E9-23233. Notice of Interim Approval

AGENCY:

Southeastern Power Administration, DOE.

ACTION:

Notice of Rate Order.

SUMMARY:

The Deputy Secretary of the Department of Energy, confirmed and approved, on an interim basis, Rate Schedules JW-1-I and JW-2-F. The rates were approved on an interim basis through September 19, 2014, and are subject to confirmation and approval by the Federal Energy Regulatory Commission (Commission) on a final basis.

DATES:

Approval of rates on an interim basis is effective September 20, 2009.

FOR FURTHER INFORMATION CONTACT:

Leon Jourolmon, Assistant Administrator, Finance & Marketing, Southeastern Power Administration, Department of Energy, 1166 Athens Tech Road, Elberton, Georgia 30635-6711, [phone].

SUPPLEMENTARY INFORMATION:

The Commission, by Order issued April 18, 2005, in Docket No. EF04-3031-000, confirmed and approved Wholesale Power Rate Schedules JW-1-H and JW-2-E. Rate schedules JW-1-I and JW-2-F replace these schedules.

Dated: September 18, 2009.

Daniel B. Poneman,

Deputy Secretary.

Department of Energy, Deputy Secretary; In the Matter of: Southeastern Power Administration, Jim Woodruff Project Power Rates; Rate Order No. SEPA-51; Order Confirming and Approving Power Rates on an Interim Basis

Pursuant to Sections 302(a) 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, relating to the Southeastern Power Administration (“Southeastern” or “SEPA”) were transferred to and vested in the Secretary of Energy. By Delegation Order No. 00-037.00, effective December 6, 2001, the Secretary of Energy delegated to Southeastern's Administrator the authority to develop power and transmission rates, delegated to the Deputy Secretary of Energy the authority to confirm, approve, and place in effect such rates on an interim basis, and delegated to the Federal Energy Regulatory Commission (“Commission”) the authority to confirm, approve, and place into effect on a final basis or to disapprove rates developed by the Administrator under the delegation. This rate order is issued by the Deputy Secretary pursuant to said delegation.

Background

Power from the Jim Woodruff Project is presently sold under Wholesale Power Rate Schedules JW-1-H and JW-2-E. These rate schedules were approved by the Commission on April 18, 2005, for a period ending September 19, 2009 (111 FERC ¶61,067).

Public Notice and Comment

Southeastern prepared a Power Repayment Study, dated March 2009, that showed that revenues at current rates were not adequate to meet repayment criteria. A revised study with a revenue increase of $5,575,000 produced rates that are adequate to meet repayment criteria. On March 11, 2009, by Federal Register notice (74 FR 10570), Southeastern proposed a rate adjustment of about 70.6 percent to recover this revenue. The notice also announced a Public Information and Comment Forum to be held April 23, 2009, in Tallahassee, Florida. Nine parties asked questions or made comments at the forum. Responses to the questions are part of the written record of the forum. Written comments were accepted on or before June 26, 2009. Written comments were received from two sources. After review of all comments received Southeastern revised the repayment study. The new revised study with a revenue increase of $5,393,000 produces rates that are adequate to meet repayment criteria. The proposed rate adjustment is an increase of about 67.3 percent.

Staff Review of Comments

The following comments were received during the public comment period. Southeastern's response follows each comment.

Comment 1: The Southeastern Federal Power Customers (“SeFPC”) submitted comments on behalf of certain preference customers of the Jim Woodruff System (“Jim Woodruff Preference Customers”). The Jim Woodruff Preference Customers suggest setting aside the rate for the five year study period and preparing an interim one year rate, or in the alternative, setting a one year interim rate with an express understanding that SEPA will revisit the rate for the five year study period within one year.

