20080611IPUC Initial Brief.pdf

UNITED STATES OF AMERICA
S. DEPARTMENT OF ENERGY
BEFORE THE
BONNEVILLE POWER ADMINISTRATION
2007 SUPPLEMENTAL WHOLESALE
POWER RATE ADJUSTMENT PROCEEDING ) BP A DOCKET WP-07 SUPP
INITIAL BRIEF OF THE
IDAHO PUBLIC UTILITIES COMMISSION
Donald L. Howell , II
D. Neil Price
Deputy Attorneys General
Idaho Public Utilities Commission
472 W. Washington Street (83702-5918)
PO Box 83720
Boise, ID 83720-0074
Idaho State Bar No. 3366
Idaho State Bar No. 6864
Telephone: [phone]
E-mail: don.howell~puc.idaho.gov
neil. price~puc. idaho. gOY
Filed: June 11 , 2008
INITIAL BRIEF OF THE
IDAHO PUBLIC UTILITIES COMMISSION
T ABLE OF CONTENTS
BACKGROUND ............................................................................................................................
A. The Ninth Circuit Opinions
..............................................................."...............................
B. Remand to BP A.
....... ................................ .................... ..... ............... .........
.......... ...... ...... ....... 3
ARGUMENT .......................,..........................................................................................................
BPA'S LOOKBACK MECHANISM IS UNLAWFUL RETROACTIVE RATEMAKING........ 3
A. BP A Cannot Correct the WP-02 Rates .................................................................................. 3
B. The Court Did Not Order BPA to Provide Retroactive Relief.............................................. 4
C. BP A has no Statutory Authority to Engage in Retroactive Ratemaking or Provide
Retroactive Relief .........................................................................................................,.............
D. The Prevailing Parties in PGE and Golden Northwest Failed to Exercise Measures that
would have Protected Their Interests.......................................................................................... 9
THE "DEEMER" MECHANISM IS BEYOND THE SCOPE OF THE NPA............................ 10
A. Introduction and History ......................................................................................................
1. The 1981 RPSAs.............................................................................................................. 11
2. The Suspension Agreements............................................................................................ 13
3. Termination of the RPSAs ............................................................................................... 14
B. The Deemer Mechanism is not Authorized by the NPA...................................................... 14
C. Collection ofthe Deemers is Barred by Regulation............................................................. 15
BPA'S CALCULATIONS OF THE DEEMER BALANCES ARE ARBITRARY AND NOT
SUPPORTED BY THE TOTALITY OF THE EVIDENCE........................................................ 16
A. BPA's Use of Different Methods to Calculate Deemer Interest is Arbitrary...................... 16
B. The Totality of the Evidence Does Not Support BPA's Calculations of the Deemer
Balances .................................................................................................................................... 18
I. The 18-Month Gap........................................................................................................... 18
2. Nevada Benefits............................................................................................................... 19
3. Treasury v. Prime Rate ....................................................".............................................. 19
IDAHO PUC INITIAL BRIEF WP -07 - B- ID-
BPA'S FAILURE TO RECORD THE DEEMER BALANCES IN ITS FINANCIAL BOOKS
VIOLATES GENERALLY ACCEPTED ACCOUNTING AND RATEMAKING PRINCIPLES
....................................................................................................,..................................................
CONCLUSION.............................................................................................................................
IDAHO PUC INITIAL BRIEF 111 WP-07-ID-
UNITED STATES OF AMERICA
S. DEPARTMENT OF ENERGY
BEFORE THE
BONNEVILLE POWER ADMINISTRATION
2007 SUPPLEMENTAL WHOLESALE
POWER RATE ADJUSTMENT PROCEEDING ) BP A DOCKET WP-07 SUPP
INITIAL BRIEF OF THE
IDAHO PUBLIC UTILITIES COMMISSION
The Bonneville Power Administration (BP A) has no express legal authority to engage
in retroactive ratemaking or provide retroactive relief in this proceeding. Consistent with its
authority in Section 7 of the Northwest Power Act, BPA should only set rates prospectively. The
successful petitioners in the two circuit appeals failed to avail themselves of established stay
procedures and thus should only be accorded prospective relief.In addition, the deemer
accounting mechanism is not authorized by the Northwest Power Act and deemer balances
should not be included in the "Lookback" mechanism. Consequently, the Administrator should
reject the Lookback mechanism as unlawful, arbitrary, and not in conformance with sound
ratemaking principles.
BACKGROUND
A. The Ninth Circuit Opinions
On May 3 , 2007, the United States Court of Appeals for the Ninth Circuit issued two
OpInIOnS in consolidated appeals challenging BPA's Residential Exchange Program (REP)
Settlement Agreements and certain rates in BPA's WP-02 Wholesale Rate proceeding. In
Portland General Electric Co. v. Bonneville Power Admin. ("PGE"
),
501 F .3d 1009 (9th Cir.
2007), cert. denied S. (2008), the Court held that BPA's REP Settlement Agreements
IDAHO PUC INITIAL BRIEF WP-07-ID-
with the six regional investor-owned utilities (IOUs) were contrary to the Northwest Power Act
16 u.S.c. 99 839-839h. The Court also held that BP A improperly included these "settlement
costs" in the rates paid by preference customers in violation of Section 7(b)(2) and (3) of the
Northwest Power Act, 16 U.C. 9 83ge(b)(2) and (3). PGE 501 F.3d at 1036. The Court held
that BPA was bound by the power exchange requirements of the (NPAJ, and that BPA
exercised its settlement authority contrary to those requirements.Id. at 1013. It granted the
petitions for review.
In the companion appeal Golden Northwest Aluminum, Inc. v. Bonneville Power
Admin. ("Golden Northwest"
),
501 F.3d 1037 (9th Cir. 2007), cert. denied sub nom. Portland
General Electric Co. v. Bonneville Power Admin.S. (2008), three groups of
petitioners also challenged BP A's WP-02 preference power rates. Two groups argued that the
established preference rates were too high. More specifically, the first group asserted that BP
inappropriately allocated the costs of supplying power to the DSls to the preference rates. The
second group insisted that BP A erroneously allocated REP settlement costs to the preference
rates. The Ninth Circuit held against the first group but held for the second group. Golden
Northwest 501 F .3d at 1040-41. In granting the petition of the second group, the Court stated
that the holding in PGE was dispositive in this case: BP A improperly allocated the costs of the
REP Settlement Agreements in the rate paid by preference customers. Id.at 1048.
The third group of petitioners ("the Tribes ) argued the preference rates were too low
for BPA to meet its fish and wildlife obligations. The Court agreed. !d.at 1052-53. The Court
therefore remandredl to BPA to set rates in accordance with this opinion Id. at 1053
(emphasis added). On October 5 , 2007 , the Court denied petitions seeking rehearing and en bane
on the two opinions.
IDAHO PUC INITIAL BRIEF WP-07-ID-
B. Remand to BP A
Following the two Circuit opinions, BP A suspended REP payments to the IOUs
effective June 2007. BP A later acknowledged "the Ninth Circuit provided little guidance to
BP A in its (two J decisions regarding the subsequent actions BP A should take in response to
those opinions.BPA Response to APAC's Motion to Strike , WP-07-BPA-, p. 5.
Settlement negotiations were unsuccessful and BP A subsequently issued its Federal Register
Notice reopening this WP-07 case. 73 Fed.Reg. 7 539 (Feb. 8 2008). Because BPA's WP-
proceeding used the same methodology that the Court overturned in the WP-02 proceeding,
BPA's response to the opinions! is to "correct both the WP-02 rates and the WP-07 rates and
response to the Court's rulings." WP-07-BPA-, p. 2, 1. 14.
ARGUMENT
BP A'S LOOKBACK MECHANISM IS
UNLAWFUL RETROACTIVE RA TEMAKING
A. BPA Cannot Correct the WP-O2 Rates
Despite BP A's intent to correct the WP-02 rates , these rates have been superseded.
Indeed, the WP-02 rates expired September 30, 2006. On September 21 , 2006, the Federal
Energy Regulatory Commission (FERC) granted interim approval of BPA's new WP-07 rates
effective October 1 , 2006 (subject to refund). Order Approving Rates on an Interim Basis and
Providing Opportunity for Additional Comments Docket No. EF06-2011-000, 116 F.R.C. Rec.
~ 61 264 (Sept. 21 , 2006).The WP-07 interim rates currently remain in effect pending
completion of this supplement proceeding and final FERC approval. On March 4, 2008, BP A
J In October 2007, the Ninth Circuit also issued a third opinion addressing the 2004 amendments to the REP
Settlement Agreements. Public Utility Dist. No.1 ofSnohomish Cty, Wash. v. Bonneville Power Admin.506 F.
1145 (9th Cir. 2007).
IDAHO PUC INITIAL BRIEF WP-07-ID-
moved FERC to continue the previously granted Stay of the WP-07 rates through September 4
2008.
As the chronology above clearly demonstrates, the WP-02 rates no longer exist
because they have been superseded by the interim WP-07 rates as of October 1 2006. The only
retroactive" relief that the consumer-owned utilities (COUs) may be entitled to is the "refund
with interest" of the interim WP-07 rates if these interim rates are determined to be too high. 18
c.F.R. 9 300.20(c); see also 18 C.R. 9 300.21(g) ("if a rate collected by any power marketing
administration on an interim basis exceeds the rate which is confirmed and approved by (FERCJ
as a final rate, the Administrator. . . must refund with interest any rate collected during the
interim period which exceeds the final rate.). Thus, BP A cannot correct the WP-02 rates.
B. The Court Did Not Order BPA to Provide Retroactive Relief
There is nothing in the Ninth Circuit's two decisions that requires BP A to provide
retroactive relief to the prevailing parties in the PGE and Golden Northwest cases. In Golden
Northwest the Court "remand(edJ to BPA to set rates in accordance with this opinion." 501 F.
at 1053. BPA has reopened the WP-07 proceeding with its interim rates still in effect. Because
BP A has requested an extension of the existing Stay of the WP-07 interim rates, BP A should
simply proceed to set lawful rates.
In neither case did the Ninth Circuit vacate the BPA rates. Indeed, given the Court'
findings in Golden Northwest that the rates were both too high and too low, the Court remanded
the matter back to BP A "to set rates in accordance with this opinion.Id. This is consistent with
the well-established rule that Courts do not set rates - they are empowered to set aside agency
action. 5 U.C. 9 706(2). It is BP A that is vested with the authority to "establish, and
periodically review and revise, rates for the sale and disposition of electric energy and capacity
IDAHO PUC INITIAL BRIEF WP-07-ID-
. . ..
Section 7(a)(I), 16 U.c. 9 83ge(a)(1). Moreover, it is for BPA to first establish rates
and then submit those rates for "confirmation and approval by" FERC. Section 7(a)(2), 16
c. 9 83ge(a)(2).
C. BPA has no Statutory Authority to Engage in
Retroactive Ratemaking or Provide Retroactive Relief
The law is clear: a federal agency must have express statutory authority before it can
engage in retroactive ratemaking or provide a retroactive remedy such as reparations or refunds.
In Bowen v. Georgetown University Hospital 488 U.S. 204, 109 S.Ct 468 , 102 LEd.2d 493
(1988), the United States Supreme Court declared that "(rJetroactivity is not favored in the law.
Thus, congressional enactments and administrative rules will not be construed to have retroactive
effect unless their language requires this result." 488 u.S. at 208, 109 S.Ct at 471. Indeed
because it is not a sound business practice to retroactively increase rates, the Court requires that
Congress expressly permits such a practice in no uncertain terms. Bowen 488 U.S. at 208, 109
Ct. at 472?
