Integrated System Rates

DEPARTMENT OF ENERGY

Southwestern Power Administration

Integrated System Rates

AGENCY: Southwestern Power Administration, DOE.

ACTION: Notice of rate order.

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SUMMARY: The Secretary acting under sections 301(b), 302(a), 402(e),

641, 642, 643, and 644, of the Department of Energy Organization Act

(Pub. L. 95-91), has approved and placed in effect on an interim basis

Rate Order No. SWPA-48 which provides for the following Integrated

System Rate Schedules:

Rate Schedule P-02, Wholesale Rates for Hydro Peaking Power

Rate Schedule NFTS-02, Wholesale Rates for Non-Federal Transmission/

Interconnection Facilities Service

Rate Schedule EE-02, Wholesale Rate for Excess Energy

The rate schedules supersede the existing rate schedules shown

below:

Rate Schedule P-98D, Wholesale Rates for Hydro Peaking Power--

(superseded by P-02)

Rate Schedule NFTS-98D, Wholesale Rates for Non-Federal Transmission/

Interconnection Facilities Service--(superseded by NFTS-02)

Rate Schedule EE-98, Wholesale Rate for Excess Energy--(superseded by

EE-02)

DATES: The effective period for the rate schedules specified in Rate

Order No. SWPA-48 is October 1, 2002, through September 30, 2006.

FOR FURTHER INFORMATION CONTACT: Forrest E. Reeves, Assistant

Administrator, Office of Corporate Operations, Southwestern Power

Administration, Department of Energy, One West Third Street, Tulsa,

Oklahoma 74103, (918) 595-6696, [email protected].

[[Page 61611]]

SUPPLEMENTARY INFORMATION: Southwestern Power Administration's

(Southwestern) Administrator has determined, based on the Fiscal Year

(FY) 2002 Integrated System Current Power Repayment Study, that

existing rates will not satisfy cost recovery criteria specified in

Department of Energy Order No. RA 6120.2 and Section 5 of the Flood

Control Act of 1944. The finalized FY 2002 Integrated System Power

Repayment Studies (PRSs), indicate that an increase in annual revenue

of $6,138,503, or 5.6 percent, beginning October 1, 2002, will satisfy

cost recovery criteria for the Integrated System projects. The proposed

Integrated System rate schedules would increase annual revenues from

$109,463,500 to $115,006,176, primarily to recover increased

expenditures in operations and maintenance (O&M) and investment. In

addition, an analysis of the Purchased Power Deferral Account indicates

the need for an annual increase of $595,827 to recover the purchased

energy costs. This rate proposal also includes a provision to continue

the Administrator's Discretionary Purchased Power Adder Adjustment, to

adjust the purchased power adder annually, of up to $0.0011 per

kilowatthour as necessary, at his/her discretion, under a formula-type

rate, with notification to the FERC.

Following review of Southwestern's proposal within the Department

of Energy, I approved, Rate Order No. SWPA-48, on an interim basis

through September 30, 2006, or until confirmed and approved on a final

basis by the FERC.

Dated: September 18, 2002.

Spencer Abraham,

Secretary.

In the Matter of: Southwestern Power Administration Integrated System

Rates; Order Confirming, Approving and Placing Increased Power Rate in

Effect on an Interim Basis

[Rate Order No. SWPA-48]

Pursuant to sections 302(a) and 301(b) of the Department of Energy

Organization Act, Public Law 95-91, the functions of the Secretary of

the Interior and the Federal Power Commission under section 5 of the

Flood Control Act of 1944, 16 U.S.C. 825s, for the Southwestern Power

Administration (Southwestern) were transferred to and vested in the

Secretary of Energy. By Delegation Order No. 0204-108, effective

December 14, 1983, 48 FR 55664, the Secretary of Energy delegated to

the Deputy Secretary of Energy on a non-exclusive basis the authority

to confirm, approve and place into effect on an interim basis power and

transmission rates, and delegated to the Federal Energy Regulatory

Commission (FERC) on an exclusive basis the authority to confirm,

approve and place in effect on a final basis, or to disapprove power

and transmission rates. Amendment No. 1 to Delegation Order No. 0204-

108, effective May 30, 1986, 51 FR 19744, revised the delegation of

authority to confirm, approve and place into effect on an interim basis

power and transmission rates to the Under Secretary of Energy rather

than the Deputy Secretary of Energy. This delegation was reassigned to

the Deputy Secretary of Energy by Department of Energy (DOE) Notice

1110.29, dated October 27, 1988, and clarified by Secretary of Energy

Notice SEN-10-89, dated August 3, 1989, and subsequent revisions. By

Amendment No. 2 to Delegation Order No. 0204-108, effective August 23,

1991, 56 FR 41835, the Secretary of the Department of Energy revised

Delegation Order No. 0204-108 to delegate to the Assistant Secretary,

Conservation and Renewable Energy, the authority which was previously

delegated to the Deputy Secretary in that Delegation Order. By

Amendment No. 3 to Delegation Order No. 0204-108, effective November

10, 1993, 58 FR 59717, the Secretary of Energy revised the delegation

of authority to confirm, approve and place into effect on an interim

basis power and transmission rates by delegating that authority to the

Deputy Secretary of Energy. By notice, dated April 15, 1999, the

Secretary of Energy rescinded the authority of the Deputy Secretary of

Energy under Delegation Order No. 0204-108. By Delegation Order No.