Response 1: Contract provisions in the Jim Woodruff System allow rate schedules to be adjusted periodically. One of the main drivers of this rate adjustment is the need to recover capitalized deficits in the rate period. The proposed rates are expected to recover these deficits in the five year period that the rate schedules are proposed to remain in effect. Southeastern interprets DOE Order RA 6120.2 to call for the proposed rates to recover capitalized deficits in the rate period. To recover the capitalized deficits in a one-year period, the proposed rates would have to be substantially higher than Southeastern is proposing. Southeastern is proposing that the rate schedules be approved for a five year period and will, if the customers make a request to Southeastern, revisit these rates in one year.

Comment 2: The Jim Woodruff Preference Customers suggest evaluating the implementation of the contract with Progress Energy Florida that supplies replacement power in the event that the Jim Woodruff Project is unavailable.

Response 2: Southeastern cannot change the existing agreement or the interpretation of the existing agreement with Progress Energy Florida unilaterally. Any change to the implementation of the existing agreement or modification of the existing agreement will require the consent of Progress Energy Florida. The existing agreement is a bundled arrangement that includes transmission, firming energy, support capacity, and sales of energy surplus of the customers' needs to Progress Energy Florida. The agreement precedes FERC's open access rules. Southeastern will pursue changes to the existing agreement with Progress Energy Florida if a preponderance of the Jim Woodruff preference customers make a request.

Comment 3: The Jim Woodruff Preference Customers suggest removing the marginal cost of the additional 9 MW of nameplate capacity from the existing rate schedule in light of the unavailability of that capacity at the Jim Woodruff Project.

Response 3: The total nameplate capacity at the Jim Woodruff Project is 43.35 MW. DOE Order RA 6120.2 requires Southeastern to recover all costs placed in service and allocated to the power function. Southeastern has no information on the incremental costs associated with the increased capacity associated with the rehabilitation of the Jim Woodruff Project. The capacity increase was considered incidental and the marginal cost is thought to be minimal. Southeastern will request information from the U.S. Army Corps of Engineers (“Corps”) on the incremental cost associated with the additional 9 MW. A request for approval of a rate adjustment that does not include these costs would require a departure from the requirements of DOE Order RA 6120.2.

Comment 4: The Jim Woodruff Preference Customers suggest developing communications protocols that will allow the Jim Woodruff Preference Customers to understand on a real time basis the operations of the Jim Woodruff Project including the availability or lack thereof of capacity and energy.

Response 4: Southeastern will consider any communications protocols the Jim Woodruff Preference Customers request. To the extent that there are material costs associated with the requested communications protocols, these costs would be charged to the Jim Woodruff System and recovered from Jim Woodruff customers.

Comment 5: The Jim Woodruff Preference Customers suggest providing a vigorous review of operations and maintenance (“O&M”) expenses incurred by the Corps and charged to the Jim Woodruff Project.

Response 5: The Corps provides detailed annual reports of O&M costs charged to the Jim Woodruff Project to the O&M Committee of the Southeastern Federal Power Customers (SeFPC). This provides opportunity for vigorous review of these costs.

Comment 6: The Jim Woodruff Preference Customers suggest developing a rate that provides transparency as to the repayment of expenses, particularly accumulated deficits.

Response 6: DOE Order RA6120.2 requires power marketing administrations to update and monitor the status of repayment for all power marketing systems annually. The status of repayment is reported annually in the annual report for the Southeastern Federal Power Program. Southeastern will provide reports on the status of repayment that the customers request.

Comment 7: SEPA admits that the estimates for purchased power expenses are nothing more than a simple two year average of the last two years of purchased power expenses in support of the Jim Woodruff Project. This historical two year average reflects a period of atypical and extremely limited water flows due to drought conditions in the region. This approach is overly simplistic and fails to take into account multiple factors that SEPA should have considered in determining a suitable level for purchased power expenses in the study period. Specifically, SEPA should have considered:

(1) Anticipated more normal flows;

(2) Availability of the units at the Jim Woodruff Project;

(3) Scheduled outages;

(4) Progress Energy's expected average system cost including the fuel adjustment clause in the existing contract with Progress Energy; and

(5) Any particular load factors for the individual customers of the Jim Woodruff Project.

Taken together, these factors would provide a sound basis for SEPA to set a level of purchased power expense for the next year.

Response 7: Purchased power expense for the Jim Woodruff System has been volatile. Over the last five years, the expense has increased from about $495,000 in Fiscal Year 2004 to about $4,371,000 in Fiscal Year 2008. This volatility makes estimating the purchased power expense for rate setting purposes challenging. Marketing arrangements in the Jim Woodruff System require Southeastern to provide energy to preference customers at the same load factor as the customers' other supplier. This means that the preference customers can impose an obligation on Southeastern to purchase more power by allocating capacity to delivery points that have a higher load factor. In the past two years, some Jim Woodruff customers have done this. Southeastern has limited experience with the new delivery points. However, it appears that these new delivery points will require Southeastern to purchase more power from Progress Energy Florida and will reduce the amount of residual energy available for sale to Progress Energy Florida.

Due to Southeastern's limited experience with the new delivery points, Southeastern views modeling based on historic averages to be of limited value. Southeastern has limited in-house modeling capability. Southeastern is not convinced that more expensive modeling techniques yield more accurate results. Therefore, Southeastern will use the estimated purchased power costs included in the earlier repayment studies.

Regardless of the estimate used for rate-setting purposes, Southeastern is required to recover the cost of purchased power from the sale of power. Any variance of actual costs from the estimates will be recovered in the next rate adjustment.

Comment 8: In documents prepared by the Corps and attached hereto (Attachment B), the Corps has predicted that they would spend roughly $4.8 million per year on Corps O&M activities for the Jim Woodruff Project that are allocated to hydropower for fiscal year 2010 to 2013. Accordingly, the Jim Woodruff Preference Customers suggest that this figure of $4.8 million is an appropriate amount to include for years 2-5 of the study period as a base amount.

Response 8: Southeastern proposed rates in March of 2009. The Corps provides Southeastern with projections of O&M expenses and capital outlays in April. At the time rates were proposed, the April 2008 projections were the most recent projections available. Southeastern will use the April 2009 projections in the rates that are proposed to the Deputy Secretary.

Regardless of the estimate used for rate-setting purposes, Southeastern is required to recover the cost of Corps O&M from the sale of power. Any variance of actual costs from the estimates will be recovered in the next rate adjustment.

Comment 9: The Jim Woodruff Preference Customers believe that SEPA needs to perform the following analyses under the contract:

(1) Calculate whether Progress Energy's sale of firming energy leads to sales of energy to Progress Energy that would otherwise be available to the Jim Woodruff Preference Customers;

(2) Evaluate the practices employed by Progress Energy to calculate the aggregate deficiency energy requirement under the contract; and

(3) Determine whether such practices allow Progress Energy to true up energy obligations in a manner that increases the overall purchased power obligation for SEPA.

Response 9: See Response 2, above.

Comment 10: SEPA has indicated that the full cost of the hydropower plant and service at the Jim Woodruff Project is included in the rates. SEPA considers the full 45 megawatt nameplate capacity to be the plant in service and subject to cost recovery from the customers under the rate. However, SEPA's marketing policy only allows for the marketing of 36 megawatts from the Jim Woodruff Project. Indeed it is arbitrary and capricious for SEPA to set a rate that recovers excess amounts from the customers that is in clear departure from its marketing policy. Accordingly, the Jim Woodruff Preference Customers believe that the marginal cost for the rehabilitation that raised the nameplate capacity from the previous 36 megawatts to the current 45 megawatts should be excluded from the rate base in the repayment study.

Response 10: See Response 3, above.

Comment 11: The Jim Woodruff Preference Customers encourage SEPA to meet and develop real time communications protocols which would allow the individual Jim Woodruff Preference Customers, to integrate this resource into their own systems on a real time basis and allow them to take full advantage the Jim Woodruff project energy and capacity.

Response 11: See Response 4, above.

Comment 12: At the forum conducted in Tallahassee, SEPA made the assertion that the Jim Woodruff Preference Customers have signed off on the O&M expenses for the Jim Woodruff Project through the O&M Committee of the SeFPC. This is plainly false.

