[Federal Register Volume 67, Number 190 (Tuesday, October 1, 2002)]
[Notices]
[Pages 61610-61617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24863]
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DEPARTMENT OF ENERGY
Southwestern Power Administration
Integrated System Rates
AGENCY: Southwestern Power Administration, DOE.
ACTION: Notice of rate order.
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SUMMARY: The Secretary acting under sections 301(b), 302(a), 402(e),
641, 642, 643, and 644, of the Department of Energy Organization Act
(Pub. L. 95-91), has approved and placed in effect on an interim basis
Rate Order No. SWPA-48 which provides for the following Integrated
System Rate Schedules:
Rate Schedule P-02, Wholesale Rates for Hydro Peaking Power
Rate Schedule NFTS-02, Wholesale Rates for Non-Federal Transmission/
Interconnection Facilities Service
Rate Schedule EE-02, Wholesale Rate for Excess Energy
The rate schedules supersede the existing rate schedules shown
below:
Rate Schedule P-98D, Wholesale Rates for Hydro Peaking Power--
(superseded by P-02)
Rate Schedule NFTS-98D, Wholesale Rates for Non-Federal Transmission/
Interconnection Facilities Service--(superseded by NFTS-02)
Rate Schedule EE-98, Wholesale Rate for Excess Energy--(superseded by
EE-02)
DATES: The effective period for the rate schedules specified in Rate
Order No. SWPA-48 is October 1, 2002, through September 30, 2006.
FOR FURTHER INFORMATION CONTACT: Forrest E. Reeves, Assistant
Administrator, Office of Corporate Operations, Southwestern Power
Administration, Department of Energy, One West Third Street, Tulsa,
Oklahoma 74103, (918) 595-6696, [email protected]
[[Page 61611]]
SUPPLEMENTARY INFORMATION: Southwestern Power Administration's
(Southwestern) Administrator has determined, based on the Fiscal Year
(FY) 2002 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 finalized FY 2002 Integrated System Power
Repayment Studies (PRSs), indicate that an increase in annual revenue
of $6,138,503, or 5.6 percent, beginning October 1, 2002, will satisfy
cost recovery criteria for the Integrated System projects. The proposed
Integrated System rate schedules would increase annual revenues from
$109,463,500 to $115,006,176, primarily to recover increased
expenditures in operations and maintenance (O&M) and investment. In
addition, an analysis of the Purchased Power Deferral Account indicates
the need for an annual increase of $595,827 to recover the purchased
energy costs. This rate proposal also includes a provision to continue
the Administrator's Discretionary Purchased Power Adder Adjustment, to
adjust the purchased power adder annually, of up to $0.0011 per
kilowatthour as necessary, at his/her discretion, under a formula-type
rate, with notification to the FERC.
Following review of Southwestern's proposal within the Department
of Energy, I approved, Rate Order No. SWPA-48, on an interim basis
through September 30, 2006, or until confirmed and approved on a final
basis by the FERC.
Dated: September 18, 2002.
Spencer Abraham,
Secretary.
In the Matter of: Southwestern Power Administration Integrated System
Rates; Order Confirming, Approving and Placing Increased Power Rate in
Effect on an Interim Basis
[Rate Order No. SWPA-48]
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. By notice, dated April 15, 1999, the
Secretary of Energy rescinded the authority of the Deputy Secretary of
Energy under Delegation Order No. 0204-108. By Delegation Order No.
0204-172, effective November 11, 1999, the Secretary of Energy again
provided interim rate approval authority to the Deputy Secretary of
Energy. Pursuant to Delegation Order No. 00-037-00, effective December
6, 2001, authority is delegated to the Deputy Secretary of Energy for
interim rate approval and to the Federal Energy Regulatory Commission
for final rate approval. Delegation Order No. 0204-108 is no longer
applicable to rates filed by the Power Marketing Administrations. While
presently there is no Deputy Secretary; the Secretary of Energy
possesses the necessary authority to approve rates.