0204-172, effective November 11, 1999, the Secretary of Energy again

provided interim rate approval authority to the Deputy Secretary of

Energy. Pursuant to Delegation Order No. 00-037-00, effective December

6, 2001, authority is delegated to the Deputy Secretary of Energy for

interim rate approval and to the Federal Energy Regulatory Commission

for final rate approval. Delegation Order No. 0204-108 is no longer

applicable to rates filed by the Power Marketing Administrations. While

presently there is no Deputy Secretary; the Secretary of Energy

possesses the necessary authority to approve rates.

Background

Federal Energy Regulatory Commission (FERC) confirmation and

approval of the following Integrated System (System) rate schedules was

provided in FERC Docket No. EF98-4011-000 issued April 29, 1998, for

the period January 1, 1998, through September 30, 2001:

Rate Schedule P-98D, Wholesale Rates for Hydro Peaking Power--

(superseded by P-02)

Rate Schedule NFTS-98D, Wholesale Rates for Non-Federal Transmission/

Interconnection Facilities Service--(superseded by NFTS-02)

Rate Schedule EE-98, Wholesale Rate for Excess Energy--(superseded by

EE-02)

On July 26, 2001, these rate schedules were extended on an interim

basis by the Deputy Secretary under Rate Order No. 45 for the period

October 1, 2001, through September 30, 2002. During the period that

current rates have been in effect, Southwestern has modified the

Integrated System rate schedules three times for the purpose of

clarifying and revising specific provisions that did not impact revenue

requirements. Each modification of the rate schedules was approved by

FERC on a final basis, the latest being rate schedules, P-98D and NFTS-

98D, which were approved by FERC on July 31, 2001.

Southwestern Power Administration's (Southwestern), Current Power

Repayment Study (PRS) indicates that the existing rate would not

satisfy present financial criteria regarding repayment of investment

within a 50-year period due to increasing operation and maintenance

expenditures and investment for both the Corps of Engineers (Corps) and

Southwestern. The revised PRS indicates that an increase in annual

revenues of $6,138,503 was necessary beginning October 1, 2002, to

accomplish repayment in the required number of years. Accordingly,

Southwestern has prepared proposed rate schedules based on the FY 2002

Rate Design Study and the additional revenue requirement.

Informal meetings were held in April 2002 with customer

representatives to review the repayment and rate design processes and

present the basis for the 5.6 percent annual revenue increase. In May

2002, Southwestern prepared a proposed 2002 PRS for the Integrated

System.

Title 10, part 903, subpart A of the Code of Federal Regulations,

``Procedures for Public Participation in Power and Transmission Rate

Adjustment,'' has been followed in connection with the proposed rate

adjustments. More specifically, opportunities for public review and

comment on proposed System power rates during a 90-day period were

announced by notice published in the Federal Register May 21, 2002, (67

FR

[[Page 61612]]

35802). A Public Information Forum was held June 6, 2002, in Tulsa,

Oklahoma, and a Public Comment Forum was scheduled to be held July 10,

2002, also in Tulsa, but was canceled since no one indicated their

intent to attend. Written comments were due by August 19, 2002.

Southwestern mailed copies of the proposed May 2002 Power Repayment and

Rate Design Studies to customers and interested parties that requested

the data, for review and comment during the formal period of public

participation.

Following conclusion of the comment period on August 19, 2002,

comments presented during the formal public participation process were

reviewed. Once all comments were carefully evaluated, the 2002 Power

Repayment and Rate Design Studies were completed. No changes were made

to the FY 2002 PRS based on comments received. The studies were

finalized in August 2002. The Administrator has made the decision to

submit the rate proposal for interim approval and implementation. The

comments resulting from the public participation process and responses,

as developed by Southwestern's staff, are contained in this Rate Order.

Discussion

General

The existing rate schedules developed in the FY 1997 Integrated

System Power Repayment Studies were the basis for revenue determination

in the August 2002 Integrated System Current Power Repayment Study. The

Current Power Repayment Study indicates that existing rates are

insufficient to produce the annual revenues necessary to accomplish

repayment of the capital investment as required by Section 5 of the

Flood Control Act of 1944 and Department of Energy (DOE) Order No. RA

6120.2.

A Revised Power Repayment Study was prepared based on $6,138,503 of

additional annual revenue beginning October 1, 2002, to satisfy

repayment criteria. This amount is no different than what was proposed

in May 2002. No adjustments were made to the May 2002 PRS based on

comments received except to finalize the PRS.

During development of the May rate design study, Southwestern

recognized that no costs for Non-Federal, non-firm transmission service

were being incurred under the current transmission rate schedule. So,

Southwestern redesigned the rate for Non-Federal, non-firm transmission

service to be a formula rate rather than a specific dollar rate.

Currently, all requests for Non-Federal, non-firm transmission on

Southwestern's transmission system must use the Southwest Power Pool

regional open access transmission tariff rate. Consequently,

Southwestern does not have contractual arrangements for Non-Federal,

non-firm transmission service at this time; however, should

Southwestern need to provide that service in the future, a rate will be

available.

In Southwestern's 1988, 1990 and 1997 Rate Proposals, two

noteworthy issues, which were previously approved by FERC were

described in detail. The issues, which still exist today, were (1) the

treatment of a portion of the Truman project investment as not

currently repayable, and (2) the purchased power adder and

discretionary adjustment.

Harry S Truman Project

The Truman issue arose out of the limitations placed on the

project's operations by the Corps. The project was designed and

constructed to have 160 MW of dependable (marketable) capacity through

the use of six reversible pump turbine generating units which could

return water to the reservoir following normal generation, to mitigate

extreme variations in water available for generation and the lack of

storage capacity in the project (only two feet). Pumping ensures

project dependable capacity and allows marketing of all six units. A

substantial fish kill during testing of the units and considerable

opposition to the project's operation, both in the pumping mode and the

full six-unit generation mode, led the Corps to significantly restrict

the project's operation. In particular, the project's pumps may not be

used and only a limited number of units may be utilized simultaneously.

Consequently, Southwestern is unable to market full capacity from the

project and has declared only two units in commercial operation.

Southwestern proposed to the FERC in the 1988 rate filing that, since

the entire project was neither revenue-producing, declared in

commercial operation, nor expected to be in service within the then-

existing cost evaluation period, the total investment allocated to

power was not repayable under DOE or FERC regulations. Southwestern

further proposed an adjustment to Truman's allocated costs and reduced

the repayable investment to an amount equal to approximately 44 percent

of then-allocated costs, with the remaining amount to be deferred until

the project can be operated as it was designed. The FERC approved this

proposal as an acceptable interim measure while the Corps develops a

cost allocation for Truman based on actual operating conditions.

Southwestern also proposed this concept to the Corps, and the Corps

agreed to consider it as an option in developing the cost allocation

for the project. Subsequently, the Corps has completed a major revision

to the Truman project cost allocation and has utilized Southwestern's

proposed concept for determining repayable investment at the project

during the interim period until the project becomes fully operational.

Although not yet approved on a final basis, the Interim Cost Allocation

proposed by the Corps for the Truman project has been utilized in the

development of the 1990, 1997 and 2002 PRSs in support of the revenue

requirements of Southwestern's Integrated System and the rate proposal,

as the most recent cost allocation available which reasonably reflects

the level of costs expected to be payable at the Truman project during

the cost evaluation period.

During February 1997, the Interagency Committee on Cost Allocations

(ICCA) met to review and potentially approve the Truman, Stockton, and

Clarence Cannon project cost allocations. The Stockton cost allocation

was subsequently approved on a final basis on May 8, 1997. The Clarence

Cannon was approved on August 25, 1998. The Truman cost allocation was

to be sent back to the Corps' Kansas City District office to make

changes in the allocation's assumptions and then be prepared for

finalization. However, in June 1997, a meeting of the Southwestern, the

Corps and several customer representatives was held to discuss the

Truman cost allocation. The customers expressed their concern about the

significant level of costs being proposed while the project continued

to be limited in its ability to produce hydropower. At this meeting,

the Corps agreed to review the issue of assigning hydro-related costs

to another project purpose that had contributed to limiting the hydro

operation of the project. The allocation of those costs to another

purpose would be potentially considered temporary and the costs would

be reallocated back to the hydropower purpose in an amount relational

to the part of the hydropower purpose functioning as originally

designed. Southwestern is continuing to pursue finalization of this

cost allocation with the Corps. However, it is not anticipated that the

Truman cost allocation will be finalized in the near future; therefore,

Southwestern has continued to use the Interim Cost Allocation for the

Truman project in development of the 2002 PRS.

[[Page 61613]]

Purchased Power Deferral Account (Discretionary Adjustment and Adder)

During the time the purchased power adder and the deferral

accounting mechanism have been in place, they have proven to be

effective in assuring that purchased power revenues equal purchased

power costs over time. The financial interests of the Government have

been protected in this endeavor, and the rate component has been

adjusted as necessary. In the 1997 Rate Proposal, Southwestern

requested approval for the Administrator to have authority to adjust

the purchased power rate component up to once annually, based on a

formula-type rate included in the rate schedules, by up to $0.0011 per

kWh at his or her discretion. The flexibility derived from this

authority enables Southwestern to react more quickly to significant

changes in water conditions which may have occurred during the

preceding year or simply to exercise better control on the amount of

revenue in the Account and to better limit the over or under recoveries

of revenue. The Administrator utilized this authority in implement

adjustments of up to $0.0011 per kWh to help increase revenues

collected in the Account during the previous years of less than average

water conditions and the corresponding increase in the costs for

purchased power. This authority seems to remain appropriate,

particularly in light of the fact that the Account has no direct effect

on Integrated System repayment requirements and the separate rate

component serves to provide revenues to meet expected costs which, if

they do not come to pass, are either held to meet future costs or

result in a lower purchased power rate for customers. Therefore,

Southwestern's Administrator requests continuing authority to adjust

the purchased power rate component annually based on a formula-type

rate included in the rate schedules.

An element directly related to the Account and accrual of interest

thereto is the determination of the purchased power adder itself.