Response 12: Southeastern has reviewed the transcripts of the forum conducted in Tallahassee, Florida, on April 23, 2009. The words “signed” or “off” do not appear in the transcripts. The quote from the transcript the commenter appears to be referring to is as follows:

MR. JOUROLMON: “Southeastern Power customers, of which you're all members, have a committee that looks at the estimates of the Corps of Engineer costs and compares them with the actuals.

That committee will be meeting on Monday, this coming Monday. They will be looking at it in depth. The numbers that we used in our study were the numbers that were looked at a year ago at this time.

The projections were made a year ago and were studied at that time. There are a lot of increases in there. One of those that I can recall is environmental support.

We can go through and give you several other examples, but the truth of the matter is that committee is the one who does look at them. And customers, maybe not from your system, but Southeast Federal Power customers are the ones who look at those costs, and the Corps explains those costs to them.”

Southeastern believes that the activities of the O&M Committee of the SeFPC give the customers the best opportunity to review the Corps O&M Expenses. Participation in the O&M committee does not require participants to sign off on the Corps' projections or the actual costs incurred.

Regardless of the estimate used for rate-setting purposes, Southeastern is required to recover the actual cost of Corps O&M from the sale of power. Any variance of actual costs from the estimates will be recovered in the next rate adjustment.

Comment 13: An appropriate audit is merited in the immediate circumstance of those expenses that are allocated to hydropower that are appropriately termed environmental restoration activities. The Jim Woodruff Preference Customers strongly question whether it is appropriate for SEPA to include several activities including the elimination of aquatic nuisance plants and certain environmental studies at the Jim Woodruff Project in the rates charged to the hydropower customers.

Response 13: Under DOE Order RA 6120.2, Southeastern is required to recover all costs allocated to the power function, including joint costs allocated to the power function.

Southeastern will work with the customers and the Corps to assure that all costs are properly allocated. Southeastern suggests that the O&M Committee of the SeFPC is the best means to provide this review.

The SeFPP financial statements are audited by an independent audit firm, as required under DOE Order RA 6120.2. In addition, the Corps financial statements are subject an independent audit as well as an internal audit. The auditors' responsibilities include assuring that costs are appropriately allocated and reported. Southeastern does not believe that any additional audit is merited.

Comment 14: In light of the shortcomings of the prior rate, the Jim Woodruff Preference Customers ask SEPA to take the following steps with the current rate proposal:

(1) Institute an annual reporting of the revenues and expenses in order to know whether deficiencies exist with regard to the rate before the end of the five year study period; and

(2) Indicate on monthly bills the amount of the accumulated deficit that has been paid and the amount that remains to be paid.

Response 14: Under DOE Order RA 6120.2 Southeastern is required to update the repayment studies for all systems within 180 days of the close of the previous fiscal year. The status of repayment is reported annually in the annual report for the Southeastern Federal Power Program.

Under current accounting practices of the Southeastern Federal Power Program (SeFPP), the Corps provides Southeastern with financial reports annually. Providing a report on the monthly bills of the accumulated deficit that has been paid and the amount that remains to be repaid is not possible without an upgrade to the financial reporting of Southeastern and the Corps.

Southeastern provides an annual report on the status of repayment that are included in the SeFPP annual report. Southeastern can provide additional reports at the customers' request.

Southeastern can provide reports on purchased power expense monthly.

Comment 15: Quincy is not in favor of a pass through of purchase power cost. Power purchases should continue to be placed in the rate established by SEPA.

Response 15: Southeastern informally discussed the possibility of a rolling 12 month pass-through of purchased power costs and the benefits of residual energy sales to the preference customers. Because the customers did not endorse the proposal, it is not part of this rate proposal.

Southeastern is required to recover all purchased power costs from the sale of power, whether by a pass-through rate design or by bundling the costs into the capacity and energy charge, as proposed in this rate adjustment. Any variance of actual costs from the estimates will be recovered in the next rate adjustment.

Comment 16: SEPA has increased the revenue from Progress Energy by 2.5 times for each year of the study period.

Response 16: Revenue from sales to Progress Energy is estimated to be $700,000 per year for the five-year period the rates are proposed to remain in effect.

Comment 17: Apparently SEPA intends to sell Progress Energy the excess capacity of the difference between the three rated units at 14,450 kilowatts (43,350 kw) less 36,000 kilowatts that is currently contracted to the Preference Customers. The rate design must be changed to allocate this additional capacity to the Preference Customers.

Response 17: All of the capacity that is marketed from the Jim Woodruff Project is delivered to preference customers. Under the current contract with Progress Energy Florida, Southeastern can deliver 36,000 kilowatts of capacity to preference customers. Southeastern will pursue changes to the existing agreement with Progress Energy Florida if a preponderance of the Jim Woodruff preference customers make a request.

Comment 18: Quincy's contract obligates SEPA to provide Quincy capacity requirements and associated energy. Instead of meeting its contract commitment, SEPA sells energy that is otherwise due to Quincy and other Preference customers.

Response 18: The existing agreement between Southeastern and Progress Energy Florida provides for the sale of energy generated in excess of the preference customers' load to Progress Energy Florida. Southeastern will pursue changes to the existing agreement with Progress Energy Florida if a preponderance of the Jim Woodruff preference customers make a request.

Discussion

System Repayment

An examination of Southeastern's revised system power repayment study, prepared in July 2009, for the Jim Woodruff Project, shows that with the proposed rates, all system power costs are paid within the 50-year repayment period required by existing law and DOE Procedure RA 6120.2. The Administrator of Southeastern has certified that the rates are consistent with applicable law and that they are the lowest possible rates to preference customers consistent with sound business principles.

Environmental Impact

Southeastern has reviewed the possible environmental impacts of the rate adjustment under consideration and has concluded the adjusted rates would not significantly affect the quality of the human environment within the meaning of the National Environmental Policy Act of 1969. The proposed action is not a major Federal action for which preparation of an Environmental Impact Statement is required.

Availability of Information

Information regarding these rates, including studies, and other supporting materials is available for public review in the offices of Southeastern Power Administration, 1166 Athens Tech Road, Elberton, Georgia 30635-6711.

Submission to the Federal Energy Regulatory Commission

The rates hereinafter confirmed and approved on an interim basis, together with supporting documents, will be submitted promptly to the Federal Energy Regulatory Commission for confirmation and approval on a final basis for a period beginning September 20, 2009, and ending no later than September 19, 2014.

Order

In view of the foregoing and pursuant to the authority delegated to me by the Secretary of Energy, I hereby confirm and approve on an interim basis, effective September 20, 2009, attached Wholesale Power Rate Schedules JW-1-I and JW-2-F. The rate schedules shall remain in effect on an interim basis through September 19, 2014, unless such period is extended or until the Federal Energy Regulatory Commission confirms and approves them or substitute rate schedules on a final basis.

Dated: September 18, 2009

Daniel B. Poneman,

Deputy Secretary

Wholesale Power Rate Schedule JW-1-I

Availability

This rate schedule shall be available to public bodies and cooperatives served by the Progress Energy Florida and having points of delivery within 150 miles of the Jim Woodruff Project (hereinafter called the Project).

Applicability

This rate schedule shall be applicable to firm power and accompanying energy made available by the Government from the Project and sold in wholesale quantities.

Character of Service

The electric capacity and energy supplied hereunder will be three-phase alternating current at a nominal frequency of 60 cycles per second delivered at the delivery points of the customer.

Monthly Rate

The monthly rate for capacity and energy made available or delivered under this rate schedule shall be:

Demand Charge

$13.06 per kilowatt of monthly contract demand.

Energy Charge

32.07 mills per kilowatt-hour.