The power to require re-adjustments for the past is drastic. It... ought not to be
extended so as to permit unreasonably harsh action without very plain words.Id., quoting
Brimstone R. Co. v. United States 276 u.S. 104, 122 48 S.Ct. 282 287, 72 LEd. 487 (1928). In
particular, IOU customers are not a fungible mass where future customers may be substituted for
2 In addition to the prohibition of retroactive ratemaking,
Bowen also forbids retroactive rulemaking. 488 U.S. at
208, 109 S.Ct. at 471. In Bowen the Secretary of Health and Human Services promulgated a rule that had a
retroactive application. On appeal, the Circuit Court of Appeals for the District of Columbia held as a general
matter that the Administrative Procedures Act, 5 U.C. 99 551 , 553 et seq.forbids retroactive ratemaking.
Georgetown University Hospital v. Bowen 821 F.2d 750, 757 (D.c. Cir. 1987) (the APA is clear and "equitable
considerations are irrelevant to the determination of whether the Secretary s rule may be applied retroactively
The Supreme Court affirmed. Bowen 488 U.S. at 208, 109 S.Ct. at 471. The Court held that "a statutory grant of
legislative rulemaking authority will not, as a general matter, be understood to encompass the power to promulgate
retroactive rules unless that power is conveyed by Congress in express terms.Id. at 208 , 109 S.Ct. at 472. "Even
where some substantial justification for retroactive rulemaking is presented, courts should be reluctant to find such
authority absent an express statutory grant." Id. at 209, 109 S.Ct. at 472. BPA has no authority empowering it to
provide reparation, refunds or any similar retroactive remedy.
IDAHO PUC INITIAL BRIEF WP-07-ID-
past customers to make up for past rate deficiencies. Utah Power Light Co. v. Idaho Public
Utilities Commission 685 P.2d 276, 285 (Idaho 1984). Even the BP A witness panels recognize
that "residential customers of the IOUs are those who will ultimately bear the entire brunt of the
application of the Lookback Amounts to reduce future REP benefits paid." WP-07-BP A- 76-
CC1 , p. 96, 11. 7-
There is no authority in Section 7 of the Northwest Power Act which expressly
permits BP A to engage in retroactive ratemaking. On the contrary, the ratemaking scheme
embodied in Section 7 contemplates that rates will be set prospectively. In particular, the
Administrator shall establish rates and such rates shall be "revised to recover, in accordance with
sound business principles, the costs associated with the acquisition, conservation, and
transmission of electric power. . . ." Section 7(a)(1), 16 U.c. 9 83ge(a)(1) (emphasis added).
The rates established by BP A are also subject to FERC approval. Section 7(a)(2), 16
C. 9 83ge(a)(2). The Ninth Circuit has declared that "One of the fundamental tenets in
FERC jurisprudence is the rule against retroactive ratemaking.Public Utilities Comm n ofCal.
v. FERC 456 F.3d 1025 , 1061 (9th Cir. 2000) citing Arkansas Louisiana Gas Co. v. Hall 453
S. 571 , 578 101 S.Ct. 2925 , 2930-, 69 LEd.2d 856 (1981); see also Consolidated Edison
Co. of New York, Inc. v. FERC 347 F.3d 964, 966 (D.C. Cir. 2003)(Agreeing with FERC'
assertion that it "lacked the authority under (section 205 of theJ the Federal Power Act to revise
rates retroactively.
In Consolidated Edision the D.C. Circuit Court recognized certain exceptions to the
general rule against allowing utilities a retroactive recovery. Id. at 969. According to the Circuit
Court, the bar against retroactive ratemaking can be satisfied "when parties have notice that a
IDAHO PUC INITIAL BRIEF WP-07-ID-
rate is tentative and may be later adjusted with retroactive effect, or where they have agreed to
make a rate effective retroactively.Id.
The exceptions outlined by the Circuit Court are not applicable to this rate
proceeding. As explained above, the FY 2002-2006 rates that BP A seeks to reconstruct in the
instant case are not interim, nor are they tentative. See supra p. 4. To the contrary, the FY 2002-
2006 rates received full FERC approval and expired prior to the Ninth Circuit decisions that
precipitated the instant proceeding. See WP-07-, Vol. 1 , p. 35-11. 18-, 1.
BP A's proposal to undergo a wholesale reconstruction of previously approved rates
stands in stark contrast with FERC's recognized authority to order refunds for egregious or
fraudulent violations of the Federal Power Act. See California ex reI. Lockyer v. FERC 383
3d 1006 1018 (9th Cir. 2004). BPA's proposal is more analogous to the fact pattern presented
to the D.C. Circuit Court in Columbia Gas Transmission Corp. v. FERC 895 F.2d 791 (D.C. Cir.
1990). In Columbia Gas a group of pipeline customers petitioned for redress after FERC
allowed certain gas pipeline sellers to recoup past costs over a three-year period through a
retroactive mechanism" devised and approved by the Commission and referred to as purchase
gas adjustment clauses.Id. at 793.The aggrieved pipeline customers' objections to the
retroactive recovery centered mainly upon the unrebutted fact that the customers that would be
forced to absorb the newly authorized costs were "not representative of those who, during those
three years, had purchased the gas that was subject to the deferred costs.Id.
3 The Court referred to tariffs with an established rate formula as "a practical application of this principle" because
such rates would be perpetually subject to changes consistent with the filed rate formula. Id. (citing Pub. Utilities
Comm v. FERC 254 F.3d 250, 254 (D.Cir.2001)). To its credit, BPA has not attempted to characterize the so-
called "Lookback Amounts" it seeks to recover from IOU customers via this supplemental rate proceeding or the
reconstructed PF Exchange Rate for FY 2002-2006 as even remotely related to filed rate tariffs with formulas.
IDAHO PUC INITIAL BRIEF WP-07-ID-
Ultimately, the Circuit Court held that FERC had violated the clear and express
language of the Natural Gas Act which mandates that rate changes be made prospectively only.
895 F.2d at 797. The Circuit Court rejected FERC's argument that on a finding of "sufficient
cause" it could waive the filed rate doctrine and stated emphatically that "once a rate is in place
with ostensibly full legal effect and is not made provisional, it can then be changed only
prospectively.Id.; see also Southern California Edison Co. v. FERC 805 F.2d 1068 , 1070 n.
(D.C. Cir. 1986) ("Derived from the filed rate doctrine is the rule against retroactive ratemaking
. . .
). Finally, any change to the filed rate can be made only if notice was given to the ratepayers
that said rates "were provisional only and subject to later revision.Id.
Similar to the pipeline customers in Columbia Gas millions of non-representative
residential and small farm customers throughout the Pacific Northwest will be, under BPA'
proposal , forced to absorb the deferred costs of participating in the Residential Exchange
Program (REP). BP A does not dispute this intergenerational inequity. Rather, the Agency
clearly supports this inevitable outcome, stating that "reductions of future REP benefits paid (to
IOU customers) due to Lookback Amounts is a direct transfer of dollars from one class of
customers to another. . ." WP-07-76-CC1 at 4.
The rule against retroactive ratemaking arose amid concerns over allowing utilities to
set rates to recover for past losses.James C. Bonbright et aI.Principles of Public Utility
Rates (2d.Ed. 1988) p. 198. BP A claims that its Lookback Analysis does not occur in the
typical context in which retroactive ratemaking issues arise." WP-07-BPA-76-CC1 , p. 3.
BP A states that it is merely responding to the Ninth Circuit decisions by "re-running its rate
models for the specific purpose of determining the Lookback Amounts for the IOUs that will be
dealt with on a prospective, and not retrospective, basis.Id. These claims fly in the face of
IDAHO PUC INITIAL BRIEF WP-07-ID-
BP A's own admission that this supplemental rate proceeding is essentially an effort to
reconstruct the PF Exchange Rate for FY 2002-2006. See WP-07-BPA-53-CC1 , p. 9.
In summary, BP A argues that while the process of calculating the "Lookback
Amounts" for each of the IOUs is, by definition, a procedure that is retrospective in nature, this
process cannot be defined as retroactive ratemaking simply because the Agency will seek to
recover the purported overpayments, or Lookback Amounts, made to the IOUs and disburse
those amounts "to the consumer-owned utilities (COUs) through future reductions to the
Preference rate." WP-07-BPA-76-CC1 at 5. This is a distinction with no real difference. In
fact, it is hard to imagine any scenario where a ratemaking authority would run afoul of the rule
against retroactive ratemaking because recovery for past losses will nearly always be on a going
forward basis. If this sort of Carrollian logic is allowed to define the parameters of "retroactive
ratemaking" then the term would quickly be robbed of its meaning.
D. The Prevailing Parties in PGE and Golden Northwest Failed to
Exercise Measures that would have Protected Their Interests
Even though BPA has no power to grant a retroactive remedy , the prevailing parties
in PGE and Golden Northwest could have preserved the fruits of their appeal by obtaining a stay
of BP A's WP-02 Order from BP A or the Court. Judicial review of final BP A actions under the
APA expressly provides for such a procedure. 5 U.c. 9 705 (an agency "may postpone the
effective date of action taken by it, pending judicial review.
4 As noted previously, the Administrator must issue refunds if the final FERC-approved WP-07 rates are less than
the interim WP-07 rates. 18 C.R. 9300.21(g).
5 Section 705 further provides: "On such conditions as may be required and to the extent necessary to prevent
irreparable injury, the reviewing court, including the court to which a case may be taken on appeal from or on
application for a certiorari or other writ to a reviewing court, may issue all necessary and appropriate process to
postpone the effective date of an agency action or preserve status or rights pending conclusion of the review
proceedings." 5 U.c. 9 705.
IDAHO PUC INITIAL BRIEF WP-07-ID-
Likewise, Rule 18 of the Federal Rules of Appellate Practice provides for a stay
pending appellate review. Under Rule 18 , a petitioner must ordinarily first move BP A for a stay
pending review of its decision or final order. FRAP 18(a)(1). In addition, this rule provides that
a motion for stay may be made to the Ninth Circuit or one of its judges. FRAP 18(a)(2). As
indicated in WP-07-ID-CCI-AT1 , no parties to the underlying appeal sought a stay from BPA
FERC or the Ninth Circuit.
Because BPA's WP-02 rates were not stayed, they remained lawful and valid through
the judicial review process consistent with "the well-established rule that an appeal will not
affect the validity of a judgment or order during the pendency of an appeal, absence a stay or
supersedeas.Combine Metals Reduction Co. v. Gemmill 557 F.2d 179, 190 (9th Cir. 1977).
failing to stay the effects of the WP-02 rate order, the petitioners put themselves at risk of losing
the fruits of their appeal. "(Thus a party who chooses to appeal but fails to obtain a stay
injunction pending appeal risks losing its ability to realize the benefits of a successful appeal."
Holloway v. United States 799 F.2d 1372 , 1374 (9th Cir. 1986) (emphasis added and citations
omitted), quoting Matter of Combined Metals Reduction Co.557 F.2d 179, 188 (9th Cir. 1977);
United States v. Peterson 19 F.3d 1442, 1444 (9th Cir. 1994) (unpublished disposition). That
risk has now materialized.
THE "DEEMER" MECHANISM IS BEYOND THE SCOPE OF THE NP
A. Introduction and History
Section 5(c) of the Northwest Power Act authorizes BPA to enter into power
exchanges with the six regional IOUs for the purpose of providing rate relief to residential and
small farm customers of the IOUs. H.R. Report No. 96-976(1) at 60, 1980 U.A.N. 5989.
The power exchanges were intended to provide the IOUs with access to lower-cost federal
IDAHO PUC INITIAL BRIEF WP-07-ID-
power. When it enacted Section 5( c), Congress recognized that the exchange mechanism may
not result in parity between the retail rates of BP A's preference customers and the retail rates of
the IOUs' eligible customers
, "
but it should equalize the wholesale costs of the electric power
with a resulting benefit to investor-owned utilities' customers.Id.
