• 1. To what degree must the BPA’s costs be functionalized to transmission and generation for rate purposes?
• 1.A. Should BPA be permitted to diverge from the just and reasonable standard normally applicable to transmission rates to address cost recovery problems of the BPA’s power business?
• 2. How must BPA’s capital costs be calculated for ratemaking purposes?
• 3. To what degree should past unanticipated revenue shortfalls or surpluses be permitted to be reflected in future rates (i.e., retroactive ratemaking)?
• 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?
• 5. How are BPA’s transmission rates set?
• 6. For what period are BPA’s transmission rates valid?
• 7. Does FERC have jurisdiction over a decision by BPA to offer, modify, withdraw or discontinue any class of service?
• 8. Does FERC have jurisdiction over BPA transmission contracts?
• 9. On what criteria should FERC judge requests for access to BPA’s transmission system?
• 10. Should legislation remove any unique barriers to BPA joining an ISO?
• 11. What role should FERC have regarding BPA’s participation in an ISO?
• 12.How should BPA recover stranded costs from bundled power customers that become transmission only customers?
• 13. Would FERC policies regarding the collection of stranded costs apply to BPA?
• 14. Should FERC hearings on Bonneville transmission rates, terms and conditions be held in the Northwest?
• 15. How should the appeal process work?
• 16. Should a FERC administrative law judge be responsible for an initial decision or recommendation?
• 17. What ex parte rules should apply?
• 18. Should BPA have special consideration (preferential access or pricing) to transmission to support operation of the federal hydro system to benefit fish?
• 19. Are there additional legal standards for FERC review of rates, terms and conditions beyond "not unreasonable, unjust, unduly preferential or discriminatory"?

  ---

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

Strict FERC 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.

Recommendations by:

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]

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.

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.

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 U.S. 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 recover total system costs or assure repayment to the U.S. Treasury

C. NOTE: This topic is an insertion proposed by John Saven and has not been adopted by PPC as a whole. Under existing authority, BPA has functionalized the cost of transfer services acquired pursuant to a General Transfer Agreement to power rates. To prevent cost-shifts, it is intended that BPA continue to treat transfer agreement costs in this manner and nothing in these provisions authorizes or requires GTA costs or similar costs under a successor agreement to be treated as transmission costs or to be subject to the standards set forth in paragraph 1.B.

D. NOTE: This topic is an insertion proposed by John Saven and has not been adopted by PPC as a whole. Notwithstanding application of the just, reasonable and nondiscriminatory and nonpreferential standard to transmission rates as set forth in paragraph 1.B., to prevent cost shifts, BPA may allocate the costs of any BPA owned or leased transmission facilities to the Network and is not required to allocate or directly assign such costs to specific transmission customers,

E. In the event of a forecast or actual shortfall between costs and revenues, in either function, primary reliance should be on using all lines of credit, unused borrowing authority, cost reduction opportunities and repayment flexibility reasonably available to the function with the shortfall.

F. After exhausting all options available to the function with the shortfall, surpluses from the other function should be made available to the function with the shortfall. It has been suggested that this be done on repayable loan basis. Before such an approach is adopted, it should be determined whether the repayable loan will be considered an impairment of the security of the net billed debt. A similar issue arises regarding the reflection (if any) in future rates of past unanticipated revenue shortfalls or surpluses (see Issue 3).

1.A. Should BPA be permitted to diverge from the just and reasonable standard normally applicable to transmission rates to address cost recovery problems of the BPA’s power business?

Strict FERC equivalency: BPA would be prohibited to establish transmission rates, terms or conditions to recover power related costs or in any way to provide special advantage to its power business.

Recommendations by:

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.

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

Strict FERC equivalency: BPA’s capital recovery would include only depreciation and interest (or some reasonable measure of "return on capital" – Litchfield and PPC allow cash reserve to allow for variability in BPA’s costs and revenues).

Recommendations by:

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.

3. To what degree should past unanticipated revenue shortfalls or surpluses be permitted to be reflected in future rates (i.e., retroactive ratemaking)?

Strict FERC equivalency: Retroactive ratemaking is not permitted.

Recommendations by:

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

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?

Strict FERC equivalency: 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.)

Recommendations by:

A. Investment Items.

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.

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.

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.

5. How are BPA’s transmission rates set?

Strict FERC 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. FERC’s decision would be reviewable by a United States Circuit Court (D.C. Circuit or Ninth Circuit) which would grant substantial deference to FERC’s decisions.

Recommendations by:

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.

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.

