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Power Rate Setting and Repayment

This Web page describes Western's procedures and policies for power rate-setting and repayment in general terms. Detailed information and official policy guidelines for power repayment studies and rate adjustments are available on request.

History and Mission

Western Area Power Administration was established in December 1977 by the Department of Energy Organization Act. The agency's mission is to implement national energy policy by maintaining a viable and progressive Federal Power Programs program and providing reliable and efficient electrical service to customers while protecting the environment, optimizing energy efficiency and developing renewable energy resources.

Western's service area covers 1.3 million square miles in 15 western states. The Agency markets and transmits Federal electric power to wholesale preference customers, including rural electric cooperatives, municipalities, public utilities, Federal and state agencies, irrigation districts and Bureau of Reclamation projects and facilities. Some short-term energy sales are also made to neighboring public and investor-owned utilities. Western's customers, in turn, provide service to millions of consumers in Arizona, California, Colorado, Kansas, Iowa, Minnesota, Montana, Nebraska, Nevada, New Mexico, North and South Dakota, Texas, Utah and Wyoming.

Our Corporate Services Office is in Golden, Colo. Four regional offices are in Billings, Mont., Phoenix, Ariz., Loveland, Colo., and Folsom, Calif. The Colorado River Storage Project Customer Service Center is in Salt Lake City, Utah. Western operates and maintains nearly 17,000 miles of transmission lines and 260-plus substations and other electrical facilities to deliver this power from more than 50 Bureau of Reclamation, U.S. Boundary and Water Commission and U.S. Army Corps of Engineer hydroelectric plants for which it serves as marketing agent. Western also markets the U.S. entitlement from the coal-fired Navajo Generating Station near Page, Arizona, and transmits power through its entitlement on the Pacific Northwest-Pacific Southwest Intertie. Current maximum generating capability is more than 10,400 megawatts.

Policy and Legislation

Legislation for water resource projects built by the Bureau of Reclamation, the Army Corps of Engineers and the International Boundary and Water Commission generally requires those who benefit from certain Federal investments in water resource projects to ultimately reimburse the Treasury for this investment.

Reclamation law in the western United States has a long, complicated history. The Reclamation Act of 1902 authorized the Secretary of the Interior to build water resource reclamation projects. A 1906 law authorized development of power opportunities at Federal reclamation projects in the 17 western states and identified municipal power systems as preference customers. Since then, others including public utility districts and irrigation districts, have all become preference customers.

The Reclamation Project Act of 1939 further specified the role of power users in repayment. Section 9(c) states in part: "Any sale of electric power...made by the Secretary in connection with the operation of any project or division of a project, shall be...at such rates as in his judgment will produce power revenues...to cover an appropriate share of the annual operation and maintenance cost, interest on an appropriate share of the construction investments...and such other fixed charges as the Secretary deems proper: Provided further that in said sales...preference shall be given to municipalities and other public corporations or agencies, and also to cooperatives and other nonprofit organizations financed...by loans made pursuant to the REA Act of 1936..." Specific legislation authorizing each project often addressed repayment as well. Executive agencies which administer the specific projects have developed procedures to determine these repayment obligations.

Sales of electric power repay all costs associated with power generation.

Western must establish power rates sufficient to recover operating, maintenance and purchase power expenses and repay the Federal government's investment in building these generation and transmission facilities within 50 years. Rates must also be set to cover certain non-power costs Congress has assigned to power users to repay, such as irrigation costs in excess of water users' ability to repay, interest expenses on the unpaid balance of power-related principal and replacement of power facilities within the expected service life of the replacement.

Repayment Study Process

The first step in determining if power rates for each project are adequate is calculating how much revenue is needed each year to meet operating and maintenance expenses and repayment requirements. This determination is done annually through a power repayment study. A PRS is essentially a summary of historic financial data and estimates of future expenses and investments which determine annual revenue requirements.

The PRS lists income from marketing and transmitting power, purchase power and transmission costs, expenses relating to operations and maintenance, as well as capital investments including replacements and the annual interest on those investments. Repayment studies also track irrigation costs assigned to power customers for repayment. These costs, determined to be "beyond the ability of irrigators to repay" are called "aid to irrigation" or irrigation assistance.

Data in the study include historic expenses and investments already repaid from power revenues as well as projections for future years. Also listed are estimated annual repayment of generation and transmission investment costs throughout the project's repayment period. More specifically, the studies detail year-by-year projected revenues and expenses, estimated amounts of investment and interest to be paid each year and the total amount of investment remaining to be repaid. Historical data is gathered primarily from accounting records through the last fiscal year. In addition to Western's marketing and billing records, generation, hydrology and project data, historical and projected figures are provided by the Bureau of Reclamation, the Army Corps of Engineers and the International Boundary and Water Commission. The Bureau and Corps also contribute hydrological forecasting data used to project resource sales and any required purchases.

Power repayment studies normally use long-term average generation expected in all future years of the study. However, during high water years, more revenue than estimated average is available and is used to make additional principal payments. During low water years, additional expense for purchase power is incurred to meet contractual obligations. In this case, the estimated principal payments may be reduced or deferred. Variable repayment is permitted in a PRS in recognition of the variable nature of the water supply from year to year. Extended drought conditions may result in a rate increase and a series of years with high water may defer a rate increase that would otherwise be needed.

Projected operation and maintenance expenses are developed on the basis of historical cost trends and budget documents. Interest on investments in the PRS is calculated according to specific project authorizing legislation and departmental guidelines. Estimated and budgeted costs for equipment replacement are included. Projected service life is factored in as well.

For every PRS, revenues are applied to expenses according to a specific priority. Annual operation and maintenance costs, transmission charges, purchase power and annual interest expenses are paid first, and must be repaid each year. Annual expenses that cannot be repaid in the same year are capitalized and include interest charged at the current rate. Remaining revenues are applied against unpaid capital deficits and investments, such as the generation and transmission facilities and, finally, irrigation costs assigned to power for repayment. Of these capitalized investments, those carrying the highest interest rates are usually scheduled to be paid first, unless other power investments come due for repayment to meet the requirements to be repaid within 50 years or, if shorter, their service lives.

Ideal vs. Dynamic Repayment Scenario

Under ideal conditions, water conditions would remain constant, equipment would be replaced precisely at the end of its service life, and operations and maintenance crews would not have to deal with the results of earthquakes, tornadoes, droughts, ice storms and other phenomena which affect generation and transmission system components.

Revenues and expenses would remain relatively constant. However, our world is dynamic, not constant. Western responds to these changing conditions through its flexibility in repaying the Federal investment in power and irrigation facilities.

Annual repayment studies allow Western to determine the revenues needed to meet its statutory requirements of repaying Federal power investments with interest while keeping wholesale hydropower rates as low as possible, consistent with sound business principles.

Rate Development and the Public Process

The annual power repayment study determines whether the current rate will generate enough revenue to meet repayment requirements. If the current rate does so, it will continue in effect or be extended. If the rate is excessive or insufficient, Western then begins to develop a new rate that will meet the new revenue requirements.

The first step is to notify customers and the general public that Western is considering a new rate. Informal public meetings may also be held with customers.

A notice detailing the proposed rate and an explanation of why it is needed is published in the Federal Register. The notice also includes the places and dates of any public meetings and an invitation for comments, either oral or in writing, from interested people. Members of the public are offered a specific time period, usually 90 days, to gather information about the rate proposal and provide comments to Western.

Western normally hosts two kinds of public meetings concerning rate adjustment. A public information forum involves a formal presentation by Western staff as well as questions and comments from the audience. Written responses to questions which require more detailed answers are provided after the forum.

A public comment forum is held later to provide citizens an opportunity to voice their opinions and suggestions about the proposed rate adjustments. Western makes no presentation at this meeting. All comments are considered during the rate development process.

Both types of forums are formal and the proceedings recorded by a court reporter. If public participation leads to significant changes in the proposed rate adjustment, the modified proposal may be published in the Federal Register and the public offered an opportunity to comment on the modifications.

The public involvement process is designed to allow citizens to have their views considered before Western makes a power rate decision that may affect them. It offers Western an opportunity to understand issues important to the public as well as to educate the public about Western's rate development assumptions and data.

Background data, studies, reports and other documents used in developing the proposed rate are made available to anyone interested in examining the proposed rate. Additionally, during this public process, Western representatives explain the proposal and evaluate suggestions for its modification. Interested people may also submit written comments to Western concerning the proposed rate.

Once the consultation and comment period is completed, oral and written comments on the proposed rate or revised proposal are reviewed. All of this may lead to a modification of the proposal, which can, in turn, lead to more public participation and comment. Then, Western's Administrator develops a final proposed rate which he requests the Deputy Secretary of Energy to confirm, approve and place in effect on an interim basis.

Next, the interim rate, all supporting documents and the public record are forwarded to the Federal Energy Regulatory Commission. The Commission may confirm, approve and place the rate in effect on a final basis, send it back to Western for further study, or disapprove it.

Rate Development Process

In general terms, these steps are followed to develop rates. Specific circumstances however may call for modifications to the process.

If you have any questions, call Rates and Repayment, 800-472-2306

 

 

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