Integrated System RatesNotice of Order Approving New Power Rates on an Interim Basis

DEPARTMENT OF ENERGY

Southwestern Power Administration

Integrated System Rates--Notice of Order Approving New Power

Rates on an Interim Basis

AGENCY: Southwestern Power Administration, DOE.

ACTION: Notice of rate order,

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SUMMARY: The Deputy Secretary acting under Amendment No. 3 to

Delegation Order No. 0204-108, dated November 10, 1993, has approved

and placed in effect on an interim basis Rate Order No. SWPA-37 which

provides for the following Integrated System Rate Schedules:

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

Rate Schedule NFTS-98, Wholesale Rates for Point-to-Point and

Network Transmission Service

Rate Schedule EE-98, Wholesale Rate for Excess Energy

The rate schedules supersede the existing rate schedules shown

below:

Rate Schedule P-90A, Peaking Power--(superseded by P-98)

Rate Schedule P-90B, Peaking Power through Oklahoma Utility

Companies and/or Oklahoma Municipal Power Authority--(no longer

applicable)

Rate Schedule F-90B, Firm Power through Oklahoma Utility Companies--

(no longer applicable)

Rate Schedule TDC-90, Transmission Service--(superseded by NFTS-98)

Rate Schedule IC-90, Interruptible Capacity--(no longer applicable)

Rate Schedule EE-90, Excess Energy--(superseded by EE-98)

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

Order No. SWPA-37 is January 1, 1998, through September 30, 2001.

FOR FURTHER INFORMATION CONTACT: Forrest E. Reeves, Assistant

Administrator, Office of Corporate Operations, Southwestern Power

Administration, Department of Energy, P.O. Box 1619, Tulsa, Oklahoma

74101-1619.

SUPPLEMENTARY INFORMATION: Southwestern Power Administration's

(Southwestern) Administrator has determined, based on the November 1997

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 Administrator prepared a November 1997 Integrated System

Revised Power Repayment Study based on additional annual revenue of

$1,805,772 beginning January 1, 1998, which increases ultimate annual

revenues from $96,344,200 to $98,149,972, in part to recover increases

in Corps of Engineers and Southwestern Federal investments.

Southwestern has changed the rate structure to conform with the intent

of the Federal Energy Regulatory Commission's (FERC) Order No. 888;

consequently, the actual rate impact on each customer will vary based

on the type of service requested and provided. Also, a credit,

specifically designed for each individual customer, will apply

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against the purchased power adder component of the rate schedules to

refund both excess revenues and interest accruing on such revenues in

the purchased power deferral account during recent years of favorable

water conditions. This credit is intended to equalize the customer's

average purchased power adder cost. These credits will be provided to

each applicable customer over a 6-month service period beginning

January 1, 1998. The customer specific credit, along with the

Administrator's discretionary purchased power adder adjustment, will

offset the immediate impact of increasing the purchased power adder to

1.1 mills/kWh, except for those customers to which the purchased power

adder does not currently apply. This rate proposal also includes a

provision to continue and increase the Administrator's Discretionary

Purchased Power Adder Adjustment, from up to $0.0005 to up to $0.0011

per kilowatthour as necessary, and to adjust the purchased power adder

annually, at his/her discretion, under a formula-type rate, with

notification to FERC.

Following review of Southwestern's proposal within the Department

of Energy, I approved, Rate Order No. SWPA-37, on an interim basis

through September 30, 2001, or until confirmed and approved on a final

basis by FERC.

Dated: January 7, 1998.

Elizabeth A. Moler,

Deputy Secretary.

Order Confirming, Approving and Placing Increased Power Rate in Effect

on an Interim Basis

[Rate Order No. SWPA-37]

January 1, 1998.

In the matter of: Southwestern Power Administration System Rates

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. This rate order is issued by the Deputy

Secretary pursuant to said Amendment to Delegation Order No. 0204-108.

It is also made pursuant to the authorities as implemented in 10 CFR

903.

