Intent To Revise Wholesale Power Rates To Become Effective

DEPARTMENT OF ENERGY

Intent To Revise Wholesale Power Rates To Become Effective

October 1, 1995.

AGENCY: Bonneville Power Administration (BPA), DOE.

ACTION: Notice of Intent and Request for Comments.

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SUMMARY: BPA is developing adjusted wholesale power rates proposed to

become effective October 1, 1995. At this time, BPA announces its

intent to revise its rates. The formal hearings will also comprehend

changes to BPA charges under the Pacific Northwest Coordination

Agreement. BPA expects to publish a notice of the proposed rates in the

Federal Register in early 1995. That notice also will announce BPA's

proposed schedule for formal hearings as specified in section 7(i) of

the Pacific Northwest Electric Power Planning and Conservation Act

(Northwest Power Act). A final schedule will be established by the

Hearing Officer who presides over BPA's rate hearings. These hearings,

and planned general public field hearings, will give interested persons

an opportunity to present oral and written comments on the proposal.

BPA File No: WP-95. BPA requests that all comments and documents to

become part of the Official Record compiled in the process of adjusting

wholesale power rates contain the file number designation WP-95.

ADDRESSES: Written comments should be submitted to the Manager,

Corporate Communications, Bonneville Power Administration, P.O. Box

12999, Portland, Oregon 97212.

FOR FURTHER INFORMATION CONTACT: Mr. Michael Hansen, Public Involvement

and Information Specialist, at the address listed above, 503-230-4328,

or call 1-800-622-4519. Information may also be obtained from:

Mr. Steve Hickok, Group Vice President, Sales and Customer Service,

P.O. Box 3621, Portland, Oregon 97232, 503-230-5356.

Mr. George Eskridge, Manager, SE Sales and Customer Service District,

1101 West River, Suite 250, Boise, Idaho 83702, 208-334-9137.

Mr. Ken Hustad, Manager, NE Sales and Customer Service District,

Crescent Court, Suite 500, 707 Main, Spokane, Washington 99201, 509-

353-2518.

Ms. Ruth Bennett, Manager, SW Sales and Customer Service District, 703

Broadway, Vancouver, Washington 98660, 206-418-8600.

Ms. Marg Nelson, Manager, NW Sales and Customer Service District, 201

Queen Anne Avenue North, Suite 400, Seattle, Washington 98109-1030,

206-553-4130.

Responsible Official: Mr. Geoff Moorman, Manager, Pricing, Marginal

Cost, and Ratemaking, is the official responsible for the development

of BPA's rates.

SUPPLEMENTARY INFORMATION:

I. Background

BPA is a Federal power marketing agency in the Pacific Northwest.

BPA markets hydroelectric power from 30 dams, including projects

operated by the U.S. Army Corps of Engineers and the U.S. Bureau of

Reclamation on the Columbia River and its tributaries, as well as

projects owned by the City of Idaho Falls, Lewis County Public Utility

District, and the Washington Public Power Supply System (Supply

System). BPA also markets thermal power it acquires from utilities in

the region. In addition, BPA owns, operates, and maintains the nation's

largest high-voltage transmission system grid.

BPA currently supplies about 45 percent of the electric energy

consumed in the Pacific Northwest and maintains about 80 percent of the

region's high-voltage transmission capacity. Firm power is sold at

wholesale to BPA utility customers in the region for resale to

consumers and is sold directly to BPA's industrial and Federal agency

customers for their own use. In addition, BPA sells power that is

surplus to its regional firm obligations to customers within and

outside the region. BPA's existing 151 long-term power sales contracts

expire in 2001. BPA now is working with its customers to put new

contracts in place in advance of that date.

BPA began a Competitiveness Project in early 1993 in response to

market forces and the deregulation of the electric utility industry.

The project, a re-invention of the agency to make it more competitive

in the new marketplace, included the development of a new business

concept, a marketing plan, a structural reorganization, strategic

action plans for each of BPA's major activities, and internal effort to

promote leadership and employee empowerment, and proposals to eliminate

unnecessary administrative and regulatory requirements.

A major result of the Competitiveness Project, outlined in BPA's

draft Marketing Plan and refined in subsequent process, is the set of

products and services BPA could offer its customers. Once these

products are offered, customers would be able to select individual

items or choose among packages of products and services. The

``unbundled'' or separately priced power products BPA would propose to

offer include power services such as control area services and resource

management services. A more traditional bundled approach to firm

requirements service would be offered as well.

BPA's Draft Strategic Business Plan was released in June 1994. The

Draft Strategic Business Plan proposes the overall strategic direction

for serving BPA's customers and meeting BPA's legislated

responsibilities, includes new statements of BPA's mission and values,

and enunciates strategic business objectives to guide BPA's activities.

