[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(superseded by P-02)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Interconnection Facilities Service--(superseded by NFTS-02)
Rate Schedule EE-98, Wholesale Rate for Excess Energy--(superseded by 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