Background
Federal Energy Regulatory Commission (FERC) confirmation and
approval of the following Integrated System (System) rate schedules was
provided in FERC Docket No. EF98-4011-000 issued April 29, 1998, for
the period January 1, 1998, through September 30, 2001:
Rate Schedule P-98D, Wholesale Rates for Hydro Peaking Power--
(superseded by P-02)
Rate Schedule NFTS-98D, Wholesale Rates for Non-Federal Transmission/
Interconnection Facilities Service--(superseded by NFTS-02)
Rate Schedule EE-98, Wholesale Rate for Excess Energy--(superseded by
EE-02)
On July 26, 2001, these rate schedules were extended on an interim
basis by the Deputy Secretary under Rate Order No. 45 for the period
October 1, 2001, through September 30, 2002. During the period that
current rates have been in effect, Southwestern has modified the
Integrated System rate schedules three times for the purpose of
clarifying and revising specific provisions that did not impact revenue
requirements. Each modification of the rate schedules was approved by
FERC on a final basis, the latest being rate schedules, P-98D and NFTS-
98D, which were approved by FERC on July 31, 2001.
Southwestern Power Administration's (Southwestern), Current Power
Repayment Study (PRS) indicates that the existing rate would not
satisfy present financial criteria regarding repayment of investment
within a 50-year period due to increasing operation and maintenance
expenditures and investment for both the Corps of Engineers (Corps) and
Southwestern. The revised PRS indicates that an increase in annual
revenues of $6,138,503 was necessary beginning October 1, 2002, to
accomplish repayment in the required number of years. Accordingly,
Southwestern has prepared proposed rate schedules based on the FY 2002
Rate Design Study and the additional revenue requirement.
Informal meetings were held in April 2002 with customer
representatives to review the repayment and rate design processes and
present the basis for the 5.6 percent annual revenue increase. In May
2002, Southwestern prepared a proposed 2002 PRS for the Integrated
System.
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 May 21, 2002, (67
FR
[[Page 61612]]
35802). A Public Information Forum was held June 6, 2002, in Tulsa,
Oklahoma, and a Public Comment Forum was scheduled to be held July 10,
2002, also in Tulsa, but was canceled since no one indicated their
intent to attend. Written comments were due by August 19, 2002.
Southwestern mailed copies of the proposed May 2002 Power Repayment and
Rate Design Studies to customers and interested parties that requested
the data, for review and comment during the formal period of public
participation.
Following conclusion of the comment period on August 19, 2002,
comments presented during the formal public participation process were
reviewed. Once all comments were carefully evaluated, the 2002 Power
Repayment and Rate Design Studies were completed. No changes were made
to the FY 2002 PRS based on comments received. The studies were
finalized in August 2002. The Administrator has made the decision to
submit the rate proposal for interim approval and implementation. The
comments resulting from the public participation process and responses,
as developed by Southwestern's staff, are contained in this Rate Order.
Discussion
General
The existing rate schedules developed in the FY 1997 Integrated
System Power Repayment Studies were the basis for revenue determination
in the August 2002 Integrated System Current Power Repayment Study. The
Current Power Repayment Study indicates that existing rates are
insufficient to produce the annual revenues necessary to accomplish
repayment of the capital investment as required by Section 5 of the
Flood Control Act of 1944 and Department of Energy (DOE) Order No. RA
6120.2.
A Revised Power Repayment Study was prepared based on $6,138,503 of
additional annual revenue beginning October 1, 2002, to satisfy
repayment criteria. This amount is no different than what was proposed
in May 2002. No adjustments were made to the May 2002 PRS based on
comments received except to finalize the PRS.
During development of the May rate design study, Southwestern
recognized that no costs for Non-Federal, non-firm transmission service
were being incurred under the current transmission rate schedule. So,
Southwestern redesigned the rate for Non-Federal, non-firm transmission
service to be a formula rate rather than a specific dollar rate.
Currently, all requests for Non-Federal, non-firm transmission on
Southwestern's transmission system must use the Southwest Power Pool
regional open access transmission tariff rate. Consequently,
Southwestern does not have contractual arrangements for Non-Federal,
non-firm transmission service at this time; however, should
Southwestern need to provide that service in the future, a rate will be
available.
In Southwestern's 1988, 1990 and 1997 Rate Proposals, two
noteworthy issues, which were previously approved by FERC were
described in detail. The issues, which still exist today, were (1) the
treatment of a portion of the Truman project investment as not
currently repayable, and (2) the purchased power adder and
discretionary adjustment.
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 the 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. The 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, 1997 and 2002 PRSs in support of the revenue
requirements of Southwestern's Integrated 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 was approved on August 25, 1998. 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 meeting of the Southwestern, the
Corps and several customer representatives was held 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 is continuing to pursue finalization of this
cost allocation with the Corps. However, it is not anticipated that the
Truman cost allocation will be finalized in the near future; therefore,
Southwestern has continued to use the Interim Cost Allocation for the
Truman project in development of the 2002 PRS.
[[Page 61613]]
Purchased Power Deferral Account (Discretionary Adjustment and Adder)
During the time the purchased power adder and the deferral
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 1997 Rate Proposal, Southwestern
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 $0.0011 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 implement
adjustments of up to $0.0011 per kWh to help increase revenues
collected in the Account during the previous years of less than average
water conditions and the corresponding increase in the costs for
purchased power. This authority seems to remain appropriate,
particularly in light of the fact that the Account has no direct effect
on Integrated 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. 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.
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 $0.0025 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.
Rate schedules were designed to recover the additional revenue
requirements. The basic monthly demand charge for the sale of Federal
hydroelectric power and the base energy charge have increased. The
transformation charge, though paid by a few customers having 69 kV and
below deliveries, has increased and affects revenues as well. In
addition, transmission charges for non-Federal, firm service have
increased. The increases to both transformation and transmission
charges are due to additions and replacements that have been made to
Southwestern's aging transmission facilities since the last rate
change.
In accordance with FERC's Order No. 888, Southwestern will continue
charging separately for five ancillary services and offering network
transmission service. Southwestern's rate design has separated the five
ancillary services for all transmission service. Two ancillary
services, Scheduling, System Control and Dispatch Service and Reactive
and Voltage Support Service, are required for every transmission
transaction. These charges are also a part of the capacity rate for
Federal power. This is consistent with Southwestern's long-standing
practice of charging for the sale and delivery of Federal power in its
Federal demand charge. The three remaining ancillary services will be
made available to any transmission user within Southwestern's control
area, including Federal power customers. The Rate Schedules for Peaking
Power and Non-Federal Transmission Service reflect these charges.
Network transmission service will be provided to those, also within
Southwestern's control area, who request the service, but for non-
Federal deliveries only. The rate and application of this service are
identified in the Non-Federal Transmission/Interconnection Facilities
Service Rate Schedule, NFTS-02.
Comments and Responses
The Southwestern Power Administration (Southwestern) received
numerous questions to which responses were provided during the public
participation period and which are included in the background
information. In addition, Southwestern received comments from five
entities during the public participation process. Those comments are
summarized into six general areas of concern, and Southwestern's
responses to the concerns raised are as follows:
Corps O&M Expenses
Comments
Southwestern should revisit its projections of the Corps of
Engineers Operation and Maintenance (O&M) costs with particular
attention to projected personnel costs to assure projections are
conservative and that all efficiencies consistent with sound business
principles have been incorporated into these areas. With respect to
personnel costs, commentors take issue with inclusion of expenses for
trainees to replace retiring personnel. Commentors state that this
reflects poor planning on the part of the Corps and should not be
reflected as a part of the ongoing future base costs because such an
assumption inflates long term future cost estimates and rates.
Response
Projections for Corps of Engineers (Corps) O&M are developed by the
Corps and provided to Southwestern annually. The Corps makes
projections of their base O&M costs using historical information and
planning documents, and also 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
and do not include inflation. Southwestern reviews this information,
questioning the Corps where inconsistencies seem to occur, clarifying
its understanding of the cost estimates, and adjusting the estimates to
future year dollars based on the Gross Domestic Product Index to
incorporate inflationary expectations. The Corps has advised
Southwestern that, among other costs, the addition of trainees and
increased project maintenance are two elements in base costs. The Corps
informed Southwestern that trainee costs are limited to projects where
retirements are imminent but project maintenance will continue to
increase until such time as the projects identified for rehabilitation
can be completed. Southwestern inquired further and was advised that
the Corps is confident that their O&M estimates fairly represent the
minimum expenditure level expected for the projects' O&M and that this
level of expenditure is expected to continue into the future.