The Ninth Circuit has often explained how the residential exchange operates. For
example in PGE the Court stated that "Section 5(c) permits IOUs to exchange power they have
purchased or generated for lower-cost power generated by BPA." 501 F.3d at 1015 (emphasis
added); Golden Northwest 501 F.3d at 1047; Washington Utilities and Transp. Comm
FERC 26 F.3d 935 936-37 (9th Cir. 1994); PacifiCorp v. FERC 795 F.2d 816, 818-19 (9th Cir.
1986). Under the Section 5( c) Residential Exchange Program (REP), a regional IOU may elect
to sell power to BPA at the IOU's average system cost (ASC) and then purchase and exchange
an equivalent amount of BPA power at a lower price. 16 U.c. 9 839c(c)(7). "The REP
essentially acts as a cash rebate to the IOUs where the IOUs' power costs exceed those of BPA.
PGE 501 F.3d at 1015 (emphasis added).
Each utility s ASC shall be recalculated whenever a utility seeks approval from its
state regulatory commission to change retail rates. Id.,18 C.R. 9 301. 1 (b)(5); WP-07-JP21-
1/2/3 , Exhibit C 9 III(B)(2). A separate ASC will be calculated for each exchanging utility in
each of its operating jurisdictions. 18 C.R. 9 301. 1 (b)(1); WP-07-JP21-1/2/3, Exhibit C, 9 I.
Finally, Section 5(c)(3) of the Northwest Power Act requires that utilities pass through any BPA
exchange benefits to the utilities ' residential and small farm customers. PGE 501 F.3d at 1015;
16 u.S.C. 9839c(c)(3).
1. The 1981 RPSAs. After enactment of the Northwest Power Act, each of six
regional IOUs began negotiating with BP A to develop a 20-year "Residential Purchase and Sale
IDAHO PUC INITIAL BRIEF WP-07-ID-
Agreement" (RPSA). The costs of the RPSA exchanges prior to July 1 , 1985 were to be
recovered by BP A in the rates charged to the direct service industrial (DSI) customers. 16
C. 9 83ge(c)(1)(A). At that time, some parties argued that if a utility s ASC fell below
BPA's PF Exchange Rate, the utility should pay BPA the difference in cash. WP-07-BPA-
p. 7-, 11. 25-
BP A and the IOUs entered into their respective RPSAs in 1981. Under Section 2 of
the RPSAs, BP A was obligated to exchange power with the regional utilities when the utilities
ASCs were higher than the BPA PF rate. WP-07-JP21-1I2/3, 9 2. However, the RPSAs for
A vista, Idaho Power and Northwestern also contained a section addressing instances when a
utility s ASC might be lower than BP A's PF rate. For these three utilities, Section 10 ("Election
to Equalize Rates ) provided that a utility with an ASC lower than the PF rate may elect to have
its ASC "deemed equal,,6 to the PF rate. Id.9 10. Rather than discontinuing the exchange, the
utility would accumulate a "negative" deemer balance but not pay "cash" to BPA. WP-07-
BPA-, p. 18 11.9; WP-07-ID-1CC
, p.
11.17. Thus, the deemer mechanism acted as
a short-term balancing account: BP A provided exchange benefits to the three IOUs when the
utilities ' ASCs are higher than BPA's PF rate. But when an IOU's ASC was lower than the
exchange rate, the utilities would accumulate a negative balance owed to BP A. Because the
utilities' ASCs were to be recalculated whenever the utilities retail rates changed, the deemer
balancing account would apparently net the frequent exchange credits and debits.7 For example
6 The phrase "deemed equal" appears to be the source of the term "deemer.
7 The IPUC recognizes that Avista, BPA, and Idaho Power have all asserted that the deemer balances are in dispute.
WP-07-BPA-44-CC1 , p. 208, 11. 1-4; WP-07-BPA-, p. 68, 11. 21-22. The Idaho PUC encourages the parties
to settle their deemer disputes. In the mean time, BPA has used the deemer balances in its calculations of the
respective Lookback amounts. Although BPA states that it is not making a final determination regarding the deemer
balances, it acknowledges that the deemer balances were used for the ratemaking purposes of the docket. WP-07-
BPA-, p. 67, 11. 16-23-25. Consequently, the legality of the deemers and the deemer calculations are at issue
in this proceeding.
IDAHO PUC INITIAL BRIEF WP-07-ID-
during 1982-, Idaho Power made several ASC filings. E.Idaho Power Company, Docket
No. ER82-618-000 et aI., 30 F.c. ~ 63059 (March 8 1985).
Section 10 also provided, BP A "shall debit to a separate account the net exchange
payment to Bonneville.WP-07-JP21-1/2/3 , 9 10.This section also states that upon
termination of this agreement, any debit balance in such separate account shall not be a cash
obligation of the Utility, but shall be carried forward to apply to any subsequent exchange by the
Utility for the Jurisdiction under any new or succeeding agreement." WP-07-JP21-1/2/3 9 10
at p. 8 (emphasis added).
Under BPA's proposed Lookback mechanism, the purported deemer balances must
be repaid before exchanging utilities are eligible to receive future REP benefits. WP-07-BP A-
44-CC 1 , p. 195, 11. 25-32. BP A asserts that REP benefits would not be available to the three
IOUs with deemer balances (Avista, Idaho Power, and Northwestern) until the deemer balances
are satisfied. BP A calculated that as of October 1 , 2007 , A vista s deemer balance was $99.
million and Idaho Power s deemer balance was $245.36 million. WP-07-ID-ICC , p. 18; WP-
07-ID-, p. 16; WP-07-ID-, p. 28. By way of comparison, Avista received REP benefits of
$6.55 million and Idaho Power received REP benefits of $42.34 million between FY 1982 and
FY 1994. WP-07-ID-, p. 9, 11.11; WP-07-ID-AT16.
2. The Suspension Agreements . In 1983 , BP A initiated a proceeding to revise its
original ASC methodology. On October 1 , 1984, FERC approved the revised methodology. The
revised methodology had the general effect of reducing the average system costs for the IOUs.
PacifiCorp v. FERC 795 F.2d at 819. Thereafter, Avista in 1987 and Idaho Power in 1988
entered into "suspension" agreements with BP A that suspended the operation of the their 1981
RPSAs. WP-07-ID-2CC, p. 7, 11. 11-14; WP-07-ID-AT6; WP-07-ID-AT7. The
IDAHO PUC INITIAL BRIEF WP-07-ID-
utilities' Suspension Agreements are generally identical except that Idaho Power s agreement
calls for quarterly compound interest (WP-07-ID-AT6, p. 4, ~ 4), while Avista s agreement
calls for quarterly simple interest. WP-07-ID-AT7, p. 4, ~ 4.
3. Termination of the RPSAs. Both Avista and Idaho Power terminated their 1981
RPSAs in 1993. A vista s termination notice simply stated that A vista gives notice "of its
election to terminate its 1981 RPSA effective September 30, 1993. . . ." WP-07-ID-2CC, p. 9
11. 18-19 citing WP-07-ID-AT8. In comparison, Idaho Power s termination notice was
effective September 30, 1993 , and recognized continuation of compounded quarterly interest.
WP-07-ID-A T9.
B. The Deemer Mechanism is not Authorized by the NPA
There is no statutory authorization for BP A to utilize the deemer mechanism or
engage in deemer accounting. As construed by the Ninth Circuit, the Northwest Power Act
contemplates that BPA and the IOUs would exchange when an IOU's ASC was above BPA'
cost. Section 5(c), 16 U.c. 9 839c(c). In this fashion, IOUs would receive the lower-cost
benefits of the federal hydropower system. There is nothing in the Northwest Power Act or its
legislative history that suggests that the exchange benefits should flow in the opposite direction
from the three IOU s to BP A. Indeed, Section 5( c) was intended to provide residential and small
farm customers "a share in the economic benefits of the lower-cost federal system " i., lower
rates. H.R. Report No. 96-976(1) at 27, 60 , 1980 U.c.C.A.N. at 5993, 6026. Instead of
conferring a benefit, the operation of the deemer mechanism turns Section 5 on its head. As the
facts in this case bear out, the "phantom" accounting of accruing negative deemer balances
simply because the IOUs' ASC was subsequently lower than BPA's PF rate is extremely
detrimental to IOU ratepayers, especially to the more than 400 000 eligible customers of Idaho
IDAHO PUC INITIAL BRIEF WP-07-ID-
Power. Under BPA's proposal to collect Idaho Power s accumulated deemer balance of $245
million, Idaho Power s current and future customers in Idaho and Oregon would not be eligible
to receive REP benefits for the next 20 years. In fact, Idaho Power s deemer account has merely
accrued interest since FY 1985. The deemer mechanism is simply contrary to the plain reading
and intent of Section 5(c) of the Northwest Power Act, 16 u.S.C. 9839c(c).
As the Court stated in PGE whenever BP A engages in a purchase and exchange of
power - whether on a yearly basis, under an REP program, or pursuant to a settlement agreement
- BP A acts pursuant to its 9 5( c) authority, and is thus subject to the Congressionally imposed
limitations on that authority as expressed in 9 5(c) and 9 7(b)." 501 F.3d at 1032. "(W)henever
BPA exchanges power with a Pacific Northwest utility, it (must) act pursuant to its 9 5(c)
power(.J" Id. at 1028. BPA's deemer accounting mechanism is well outside the REP program
that Congress created in the Northwest Power Act. 16 U.C. 9839c(c).
C. Collection of the Deemers is Barred by Regulation
Although BP A recognizes that the deemer balances are not cash obligations of the
utilities, it asserts that "BP A may contractually set off (the deemer balances) against future REP
benefits." WP-07-BPA-, p. 72 , 11.18-20 (emphasis added). Despite BPA's assertion to the
contrary, the Department of Energy (DOE) has promulgated a regulation that prohibits BPA
from offsetting the deemer balances against future REP payments. In pertinent part, the DOE
regulation states:
Unless otherwise provided by law administrative offset of payments under
the authority of 31 u.S.C. 3716 to collect a debt may not be conducted more
than 10 years after the Government's right to collect the debt first accrued
unless fact materials to the Government's right to collect the debt were not
known and could not reasonably have been known by the official or officials
of the Government who were charged with the responsibility to discover and
collect such debts.
IDAHO PUC INITIAL BRIEF WP -07 - B- ID-
10 C.R. 9 1O15.203(a)(4) (emphasis added). In addition, 31 U.C. 9 3716(e)(1) prohibits the
Government from pursuing an administrative offset for claims that have been outstanding for
more than 10 years. Section 3701 defines a "claim" as "any amount of funds. . . owed to the
United States" including over-payments (e., REP benefits). 31 u.S.C. 93701(b)(1)(C).
A vista and Idaho Power both suspended their RPSAs with BP A in 1987 and 1988
respectively. WP-07-ID-, p. 7, 11. 11-14; WP-07-ID-AT7; WP-07-ID-A T6. Avista and
Idaho Power also terminated their 1981 RPSAs in 1993. WP-07-ID-1CC , p. 19 11. 19-20.
Since that time, BP A has had ample opportunity to assert its right to offset the alleged deemer
balances against the residential exchange benefits distributed to the three IOUs. Given BP A'
failure to pursue its claim to recover the deemer balances, the DOE regulation prohibits BP
from collecting the deemer balances now. 10 C.R. 9 1015.203(a)(4).
BP A'S CALCULATIONS OF THE DEEMER BALANCES ARE ARBITRARY AND
NOT SUPPORTED BY THE TOTALITY OF THE EVIDENCE
A. BPA's Use of Different Methods to Calculate Deemer Interest is Arbitrary
Although the 1981 RPSA contracts for A vista, Idaho Power and Northwestern are
identical, BP A used different methods of calculating the interest on the deemer balances. For
Idaho Power and Northwestern, BP A used compounded interest to calculate the respective
deemer balances, but for Avista it used simple interest to calculate Avista s deemer balance.