Southwestern is proposing, as in all previous proposals beginning with

the 1983 implementation of the purchased power rate component, that the

adder be set equal to the current average long-term purchased power

rate requirement. As shown in the Rate Design Study, the amount is

determined by dividing the estimated total average direct purchased

power costs by Southwestern's total annual contractual 1200-hour

peaking energy commitments to the customers (exclusive of contract

support arrangements). In this rate proposal, the resulting Purchased

Power Adder (Adder) is $0.0025 per kWh of peaking energy. The total

revenue created through application of this Adder would enable

Southwestern to cover its average annual purchased power costs.

Rate schedules were designed to recover the additional revenue

requirements. The basic monthly demand charge for the sale of Federal

hydroelectric power and the base energy charge have increased. The

transformation charge, though paid by a few customers having 69 kV and

below deliveries, has increased and affects revenues as well. In

addition, transmission charges for non-Federal, firm service have

increased. The increases to both transformation and transmission

charges are due to additions and replacements that have been made to

Southwestern's aging transmission facilities since the last rate

change.

In accordance with FERC's Order No. 888, Southwestern will continue

charging separately for five ancillary services and offering network

transmission service. Southwestern's rate design has separated the five

ancillary services for all transmission service. Two ancillary

services, Scheduling, System Control and Dispatch Service and Reactive

and Voltage Support Service, are required for every transmission

transaction. These charges are also a part of the capacity rate for

Federal power. This is consistent with Southwestern's long-standing

practice of charging for the sale and delivery of Federal power in its

Federal demand charge. The three remaining ancillary services will be

made available to any transmission user within Southwestern's control

area, including Federal power customers. The Rate Schedules for Peaking

Power and Non-Federal Transmission Service reflect these charges.

Network transmission service will be provided to those, also within

Southwestern's control area, who request the service, but for non-

Federal deliveries only. The rate and application of this service are

identified in the Non-Federal Transmission/Interconnection Facilities

Service Rate Schedule, NFTS-02.

Comments and Responses

The Southwestern Power Administration (Southwestern) received

numerous questions to which responses were provided during the public

participation period and which are included in the background

information. In addition, Southwestern received comments from five

entities during the public participation process. Those comments are

summarized into six general areas of concern, and Southwestern's

responses to the concerns raised are as follows:

Corps O&M Expenses

Comments

Southwestern should revisit its projections of the Corps of

Engineers Operation and Maintenance (O&M) costs with particular

attention to projected personnel costs to assure projections are

conservative and that all efficiencies consistent with sound business

principles have been incorporated into these areas. With respect to

personnel costs, commentors take issue with inclusion of expenses for

trainees to replace retiring personnel. Commentors state that this

reflects poor planning on the part of the Corps and should not be

reflected as a part of the ongoing future base costs because such an

assumption inflates long term future cost estimates and rates.

Response

Projections for Corps of Engineers (Corps) O&M are developed by the

Corps and provided to Southwestern annually. The Corps makes

projections of their base O&M costs using historical information and

planning documents, and also includes projections for large maintenance

items for each of the projects that have been included in their outyear

budget estimates. These projections are made in current year dollars

and do not include inflation. Southwestern reviews this information,

questioning the Corps where inconsistencies seem to occur, clarifying

its understanding of the cost estimates, and adjusting the estimates to

future year dollars based on the Gross Domestic Product Index to

incorporate inflationary expectations. The Corps has advised

Southwestern that, among other costs, the addition of trainees and

increased project maintenance are two elements in base costs. The Corps

informed Southwestern that trainee costs are limited to projects where

retirements are imminent but project maintenance will continue to

increase until such time as the projects identified for rehabilitation

can be completed. Southwestern inquired further and was advised that

the Corps is confident that their O&M estimates fairly represent the

minimum expenditure level expected for the projects' O&M and that this

level of expenditure is expected to continue into the future.

Southwestern does not receive the detail of personnel costs

included in the Corps' O&M estimates, nor is it necessary for

Southwestern to have this information since the Corps provides

[[Page 61614]]

total forecasted O&M expenditures by project. Although Southwestern can

provide suggestions, proposing changes to the management of the Corps'

resources, particularly their personnel processes, is beyond the scope

of Southwestern's authorities. Southwestern is tasked with recovering

the power costs at Corps of Engineers dams; the Corps is responsible

for managing their organization. The Corps believes that its internal

controls, accounting system reviews and funding procedures effectively

provide the needed level of justification, consistency and control of

its O&M expenditures. Southwestern has no oversight authority with

regard to Corps expenditures for O&M activities. Southwestern agrees

that such costs should be prudently and timely incurred at reasonable

levels consistent with sound business principles. The estimates

historically provided by the Corps have been reasonably accurate in

total, although they fluctuate somewhat from actual expenditures by

individual project.

The primary cause for the increase in Corps O&M between the FY 1997

PRS (on which current rates are based) and the FY 2002 PRS is the

inclusion, beginning with the FY 1998 PRS, of an estimate for the

Unfunded Civil Service Retirement System (CSRS) and Health/Life

Insurance Benefits. Without the inclusion of this increased cost

element in the FY 2002 PRS (which were not part of the forecast in the

FY 1997 filing), the Corps' O&M estimate, including the average year

large maintenance items, has increased less than 2% in total over the

last five years. Although the Corps has historically been fairly

accurate, their projections for O&M costs for the past two years have

been less than what was recorded on their financial statements. The

Corps has confirmed that the past few years' projections were based on

anticipated reductions in funding, but have realized they were

underestimating and in the FY 2002 projections have increased their

estimates to better reflect their expected expenditures.