Background

FERC confirmation and approval of the following Integrated System

(System) rate schedules was provided in FERC Docket No. EF90-4011-000

issued September 18, 1991, for the period October 1, 1990, through

September 30, 1994:

Rate Schedule P-90A, Peaking Power--(superseded by P-98)

Rate Schedule P-90B, Peaking Power through Oklahoma Utility

Companies and/or Oklahoma Municipal Power Authority--(no longer

applicable)

Rate Schedule F-90B, Firm Power through Oklahoma Utility Companies--

(no longer applicable)

Rate Schedule TDC-90, Transmission Service--(superseded by NFTS-98)

Rate Schedule IC-90, Interruptible Capacity--(no longer applicable)

Rate Schedule EE-90, Excess Energy--(superseded by EE-98)

These rate schedules were subsequently extended on an interim basis

by the Deputy Secretary under the Rate Order No. and for the periods

listed below:

Rate Order SWPA-29, October 1, 1994-September 30, 1995

Rate Order SWPA-32, October 1, 1995-September 30, 1996

Rate Order SWPA-34, October 1, 1996-September 30, 1997

Rate Order SWPA-35, October 1, 1997-March 31, 1998

Southwestern's November 1997 Current Power Repayment Study (PRS)

indicated that the existing rates would not satisfy present financial

criteria regarding repayment of investment in a 50-year period due, in

part, to increasing Corps of Engineers (Corps) and Southwestern Federal

investment. The Revised PRS indicated that an increase in annual

revenues of $1,805,772 was necessary beginning in FY 1998 to accomplish

System repayment in the required number of years. Accordingly,

Southwestern developed proposed System rate schedules in the November

1997 Rate Design Study based on that additional revenue requirement.

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 August 22, 1997,

(62 FR 44670). A Public Information Forum was held September 4, 1997,

in Tulsa, Oklahoma, and a Public Comment Forum was held October 9,

1997, also in Tulsa. Written comments were due by November 20, 1997. On

August 25, 1997, Southwestern mailed a copy of the Federal Register

Notice, making copies of the proposed rate schedules and supporting

data for the August 1997 Power Repayment and Rate Design Studies

available to customers and interested parties for review and comment

during the formal period of public participation. In addition, and

prior to the formal 90-day public participation process, Southwestern

held a number of informal meetings with customer representatives during

preparation of the August 1997 Current and Revised Power Repayment

Studies and Rate Design Study. Southwestern personnel met informally

with representatives of the Southwestern Power Resources Association

(an organization representing many of Southwestern's customers) on four

occasions and with the Oklahoma Municipal Power Authority (OMPA) member

representatives once to explain the studies, answer questions, and

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consider comments and suggestions concerning development of the

proposed System rates. Further, Southwestern staff met with specific

customer representatives following the Public Information and Comment

Forums to discuss the results of the August 1997 Current and Revised

Power Repayment Studies and Rate Design Study and how the proposals

impacted these customers directly.

Following the conclusion of the comment period in November 1997,

modifications to the August 1997 Power Repayment and Rate Design

Studies and the proposed rate schedules were completed based on (1)

Formal comments received, (2) finalization of the FY 1996 Southwestern

Federal Power System (SWFPS) financial audit, and (3) resolution of a

major power sales contract. The comments presented during the formal

public participation process were considered, responses developed and,

where deemed appropriate, incorporated into the studies. Once all

comments had been carefully considered, the Administrator made the

decision to submit the revised (November 1997) rate proposal for

interim approval and implementation. Responses to major comments are

contained herein. The proposed rate schedules resulting from these

changes are designed to increase total annual revenues to a level

sufficient to repay all costs by the 50th year.

Discussion

The rate schedules proposed by Southwestern for implementation

increase ultimate annual revenue from $96,344,200, to $98,149,972, or

1.9 percent, which will satisfy cost recovery criteria outlined in

Department of Energy (DOE) Order No. RA 6120.2 and Section 5 of the

Flood Control Act of 1944, by increasing annual net revenues by

$1,805,772, beginning January 1, 1998. This amount is less than the

revenue level initially proposed in August 1997 due to changes made to

(1) Correct errors in the August study cited within comments received

and noted by staff review; (2) reflect the results of the FY 1996

financial audit that had been delayed (due to the Corps of Engineer's

(Corps) switchover to a new financial management system); and (3)

better show the impacts of specific power sales contract provisions.