B. Substantive Standards. As stated in Section 1(b), BPA's transmission rates must meet the just, reasonable, nondiscriminatory and nonpreferential standard, subject to satisfying the requirements that the combined power and transmission rates recover total system costs and assure repayment of the U.S. Treasury over a reasonable number of years. This standard would be applicable to decisions by the administrative law judge, the Administrator and FERC.

C. What Issues are Appropriate. All issues relevant to formulating transmission rates would be appropriate, 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.

D. Who Decides. At the evidentiary level, the administrative law judge would initially decide all issues of policy, fact and law, and would render an initial decision containing findings and conclusions dealing with all issues necessary to establish transmission rates and terms and conditions which comply with the standard set forth in Section 5(B) above. The Administrator would review the initial decision of the administrative law judge, and would adopt those portions of the initial decision with which he/she agrees. The Administrator could modify the initial decision upon a finding that a preponderance of the evidence in the record supported a different decision.

E. What Deference is Due BPA. BPA's decision would be subject to FERC review based on the standard set out in Section 1(B) above, which 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 below, FERC can find the decision of BPA is clearly erroneous. Such a finding by FERC would result in a remand. Court review would be in the Ninth or District of Columbia Circuit, at the election of the petitioner, and would be a review of the BPA decision. The standard of review would be arbitrary, capricious, unsupported by the record, not in accordance with law.

F. Procedural Issues. BPA's transmission rate hearing would be conducted in the Northwest before an administrative law judge. Proceedings for Section 211 requests would be conducted as determined by FERC. Proceedings would be subject to the ex parte rule at the evidentiary level, on review by the Administrator and by FERC. As discussed in Section 5(D) above, the administrative law judge would have substantive decisional authority over issues of fact, law and policy, and would render an initial decision. The administrative law judge would need experience with transmission rate proceedings, and would be either a sitting or retired FERC administrative law judge. Following the Northwest hearing, transmission rates and supporting documentation would be filed at FERC under current procedures applicable to BPA.

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

Strict FERC 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.

Recommendations by:

7. Does FERC have jurisdiction over a decision by BPA to offer, modify, withdraw or discontinue any class of service?

Strict FERC equivalency: Yes. FERC would have jurisdiction over all of BPA’s decisions affecting transmission rates, terms and conditions. (This does not mean 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. It means only that FERC would need to agree any changes were reasonable.)

Recommendations by:

8. Does FERC have jurisdiction over BPA transmission contracts?

Strict FERC equivalency: BPA would file all transmission contracts with FERC and, FERC would review contracts for reasonableness prior to their effectiveness. FERC 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 the contracts and resolve disputes arising from approved contracts.

Recommendations by:

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.

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.

FERC should have no role reviewing or modifying existing transmission contracts. FERC should be available to interpret existing contracts to resolve disputes.

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

Strict FERC equivalency: BPA should be subject to 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).

Recommendations by:

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.

10. Should legislation remove any unique barriers to BPA joining an ISO?

Strict FERC equivalency: By definition, any barriers unique to BPA are inconsistent with equivalency.

Recommendations by:

11. What role should FERC have regarding BPA’s participation in an ISO?

Strict FERC equivalency: FERC has broad authority over ISOs. It is uncertain whether FERC can order an IOU to join an ISO.

Recommendations by:

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

Strict FERC equivalency: Unless otherwise covered by contract, BPA would 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 would be calculated as the difference between expected revenues from the reasonably expected sales and the market value of the power.

Recommendations by:

13. Would FERC policies regarding the collection of stranded costs apply to BPA?

Strict FERC equivalency: See the "Strict FERC Equivalency" portion of Section 12 above.

Recommendations by:

14. Should FERC hearings on Bonneville transmission rates, terms and conditions be held in the Northwest?

Strict FERC equivalency: Up to the FERC, often in Washington D.C.

Recommendations by:

15. How should the appeal process work?

Strict FERC 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.

Recommendations by:

16. Should a FERC administrative law judge be responsible for an initial decision or recommendation?

Strict FERC equivalency: Yes

Recommendations by:

17. What ex parte rules should apply?

Strict FERC equivalency: For on-the-record hearings, parties are precluded from ex parte contact with FERC decision-makers.

Recommendations by:

18. Should BPA have special consideration (preferential access or pricing) to transmission to support operation of the federal hydro system to benefit fish?

Strict FERC equivalency: No.

19. Are there additional legal standards for FERC review of rates, terms and conditions beyond "not unreasonable, unjust, unduly preferential or discriminatory"?

Strict FERC equivalency: No.

Recommendations by: