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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A98-1060

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** January 15, 1998
- **Citation:** 63 FR 2383

## Text

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,

-----------------------------------------------------------------------

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Rate Schedule P-90A, Peaking Power--(superseded by P-98)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Companies and/or Oklahoma Municipal Power Authority--(no longer
applicable)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(no longer applicable)
Rate Schedule TDC-90, Transmission Service--(superseded by NFTS-98)
Rate Schedule IC-90, Interruptible Capacity--(no longer applicable)
Rate Schedule EE-90, Excess Energy--(superseded by EE-98)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

[[Page 2384]]

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

[[Page 2385]]

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

[[Page 2386]]

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

[[Page 2387]]

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.

[[Page 2388]]

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

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-1060. Public record. Not legal advice.