The following adjustments or corrections, which were not included in

the August 1997 studies, lowered the level of increase needed:

1. Completion of the FY 1996 SWFPS audit. This audit was not

finalized until September 1997 due to numerous problems with Corps'

financial data for FY 1996. The Corps implemented a new financial

system during FY 1996 within several of its district offices and

numerous problems developed during retrieval of the 1996 financial

data which significantly delayed preparation of financial statements

and the financial audit. Southwestern incorporated the audited

financial data for FY 1996 in its November 1997 Power Repayment

Studies. This audited financial data resulted in a decrease in the

level of revenues needed.

2. Reduction in the level of Service Charges due to resolution

of a major power sales contract. Southwestern had been involved in

power sales contract negotiations with a major customer for some

time. Upon successful negotiation of a new power sales contract in

August 1997, Southwestern lowered its estimate of transmission

service charges to correspond with revised anticipated rate levels.

This change also caused a decrease in the level of revenues needed.

3. Minor corrections to revenues to reflect effective dates of

contract changes and implementation of rates for new services for

specific customers. The corrections had both increasing and

decreasing impacts on the revenues needed.

4. Minor revisions to estimates of revenues expected from

facilities charges based on recently updated projections of future

individual customer transmission system usage. These revisions had

both increasing and decreasing impacts on the revenues needed also.

5. Adjusted revenues to include customer-specific purchased

power credits not identified in the August 1997 PRS due to the

unavailability of account data that determines the level of

participation for each individual customer. Analysis of the

individual customer account activity has been completed and specific

purchased power revenue credits have been determined for those

participating customers to place all such customers on an equal

level.

Not included in the above adjustments are additional issues related

to rate design. Southwestern has redesigned its rates for transmission

service in accordance with the intent of FERC Order No. 888 on open

transmission access. Most of the comments, concerns and requests for

information have been related to Southwestern's proposed August 1997

Rate Design and Rate Schedules, and in particular, its charges for

transmission service. In consideration of comments and suggested

improvements to its rate design, Southwestern has made numerous changes

to both its rate design and rate schedules. The following are changes

made to Southwestern's August 1997 Rate Design and Rate Schedules: (The

rationale for these changes is described in Southwestern's responses to

major comments section.)

1. The revenue requirement and transmission capacity sales were

changed based on the November 1997 Revised Power Repayment Study.

2. The Net Capacity or Energy Sales/Deliveries divisor on

ancillary services was changed from the average 12 months'

coincidental peak (CP) of the fifteen projects within Southwestern's

control area to the capacity sales (billing units) associated with

the customers who are anticipated to be taking the ancillary

services.

3. The separate ancillary service charge for Energy Imbalance

was deleted while the penalty provision for the service as proposed

in the August 1997 Rate Design was retained.

4. The calculation of the per MW cost for providing generation

for the two ancillary services, (1) Operational Reserves-Spinning

and (2) Operational Reserves-Supplemental were revised to divide the

projected generation expenses by the rated capacity of the

generation rather than the 12 CP value.

5. Switchyard costs on the transmission side of the Corps'

facilities that previously were included in generation have been

reassigned to transmission.

6. Before allocating Transmission Expenses to Transformation,

the costs for the Scheduling, System Control and Dispatch ancillary

service have been removed.

7. An energy transmission loss analysis was completed and the

energy loss percentage to be charged on transactions was reduced

from 5 percent to 4 percent. Also, a determination was made to

charge dollars for losses, based on a formula described in Rate

Schedule NFTS-98, rather than have them scheduled/repaid with

energy.

8. Southwestern will be providing secondary service,

``headroom,'' under its firm transmission service for both Federal

and non-Federal power.

9. Southwestern will be offering Network Integration

Transmission Service. The charge for this service will be based on

the calculation specified by FERC in its Order No. 888 for this type

of service.

In review, Southwestern is filing a revised rate adjustment plan

for two reasons. These reasons include the need for a minor increase in

the annual revenue requirements to satisfy cost recovery criteria and

also the restructuring of rates to conform with the intent of FERC

Order Nos. 888 and 888-A. The PRSs indicated that current revenue

levels are insufficient, by approximately 1.9 percent, to repay the

Federal investment within the repayment period. That increased

requirement is due to increased investments for both the Corps of

Engineers (Corps) hydroelectric projects and Southwestern's

transmission system facilities. Some of the factors causing the Corps

increases in project investments include a finalization of the Stockton

cost allocation study, and major rehabilitation of a few projects to

correct identified problems. Also, major investments have been made in

Southwestern's aging transmission facilities to sustain the reliability

of the system. This filing represents the first

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revenue change for the Integrated System in seven years. The second

reason is the restructuring of Southwestern's generation and

transmission rates and the development of separate rates for ancillary

services. This restructuring conforms with the intent of FERC Order

Nos. 888 and 888-A, and required a shift of certain costs between

generation and transmission to provide for ancillary services and also

to reassign generation costs associated with Corps transmission-related

switchyard facilities to transmission. The reassignment of costs will

have varying financial impacts on Southwestern's customers based on the

service requested and provided.

In Southwestern's 1988 and again in the 1990 Rate Proposals, two

noteworthy issues, which have previously been approved by FERC were

described in detail. The two issues were (1) the treatment of a portion

of the Truman project investment as not currently repayable, and (2)

the development of customer-specific credits to the Purchased Power

Adder to refund excess revenues collected under Southwestern's

purchased power rate component.

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 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. 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 PRSs and in the 1997 PRSs in support of the

revenue requirements of Southwestern's 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 cost allocation was sent back to the Corps' St. Louis District

for a review of the classification of a specific charge and was to be

returned to the ICCA for final approval. 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 second meeting of the ICCA was

held with several customer representatives 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

does not anticipate finalization of the Truman cost allocation within

the 1997 PRS cost evaluation period; therefore, Southwestern has

continued to use the Interim Cost Allocation for the Truman project in

development of the 1997 PRS.

Purchased Power Deferral Account (Credit and Adders)

In the 1988 and 1990 PRSs, Southwestern implemented customer-

specific purchased power credits to flow back over a fixed period

deferred revenues and interest accrued on such revenues in such a way

as to equalize the average purchased power adder rate per kilowatthour

(kWh) paid by each customer. These credits remained in effect through

September 30, 1993, to balance each customer's average cost

irrespective of the condition or balance of the Purchase Power Account

(Account), or the need for rate adjustment in the meantime. The

customer-specific credits specified in the 1990 PRS, like the previous

credits, were insufficient to totally equalize the average purchased

power adder rate paid by each customer. Changing interest rates, above

average water conditions during the period which eliminated the need

for estimated average-year purchases, and different rates for the

credits over the credit period kept the previous credits from reaching

the goal. Therefore, additional customer-specific adjustments are

needed to bring all participating customers to the same level. It is

important that the remaining revenues to be credited flow back over a

short period to get all customers on the same per kWh contribution

basis. Southwestern is proposing to flow back the deferred revenues and

interest during the service period January 1, 1998, through June 30,

1998. However, to avoid the potential for making cash payments to

customers in excess of monthly charges, the rate schedules again limit

the amount of applicable credit in any month to the level of total

charges for Southwestern's services rendered for such month, and allow

for any excess credit to be used in future billing periods. Amounts of

revenue and interest in the Account at any time are System revenues,

entirely within the purview of Southwestern. No customer is considered

to have escrowed these funds, nor to have any specific entitlement or

ownership right in contributions to the Account or accrued interest,

although Southwestern will

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attempt to apply purchased power adders, and credits, on a basis

reasonably proportional to applicable customer purchases of peaking

power and energy.

During the time the purchased power adders and the 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 1988 and 1990 Rate Proposals, Southwestern also 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 $0.0005 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 December 1993, 1994, 1995,

and 1996 to implement adjustments of up to $0.0005 per kWh additional

credit to help reduce excess revenues collected in the Account during

the previous years of good water conditions and the corresponding

reduced need for purchased power. This authority seems to remain

appropriate, particularly in light of the fact that the Account has no

direct effect on 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. However,

experience has shown Southwestern that the $0.0005 per kWh adjustment

level does not provide significant impact to the Account especially

during times of widely fluctuating water conditions. 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, but increasing his/her authority

up to $0.0011 per kWh, an increase of $0.0006 per kWh, as he/she

determines necessary, to provide better control over the amount of

revenue in the Account and to provide greater flexibility in limiting

the over and under recoveries of revenue.

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 $0.0011 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.

Comments and Responses

The Southwestern Power Administration (Southwestern) received

numerous comments from customers and interested parties from the public

participation process. The issues identified in these comments were

given careful and thorough consideration and, where deemed appropriate,

solutions were developed and incorporated into Southwestern's final

rate proposal, as noted in the earlier Discussion section. A summary of

major comments and Southwestern's responses to the issues raised in

them follows:

Corps O&M Expenses

Comment: Southwestern's updated revenue requirement projections

based on audited financial statements for the FY 1996 indicate that

Corps of Engineer's (Corps) Operation & Maintenance (O&M) expenses for

1996 were approximately $4,900,000 less than estimated by Southwestern

in its revenue requirements projection. However, Southwestern did not

revise its Corps O&M projection. It appears that Corps O&M expenditures

are increasing as compared to historical levels, while Southwestern is

reducing its expenditures. Corps O&M expenditures are approximately 30

percent of the cost of Southwestern hydropower. Reductions in Corps O&M

expenditures will reduce upward rate pressure on Southwestern's rates.

When Southwestern modifies rates in FY 2001, it should consider

reducing the Corps O&M expense to reflect actual expenses in 1996, 1997

and 1998.

Response: Southwestern agrees that the audited financial statements

for FY 1996 Corps O&M expense were approximately $4.9 million less than

Southwestern estimated in the 1996 Power Repayment Study (PRS), but

$4.2 million of this difference was due to unforeseen and

extraordinarily large retirement losses which are not projected by the

Corps or Southwestern. The Corps O&M expenses before the retirement

losses were $30.9 million, less than 2 percent from the previous

projection for FY 1996. Projections for Corps O&M are not developed by

Southwestern, but are developed by the Corps and provided to

Southwestern annually. The Corps makes projections using historical

information and then 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.

Southwestern reviews this information and adjusts the estimates to

future year dollars based on the Gross Domestic Product Price Index

projection to incorporate inflationary trends. Southwestern agrees that

such costs should be prudently and timely incurred at reasonable levels

consistent with maintaining the high level of reliability required in

the utility industry. Historically, the estimates that the Corps

provides have been reasonably accurate in total, although they

fluctuate from actual expenditures by individual project. 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 agrees that a reduction in Corps O&M expenditures

would help in reducing the upward pressure on rates. However, the Corps

O&M expenditures have been quite stable for most of the last ten years.

There is no indication by the Corps that O&M costs will be increasing

significantly, but future PRSs will reflect any such trend. It is true

that Corps O&M expenditures are a significant percentage of the cost of

hydropower; but, considering the level of Corps power investment on the

financial statements, this percentage does not appear to be out of

line. Southwestern will continue to monitor the Corps estimates of O&M

expenses to assure the estimates are reasonably comparable to actual

expenses as noted on each year's financial statements. Southwestern

completes repayment reviews each year and will include actual expenses

for the latest historical year available in its review. When

Southwestern modifies rates in FY 2001, it will incorporate actual

Corps O&M expenses for FY 1997, FY 1998, FY 1999 and FY 2000.

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Accelerated Repayment

Comment: Footnotes in the Southwestern PRS indicate that

Southwestern plans in this PRS to repay debt faster than required by

its loan obligations. Southwestern should not repay its Federal

obligations any faster than required for purposes of establishing cost

of service and rates. Southwestern should use amortization and interest

expenses that do not exceed what is required to repay loan obligations.

