Recommendations for FERC Equivalent Regulation of BPA Transmission
August 19, 1997
By
Jim Litchfield
[ The following recommended changes to ensure that the Regional Review’s recommendation to require "equivalent" FERC regulation of BPA’s transmission has not been review or approved by the IOUs due to schedule conflicts and the press of other business. These suggestions are provided to help the Transmission Separation Working Group to evaluate regulatory requirements that are likely to be supported by the IOUs.]
The following is a list of issues regarding regulation of the Bonneville Power Administration by the Federal Energy Regulatory Commission. The "Strict Equivalency" 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.
The Recommended Standards for BPA are wherever possible the requirement of unqualified Strict Equivalency for FERC’s regulatory role over BPA transmission. In some instances, some variation from strict equivalency was deemed necessary by virtue of BPA’s structure.
| Strict Equivalency: | Unless otherwise allowed under the just and reasonable standard, transmission rates would be required to be based exclusively on transmission costs as defined by the FERC Uniform System of Accounts. | |
| Recommended Standards for BPA: | A. | BPA should be required to account for its costs (both investments and expenses) pursuant to the FERC Uniform System of Accounts. |
| B. | BPA’s transmission rates should be set in accordance with FERC’s transmission pricing policies. | |
| C. | In the event of an actual shortfall (i.e., a shortfall not anticipated in the rate setting process) 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, available to the function experiencing the revenue shortage. | |
| D. | After exhausting all other sources of credit,
and if the other function has a surplus, an interfunction loan payable
with interest on a specific schedule should be allowed for nonrecurring
shortfalls. The loan repayment would be reflected in the future rates of
the borrowing function but would not affect the revenue requirement of the
lending function. Any future surplus in the borrowing function would be
dedicated first to prepayment of the loan. In the event an interfunctional
loan is triggered, a complete independent audit of the function suffering
the deficiency should be mandated.
After exhausting available credit, BPA should exercise any and all repayment flexibility available under the law. It is appropriate to change the current repayment practices reflected in RA 6120.2 see #2 below. |
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| E. | An anticipated chronic shortfall of revenues in one function to cover the cost of that function should be addressed as a "transition issue". Cross subsidies would not be allowed. |
| Strict Equivalency: | BPA’s capital recovery would include only depreciation and interest however, BPA would be provided a cash reserve (working capital) to allow for variability between its costs and revenues. | |
| Recommended Standards for BPA: | Adopt strict equivalency and exempt BPA from the requirements RA 6120.2. |
| Strict Equivalency: | Retroactive ratemaking is not permitted. | |
| Recommended Standards for BPA: | Retroactive rate making is generally not
permitted however, in the event of an unanticipated shortfall in revenues
that results in a Treasury deferral BPA should be allowed to recover the
deferral obligation in future rates . To be parallel, BPA should reflect
the effect of a surplus in future rates, either through the reduction of
future "reserve" build-up or by prepaying debt. The time period over which deferrals are recouped and surpluses are returned should be accomplished within the next fiscal year but no longer than over a five year period. |
| 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. [] (In effect, past expenditures are grandfathered.) | ||
| Recommended Standards for BPA: | FERC must have a role in determining what costs are appropriate to include in transmission rates. Otherwise, FERC regulatory review is meaningless. The appropriate role depends on the nature of the expense or investment item, and whether the reasonableness of the outlay had previously been addressed. | |
| A. | Investment Items.
1) FERC should have a role in determining the reasonableness of major (dollar limit?) planned investments before they are submitted to Congress for approval. Congress would, of course, not be bound by FERC’s recommendations and could authorize the investment and require its recovery in transmission rates. 2) FERC should have the authority to reject certain claimed investment costs as unrelated to the transmission business, except to the extent that Congress has previously spoken on the precise issue. |
|
| B. | Expense Items. If BPA continues to have a
forecasted test period, the issue is not so much a question of allowing
recovery of past expenses so much as approving in rates expenses that have
not yet been incurred. There may also be questions related to the accuracy
of forecasts.