WP-07-BPA-44-CCl , p. 196 11.12-26; WP-07-, Vol. 1 , p. 90 at 11.2. Idaho PUC witness
Westerfield testified that BPA's use of simple versus compound interest has a significant effect
on the calculations of the deemer balances. For example, Avista s purported deemer balance
grew 2.5 times from the accumulation of only interest between January 1987 and October 1
2007 (to $99.3 million). WP-07-ID-1CC , p. 18, 11. 7-12; WP-07-ID-5. In comparison
BPA's use of compound interest increased Idaho Power s purported deemer balance 4.2 times
IDAHO PUC INITIAL BRIEF WP -07 - B- ID-
(interest only) between January 1987 and October 2007 ($245.36 million). WP-07-ID-1CC
p. 18 11. 13-20; WP-07-ID-
When asked to explain why Avista s deemer balance was calculated using simple
interest but Idaho Power s deemer balance was calculated using compound interest, the BP
panel offered no explanation other than the wording of the utilities ' respective Suspension
Agreements (WP-07-ID-AT6 and AT7). WP-07-, Vol. p. 90-11.23-6. Avista
principal deemer balance has not changed since January 1987 and the growing balance merely
represents the accrual of simple quarterly interest at the prime rate. WP-07-ID-, p. 8, 11. 13-
14; WP-07-ID-5. On the other hand, BPA's Excel spreadsheet for the calculation of Idaho
Power s deemer balance (WP-07-ID-4) reflects that using the compound method, interest is
added to the principal and this "new" subtotal or principal balance is then subject to quarterly
interest at the prime rate. WP-07-ID-, p. 8 at 11.12; WP-07-ID-4.
The use of two different interest rates (i., simple versus compound) for similarly
situated utilities is arbitrary and discriminatory. There is no evidence in the record and BP A has
not offered any logical explanation why BP A uses simple interest to calculate A vista s deemer
balance, but used compound interest to calculate Idaho Power s deemer balance. The 1981
RPSAs of the two companies are identical as are the subsequent Suspension Agreements but for
the issue of simple versus compound interest. The circumstances between the two companies are
indistinguishable yet BP A has intentionally treated them differently in calculating their deemer
balances. The use of difference interest methodologies to calculate the deemer balances in this
instance is clearly unreasonable and arbitrary. 5 u.S.c. 9 706(2)(a).
Applying compound interest to Idaho Power s deemer balance also has a punitive
effect. By adding the purported deemer balances to the Lookback amount, more than 400 000
IDAHO PUC INITIAL BRIEF WP-07-ID-
Idaho Power residential and small farm customers will be deprived of any REP benefits for more
than 20 years into the future. WP-07-ID-1CC, p. 12 11. 1-15; WP-07-, Vol. 1 , p. 95-11.
23-Even BPA's Lookback Study calculates that Idaho Power would not amortize its
Lookback amount ($96.56 million) and its deemer balance ($245.36 million) by the year 2028.
WP-07-BPA-44-CC1 , p. 207, 11. 25-27; WP-07-BPA-44-CCl , p. 201 , Table 15.4. Is it
inequitable to withhold REP benefits from present and future customers because past customers
received the benefit of BP A's inappropriate rates.
B. The Totality of the Evidence Does Not Support
BPA's Calculations of the Deemer Balances
1. The 18-Month Gap . In May 1985, FERC approved a Settlement Agreement
among BP A, Idaho Power and each DSI customer. As part of the Settlement Agreement, BP A
paid Idaho Power $7.5 million and credited its deemer account a total of $6.7 million (for its
jurisdictions in Idaho, Oregon, and Nevada). WP-07-ID-2CC, p. 4, 11. 10-16; WP-07-ID-
AT4, p. 6-7. Following FERC's approval of the 1985 Settlement Agreement, Idaho Power asked
BP A in a letter dated June 18, 1985 to confirm Idaho Power s deemer balance as of May 31
1985. WP-07-ID-AT5. In the letter, BPA confirmed by counter-signature that Idaho
Power total deemer balance (for its Idaho, Oregon, and Nevada jurisdictions) totaled
068 020.50 as of May 31 , 1985. Id. BP A's witness panel agreed that this amount was the
correct deemer balance for Idaho Power as of May 31 , 1985. WP-07 - TE, Vol. 1 , p.115-, 11.
21-
In the BP A Excel spreadsheets used to calculate Idaho Power s purported deemer
balances (WP-07-ID-4), BPA used a beginning balance for Idaho Power s three jurisdictions
totaling approximately $58 154 151 as of January 1987. WP-07-ID-, p. 5 , 11. 12-15. On
cross-examination, BPA witness panels could not explain how Idaho Power s deemer balance
IDAHO PUC INITIAL BRIEF WP-07-ID-
could increase from approximately $8 million to more than $50 million in the 18 months
between May 31 , 1985 and January 1987. WP-07-, Vol. p. 137 1. 7. Moreover, Idaho
Power received no REP benefits after FY 1985. WP-07-ID-AT16. The BPA panels said
that they had no information on the deemer balances prior to 1987 and simply relied on the
deemer balances identified in the Suspension Agreements. WP-07-, Vol. p. 93-, 11. 23-
12.
2. Nevada Benefits. In addition, it was unrefuted that Idaho Power sold its Nevada
service area to an Idaho electric co-operative in 2001. WP-07-ID-1CC, p. 13 11.17-21; WP-
07-ID-AT2. Consequently, it is inappropriate to collect the Nevada deemer balance of $2.
million from the remaining Idaho Power customers in Idaho and Oregon. WP-07-ID-, p. 28.
Treasury v. Prime Rate The 1981 RPSAs for A vista, Idaho Power and
Northwestern state that the "net balance in (the deemerJ account shall accumulate interest at the
rate specified in Section IY.E. of Exhibit C." WP-07-JP21-1/2/3 , p. 7. That portion of Exhibit
C provides in pertinent part
If Bonneville determines that the ASC computed by the Utility in Appendix
is excessive or inadequate, the injured party shall recover the excess or
deficiency with interest which shall be computed from time to time on the
outstanding balance at the rate or rates of interest charged to Bonneville by the
S. Treasury during the period unless another form of refund is ordered by
the Joint State Board, the FERC, or a reviewing court.