Response: The footnote in Southwestern's PRS indicates that

historical water conditions have been above average allowing for

increased sales and amortization; however, this PRS indicates that,

even with above average water conditions, current rates are

insufficient to meet repayment criteria for the System. Southwestern's

rate adjustment plan in the FY 1997 PRS does not accelerate repayment

of the Federal investment. The comment's reference to loan obligations

is actually the repayment of the Federal investment. Each year's

investment at each project is treated as a separate repayment

obligation with a specific term and interest rate. Southwestern's

repayment policy is set forth in DOE Order No. RA 6120.2. Section

8.c.(3) of that Order states: ``To the extent possible, while still

complying with the repayment periods established for each increment of

investment and unless otherwise indicated by legislation, amortization

of the investment will be accompanied by application to the highest

interest-bearing investment first.'' The policy is based on Section 5

of the Flood Control Act of 1944 (Flood Control Act) which requires

that power and energy from Federal projects be marketed, ``* * * at the

lowest possible rates to consumers consistent with sound business

principles * * *.'' Amortization of the capital investment is required

by the Flood Control Act to be accomplished, ``* * * over a reasonable

period of years * * *.'' This period has been determined by Order No.

RA 6120.2 to be within 50 years from the date of commercial service for

the hydroelectric projects and to be shorter periods for transmission

and replacement investments based on their service lives.

Southwestern sets its rates based on average year water conditions.

Southwestern's PRSs reflect the rate adjustment plan based on average

hydrologic conditions. The repayment system permits the Power Marketing

Administrations (PMAs) to vary the amount of capital returned to the

Treasury from year to year, reflecting the water conditions and the

volume of sales which they experience. From the beginning, the U.S.

Congress recognized that marketable energy in a hydroelectric system

would vary from year to year with fluctuations in available water. The

Congress agreed that, in order to produce a stable rate structure,

repayment plans which are based on average water conditions are a

reasonable approach. This model permits Southwestern to apply a stable

rate over a period of years, regardless of actual water conditions. In

above-average water years, the rate model recovers more capital which

balances poorer returns during below average water years.

During most of the past ten years, Southwestern has experienced

above average water conditions; therefore, Southwestern has returned

more funds to the U.S. Treasury than had been planned. The Flood

Control Act of 1944 requires that: ``All moneys received from such

sales shall be deposited in the Treasury of the United States as

miscellaneous receipts.'' All revenues from sales of power and energy

and non-Federal transmission are returned to the Treasury. Revenues

that exceed expenditures for a particular year are credited to the

repayment of investment. Revenues credited to repayment of the Federal

investment during the past ten years have enabled Southwestern to

maintain stable rates since 1992. As a rate increase of 1.9 percent is

needed, the Current PRS reflects that the 1997 rate adjustment plan,

with existing rates, is insufficient to meet anticipated repayment

obligations.

FY 2001 Test Year

Comment: Industry accepted practice is to raise rates when there is

a clear need to raise them. There does not appear to be information

that supports Southwestern's need to increase its rates before FY 2001.

Typically, electric utilities use one of three methods to establish a

test year. The test year selection methods include (1) Historical,

based on actual results of a previous year; (2) projected, based on the

same year the rates are established; or (3) combination of actual and

projected data. Southwestern does not need a rate increase until the

year 2001. It would be consistent with past precedent to develop steps

to these rates or implement them for a test year in 1998.

Response: The existing repayment study methodology prescribed by

DOE Order No. RA 6120.2 advocates a cost evaluation period (CEP) that

is ``normally 5 years'' to project future costs and revenues to reflect

changing conditions. That methodology was established, at least in

part, (1) to provide some protection for the financial integrity and

stability of the PMAs, including Southwestern, which must assure

recovery of all annual costs and repayment of investment from revenues

based on hydroelectric power generation under highly variable water

conditions, and (2) to provide a stabilizing effect on hydroelectric

power rates to minimize the need for more numerous and potentially

larger increases caused by a single year or event. While it is true

that a five-year cost evaluation period is not required, Southwestern

has utilized it consistently, and it serves as a ``reasonable'' period

over which Southwestern can project future events and costs. This

repayment methodology has been used consistently through Southwestern's

history, and the FERC has supported the process through its approval of

past rate adjustments.

Southwestern's customers' concerns that would warrant pursuing a

phased-in rate increase at this time have been carefully considered.

