The Columbia/Pacific Institute

For: File

From: Angus Duncan

Subject: FERC-Equivalent Regulation of BPA/Transmission

The language attached is drafted to correspond to the work paper and questions developed by the regional Transmission Working Group.

This draft was prepared to take positions on three issues (reserving the right to comment subsequently on other issues of concern):

1. Should BPA be allowed by FERC to shift costs and revenues across functions (between power marketing and transmission business lines)(Working Paper #5)? FERC policies erect a barrier between functions. BPA policy allows cross-function transactions when necessary to meet total system costs.

This paper takes the position that BPA’s authority to do cross-functional transactions should be preserved if necessary to meet total system costs, unless an alternative funding mechanism (e.g., a satisfactory stranded cost mechanism) exists.

2. In a transmission rate case who should make what decisions, against what standards, subject to what review (Working Paper #4 and #5)?

This paper favors a process that has a FERC/BPA Administrative Law Judge conducting an evidentiary hearing and making recommendations to the BPA Administrator. The Administrator makes the rate decision, including policy and budget decisions and rate design (allocation of costs). FERC has limited review authority to judge whether the adopted rates meet the just, reasonable, non-discriminatory and non-preferential standard. The Ninth Circuit may review either the Administrator’s overall decision, or the outcome of FERC’s narrower review.

The intent is to create a more open rate-making process, with more checks and balances on BPA, while still keeping agency policy (e.g., budget) decisions within the region and accessible to parties here (subject to Congressional review). FERC is accorded deference on questions of fairness in allocating costs among customer classes, but not whether the underlying costs are appropriate or reasonable.

3. How should access to BPA’s transmission lines be governed (Working Paper #9)?

This paper favors open access, consistent with national transmission access policy, with no special preference to either regional or Federal loads. However, for certain overriding public purposes the Federal system must reserve a pre-emption right. For public safety or legally-mandated fish operations that require access to and capacity on the federal transmission system, BPA should reserve in advance the right to pre-empt other users if necessary.

[DRAFT 10/29/97 : cpi/angus duncan]

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

A. BPA should be required to account for its costs (both expense and investments) pursuant to the FERC Uniform System of Accounts.

B. BPA’s transmission rates would be established consistent with the just, reasonable, nondiscriminatory and nonpreferential standard, subject to satisfying the requirement that the combined power and transmission rates be set to recover total system costs and assure repayment of the US Treasury over a reasonable number of years. Such a standard would permit costs from one function to be covered by the expected revenues of another function, on either a forecast or actual basis, but only when and if necessary to recovery total system cost and assure repayment to the US Treasury.

We recognize that this language represents a substantial exception to strict equivalency in FERC regulation of BPA’s transmission activities. The exception could be narrowed considerably if the region adopted a satisfactory stranded cost recovery mechanism, one that would assure a high probability of BPA recovering its total system costs without the necessity of resorting to inter-functional loans or other such transactions.

Such a stranded cost mechanism should:

(1) address both short-term, non-recurring revenue shortfalls and substantial, long-term, recurring ones;

(2) address both actual and projected shortfalls; and,

(3) while doing so, preserve in significant measure the contribution of market forces to disciplining BPA’s costs.

Absent such a mechanism, we must reserve BPA’s recourse to cross-functional financing if necessary to meet total system costs.

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

a. FERC’s role should be to review BPA’s rates, and terms and conditions of service, for consistency with the just, reasonable, nondiscriminatory and nonpreferential standard, subject to satisfying the requirement that the combined power and transmission rates be set to recover total system costs and assure repayment of the US Treasury over a reasonable number of years.

Congress’ role is to oversee the reasonableness and prudency of BPA investments and expenditures, which are also subject to the discipline of the marketplace. FERC should not second-guess policy, program or budget choices made by either the Congress or BPA, but rather should assure that these choices are translated into rates that are fair and non-discriminatory, and that can generate revenues sufficient to meet system costs.

b. FERC should have authority to disallow the manner in which costs were allocated to rates, but not to reduce or disallow forecasted expenditures.

c. FERC should have the ability to exclude cross-functional costs within either power or transmission business lines, unless their inclusion was necessary to satisfy the recovery of total system costs.

#5 How are BPA’s transmission rates set?

We would favor approximately the following process:

a. Record Development: BPA transmission rates should be established based on a record developed in an evidentiary proceeding conducted in the Northwest.

b. Substantive Standard: BPA’s transmission rates must meet the just, reasonable, non-discriminatory and nonpreferential standard, subject to satisfying the requirements that the combined power and transmission rates recover total system costs and assure repayment of the US Treasury over a reasonable number of years. This standard would be applicable to decisions by the administrative law judge (ALJ), the Administrator and FERC.

c. What Issues are Appropriate: All issues of fact and law relevant to formulating transmission rates would be appropriate at the ALJ and Administrator levels, including forecasts of expenses and deficits, rate design, terms and conditions and ancillary service rates and cost allocation. Fixed obligations flowing from historical decisions would not be appropriate issues for a rate case, but the means by which fixed obligations are managed would be appropriate for a rate case.

At the level of FERC review, appropriate issues are limited to those necessary to assure compliance with the just, reasonable, nondiscriminatory and nonpreferential standard, but not the reasonableness or prudency of policy (budget) decisions, and not the resulting forecast expenses.

d. Who Decides: At the evidentiary hearing level, an ALJ jointly selected by BPA and FERC would solicit testimony from all interested parties (including BPA), would develop findings on all questions of fact and law, and based on these would make recommendations to the Administrator.

The Administrator would review the findings and recommendations, and would render a decision.

e. What Deference is Due to BPA: BPA’s decision would be subject to FERC review based on the just, reasonable, non-discriminatory and nonpreferential standard for rates. The review proceeding would be open to participation by rate case parties. FERC would be able to invalidate a BPA decision if, based upon the record developed by the ALJ, FERC can find the decision of BPA fails to meet the just, reasonable, nondiscriminatory and nonpreferential standard, or that the proposed rate schedule is insufficient to generate revenue necessary to meet system costs. Such a finding by FERC would result in a remand of the rate decision (terms and conditions of transmission access are now established by FERC).

FERC would not be permitted to substitute its judgement for BPA’s on policy (budget) and discretionary issues, or on whether BPA’s actions were consistent with the agency’s statutory obligations so long as BPA’s proposed rates are based on a reasonable construction of facts in the record and are consistent with the just, reasonable, non-discriminatory and nonpreferential standard.

Court review would be in the Ninth Circuit and would be a review of the BPA decision (or if appropriate, a FERC decision for its application of the "just and reasonable" standard). The standard of review would be arbitrary, capricious, unsupported by the record, not in accordance with law. Deference would be accorded the Administrator, except on the question of FERC’s application of the just, reasonable, non-discriminatory and nonpreferential standard, where deference would be accorded to FERC.

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

A. Comparable, non-discriminatory open access as provided in FERC Order 888, except as provided below.

B. BPA would reserve in advance the right to displace other users of the federal transmission system if river operations related to public safety, fish conservation or other purposes undertaken to comply with state or federal law (and state or federal agency actions undertaken pursuant to such law) required such displacement. Transmission capacity and services would be contracted for with this right clearly reserved to BPA. To the extent this reservation affects availability and quality of transmission services, we assume this will be reflected in pricing of the services.