20110328_3291.pdf

DECISION MEMORANDUM 1
DECISION MEMORANDUM

TO: COMMISSIONER KEMPTON
COMMISSIONER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF

FROM: DON HOWELL
DEPUTY ATTORNEY GENERAL

DATE: MARCH 25, 2011

SUBJECT: SETTLEMENT AGREEMENT, BPA REP-12 CASE

On September 1, 2010, parties in the five Ninth Circuit BPA appeals executed an
“Agreement in Principle” (AP) to resolve or partially resolve the appeals stemming from three
BPA cases (WP-07, WP-10, RPSA). The parties to the AP included: BPA; the State
Commissions of Idaho, Oregon and Washington; the Citizens Utility Board (CUB) of Oregon;
five investor-owned utilities (Avista, Idaho Power, PacifiCorp, PGE, and PSE); and many but
not all consumer-owned utility associations (the “COUs”). Having entered into the AP, the
parties next set about drafting the actual “Settlement Agreement” (SA) that was initially intended
to be ready on or about November 1, 2010. Since September 1, the three drafting groups (BPA,
IOUs/State Commissions, and the COUs) have been engaged in the drafting of the SA. The
attached SA was submitted to BPA in the REP-12 case (where the Administrator is formally
asked to adopt and implement the settlement). Exhibit A (Implementation Agreement) to the SA
is intended to take the place of the “old” Residential Purchase and Sale Agreements (RSPAs).
The Implementation Agreement is the contract BPA would enter into with each exchanging
utility during the FY 2012 to 2028 period.
SETTLEMENT AGREEMENT
A. Background
The Settlement Agreement is intended to resolve long-standing disputes among the
settling parties. As the Commission will remember, in May 2007 the Ninth Circuit overturned
BPA’s decision to approve the 2000 and 2001 RPSA Settlement Agreements between BPA and
the six regional IOUs. The Court found that Bonneville provided Residential Exchange Program
DECISION MEMORANDUM 2
(REP) benefits to the six regional utilities (including Northwestern) in the RPSA Settlement
Agreement without regard to the Section 7(b)(2) protections afforded the COUs.
In response to the Ninth Circuit’s decision, BPA generally determined in the WP-07
Supplemental case that the six IOUs must refund their REP Settlement benefits to Bonneville so
that BPA may refund the overpayments to the COUs. Accordingly, Bonneville calculated a
“Lookback” amount for each of the IOUs.1 In addition, for the first time in approximately 20
years, BPA calculated “Deemer” amounts for both Avista and Idaho Power.2 In the WP-07
Supplemental and the WP-10 rate cases, BPA began deducting the Lookback amounts from
current and future REP benefits paid to the five IOUs.3
In late 2008, the five IOUs and the State Commissions filed consolidated appeals in
the Ninth Circuit against BPA. Among other issues, the IOU/PUC group argued that the
Lookback mechanism was arbitrary, not in conformance with the Northwest Power Act, and
contrary to a “saving clause” in the 2000/2001 RPSA Settlement Agreements. Idaho Power, this
Commission and Avista also asserted that the Deemer mechanism was unlawful. On the other
side, several COUs also filed appeals asserting that BPA had miscalculated the Lookback
Amounts as too small and that the COUs were owed greater amounts. In addition, the
Association of Public Agency Customers (APAC – the industrial customers group of
Weyerhauser, Longview Fiber, Georgia Pacific, Simplot, etc.) argued that its members were
entitled to larger and direct refunds from the IOUs.
The settling parties recognize that not all parties to the litigation may settle.
However, the parties that do settle have agreed to waive their claims against other settling
parties, thereby minimizing the overall liability exposure of the settling parties. It is intended
that BPA become a party to the Settlement Agreement after conducting a Section 7(i) settlement
proceeding. In the REP-12 case, BPA will issue a Record of Decision (ROD) related to the
Settlement Agreement. Parties intending to enter into the SA should do so by April 15, 2011.

1 According to BPA, the Lookback balances for the three Idaho IOUs as of September 30, 2011, are estimated to be:
Avista – $57 million; PacifiCorp – $180 million; and Idaho Power – $118 million.
2 Because Idaho Power’s ASC was lower than the BPA PF Rate, Idaho Power was not eligible to receive any REP
benefits for the 2001 to 2007 period. Consequently, its Lookback Amount and Deemer accounts continued to grow
with the accumulation of interest.
3 Avista settled its Deemer issue with BPA in 2009, and “converted” the settled Deemer amount into its Lookback
amount referenced in Footnote 1.
DECISION MEMORANDUM 3
B. Major Points of the Settlement Agreement
1. Net Present Value of REP Benefits. The settlement provides that REP benefits for
the period FY 2007-2028 equals $2.05 billion in net present value (NPV) using an 8% discount
rate. This REP benefit amount is dedicated solely to eligible IOUs using the ASC methodology.
REP benefits paid to any COU are not addressed in the SA but will be addressed in the REP-12
case set for hearing April 4-8. BPA is scheduled to issue its ROD July 5, 2011.
2. “Tilting” Annual REP Payments. Section 6 of the Settlement Agreement shows
the collective REP amounts to be divided among the 6 IOUs over the next 17 years. As
indicated in Table 3.1 on page 11, REP benefits for FY 2012 start at $182.1 million and increase
over time to $286.1 million in FY 2028.
3. Interim Agreement True-Up Payments. Section 4 of the Settlement Agreement
obligates BPA to pay approximately $80 million to Avista, Northwestern, PGE and PSE as set
out in the table in Table 4.
4. Environmental Attributes. In Section 5.1 of the Settlement Agreement, BPA will
convey certain renewable energy credits (RECs) and carbon credits as such RECs and carbon
credits become available for allocation to the IOUs.
5. Reallocation of REP Benefits Among the IOUs. Section 6 of the Settlement
Agreement contains the mechanism for reallocating REP benefits among the six IOUs. This
“reallocation” became necessary so that the benefits of settling are about equal among the IOUs
(except Idaho Power). For example, Idaho Power has paid none of its Lookback Amounts but
PSE has paid approximately 55% of its Lookback Amounts. The IOUs and the State
Commissions have agreed to benchmark the settlement benefits to PSE’s 55% repayment level.
Consequently, Avista, Idaho Power, PacifiCorp and PGE will reallocate some of their REP
benefits over a 10-year period or less to the other IOUs: Avista – $22.98 million; Idaho Power –
$45.14 million; PacifiCorp – $66.72 million; and PGE – $4.66 million. See Table 6.2.3 on pp.
21-22. This “redistribution” of REP benefits will roughly make all the IOUs proportionally the
same (except Idaho Power, as discussed below). The Settlement Agreement does set a cap on
the amount of reallocation annually so as not to negatively affect REP credits to Avista,
PacifiCorp and Portland General customers. The maximum annual reallocation for the three
DECISION MEMORANDUM 4
companies is: Avista – $2.0 million; PacifiCorp – $8.44 million; and PGE – $1.23 million. See
Table 6.2.3 on p. 22.4
The reallocation provision in Section 6.2.3(ii) further provides that Idaho Power’s
commitment to reallocate REP benefits shall only begin when Idaho Power begins receiving
REP settlement benefits from BPA. In addition, the amount of REP benefits to be reallocated by
Idaho Power to the other IOUs is not to exceed 50% of Idaho Power’s annual REP benefits for
any year. In other words, when Idaho Power begins to receive its REP benefits, 50% will be
allocated to Idaho Power’s customers and the remaining 50% will be reallocated to the other
IOUs under this mechanism. If Idaho Power has not reallocated the $45.14 million by the end of
FY 2028, then any remaining balances will be deemed to be fully extinguished. Section 6.2.5.
6. Lookback Amounts and Deemers. The Settlement Agreement provides in Section
7.6 that the Lookback Amounts will continue to be deducted from each IOU’s REP benefits until
September 30, 2011. All Lookback Amounts at that time will then be extinguished on October
1, 2011. Section 7.4. In addition, as of October 1, 2011, all Deemer amounts then owed by any
settling IOU (i.e., Idaho Power) will be extinguished. Section 7.4. PSE and PacifiCorp will
retain any payments previously received under their respective Load Reduction Agreements
(LRA) and BPA and the COU settling parties will permanently cease any efforts to collect such
LRA amounts from the two utilities.
7. Waiver. Section 3.8 provides that no settling party will directly or indirectly
challenge the legality or provisions of the Settlement Agreement.
8. Ratification. The settling parties agree to make a good faith effort to have
Congress ratify this Settlement Agreement. Section 8 provides that settling parties and BPA will
seek such legislative ratification by creating a committee of interested principals and legislative
specialists. All parties to the Settlement Agreement shall support ratification. During the
ratification process, all settling parties will refrain from proposing any changes to the Settlement
Agreement and agree to support ratification efforts. The committee may conclude that
ratification will not be successful and discontinue such effort.
9. Dispute Resolution. Section 9 addresses how disputes under the Settlement
Agreement will be resolved. In the absence of ratification, then Section 9.2 expresses a
preference for binding arbitration.

4 Northwestern will receive $766,000 for six years. Section 6.2.4.
DECISION MEMORANDUM 5
10. Retention of Claims and Defenses. Sections 10.1 and 10.2 of the Settlement
Agreement are intended to reserve all claims and defenses by the settling parties against non-
settling entities. The parties envision that the existing five appeals will be stayed until BPA can
complete its Section 7(i) proceeding for the Settlement Agreement itself.5
In summary, the settling parties have worked hard to arrive at a reasonable settlement
which would settle the REP benefit dispute for the next 17 years, until 2028. Although I have
not broken out the liabilities and benefits on a jurisdictional basis, I believe the settlement
represents a fair, just and reasonable conclusion to this extensive litigation. Although the
settlement will not completely resolve all legal disputes, it will significantly limit litigation
exposure and potential liability for the settling parties (our regulated IOUs). From the
Commission’s perspective, the settlement ends the retroactive Lookback payments, and more
importantly, eliminates the Deemer mechanism on a going forward basis.
REP SETTLEMENT IMPLEMENTATION AGREEMENT
As explained above, the REP Settlement Implementation Agreement (Exhibit A to
the SA) is intended to replace the RPSAs that Bonneville and the REP-eligible IOUs execute
every two years. The Implementation Agreement would be in effect from FY 2012 to FY 2028 –
the same time period as the SA. Using the Average System Cost (ASC) methodology, BPA will
calculate for each two-year rate cycle whether each of the six IOUs is eligible for REP benefits.
If an IOU is eligible for REP benefits – the IOU’s ASC is higher than BPA’s PF Exchange Rate
– then BPA will calculate the REP benefits for each IOU. The accumulative total of the REP
benefits for the six IOUs may not exceed the annual amount of REP benefits identified in the
Settlement Agreement.6
The REP Settlement Implementation Agreement operates much the same as the prior
RPSAs. For example, the Implementation Agreement will require that the IOUs “passed
through” the REP benefits to qualifying residential and small farm customers as credits against
the applicable retail rates, as monetary payments, or “as otherwise directed by the applicable
Regulatory Body.” Section 10.1.
5 However, APAC recently filed a Motion with the 9th Circuit to set oral argument in its appeal of the WP-07S case.
6 For example, the FY 2012 REP benefits for all the IOUs cannot exceed $182.1 million.

DECISION MEMORANDUM 6
One of the issues in our appeal of Bonneville’s 2008 RPSA ROD was the ability to
terminate and suspend the old RPSAs. More specifically, if an IOU wanted to suspend its
participation in the REP because its ASC fell below the BPA PF Exchange Rate, under the old
RPSA it was not eligible to re-enter the REP until September 30, 2028. This Commission and
other parties argued that such a restriction is contrary to Section 5c(1) of the Northwest Power
Act which permits an IOU to enter into a residential exchange transaction “whenever [the] utility
offers to sell electric power to the administrator at the average system cost of that utility’s
resources in each year. . . .” 16 U.S.C. § 839cC(1) (emphasis added). In the current
Implementation Agreements, an IOU may suspend its participation for any reason on 30 days’
advanced notice to BPA. Section 11.1.1. An IOU that has suspended its Agreement may re-
enter the Agreement (become eligible for REP benefits) in the next two-year rate cycle.
COMMISSION DECISION
In summary, I recommend that the Commission adopt and approve the SA and
authorize me to transmit a signature page to BPA. Does the Commission concur?

bls/M:BPA Settlement Agreement_REP-12_dh2