Dear Paul:

Thank you very much for taking the time to meet with the Transition Board on June 8. The Board appreciates the difficult task you face in putting together a subscription package that satisfies the competing desires of your different customer groups and other constituencies. The candor and openness with which you approach the issues will serve you well in reaching that goal.

The Transition Board was pleased to hear that you are open to considering options regarding the Cost Recovery Adjustment Clause (CRAC) as you move through the upcoming rate case. As you know, the Transition Board has been, and remains, concerned about the combination of a fixed CRAC and a transmission surcharge as described in Bonneville’s subscription Record of Decision and subsequent communications. An important goal of the Comprehensive Review and, thus, the Transition Board, is to align the benefits and risks of access to federal power. We believe this is particularly critical when access to federal power is coveted but, of necessity, limited. Unfortunately, your current proposal leaves the possibility, albeit relatively small, that transmission customers who are not able to benefit from federal power will be called upon to help meet Bonneville’s power costs while power customers still pay less than market power rates. Were that to occur, it would be both unfair and adverse to the region’s political cohesiveness. We believe the chances of this occurring should be minimized to the greatest extent practicable.

We understand that Bonneville has concerns about the CRAC originally proposed by the Transition Board. Clearly, customers object to the uncertainty in the proposed approach and to triggering any CRAC based on projected rather than actual reserves. Still, we think that the principle underlying that proposal – that power customers should be paying rates sufficient to recover all power system costs up to a limit that approximates market rates before transmission customers are asked to share in meeting the power business’s costs – is fair and economically sound.

There are certainly a number of designs for a CRAC that could achieve that end. Perhaps the most simple is a two-stage CRAC triggered by actual reserves. The first stage would be the same as Bonneville’s current proposal. The second stage would trigger at the level of reserves currently proposed to trigger the transmission surcharge, and would bring power customers rates as close to market as necessary to meet power system costs. Only then, if revenues are still insufficient to maintain adequate reserves, could a transmission charge be levied.

Another alternative that you should seriously consider is what might be called an "adaptive CRAC." Bonneville’s risk mitigation requirements in the 2002 – 2006 time frame are affected significantly by the wide range in fish and wildlife recovery costs that Bonneville may have to support. There is, however, something fundamentally different about the risks associated with fish and wildlife recovery costs compared to the other risks Bonneville takes into account. The difference is that once a decision is made regarding the fish and wildlife alternative, the annual fish and wildlife costs for the remainder of the rate period will be known within a relatively small range. An adaptive CRAC would take advantage of that by establishing a set of CRACs (rate increments and reserve trigger levels) in the rate case that would raise power rates to recover power system costs, up to a limit that approximates market rates. The CRAC that would be used would depend on the annual costs for the fish and wildlife alternative chosen. Low cost alternatives would have a very small CRAC that would not trigger until reserves reached a fairly low level. Conversely, higher cost alternatives would have higher CRACs that trigger at higher reserve levels.

The advantage of this approach is that it may be possible to have a lower initial rate offering, significantly reduce the chance of triggering a transmission surcharge and increase the likelihood of reaching the target Treasury payment probability for any of the specific fish and wildlife alternatives. Customers would know the range of different CRACs and the conditions under which they would apply. They could make their own judgments of the likelihood of any particular fish and wildlife alternative being chosen and the resulting CRAC.

The Transition Board recognizes there may be other alternatives that would meet our objectives while better meeting yours. What we believe is important, however, is that options like these that more closely align benefits and risks and maintain cost-based rates receive your serious consideration. We are confident they will. The Board and our staff are ready to work with you toward that end.