Southwestern does not receive the detail of personnel costs
included in the Corps' O&M estimates, nor is it necessary for
Southwestern to have this information since the Corps provides
[[Page 61614]]
total forecasted O&M expenditures by project. Although Southwestern can
provide suggestions, proposing changes to the management of the Corps'
resources, particularly their personnel processes, is beyond the scope
of Southwestern's authorities. Southwestern is tasked with recovering
the power costs at Corps of Engineers dams; the Corps is responsible
for managing their organization. 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 has no oversight authority with
regard to Corps expenditures for O&M activities. Southwestern agrees
that such costs should be prudently and timely incurred at reasonable
levels consistent with sound business principles. The estimates
historically provided by the Corps have been reasonably accurate in
total, although they fluctuate somewhat from actual expenditures by
individual project.
The primary cause for the increase in Corps O&M between the FY 1997
PRS (on which current rates are based) and the FY 2002 PRS is the
inclusion, beginning with the FY 1998 PRS, of an estimate for the
Unfunded Civil Service Retirement System (CSRS) and Health/Life
Insurance Benefits. Without the inclusion of this increased cost
element in the FY 2002 PRS (which were not part of the forecast in the
FY 1997 filing), the Corps' O&M estimate, including the average year
large maintenance items, has increased less than 2% in total over the
last five years. Although the Corps has historically been fairly
accurate, their projections for O&M costs for the past two years have
been less than what was recorded on their financial statements. The
Corps has confirmed that the past few years' projections were based on
anticipated reductions in funding, but have realized they were
underestimating and in the FY 2002 projections have increased their
estimates to better reflect their expected expenditures.
The Corps' estimates of O&M are based on what they believe will be
their actual expenditures on their financial statements. This process
is consistent with the requirements of RA 6120.2. The procedure for the
Corps to provide O&M estimates is based on a Memorandum of Agreement
with the Corps of Engineers in November 1989, and has been fairly
accurate. The projection of Corps O&M in the FY 2002 PRS for the final
year of the cost evaluation period (FY 2006) is 3.8 percent higher than
the Corps' actual O&M expenditures for historical year FY 2001,
primarily reflecting an expected period of relatively stable funding.
Southwestern believes that the estimates provided by the Corps for
their O&M are reasonable based on their historical accuracy and
accurately reflect what the Corps will ultimately book as actual
expenditures on their financial statements.
Corps of Engineers--Estimates for Large Maintenance Items
Comments
Southwestern should revisit its process for determining estimates
of future Large Maintenance Items (LMI) for purposes of the PRS. It
would appear that the process Southwestern is using is not in
compliance with RA 6120.2. Southwestern should modify the process to
include a comparison of actual LMI costs in previous years with the
forecasted LMI for those years contained in previous PRSs. In addition,
Southwestern should closely examine the proposed 5.25 percent one-year
LMI factor proposed by the East Texas Cooperatives, a figure premised
on a more accurate methodology than used by Southwestern.
Response
Southwestern has reviewed its methodology for mitigating the impact
of Large Maintenance Items which are estimated to occur in the final
year of the cost evaluation period and has determined that the
methodology is sound, produces reasonable estimates and has been
reasonably accurate historically when combined as a part of overall
total estimates of Corps O&M costs.
The estimates of large maintenance items are provided by the Corps,
in detail by project, by year. In an effort to minimize wide swings in
the effect of large maintenance items (specifically in the last year)
and to add stability to rates, Southwestern developed a procedure over
fifteen years ago that removes the large maintenance estimates in the
fifth year of the cost evaluation period and replaces that estimate
with a ten-year average of large maintenance item estimates. In order
to alleviate the impact that one or two years of increased large
maintenance items had on the rates, Southwestern has used an average
over a ten-year period. This has ``leveled out'' the LMI estimates and
has, when added to the routine O&M, reflected a more accurate estimate
of what the Corps' expenditures have been in the fifth year. This
method of forecasting appears to be very efficient since in comparing
the historical fifth year estimate with its corresponding actual
expenditure, the Corps' O&M estimates appear to be quite reasonable. In
fact, during the past few years, the estimate of total Corps O&M
expenditures for the fifth year, which include Southwestern's
methodology for estimating the large maintenance item component, has
been within three percent of the actual for that year, with the most
recent estimate being within 0.1 percent of the actual.
Southwestern has also evaluated the use of an average of the most
recent forecasts as suggested by one entity commenting, but found that
in years when forecasts for that one year were significantly higher,
there was a substantial impact on the rate Southwestern would charge.
By using the suggested methodology in the commentor's suggestion, the
one-year average factor for eight of the past ten years would have
resulted in a factor significantly greater than the recommended 5.25
percent. While the proposal to use one year's average would reflect a
decrease in this PRS, use of the recommended methodology in eight of
the past ten years would have resulted in an increase in revenue
requirements for those years and possible rate increases. Consequently,
Southwestern believes the proposed method is less accurate than the
existing method and reintroduces yearly variations which are mitigated
under the existing method in response to customer concerns expressed
some years ago.
The use of actual historical data on large maintenance items and
base expenses may be preferable, but with the lack of detailed data
available from the Corps and with power being only one of the purposes
for which the Corps captures financial data, we believe it is not a
practical approach. In addition, it would add very little, if anything,
to the accuracy of the Corps' O&M estimates which in total have been
very good.
Southwestern has confirmed that the Corps' O&M estimates are based
on historical costs and actual project costs in accordance with RA
6120.2. Southwestern reviews the estimates to compare with actuals.
However, the Corps also considers in its estimates the RA 6120.2
requirement that, ``forecast shall take into account known factors
which are expected to affect the future level of such costs during the
cost evaluation period.'' The PRS reflects actual LMI in the Corps'
total historical O&M expenses for each year since it is part of the
total O&M number. The Corps provides actual O&M expenses based on
joint-use and specific-use cost
[[Page 61615]]
pursuant to their regulations for their financial statement reporting.
As has been noted, Southwestern believes that the estimate in the
fifth year of average LMI expenses for Corps O&M expenses is reasonably
accurate. Southwestern prepares PRSs each year and will continue to
monitor its processes to assure estimates are reasonable and that all
efficiencies consistent with sound business principles have been
incorporated.
Southwestern's O&M Expenses
Southwestern's O&M expenses have increased by approximately $13
million over the FY 1997 Power Repayment Study. Included in
Southwestern's O&M expenses are salaries and wages, maintenance costs
on aging transmission facilities, transmission-related services and
purchased power costs. The commentors state that Southwestern should
reduce its forecasted O&M expenses to reflect more reasonable
estimates.
Response
Southwestern's O&M expense estimates increased significantly
between the FY 1997 Power Repayment Study (PRS) and the current PRS for
a number of reasons. Purchased Power costs increased by approximately
$3 million due to greater than expected unit cost increases and
reductions in the availability of banking energy arrangements. In
addition, costs increased by $4.4 million due to requirements beginning
January 1, 1998, for transmission losses to be replaced through
purchased energy rather than reduced in kind as done previously. This
cost is totally offset by a corresponding increase in revenues
collected from transmission customers, but nonetheless appears as a
significant cost increase. The rate for Federal power and energy,
including the Purchased Power Adder are not affected by this cost.
Southwestern has experienced increased costs for transmission
service charges since FY 1997. Due to implementation of a new contract,
Southwestern now pays an additional $1.0 million for transmission
service. However, the impact of this increase in Southwestern's
transmission service costs has been minimized by an increase in
transmission revenues.
Southwestern's Transmission and Marketing expense have increased by
$4.6 million over the FY 1997 PRS estimates. A significant portion of
this increase is related to Southwestern's employee salaries, even
though Southwestern has reduced Full-Time Equivalents by approximately
8 percent. This increase in employee salaries and wages is due to cost
of living adjustments and other payroll requirements set by the U.S.
Congress and regulated wage surveys affecting craft personnel and
dispatchers. The remaining portion of Transmission and Marketing costs
have increased proportionately to historical trends and are within the
rate of inflation for the period.