1) FERC should be allowed to reduce forecasted expense levels (e.g., upon a showing that the expenses exceed reasonable levels or exceed a known and measurable forecast of what actually will occur). 2) FERC should have the ability to exclude expenses that it determines are unrelated to the transmission function. Note: FERC disapproval of an expense for ratemaking purposes would not be tantamount to prohibiting BPA from incurring the expense. On a real time basis, BPA would simply have to manage as to keep costs at a level sustainable with its revenues. |
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| C. | Other Items:
FERC should decide on the amount of the large of a cash reserve (working capital) that will be allowed for variability in BPA’s transmission costs and revenues. |
| Strict Equivalency: | The 7(i) process would 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. | |
| Recommended Standards for BPA: | The strict equivalency should be adopted,
except that any evidentiary hearing should take place in the Northwest
before a FERC Administrative Law Judge.
BPA should be encouraged to engage in some form of consultation and settlement discussions with customers, either before or immediately after filing new rates with FERC. |
| Strict Equivalency: | 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. | |
| Recommended Standards for BPA: | Adopt equivalency. |
| Strict Equivalency: | Yes. | |
| Recommended Standards for BPA: | Adopt equivalency. (This does not mean however, that contracts would automatically be extended beyond their terms or that BPA would be locked into the particular set of terms and conditions that presently exist.) |
| Strict Equivalency: | BPA would file all transmission contracts with FERC and FERC would review contracts for reasonableness prior to the effectiveness and could modify rate terms in contracts in certain narrow circumstances (e.g., threatens the financial viability of the utility). FERC also has the authority to interpret and resolve disputes arising from approved contracts. | |
| Recommended Standards for BPA: | All new BPA transmission contracts should be
subject to full FERC review of the same type applicable to IOUs.
FERC role in reviewing existing transmission contracts should be limited to reviewing the revision of rates in those existing contracts where rates are subject to revision. . |
| Strict Equivalency: | Criteria identical to that applicable to IOUs (i.e., non-discriminatory comparable access with a preference for "native loads" in the event of competing requests for access over constrained paths). | |
| Recommended Standards for BPA: | Comparable, nondescriminatory open access. With
respect to whether other preferences are appropriate I recommend:
1. No preference for federal power. Federal preference is the antithesis of comparable access. 2. Fish related use of transmission can be accommodated with market
based solutions such as generation reserving sufficient transmission in
advance for fish operations or competitively pricing power to be able to
displace non-federal generation. 3. The only preference for regional loads should be as a tiebreaker for
simultaneous requests for transmission over constrained paths. |
| Strict Equivalency: | By definition any barriers unique to BPA are inconsistent with equivalency. | |
| Recommended Standards for BPA: | Legislation should be structured to remove any barriers so that if a favorable ISO arrangement is identified and approved by FERC, BPA is free to join the ISO. |
| Strict Equivalency: | FERC has broad authority over ISOs. It is uncertain whether FERC can order an IOU to join an ISO. | |
| Recommended Standards for BPA: | Assuming the existence of a favorable ISO structure, it is recommended that FERC have authority with respect to BPA and any ISO that BPA may join identical to its authority over IOUs and an ISO consisting only of IOUs. |
| Strict Equivalency: | Unless otherwise covered by contract, BPA should only recover legitimate, verifiable and prudent costs previously 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. | |
| Recommended Standards for BPA: | Discussion of this question is deferred to a
different group.
1. |
| Strict Equivalency: | Up to the FERC, often in Washington D.C. | |
| Recommended Standards for BPA: | Evidentiary hearing should take place in the Northwest before a FERC Administrative Law Judge and BPA should be encouraged to engage in some form of consultation and settlement discussions with customers, either before or immediately after filing new rates with FERC. |
| Strict Equivalency: | IOUs must seek rehearing by the FERC, then can appeal to the Court of Appeals in Washington D.C. or the appropriate circuit court of appeals, at the option of the appealing party. | |
| Recommended Standards for BPA: | Adopt equivalency |
| Strict Equivalency: | Yes | |
| Recommended Standards for BPA: | Yes |
| Strict Equivalency: | For on-the-record hearings, parties are precluded from ex parte contact with FERC decision-makers. | |
| Recommended Standards for BPA: | Adopt equivalency |
| Strict Equivalency: | No. PBL either pays for reservation of transmission, or negotiates to gain access if necessary. | |
| Recommended Standards for BPA: | Adopt equivalency |
| Strict Equivalency: | No. | |
| Recommended Standards for BPA: | See above. In addition BPA should not be allowed to exercise market power. |
SECTION 3
Blackboard list of issues from August 5, 1997 meeting of transmission work group