The Draft Strategic Business Plan also describes the conceptual

framework for the products BPA would offer. As stated in the Draft

Strategic Business Plan, BPA's pricing policies are designed to meet

many objectives including: (1) providing maximum customer choice and

encouraging optimal use of the Federal Columbia River Power System

(FCRPS); (2) contributing to BPA's continued viability in an

increasingly competitive energy-market environment; and (3) allowing

BPA to take full advantage of its responsibility and authority to

manage the FCRPS, consistent with all statutory requirements.

The Draft Strategic Business Plan envisions BPA as operating three

business lines: power, transmission, and energy services (includes

conservation product lines), which will be self-supporting and serve

customers according to their unique needs. The Draft Strategic Business

Plan also outlines a number of initiatives to improve BPA's

competitiveness, including strategies to close the projected gap

between BPA's costs and revenues, a financial strategy, and proposals

to change BPA's power rate structures. These initiatives give customers

more choice and more accurately reflect BPA's costs associated with

providing the discrete components of electric service selected by

customers, and thereby should encourage investment in cost-effective

conservation. BPA proposes to close the revenue gap by exerting strict

cost management and restructuring its products and services to respond

more effectively to the market.

BPA is preparing initial studies to determine the extent to which

projected revenue requirements for FY 1996 and 1997 will exceed

revenues projected under current rates. BPA will then prepare studies

to establish proposed rates for the FY 1996 and 1997 period. The

initial proposal for the 1995 rate case is among the first steps in

ensuring BPA is positioned to compete in the new market environment.

BPA has prepared a draft environmental impact statement (EIS)

addressing the alternatives and impacts of its proposed business

direction, as expressed in its draft Strategic Business Plan. The draft

EIS was released for public comment in June 1994, along with the draft

Business Plan. The Business Plan EIS is designed to evaluate the

proposed actions and the range of alternatives, including the impacts

of the range of potential rate designs for BPA's power and transmission

services. It also is intended to provide documentation of BPA's 1995

rate proposal for the purposes of the National Environmental Policy

Act. A second draft of the EIS will be available for public comment in

late January.

II. Major Issues

The development of BPA's rates is complex, raising numerous issues

for resolution in the hearing process. The following is a brief

explanation of several major issues that are expected to be addressed

in the hearing. Some of these issues have been the subject of

discussion in previous BPA rate cases.

A. Revenue Requirement

The rates that BPA charges its customers must produce revenues that

are sufficient to repay, with interest, the Federal investment in

generation, conservation, and transmission facilities. Revenues also

must pay BPA's operation and maintenance expenses, purchased power

costs, and other miscellaneous expenses. BPA also sets rates to recover

a certain amount of net revenues. These planned net revenues, combined

with BPA's existing financial reserves, are intended to mitigate

financial risk to help assure BPA's ability to recover its costs,

including its timely repayment of the Federal investment.

BPA develops a Revenue Requirement Study, that sets forth BPA's

total costs of providing services to BPA's customers, including

repayment of the Federal investment in the Federal Columbia River Power

System. The revenue requirement calculation is a major input in

determining the overall level of BPA's proposed rates for power and

transmission.

Program levels for FY 1996 and 1997 were developed outside of BPA's

rate case, and as part of the BPA Draft Strategic Business Plan, with

the benefit of a public comment process. BPA has reduced programs

through a combination of cost cutting, program reinvention, and

reductions in government and contractor employees. Program level

decisions will not be an issue in the rate case. The Revenue

Requirement Study will incorporate BPA's program level decisions and

implement BPA's risk mitigation, capital funding, and other financial

goals in 1996-1997 rates.

B. Revenue Forecast and Risk Analysis

The Revenue Forecast provides a most likely estimate of BPA's sales

and revenues for the rate period. The Revenue Forecast includes several

new products and associated billing determinants. The Risk Analysis

identifies and quantifies risk elements associated with this forecast.

Risk factors influence the expected revenues, the revenue distribution,

and the likelihood of meeting planned Treasury payments.

Historical risk categories include streamflow conditions related to

precipitation, affecting quantities of hydropower produced; aluminum

prices affecting the quantity and price of power purchased by the

aluminum smelters in the Northwest; temperature affecting a large

Northwest space heating load; fossil fuel prices affecting both the

size of market for and the cost of sales and purchases; and employment

affecting power consumption by durable goods industries like forest

products and aircraft manufacture; among others. In its initial

proposal, BPA is proposing to examine the potential revenue variability

that could result from changes in its rate design, including the

proposed tiered rate structure. BPA expects to increase planned net

revenues to cover the revenue variability, if necessary, to ensure

sufficient revenues to meet its Treasury payments.