Southwestern has based its O&M expense estimates in the FY 2002 PRS
on historical trends and future budget projections. As evidenced by the
increase in historical costs, many of which are outside Southwestern's
control, Southwestern believes its estimates are reasonable and will
represent what is anticipated to be recorded on Southwestern's
financial statements.
Corps and Southwestern's Investment Estimates
Comments
Some commentors have expressed concern regarding the level of added
investment during the initial 5-year cost evaluation period (CEP) and
that past history shows an over-forecasting of actual plant in service
to estimates. Some commentors recommended that Southwestern reduce its
forecast for added investment while others expressed a desire for the
appropriate level to be achieved to assure rehabilitation of the Corps'
aging plants. Also noted in the comments was a lack of decreased O&M
expense related to replacing older, typically maintenance-intensive
plant.
Response
The estimates in the PRS for future investment (over the 5-year
CEP) is an average of $9 million per year for replacements, $18 million
in construction work in progress (projects that have been started but
not yet complete and on the ``books''), and a conservative estimate of
$35.7 million for single unit rehabilitations at four of the Corps' 22
projects. These projections are for only an incremental portion of the
total rehabilitation and represents what is expected to take place
within the 5-year CEP and has been committed to funding by the Corps.
It is anticipated that the remaining costs that fall outside the 5-year
CEP in the FY 2002 PRS will be included in future PRSs.
Projections for the Corps Investment (replacements) are developed
based on data provided by the Corps to Southwestern every five years
and reviewed annually by the Corps. The Corps makes projections of
their investments based on planning documents. The Corps determines
what projects are in need of repair and makes a request for budget
appropriations to fund that replacement. The Corps has based their
estimates of future investments for the PRS on anticipated project
funding to perform the needed work. The funding has not always
materialized during the budgeting process. This has contributed to some
historical estimates being higher than actual expenditures.
We believe the FY 2002 PRS estimates are more accurate than
previous estimates due to a new customer funding source whereby the
Corps has access to a consistent funding level in addition to the
appropriation process. The alternative customer funding process will
relieve some pressure due to reduced appropriations and allow for
projects to be started and completed in a timely manner. Southwestern
believes that with the alternative customer funding method in place,
more of the projected replacements and maintenance will be accomplished
by the Corps, and will result in more closely matching PRS estimates in
the future.
In addition, the O&M costs for which the Corps provides
Southwestern estimates (as discussed in an earlier comment) are
anticipated to remain higher during the 5-year CEP, until such time as
all phases of the rehabilitations have been completed, due to having to
maintain and upgrade the rest of the aging facilities. Having discussed
these issues with Corps representatives, Southwestern believes that the
estimates provided by the Corps for O&M are based on their best
judgment as to what will be their actual expenditures. Southwestern
also believes that their O&M estimates, compared with actuals, are
fairly accurate and representative of what will be entered on their
financial statements. Southwestern shares the customers' belief that in
the future these O&M estimates may well, in fact, be reduced. But with
the appropriation reductions and other funding issues that the Corps
has encountered in the past, there remains a massive backlog of
projects that need to be completed as funding becomes available, which
means that it will be many years before a reduction in O&M is
recognized by the Corps. Contrary to one commentor's assertion, Corps
estimates do not continue to increase throughout the 50 year period.
Corps O&M estimates beyond the 5-year CEP are held constant from the
5th year through the 50th year yielding no additional expenses.
As stated in RA6120.2 (paragraph 10), replacements of investment
will be
[[Page 61616]]
``included in repayment studies by adding the estimated capital cost of
(the) replacement to the unpaid Federal investment in the year each
replacement is estimated to go into service.'' Southwestern is required
to forecast for replacements. Southwestern must forecast replacements
for the entire period of the PRS. The Corps provides the best data they
have available, together with the service lives of the equipment.
Southwestern and the Corps review these estimates annually and update
the replacement data with the goal to reflect what will occur on the
annual financial statements.