The Corps' estimates of O&M are based on what they believe will be

their actual expenditures on their financial statements. This process

is consistent with the requirements of RA 6120.2. The procedure for the

Corps to provide O&M estimates is based on a Memorandum of Agreement

with the Corps of Engineers in November 1989, and has been fairly

accurate. The projection of Corps O&M in the FY 2002 PRS for the final

year of the cost evaluation period (FY 2006) is 3.8 percent higher than

the Corps' actual O&M expenditures for historical year FY 2001,

primarily reflecting an expected period of relatively stable funding.

Southwestern believes that the estimates provided by the Corps for

their O&M are reasonable based on their historical accuracy and

accurately reflect what the Corps will ultimately book as actual

expenditures on their financial statements.

Corps of Engineers--Estimates for Large Maintenance Items

Comments

Southwestern should revisit its process for determining estimates

of future Large Maintenance Items (LMI) for purposes of the PRS. It

would appear that the process Southwestern is using is not in

compliance with RA 6120.2. Southwestern should modify the process to

include a comparison of actual LMI costs in previous years with the

forecasted LMI for those years contained in previous PRSs. In addition,

Southwestern should closely examine the proposed 5.25 percent one-year

LMI factor proposed by the East Texas Cooperatives, a figure premised

on a more accurate methodology than used by Southwestern.

Response

Southwestern has reviewed its methodology for mitigating the impact

of Large Maintenance Items which are estimated to occur in the final

year of the cost evaluation period and has determined that the

methodology is sound, produces reasonable estimates and has been

reasonably accurate historically when combined as a part of overall

total estimates of Corps O&M costs.

The estimates of large maintenance items are provided by the Corps,

in detail by project, by year. In an effort to minimize wide swings in

the effect of large maintenance items (specifically in the last year)

and to add stability to rates, Southwestern developed a procedure over

fifteen years ago that removes the large maintenance estimates in the

fifth year of the cost evaluation period and replaces that estimate

with a ten-year average of large maintenance item estimates. In order

to alleviate the impact that one or two years of increased large

maintenance items had on the rates, Southwestern has used an average

over a ten-year period. This has ``leveled out'' the LMI estimates and

has, when added to the routine O&M, reflected a more accurate estimate

of what the Corps' expenditures have been in the fifth year. This

method of forecasting appears to be very efficient since in comparing

the historical fifth year estimate with its corresponding actual

expenditure, the Corps' O&M estimates appear to be quite reasonable. In

fact, during the past few years, the estimate of total Corps O&M

expenditures for the fifth year, which include Southwestern's

methodology for estimating the large maintenance item component, has

been within three percent of the actual for that year, with the most

recent estimate being within 0.1 percent of the actual.

Southwestern has also evaluated the use of an average of the most

recent forecasts as suggested by one entity commenting, but found that

in years when forecasts for that one year were significantly higher,

there was a substantial impact on the rate Southwestern would charge.

By using the suggested methodology in the commentor's suggestion, the

one-year average factor for eight of the past ten years would have

resulted in a factor significantly greater than the recommended 5.25

percent. While the proposal to use one year's average would reflect a

decrease in this PRS, use of the recommended methodology in eight of

the past ten years would have resulted in an increase in revenue

requirements for those years and possible rate increases. Consequently,

Southwestern believes the proposed method is less accurate than the

existing method and reintroduces yearly variations which are mitigated

under the existing method in response to customer concerns expressed

some years ago.

The use of actual historical data on large maintenance items and

base expenses may be preferable, but with the lack of detailed data

available from the Corps and with power being only one of the purposes

for which the Corps captures financial data, we believe it is not a

practical approach. In addition, it would add very little, if anything,

to the accuracy of the Corps' O&M estimates which in total have been

very good.

Southwestern has confirmed that the Corps' O&M estimates are based

on historical costs and actual project costs in accordance with RA

6120.2. Southwestern reviews the estimates to compare with actuals.

However, the Corps also considers in its estimates the RA 6120.2

requirement that, ``forecast shall take into account known factors

which are expected to affect the future level of such costs during the

cost evaluation period.'' The PRS reflects actual LMI in the Corps'

total historical O&M expenses for each year since it is part of the

total O&M number. The Corps provides actual O&M expenses based on

joint-use and specific-use cost

[[Page 61615]]

pursuant to their regulations for their financial statement reporting.

As has been noted, Southwestern believes that the estimate in the

fifth year of average LMI expenses for Corps O&M expenses is reasonably

accurate. Southwestern prepares PRSs each year and will continue to

monitor its processes to assure estimates are reasonable and that all

efficiencies consistent with sound business principles have been

incorporated.

Southwestern's O&M Expenses

Southwestern's O&M expenses have increased by approximately $13

million over the FY 1997 Power Repayment Study. Included in

Southwestern's O&M expenses are salaries and wages, maintenance costs

on aging transmission facilities, transmission-related services and

purchased power costs. The commentors state that Southwestern should

reduce its forecasted O&M expenses to reflect more reasonable

estimates.