C. Loads and Resources Determinations

The firm energy and capacity loads and resources forecasted by BPA

to occur during the forthcoming rate period, along with estimated sales

of unbundled products and services, determine BPA's forecasted power

sales. Forecasted sales and revenue requirements determine the general

level of rates that must be charged to generate sufficient revenue.

D. Cost Allocations and Rate Design

Historically, BPA has sold firm requirements power on a ``bundled''

basis; that is, all customers within a customer class paid for a

bundled package of products even if they did not use or need all the

products and services in the bundled price. BPA is planning to propose

a number of rate design changes to provide purchasers information about

the prices associated with a fuller selection of electric power

products and services that BPA can provide. In designing the rates to

be proposed in the 1995 rate proceeding, BPA also adheres to statutory

ratemaking requirements, including those for allocating resource costs

to customer groups. In particular, section 7 of the Northwest Power Act

guides how rates are to be established and revised.

1. Cost Allocation: the rates BPA charges to each customer class

reflect the classification of costs among different attributes of power

and the allocation of costs to each customer class. BPA is planning to

change the classification and allocation of costs in its initial

proposal for the 1995 rate case to provide customers with better

information on the costs associated with providing electric power and

services. BPA also intends to develop a revised cost allocation

construct for the 1995 rate case consistent with the separation of

resource costs among the different business lines--power, transmission,

and energy services--and different product lines within each business

line. The Draft Strategic Business Plan proposes three different power

product lines: Tier 1 products, Tier 2 products, and unbundled products

and services.

BPA plans to classify generation costs using the results of a

revised Marginal Cost Analysis. Results of the Marginal Cost Analysis

also will be used to determine hourly and seasonal periods for

ratesetting.

2. Marginal Cost Analysis: BPA is planning to propose to reflect

the changing market conditions and opportunities in which BPA operates

in its approach to measuring the incremental cost of providing

electricity. BPA plans to measure marginal costs based on the supply

and demand conditions BPA faces in the West Coast market instead of

limiting the measurement to just the incremental costs associated with

acquiring additional generating resources. BPA plans to change the

Marginal Cost Analysis to provide a better understanding of how BPA

incurs marginal costs and how those costs vary within the year.

3. Tiered Rates and Unbundled Products: BPA is planning significant

changes in the design of its rates. BPA is planning to propose to

divide its rates for firm requirements service into two tiers: Tier 1

and Tier 2. The other services and products that customers may select

to complement either firm requirements service provided by BPA, or

power acquired from other sources, will be priced separately.

To provide customers with a price signal that encourages efficient

resource investment decisions, including conservation resources, and

shares the benefits of the relatively low-cost Federal power and

transmission systems, BPA is planning to propose to tier its rates for

requirements service and for the residential exchange. The rate for

requirements service would be divided into two parts: a Tier 1 rate,

and one or several alternative Tier 2 rates. BPA expects that the Tier

1 rate will be available to serve most of the existing customers' firm

loads. The Tier 1 rate is expected to be a lower rate than Tier 2

because it will be based primarily on the costs associated with the

existing Federal system. The Tier 2 rates will be available to serve

regional firm requirements in excess of Tier 1, including future load

growth, and will be based on the costs associated with supplying power

to meet these loads.

To address the increasingly competitive market for power,

transmission, and energy services, BPA is planning to propose to offer

a limited menu of unbundled products in the 1995 rate case. BPA expects

that the products offered will be available both under the current

power sales contracts and under new power sales contracts. BPA expects

to offer additional unbundled products in future rate cases and to

price these products to meet market conditions and its cost recovery

obligations. In some cases, BPA expects the market will require

flexible pricing. BPA is planning to ``unbundle'' what it offers so

customers can choose among products and services based on what they

need to meet their loads and support their own resources, if any.

Following publication of the initial proposal in the Federal

Register, formal public hearings and general public field hearings will

be conducted by BPA. Written comments from individuals or entities,

other than parties to BPA's formal rate case, also will be accepted

through a date established by the Hearing Officer at the prehearing

conference. Oral communications should be for the purpose of requesting

either status reports or procedural information. After completion of an

environmental process pursuant to the National Environmental Policy Act

and following the hearings, BPA will announce its final proposed

wholesale power rates and submit them to the Federal Energy Regulatory

Commission for approval.

Issued in Portland, Oregon, on December 12, 1994.

Randall W. Hardy,

Administrator and Chief Executive Officer.

[FR Doc. 94-31951 Filed 12-27-94; 8:45 am]

BILLING CODE 6450-01-M