Unfunded Civil Service Retirement System Benefits
Comment
Revenues collected by Southwestern for ``Unfunded'' Civil Service
Retirement System (CSRS) and Health and Life Insurance Benefits should
be (1) removed from Southwestern's rates because Southwestern has no
authority to collect them, (2) properly account for the additional
interest effects of the revenues collected, or (3) apply the revenues
collected to Southwestern's debt rather than to the CSRS expenses.
Response
Statement of Federal Financial Accounting Standards (SFFAS) No. 5,
requires all federal agencies, including Power Marketing
Administrations (PMAs), to record the full cost of pension and
postretirement benefits in financial statements beginning in fiscal
year 1997. SFFAS No. 5 prescribes that the aggregate entry age normal
(AEAN) actuarial cost method be used to calculate pension expenses and
accrued actuarial liabilities for pension benefits. Under the AEAN
method, which is based on dynamic economic assumptions, including
future salary increases, the actuarial present value of projected
benefits is allocated on a level basis over the earnings or the service
of the group between entry age and assumed exit ages and is applied to
pensions on the basis of a level percentage of earnings. The portion of
this actuarial present value allocated to a valuation year is called
the ``normal cost''. The Office of Personnel Management (OPM) applies
the AEAN method to estimate the amount by which employer and employee
contributions toward future CSRS pension benefits fall short of the
normal cost of those benefits.
For CSRS employees, OPM reported that, in 1995, 25.14 percent of
gross salaries was the full (normal) cost to the federal government of
benefits earned that year by employees and that federal agencies
contributed 7 percent and employees contributed 7 percent to OPM for
CSRS, leaving a funding deficiency of 11.14 percent of each CSRS
employee's annual salary. Such deficiencies are made up by Treasury's
funding of OPM retirement costs. Southwestern has included an estimate
of the unfunded portion of the CSRS costs in its Power Repayment
Studies every year since 1998. Revenues have been returned to the
Treasury by Southwestern each year since 1998 to be used by Treasury to
fund OPM retirement benefits and health insurance costs.
Even though this is the first Integrated System rate filing that
has included unfunded CSRS costs, it is not the first rate filing
Southwestern has submitted that includes unfunded CSRS costs.
Southwestern has had three previous rate filings since 1998 for two
other rate systems that have been submitted through the DOE and
ultimately approved by FERC. Southwestern did not receive any comments
related to the CSRS issue in any of the public comment periods of those
three rate filings. Furthermore, the Southeastern Power Administration
(SEPA) included CSRS cost estimates in a rate filing in 1998. The
comments on that rate filing included opposition to the inclusion of
the CSRS estimates. The FERC confirmed the SEPA filing on a final basis
and did not accept the arguments to exclude the CSRS costs. A request
for rehearing related to the filing was also denied.
Authority to collect revenues for the unfunded CSRS costs comes
primarily from Section 5 of the Flood Control Act of 1944 which, in
part, states ``* * *Rate schedules shall be drawn having regard to the
recovery''* * * ``of the cost of producing and transmitting such
electric energy,* * *'' Unfunded CSRS has been determined to be a cost
of ``producing and transmitting electricity.'' Upon disbursement, the
Federal government funds the unfunded portion of the CSRS program just
as it funds the funded portion of the CSRS program. The difference is
that, when retirement payments are issued, OPM and not Southwestern is
the agency that the funding of the unfunded portion of CSRS costs is
directed to. The authority to collect revenues to repay the CSRS
program costs is no different than the authority to collect the funded
portion.
Southwestern agrees with the comment that it should properly
account for the additional interest effects of the revenues collected
and is currently doing so. Southwestern's existing procedure imputes an
interest credit at current year interest rates on all revenues
received--which would include revenues received to repay CSRS costs.
The effect of the interest credit carries throughout the entire
repayment period.
Regarding the issue of applying revenues received for CSRS expenses
to Southwestern's debt, the application of revenues is guided by DOE
Order 6120.2 (paragraph 8c.(3)) which states ``Annual revenues will be
first applied to the following recovery of costs during the year in
which they occurred: operation and maintenance (O&M), purchased and
exchanged power, transmission service and other, and interest expense
and any appropriation amortization of revenue bonds. Remaining revenues
are available for amortization* * *''. Therefore, Southwestern applies
its revenues received to the CSRS expenses before it applies any
revenue toward the amortization of the Federal investment.