Response

Southwestern's O&M expense estimates increased significantly

between the FY 1997 Power Repayment Study (PRS) and the current PRS for

a number of reasons. Purchased Power costs increased by approximately

$3 million due to greater than expected unit cost increases and

reductions in the availability of banking energy arrangements. In

addition, costs increased by $4.4 million due to requirements beginning

January 1, 1998, for transmission losses to be replaced through

purchased energy rather than reduced in kind as done previously. This

cost is totally offset by a corresponding increase in revenues

collected from transmission customers, but nonetheless appears as a

significant cost increase. The rate for Federal power and energy,

including the Purchased Power Adder are not affected by this cost.

Southwestern has experienced increased costs for transmission

service charges since FY 1997. Due to implementation of a new contract,

Southwestern now pays an additional $1.0 million for transmission

service. However, the impact of this increase in Southwestern's

transmission service costs has been minimized by an increase in

transmission revenues.

Southwestern's Transmission and Marketing expense have increased by

$4.6 million over the FY 1997 PRS estimates. A significant portion of

this increase is related to Southwestern's employee salaries, even

though Southwestern has reduced Full-Time Equivalents by approximately

8 percent. This increase in employee salaries and wages is due to cost

of living adjustments and other payroll requirements set by the U.S.

Congress and regulated wage surveys affecting craft personnel and

dispatchers. The remaining portion of Transmission and Marketing costs

have increased proportionately to historical trends and are within the

rate of inflation for the period.

Southwestern has based its O&M expense estimates in the FY 2002 PRS

on historical trends and future budget projections. As evidenced by the

increase in historical costs, many of which are outside Southwestern's

control, Southwestern believes its estimates are reasonable and will

represent what is anticipated to be recorded on Southwestern's

financial statements.

Corps and Southwestern's Investment Estimates

Comments

Some commentors have expressed concern regarding the level of added

investment during the initial 5-year cost evaluation period (CEP) and

that past history shows an over-forecasting of actual plant in service

to estimates. Some commentors recommended that Southwestern reduce its

forecast for added investment while others expressed a desire for the

appropriate level to be achieved to assure rehabilitation of the Corps'

aging plants. Also noted in the comments was a lack of decreased O&M

expense related to replacing older, typically maintenance-intensive

plant.

Response

The estimates in the PRS for future investment (over the 5-year

CEP) is an average of $9 million per year for replacements, $18 million

in construction work in progress (projects that have been started but

not yet complete and on the ``books''), and a conservative estimate of

$35.7 million for single unit rehabilitations at four of the Corps' 22

projects. These projections are for only an incremental portion of the

total rehabilitation and represents what is expected to take place

within the 5-year CEP and has been committed to funding by the Corps.

It is anticipated that the remaining costs that fall outside the 5-year

CEP in the FY 2002 PRS will be included in future PRSs.

Projections for the Corps Investment (replacements) are developed

based on data provided by the Corps to Southwestern every five years

and reviewed annually by the Corps. The Corps makes projections of

their investments based on planning documents. The Corps determines

what projects are in need of repair and makes a request for budget

appropriations to fund that replacement. The Corps has based their

estimates of future investments for the PRS on anticipated project

funding to perform the needed work. The funding has not always

materialized during the budgeting process. This has contributed to some

historical estimates being higher than actual expenditures.

We believe the FY 2002 PRS estimates are more accurate than

previous estimates due to a new customer funding source whereby the

Corps has access to a consistent funding level in addition to the

appropriation process. The alternative customer funding process will

relieve some pressure due to reduced appropriations and allow for

projects to be started and completed in a timely manner. Southwestern

believes that with the alternative customer funding method in place,

more of the projected replacements and maintenance will be accomplished

by the Corps, and will result in more closely matching PRS estimates in

the future.

In addition, the O&M costs for which the Corps provides

Southwestern estimates (as discussed in an earlier comment) are

anticipated to remain higher during the 5-year CEP, until such time as

all phases of the rehabilitations have been completed, due to having to

maintain and upgrade the rest of the aging facilities. Having discussed

these issues with Corps representatives, Southwestern believes that the

estimates provided by the Corps for O&M are based on their best

judgment as to what will be their actual expenditures. Southwestern

also believes that their O&M estimates, compared with actuals, are

fairly accurate and representative of what will be entered on their

financial statements. Southwestern shares the customers' belief that in

the future these O&M estimates may well, in fact, be reduced. But with

the appropriation reductions and other funding issues that the Corps

has encountered in the past, there remains a massive backlog of

projects that need to be completed as funding becomes available, which

means that it will be many years before a reduction in O&M is

recognized by the Corps. Contrary to one commentor's assertion, Corps

estimates do not continue to increase throughout the 50 year period.

Corps O&M estimates beyond the 5-year CEP are held constant from the

5th year through the 50th year yielding no additional expenses.

As stated in RA6120.2 (paragraph 10), replacements of investment

will be

[[Page 61616]]

``included in repayment studies by adding the estimated capital cost of

(the) replacement to the unpaid Federal investment in the year each

replacement is estimated to go into service.'' Southwestern is required

to forecast for replacements. Southwestern must forecast replacements

for the entire period of the PRS. The Corps provides the best data they

have available, together with the service lives of the equipment.

Southwestern and the Corps review these estimates annually and update

the replacement data with the goal to reflect what will occur on the

annual financial statements.