Billing Demand

The monthly billing demand for any billing month shall be the lower of (a) the Customer's contract demand or (b) the sum of the maximum 30-minute integrated demands for the month at each of the Customer's points of delivery; provided, that, if an allocation of contract demand to delivery points has become effective, the 30-minute maximum integrated demand for any point of delivery shall not be considered to be greater than the portion of the Customer's contract demand allocated to that point of delivery.

Contract Demand

The contract demand is the amount of capacity in kilowatts stated in the contract which the Government is obligated to supply and the Customer is entitled to receive.

Energy Made Available

During any billing month in which the Government supplies all the Customer's capacity requirements for a particular delivery point, the Government will make available the total energy requirement of said point. When both the Government and the Progress Energy Florida are supplying capacity to a delivery point, each kilowatt of capacity supplied to such point during such month will be considered to be accompanied by an equal quantity of energy.

Billing Month

The billing month for power sold under this schedule shall end at 12 midnight on the 20th day of each calendar month.

Conditions of Service

The customer shall, at its own expense, provide, install, and maintain on its side of each delivery point the equipment necessary to protect and control its own system. In so doing, the installation, adjustment, and setting of all such control and protective equipment at or near the point of delivery shall be coordinated with that which is installed by and at the expense of the Progress Energy Florida on its side of the delivery point.

Service Interruption

When energy delivered to the Customer's system for the account of the Government is reduced or interrupted for one hour or longer, and such reduction or interruption is not due to conditions on the Customer's system or has not been planned and agreed to in advance, the demand charge for the month shall be appropriately reduced.

Proposed Wholesale Power Rate Schedule JW-2-F

Availability

This rate schedule shall be available to the Florida Power Corporation (or Progress Energy Florida, hereinafter called the Company).

Applicability

This rate schedule shall be applicable to electric energy generated at the Jim Woodruff Project (hereinafter called the Project) and sold to the Company in wholesale quantities.

Points of Delivery

Power sold to the Company by the Government will be delivered at the connection of the Company's transmission system with the Project bus.

Character of Service

Electric power delivered to the Company will be three-phase alternating current at a nominal frequency of 60 cycles per second.

Monthly Rate

The monthly rate for energy sold under this schedule shall be equal to 100 percent of the calculated saving in the cost of fuel per KWH to the Company determined as follows:

[Computed to the nearest $0.00001 (1/100mill) per KWH]

Where: Fm = Company fuel cost in the current period as defined in Federal Power Commission Order 517 issued November 13, 1974, Docket No. R-479.

Sm = Company sales in the current period reflecting only losses associated with wholesale sales for resale. Sale shall be equated to the sum of (a) generation, (b) purchases, (c) interchange-in, less (d) inter-system sales, less estimated wholesale losses (based on average transmission loss percentage for preceding calendar year).

Determination of Energy Sold

Energy will be furnished by the Company to supply any excess of Project use over Project generation. Energy so supplied by the Company will be deducted from the actual deliveries to the Company's system to determine the net deliveries for energy accounting and billing purposes. Energy for Project use shall consist of energy used for station service, lock operation, Project yard, village lighting, and similar uses.

The on-peak hours shall be the hours between 7 a.m. and 11 p.m., Monday through Sunday, inclusive. Off-peak hours shall be all other hours.

All energy made available to the Company shall, to the extent required, be classified as energy transmitted to the Government's preference customers served from the Company's system. All energy made available to the Company from the Project shall be separated on the basis of the metered deliveries to it at the Project during on-peak and off-peak hours, respectively. Deliveries to preference customers of the Government shall be divided on the basis (with allowance for losses) of 77 percent being considered as on-peak energy and 23 percent being off-peak energy. Such percentages may by mutual consent be changed from time to time as further studies show to be appropriate. In the event that in classifying energy there is more than enough on-peak energy available to supply on-peak requirements of the Government's preference customers but less than enough off-peak energy available to supply such customers off-peak requirements, such excess on-peak energy may be applied to the extent necessary to meet off-peak requirements of such customers in lieu of purchasing deficiency energy to meet such off-peak requirements.

Billing Month

The billing month under this schedule shall end at 12:00 midnight on the 20th day of each calendar month.