WP-07-JP21-1/2/3 , Exhibit C, p. 5 of 7 (emphasis added). Thus, the 1981 RPSAs for these
three utilities set the interest rate for the deemer mechanism at the "Treasury rate.
Although the 1981 RPSAs provided that interest on the deemer balances would
accrue at the Treasury rate, BP A utilized the prime rate to calculate the quarterly interest on the
deemer balances before the effective date of Idaho Power s Suspension Agreement, August 1
1988. Compare WP-07-ID-AT6 with WP-07-ID-, p. 1 , 10, 19. The same error applies
IDAHO PUC INITIAL BRIEF WP-07-ID-
to the calculation of Avista s deemer balance. Compare WP-07-ID-AT7 with WP-07-ID-
, p. 1 , 8. On cross-examination, the BP A panel could not explain when the Treasury rate
changed to the prime rate or the reasons for such a change. WP-07-, Vol. 1 , p. 135-11. 17-
24. In the Excel spreadsheets used to calculate the deemer balances for A vista and Idaho Power
BP A utilized the prime rate instead of the Treasury rate before the prime rate was specified in the
two utilities' Suspension Agreements.
Given the unexplained increase in Idaho Power s deemer balance for 18 months, the
arbitrary use of two interest methodologies, the inclusion of the Nevada deemers for Idaho
Power and the use of the erroneous interest rate (Treasury v. prime), the totality of the evidence
does not provide adequate support for BPA's deemer calculations. As outlined above there is
substantial evidence that BPA's deemer balances are incorrect. 5 u.S.C. 9 706(2)(E); Robert F.
Kennedy Medical Center v. Leavitt - F.3d _2008 WL 2080238 (9th Cir. 2008).
BPA'S FAILURE TO RECORD THE DEEMER BALANCES IN ITS
FINANCIAL BOOKS VIOLATES GENERALLY ACCEPTED
ACCOUNTING AND RA TEMAKING PRINCIPLES
BPA acknowledges that it follows FERC's Uniform System of Accounts in
maintaining its financial books and records. WP-07 - TE, Vol. 1 , p. 98, 11. 5-7. BP A also follows
the u.S. Department of Energy s (DOE's) accounting order RA 6120., entitled "Power
Marketing Administration Financial Reporting," which states:Power system financial
statements will be prepared in accordance with generally accepted accounting principles." WP-
07-ID-CCl , p. 16, 11. 7-24; Order Confirming and Approving Rates Docket No. EF03-2011-
000, 107 FERC ~ 61138 n.2 (May 10 2004).
However, by BPA's own admission, the deemers have never been recorded in BPA'
books and accounts.WP-07-ID-1CC-AT3(BPA's response to Data Request PU-BPA-5).
IDAHO PUC INITIAL BRIEF WP-07-ID-
BPA's failure to record the deemer balances in its financial records is contrary to generally
accepted accounting principles, as well as ratemaking principles. Neither generally accepted
accounting principles, nor FERC's Uniform System of Accounts , nor DOE's accounting order
RA 6120.2 sanction "off the books" accounting for transactions. WP-07-ID-ICC, p. 17 11. 13-
15. Therefore, BPA cannot now propose to include these "off the books" amounts in the
Lookback Analysis and, thus, in rates in violation of accounting and ratemaking principles.
Absent a legitimate audit trail in BP A's records, the deemer balances cannot be
substantiated or verified. Instead, BP A maintains the calculation of the deemer balances for
Avista and Idaho Power in Excel spreadsheets that are unaudited. WP-07-ID-4; WP-07-ID-
5. This type of documentation cannot substitute for a durable accounting record.
BP A has had every opportunity over a long period of time to record the deemer
balances in its books and records, but has chosen not to do so. BP A's rationale now for not
recording the deemers is that, as things have turned out, the deemer balances were not collected.
(WP-07-, Vol. 1 , p. 99-100 11. 21-18). This rationalization using hindsight to explain BPA'
lack of adherence to generally accepted accounting principles is absurd.
Finally, Section 10 of the 1981 RPSAs specifies that BP A "shall debit to a separate
account the net exchange payment to Bonneville." WP-07-JP21-l/2/3 , 9 10. The plain
meaning of "separate account" is an account contained in BPA's financial books and records-
not an account kept somewhere else.
CONCLUSION
The Administrator s obligation in response to PGE and Golden Northwest is to
implement the Court's holdings. The Ninth Circuit invalidated the REP Settlement Agreements
which in turn affects the REP payments to the IOUs and the preferred rates of the COU
IDAHO PUC INITIAL BRIEF WP-07-ID-
customers. To remedy the errors in the Residential Exchange Program, BP A should calculate
new ASCs for the IOUs using the 2008 ASCM being developed in a separate proceeding.
Given that the WP-02 rates have expired, BP A is prohibited from retroactive
ratemaking. This position is further supported by the fact that the petitioners in the two court
appeals did not seek a stay pending review. Thus, the Administrator s duty is to set new rates
prospectively. Because the WP-07 interim rates became effective October 1 , 2006 and have not
yet been approved as final rates by FERC , these interim rates are subject to refund. The
Administrator s duty and the petitioners' remedy is to establish prospective rates with the WP-
rate being subject to refund back to October 2006. Finally, BPA acted outside the bounds of
its statutory authority in Section 5 of the Northwest Power Act when it created the deemer
accounting mechanism. Moreover, BP A has made several material errors in calculation the
deemer balances. For these reasons, the Lookback and deemer mechanisms are unnecessary and
unlawful and must be discarded.
Respectfully submitted this J I ~ day of June 2008.
TIES COMMISSION
..,..
PO Box 83720
472 W. Washington Street (83702-5918)
Boise, ID 83720-0074
Idaho State Bar Nos. 3366 and 6864
Telephone No. [phone]
E-mail: don.howell~puc.idaho.gov
neil. price~puc.idaho. gov
N:BPA- WPO7-Supp_Initial Brief
IDAHO PUC INITIAL BRIEF WP-07-ID-