Unfunded Civil Service Retirement System Benefits

Comment

Revenues collected by Southwestern for ``Unfunded'' Civil Service

Retirement System (CSRS) and Health and Life Insurance Benefits should

be (1) removed from Southwestern's rates because Southwestern has no

authority to collect them, (2) properly account for the additional

interest effects of the revenues collected, or (3) apply the revenues

collected to Southwestern's debt rather than to the CSRS expenses.

Response

Statement of Federal Financial Accounting Standards (SFFAS) No. 5,

requires all federal agencies, including Power Marketing

Administrations (PMAs), to record the full cost of pension and

postretirement benefits in financial statements beginning in fiscal

year 1997. SFFAS No. 5 prescribes that the aggregate entry age normal

(AEAN) actuarial cost method be used to calculate pension expenses and

accrued actuarial liabilities for pension benefits. Under the AEAN

method, which is based on dynamic economic assumptions, including

future salary increases, the actuarial present value of projected

benefits is allocated on a level basis over the earnings or the service

of the group between entry age and assumed exit ages and is applied to

pensions on the basis of a level percentage of earnings. The portion of

this actuarial present value allocated to a valuation year is called

the ``normal cost''. The Office of Personnel Management (OPM) applies

the AEAN method to estimate the amount by which employer and employee

contributions toward future CSRS pension benefits fall short of the

normal cost of those benefits.

For CSRS employees, OPM reported that, in 1995, 25.14 percent of

gross salaries was the full (normal) cost to the federal government of

benefits earned that year by employees and that federal agencies

contributed 7 percent and employees contributed 7 percent to OPM for

CSRS, leaving a funding deficiency of 11.14 percent of each CSRS

employee's annual salary. Such deficiencies are made up by Treasury's

funding of OPM retirement costs. Southwestern has included an estimate

of the unfunded portion of the CSRS costs in its Power Repayment

Studies every year since 1998. Revenues have been returned to the

Treasury by Southwestern each year since 1998 to be used by Treasury to

fund OPM retirement benefits and health insurance costs.

Even though this is the first Integrated System rate filing that

has included unfunded CSRS costs, it is not the first rate filing

Southwestern has submitted that includes unfunded CSRS costs.

Southwestern has had three previous rate filings since 1998 for two

other rate systems that have been submitted through the DOE and

ultimately approved by FERC. Southwestern did not receive any comments

related to the CSRS issue in any of the public comment periods of those

three rate filings. Furthermore, the Southeastern Power Administration

(SEPA) included CSRS cost estimates in a rate filing in 1998. The

comments on that rate filing included opposition to the inclusion of

the CSRS estimates. The FERC confirmed the SEPA filing on a final basis

and did not accept the arguments to exclude the CSRS costs. A request

for rehearing related to the filing was also denied.

Authority to collect revenues for the unfunded CSRS costs comes

primarily from Section 5 of the Flood Control Act of 1944 which, in

part, states ``* * *Rate schedules shall be drawn having regard to the

recovery''* * * ``of the cost of producing and transmitting such

electric energy,* * *'' Unfunded CSRS has been determined to be a cost

of ``producing and transmitting electricity.'' Upon disbursement, the

Federal government funds the unfunded portion of the CSRS program just

as it funds the funded portion of the CSRS program. The difference is

that, when retirement payments are issued, OPM and not Southwestern is

the agency that the funding of the unfunded portion of CSRS costs is

directed to. The authority to collect revenues to repay the CSRS

program costs is no different than the authority to collect the funded

portion.

Southwestern agrees with the comment that it should properly

account for the additional interest effects of the revenues collected

and is currently doing so. Southwestern's existing procedure imputes an

interest credit at current year interest rates on all revenues

received--which would include revenues received to repay CSRS costs.

The effect of the interest credit carries throughout the entire

repayment period.

Regarding the issue of applying revenues received for CSRS expenses

to Southwestern's debt, the application of revenues is guided by DOE

Order 6120.2 (paragraph 8c.(3)) which states ``Annual revenues will be

first applied to the following recovery of costs during the year in

which they occurred: operation and maintenance (O&M), purchased and

exchanged power, transmission service and other, and interest expense

and any appropriation amortization of revenue bonds. Remaining revenues

are available for amortization* * *''. Therefore, Southwestern applies

its revenues received to the CSRS expenses before it applies any

revenue toward the amortization of the Federal investment.

Isolated Projects and Bundled Rates

Comments

Southwestern should not be charging a pancaked rate for the sale

and delivery of Federal power. Those customers that receive Federal

power from isolated Corps projects should not be required to pay for

transmission and ancillary services that they do not use. In addition,

those customers should receive credit for incurring costs that the

typical Southwestern customer does not. Even though this issue was

raised in Southwestern's 1997 rate proceedings and was rejected by

Southwestern, the Secretary of Energy and the FERC, this issue should

be reconsidered and not viewed as a binding precedent because the

regulatory and market environment has changed considerably.

Response

Southwestern's sales of Federal power and energy are based on a

``postage-stamp'' type rate, which is based on the financial

integration of all the projects marketed under the Integrated System,

as well as various components of Southwestern's transmission system.