Southwestern is faced with certain statutory (the Flood Control Act of

1944) and regulatory (DOE Order No. RA 6120.2) requirements which limit

the latitude the Administrator can exercise in setting the cost-based

rates. Southwestern remains committed to the continued financial

integrity and stability of its System through the development of

regular annual PRSs based upon average-water-year conditions and on the

implementation of rate increases, as needed, in accordance with such

legal and regulatory requirements. This process has been strongly

supported in recent years by customers and customer organizations. The

stepped-in rate approved in 1990 was a one-time phase-in approach that

was intended as a reasonable accommodation to customer concerns

regarding a single 14.4 percent increase. At that time, there was a

unique situation regarding Corps O&M costs and confusion over Corps

policy regarding preventive and breakdown maintenance as well as

inconsistency in anticipated funding level restrictions. The level of

the rate adjustment in this rate filing, 1.9 percent, is minor in its

application to rates, and Southwestern does not have a compelling

reason to phase it in.

Some customers are impacted at a rate greater than 1.9 percent,

primarily due to rate restructuring. Such restructuring stems from

Southwestern's requirement to conform to the intent of FERC Order No.

888. However, an analysis of the data indicates that the shift in

Southwestern's expense patterns from generation-related costs, which

have

[[Page 2389]]

decreased, to increased transmission system-related costs, would have

caused such customers to be impacted by increased transmission costs,

whether or not an overall revenue increase were warranted. In addition,

with all the changes in the electric industry, this is considered a

``sound business principle'' in that it reduces Southwestern's

financial risk (albeit, only slightly) of repaying its Federal

investment in a timely manner.

Losses

Comment: Capacity losses are approximately 2.8% of total peaking

and firm capacity. Losses and station services are approximately 3.3%

of total energy resources available for sale. Typically demand losses

are greater than energy losses, stated on a percentage basis. Station

service should not be included as energy losses; only losses that occur

on the transmission system should be considered when calculating

transmission losses. Request Southwestern prepare a transmission loss

study. Transmission loss rates for transmission customers should be

established and updated each year. 5% power factor losses are higher

than surrounding control areas. Anything over 3% must be justified by a

loss study.

Response: The percentages used in the above comment are believed to

have been developed from numbers in the 1997 PRS and were based on

Southwestern's Load Resource Study which, for simplicity, combines

losses and station service to show total energy usage. Southwestern

recently performed a transmission loss study. Station service was not

included in our loss study. Only losses that occur on the transmission

system were considered in the calculation of transmission losses in the

loss study. Southwestern's loss study indicates that Southwestern's

loss percentage is approximately 4 percent. Consequently, Southwestern

has reduced the loss percentage from 5 percent to 4 percent for real

power losses and included that figure in its rate schedules.

Southwestern will also begin charging for losses, as compared to its

previous practice of requiring losses to be scheduled as energy.

Isolated Projects and Bundled Rates

Comments: Isolated projects should not be required to pay for

transmission and ancillary services that they do not use. Isolated

projects should receive credit for incurring costs that the typical

Southwestern customer does not. It is not appropriate to charge

ancillary services for isolated project power.

SWPA must offer unbundled service to all of its customers under

non-discriminatory terms and conditions. Proposal to require all

customers, regardless of whether they take power from SWPA's Integrated

System or use any of SWPA's transmission facilities, to pay for their

hydro power purchases under a bundled rate that includes transmission

and a charge for scheduling and reactive power services is contrary to

Order No. 888 and will not be approved by FERC.

Response: Southwestern's sale 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

projects that are presently electrically isolated from Southwestern's

primary interconnected system requested integration of such projects

into the Integrated System to 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

exclusion from paying the Purchased Power Adder. Additionally, such

projects also include components of Southwestern's transmission system

and switchyard facilities used to deliver power and energy from the

dams. In addition, 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 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. 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 to

provide for ancillary services.

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 November 1997 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 Section 1 of Delegation Order No. 0204-108, as amended November

10, 1993, 58 FR 59717, 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 by the Secretary of Energy, I hereby confirm, approve and place in

effect on an interim basis, effective January 1, 1998, the following

Southwestern System Rate Schedules which shall remain in effect on an

interim basis through September 30, 2001, or until the FERC confirms

and approves the rates on a final basis.

Dated: January 7, 1998.

Elizabeth A. Moler,

Deputy Secretary.

[FR Doc. 98-1060 Filed 1-14-98; 8:45 am]

BILLING CODE 6450-01-P