Isolated Projects and Bundled Rates
Comments
Southwestern should not be charging a pancaked rate for the sale
and delivery of Federal power. Those customers that receive Federal
power from isolated Corps projects should not be required to pay for
transmission and ancillary services that they do not use. In addition,
those customers should receive credit for incurring costs that the
typical Southwestern customer does not. Even though this issue was
raised in Southwestern's 1997 rate proceedings and was rejected by
Southwestern, the Secretary of Energy and the FERC, this issue should
be reconsidered and not viewed as a binding precedent because the
regulatory and market environment has changed considerably.
Response
Southwestern's sales 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 of
Engineers projects that are presently electrically isolated from
Southwestern's primary interconnected system requested integration of
such projects into the Integrated System to
[[Page 61617]]
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 an exclusion from
paying the Purchased Power Adder. Such projects also include components
of Southwestern's transmission system and switchyard facilities used to
deliver power and energy from the dams. 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 or Order No.
2000 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. Furthermore, 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 and to provide for ancillary services.
Even though Southwestern agrees that the electric industry has
changed considerably since 1997, the conditions and points raised
related to this issue are the same as were espoused in 1997. Upon
review, there does not appear to be any overriding factor that compels
Southwestern to change its previous determination that those customers
do benefit from the treatment of the transmission system and related
facilities and the power rate charged to the customers reflects such
benefits. The parties expressing these concerns voluntarily and
knowingly entered into long-term contractual arrangements to receive
the benefits of these projects at integrated system rates. We find it
disingenuous to now seek through the rate development process to
overturn what was done for their benefit through mutually agreeable bi-
lateral contracts.
Operational Efficiencies
Comments
Southwestern management should commit to incorporate any
operational efficiencies that would reduce the magnitude of the rate
increase. Such efficiencies should be fully discussed as part of the
Power Repayment Study. Overstatement of revenue requirements can tempt
management to operate less efficiently than might otherwise have been
possible.
Response
Southwestern agrees that it should incorporate all efficiencies
available into its day-to-day operations to accomplish the requirements
of Section 5 of the Flood Control Act of 1944 for Southwestern to
maintain ``the lowest possible rates to consumers consistent with sound
business principles.'' Southwestern's Power Repayment Studies are
developed annually to recover its costs to help accomplish that
requirement and not to specifically identify efficiencies that have
been instituted by the agency throughout the year. Southwestern
continually strives to incorporate efficiencies in its operational
activities. One example of such efficiencies can be illustrated by the
number of full-time employees (FTE) employed by Southwestern. Even with
the same number of customers and a significantly changing industry, the
FTE for 1997 was 193 while the FTE in 2001 was 178. Another example of
Southwestern's attention to efficient operation may be reflected in the
rates themselves. The average rates charged by Southwestern for energy
or transmission are the lowest in the region and will continue to be so
even if this proposed rate increase is implemented. Furthermore, most
of the increase in this proposed rate increase comes from costs outside
of Southwestern's direct control. Those costs include Corps of
Engineers costs, salary increases determined by Congress and charges
for unfunded civil service retirement system costs.
Unlike many other utilities, Southwestern's management has no
incentive to raise rates to allow them to operate less efficiently.
Revenues received from sales of power and other services are deposited
directly into the U.S. Treasury and are credited toward the repayment
of the hydropower system costs. There are no additional revenues for
Southwestern's management to use from higher rates because operating
costs are obtained through a separate Congressional appropriation
process which is not directly related to higher or lower rates.
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 August 2002 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 Delegation Order No. 00-037.00, December 6, 2001, 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 the Secretary of Energy, I hereby confirm, approve and place in
effect on an interim basis, effective October 1, 2002, the following
Southwestern System Rate Schedules which shall remain in effect on an
interim basis through September 30, 2006, or until the FERC confirms
and approves the rates on a final basis.
Dated: September 18, 2002.
Spencer Abraham,
Secretary.
[FR Doc. 02-24863 Filed 9-30-02; 8:45 am]
BILLING CODE 6450-01-P
