret the law (i.e., the just and reasonable standard) assures consistency between the legal protection provided BPA’s transmission customers and the protection provided to customers using other systems. Allowing FERC to resolve disputed issues of fact assures an unbiased fact-finder. For example, if BPA continues to treat the southern intertie as a separate function, FERC could not require otherwise unless there were no factual basis for BPA’s decision, or BPA’s decision violates the law. It would not be enough that FERC might prefer a different result.

d. Procedural Issues. Unless otherwise specified by contract or existing law, BPA’s hearing would occur in Portland before a FERC ALJ for general transmission rate cases, as determined by FERC for § 211 requests, and as determined by BPA for other proceedings.

Hearings would be subject to the ex parte rule at BPA (to assure that BPA’s initial decision is based on the record) and BPA as well as parties would be subject to the ex parte rule at FERC.

The ALJ would issue a recommended decision which would not be binding on BPA (no deference). BPA’s decision could incorporate the ALJ recommendations and reasoning, or adopt different outcomes or reasoning, as long as the differences were adequately explained.

Transmission rates and supporting record would be filed at FERC under current procedures applicable to BPA, modified as appropriate to address the changes recommended herein.

FERC should have no role to review or modify existing transmission contracts, but it may be appropriate to grant FERC an expanded role in interpreting such contracts to resolve disputes.