The capacity rate for all Federal power customers includes a

transmission component and the two required ancillary services. This

rate has been set to assure that Southwestern charges itself the same

rates it charges for the use of the transmission system for wheeling

non-Federal power. The customers which receive the output of Corps of

Engineers projects that are presently electrically isolated from

Southwestern's primary interconnected system requested integration of

such projects into the Integrated System to

[[Page 61617]]

receive that system's benefits, including lower costs. In addition,

such customers receive a number of benefits from their project sales

which other Federal customers do not, such as overload capacity,

condensing, greater scheduling flexibility, and an exclusion from

paying the Purchased Power Adder. Such projects also include components

of Southwestern's transmission system and switchyard facilities used to

deliver power and energy from the dams. Revenues from all sales within

the Integrated System are applied toward repayment of all Federal

investment for all projects, regardless of their electrical integration

status.

Southwestern is not required by FERC Order No. 888 or Order No.

2000 to offer unbundled services to its customers. Section 5 of the

Flood Control Act of 1944 sets forth the statutory requirements for the

sale and delivery of Federal power and energy. Furthermore, based on

DOE policy, ``each of the PMAs that own transmission facilities will

publish generally applicable open access wholesale transmission tariffs

and will take service itself under such tariffs. The tariffs will

include rates, terms, and conditions, and will offer transmission

services, including ancillary services, to all entities eligible to

seek a transmission order under section 211 of the Federal Power Act *

* *'' Southwestern has complied with this policy in separating its non-

Federal transmission service and to provide for ancillary services.

Even though Southwestern agrees that the electric industry has

changed considerably since 1997, the conditions and points raised

related to this issue are the same as were espoused in 1997. Upon

review, there does not appear to be any overriding factor that compels

Southwestern to change its previous determination that those customers

do benefit from the treatment of the transmission system and related

facilities and the power rate charged to the customers reflects such

benefits. The parties expressing these concerns voluntarily and

knowingly entered into long-term contractual arrangements to receive

the benefits of these projects at integrated system rates. We find it

disingenuous to now seek through the rate development process to

overturn what was done for their benefit through mutually agreeable bi-

lateral contracts.

Operational Efficiencies

Comments

Southwestern management should commit to incorporate any

operational efficiencies that would reduce the magnitude of the rate

increase. Such efficiencies should be fully discussed as part of the

Power Repayment Study. Overstatement of revenue requirements can tempt

management to operate less efficiently than might otherwise have been

possible.

Response

Southwestern agrees that it should incorporate all efficiencies

available into its day-to-day operations to accomplish the requirements

of Section 5 of the Flood Control Act of 1944 for Southwestern to

maintain ``the lowest possible rates to consumers consistent with sound

business principles.'' Southwestern's Power Repayment Studies are

developed annually to recover its costs to help accomplish that

requirement and not to specifically identify efficiencies that have

been instituted by the agency throughout the year. Southwestern

continually strives to incorporate efficiencies in its operational

activities. One example of such efficiencies can be illustrated by the

number of full-time employees (FTE) employed by Southwestern. Even with

the same number of customers and a significantly changing industry, the

FTE for 1997 was 193 while the FTE in 2001 was 178. Another example of

Southwestern's attention to efficient operation may be reflected in the

rates themselves. The average rates charged by Southwestern for energy

or transmission are the lowest in the region and will continue to be so

even if this proposed rate increase is implemented. Furthermore, most

of the increase in this proposed rate increase comes from costs outside

of Southwestern's direct control. Those costs include Corps of

Engineers costs, salary increases determined by Congress and charges

for unfunded civil service retirement system costs.

Unlike many other utilities, Southwestern's management has no

incentive to raise rates to allow them to operate less efficiently.

Revenues received from sales of power and other services are deposited

directly into the U.S. Treasury and are credited toward the repayment

of the hydropower system costs. There are no additional revenues for

Southwestern's management to use from higher rates because operating

costs are obtained through a separate Congressional appropriation

process which is not directly related to higher or lower rates.

Other Issues

Other issues are discussed in the Administrator's Record of

Decision.

Availability of Information

Information regarding this rate proposal including studies,

comments and other supporting material, is available for public review

and comment in the offices of Southwestern Power Administration, One

West Third Street, Tulsa, OK 74101.

Administrator's Certification

The August 2002 Revised Power Repayment Study indicates that the

increased power rates will repay all costs of the Integrated System

including amortization of the power investment consistent with the

provisions of Department of Energy Order No. RA 6120.2. In accordance

with Delegation Order No. 00-037.00, December 6, 2001, and Section 5 of

the Flood Control Act of 1944, the Administrator has determined that

the proposed System rates are consistent with applicable law and the

lowest possible rates consistent with sound business principles.

Environment

The environmental impact of the proposed System rates was evaluated

in consideration of DOE's guidelines for implementing the procedural

provisions of the National Environmental Policy Act and was determined

to fall within the class of actions that are categorically excluded

from the requirements of preparing either an Environmental Impact

Statement or an Environmental Assessment.

Order

In view of the foregoing and pursuant to the authority delegated to

me the Secretary of Energy, I hereby confirm, approve and place in

effect on an interim basis, effective October 1, 2002, the following

Southwestern System Rate Schedules which shall remain in effect on an

interim basis through September 30, 2006, or until the FERC confirms

and approves the rates on a final basis.

Dated: September 18, 2002.

Spencer Abraham,

Secretary.

[FR Doc. 02-24863 Filed 9-30-02; 8:45 am]

BILLING CODE 6450-01-P