Attached is the report of the Less-Than-Full Separation Task Force of the Transition Board Transmission Work Group, authored by Paul Murphy, which includes the results of the task force meeting plus supplemental ideas added by task force members to the prior draft report.

THE SINGLE BPA WITH ENHANCED REGULATORY OVERSIGHT
TRANSMISSION ALTERNATIVE

The ad-hoc task force to report on "less-than-full-separation" alternatives met on June 9. We generally agreed that our task was to develop an alternative to complete legal separation of BPA?s transmission and power business lines (TBL and PBL) into two entirely separate entities while still meeting the goals identified for the Transmission Work Group. (See the minutes of the Work Group?s meeting of April 1.)

I. We agreed the alternative would be based on:

? A single BPA Administration and Administrator;

? A single BPA fund at Treasury;

? Legislation that functionally separated BPA?s TBL and PBL; that required all dealings between the TBL and PBL to meet all standards of conduct required by FERC under Order 889; and granted FERC greater regulatory authority over the TBL?s rates and conditions of access than FERC now enjoys.

II. The following issues were identified and discussed. With respect to each issue, we identified two or more options to address the issue. The options under each issue are independent in the sense that the first option under issue 1 can be paired any option under issue 2, any option under issue 3, etc.

A. Issues relating to FERC rate regulation of the TBL.

1. To what degree must the BPA?s costs be functionalized to transmission and generation for rate purposes?

Options:

? Transmission rates would be required to be based exclusively on transmission costs (which may in turn require specific definition).

? Transmission rates required to be based on transmission costs but, in extraordinary circumstances (which we did not attempt to define), transmission rates could include some costs of previous commitments for generation related costs (e.g., net billing costs). New commitments of the generation function would never be recovered in transmission rates.

? Transmission rates required to be based on transmission costs but, in extraordinary circumstances, could include other costs.

? Rates would not be required to be based on strictly functionalized costs.

2. How are BPA?s capital costs calculated?

Options:

? BPA?s capital recovery would include only depreciation and interest.

? BPA?s capital recovery would be consistent with whatever methods FERC approves for consumer-owned utilities.

? BPA?s capital recovery would include only amortization (as calculated by the transmission repayment study), plus interest.

? BPA?s capital recovery would include interest plus the higher of depreciation or amortization.

3. Does FERC have any role in determining the prudency of BPA?s expenditures so as to include or exclude them from transmission rates?

Options:

? FERC could disallow any cost it found to be unreasonable in amount or to have been incurred imprudently.

? FERC would be required to approve recovery of past costs (including costs associated with historic commitments) but, FERC could disallow for rate purposes the costs associated with imprudent plans for future expenditures (e.g., excessive maintenance, planned unreasonable additions or excessive reserves for contingencies).

? FERC would have no role in judging the prudency of any BPA costs.

4. How are BPA?s rates set?

Options: [Note: The appropriate forum and standards for judicial review of rate determinations could vary among these options.]

? The 7(i) process could be eliminated, and BPA?s proposed transmission rates would be approved or modified based on an evidentiary hearing before FERC in which BPA had the burden of proof.

? BPA sets rates in a 7(i) process, but FERC has enhanced authority in its review process. For example, the level of proof BPA needs to support a factual finding could be raised; FERC could be instructed to substitute its judgments for BPA?s in identified areas (e.g., customers complaining of discriminatory treatment); and/or FERC could be authorized to supplement BPA?s record.

? BPA sets rates in a 7(i) process. Final rate approval is subject to FERC?s current level of review (i.e., acceptance or rejection only) based on conformance to the whatever rate standards are adopted under the above issues.

5. For what period is FERC are BPA?s transmission rates valid?

Options:

? FERC approves rates for limited duration, and it can reopen on its own motion or in response to customer complaints.

? FERC approves rates for an indefinite period, and it can investigate the continued reasonableness of rates on its own motion or in response to customer complaints.

? FERC approves rates for an indefinite period, and it can investigate and act on customer complaints about the unreasonableness of BPA?s rates.

? FERC approves rates for limited duration, and FERC has no authority to re-examine the reasonableness of approved rates.

[See Note to Issue 4.]

6. May BPA discontinue any class of service without FERC approval?

Options:

? No.

? Yes.

7. Does FERC have jurisdiction over BPA contracts?

Options:

? Yes, FERC can review contracts for reasonableness prior to the effectiveness and can invalidate effective contracts in certain circumstances (e.g., manifestly inconsistent with public interest).

? Yes, FERC can determine the reasonableness of contracts and entertain and act on complaints from customers regarding interpretation of or disputes arising out of those contracts.

? Yes, FERC can review contracts for reasonableness prior to their effectiveness.

? No.

[Note: If FERC must approve BPA?s contracts before they become final, the Regional Act must be amended to specify when the contracts are final for purposes of judicial review.]

B. Other Issues

1. On what criteria should FERC judge requests for access to BPA?s transmission system?

Options:

? Criteria identical to that applicable to IOUs: no special preferences.

? Identical criteria, but with a narrowly drawn special exception to avoid forced spill that would kill fish.

? Identical criteria, but with a narrowly drawn exceptions to preserve preference for federal power and/or regional loads.

? Identify any situation that under current law would warrant different criteria for BPA and unambiguously address such situations in law (or authorize FERC to address them in rulemaking).

? Retain the status quo in its current form.

2. How should legislation address BPA?s joining an ISO?

Options:

? Require joinder.

? Permit joinder.

? Permit joinder but only if stated conditions are met (e.g., no cost shifts).

? Forbid joinder.

The task force recognized that many, if not all, of the potential transition-cost/stranded-cost/cost-recovery issues inherent in full legal separation were implicated in the functional separation model. We agreed that the Transmission Work Group as a whole should address these issues.