Intertie Project

1
Intertie Project

• Public Information Forum
• February 8, 2007

2
Agenda

• Overview of the Rate Adjustment Process
• Review Rate Drivers and Proposed Rates
• Discuss Approaches to Rate Adjustment
• Westerns Recommendation
• Next Steps
• Questions and Comments

3
Rate Adjustment Process

• Informal Rate Meeting June 15, 2006
• Formal Process for Rate Adjustment July 12,
  2006
• Publication of Federal Register Notice of
  Proposed Rates
• Beginning of Consultation and Comment Period
• Public Information Forum August 17, 2006
• Public Comment Forum August 24, 2006
• End of Consultation and Comment Period October
  10, 2006
• Extension of Rates Public Process December
  28, 2006
• Publication of Federal Register Notice of Order
  Extending Rates and Extension of Public Process
  for Rate Adjustment

4
Rate Drivers FY 2008-2012FY99 Ratebase PRS
5
Rate Drivers FY 2008-2012FY07 Ratebase PRS
6
Summary of Rate Drivers

• Significant increase in Repayment category as a
  percentage of the average total annual costs
• Moderate increase in OM and minor increase in
  Other categories
• Overall, substantial increase in total annual
  costs to recover over short period of time

7
Average Annual Expenses
8
Annual Expense Projections

• FY 2008 OM expenses derived from budget
  estimates submitted to DOE and OMB.
• FY 2009-2012 OM expenses indexed off FY 2008
  budget estimates _at_ 3.65, consistent with budget
  submission
• Repayment applied towards an estimated FY 2006
  unpaid capitalized deficit balance of 54.4M, of
  which 41.7M are required payments

9
Annual Expense Summary

• Largest contributor to proposed rates is the
  short-term repayment obligation associated with
  capitalized deficits
• Why the increase in repayment obligation?
• Lower than projected sales of 500-kV transmission
  service
• Revenue shortfall resulted in capitalized
  deficits with short-term repayment periods

10
Which Leads Us to Where We Are Today

• Rate Adjustment necessary to ensure recovery of
  annual costs and repayment of project
• Rates must be lowest possible consistent with
  sound business principles
• Several approaches to Rate Adjustment

11
Alternatives to Consider

• Standard Approach
• Alternative Approach
• Restructure 500-kV Sales Assumptions
• 230/345/500-kV System Rate
• Combination of the above

12
Standard Approach

• Update proposed rates presented during the Public
  Information Forum held August 17, 2006
• Pros
• No additional deficits planned after FY 2007
• Most conservative approachminimizes overall
  interest costs over project repayment
• Cons
• Highest immediate rate increase
• Prices 500-kV transmission service significantly
  higher than other providers
• Higher risk of not achieving 500-kV sales
  assumptions

13
Pinch Points
14
Alternative Approach

• Use certain repayment flexibilities when
  determining proposed rates
• Incur additional deficits to cover annual
  expenses and required payments
• Direct payments to reduce a future year pinch
  point repayment obligation after deficit
  repayment completed
• Pros
• Lessens the impact of the immediate rate increase
• Still makes required payments each year in
  accordance with DOE Order RA 6120.2
• Ensures project repayment within maximum
  allowable time frame

15
Alternative Approach, Contd

• Cons
• Increases interest costs during project repayment
  
• Potential future rate increases if sales
  assumptions do not materialize
• Directing payments is allowed under DOE Order RA
  6120.2 only when no unpaid capitalized deficits
  exist
• All current and future capitalized deficits must
  be paid off by FY 2017 to begin directing
  payments

16
Restructure 500-kV Sales Projections

• Existing rates were based on phasing-in sales of
  500-kV transmission service
• Phase-in period began in FY 1999 with projected
  sales of 62.5 MW, incremental sales of 100 MW
  each fiscal year and ends in FY 2008 with total
  sales of 962.5 MW
• Current long-term sales are 612 MW
• Proposed rates from July 2006 proposal assume
  sales of 962.5 MW in FY 2008 and beyond, i.e.
  sales projections were not restructured

17
Restructure 500-kV Sales Projections

• Extending the phase-in period by five years will
  allow Western additional time to market long-term
  500-kV transmission service
• Restructuring the sales projections over the next
  five years will give Western flexibility to
  achieve the phase-in total sales of 962.5 MW
• Aligns sales projections based on performance to
  date and future outlook

18
230/345/500-kV System Rate

• Legislatively, and from a financial accounting
  and repayment standpoint, the Intertie is one
  project
• Indirect costs are allocated to the Intertie
  Project, not to the 230/345-kV and 500-kV
  transmission systems
• Slower than projected sales of 500-kV
  transmission service does not relieve Western
  from Intertie Project repayment responsibility.
• A 230/345/500-kV rate is consistent with sound
  business principles

19
Westerns Recommendation

• Combination of the above
• Alternative Approach
• 230/345/500-kV System Rate
• Restructure the 500-kV Sales Assumptions
• Alternative Approach
• Makes required payments in all years in
  accordance with DOE Order RA6120.2
• Incurs additional deficits in FY 2007-2010
• Pays deficits first, then begins directing
  payments in FY 2017

20
Recommendation, Contd

• 230/345/500-kV System Rate
• The same rate for entire transmission system
  regardless of voltage level
• Potential for additional sales by moving
  reservations from the 230/345-kV to the 500-kV or
  vice versa
• Beneficial for all customers by keeping the
  500-kV transmission system competitively priced
• Restructure 500-kV Sales Assumptions
• Extend phase-in period by five years to achieve
  sales
• Attain 962.5 MW sales level by FY2013

21
230/345/500 System Rate

• 15.24 kW-Yr, regardless of voltage
• Assumes additional deficits incurred FY 2007-2010
  and all deficits paid by FY 2017
• Begins directing payments in FY 2017
• Extends phase-in period of 500-kV sales
  projections to FY 2013

22
Transmission Service Rates
23
Credit Risk Mitigation for Transmission Service
Sales

• Current business practice requires customers to
  pay for transmission service after the fact,
  usually one month in arrears
• Western can be at risk for up to 4 months
  revenue in event of default
• All customers will be required to pay in advance
  for long-term transmission service
• New business practice of pre-payment will reduce
  the revenue risk exposure to one month

24
Credit Risk MitigationExample

• Calpinefiled for Bankruptcy protection late in
  2005
• Monthly transmission service bills approx. 500k
• When bankruptcy filing done, Western was owed
  approx. 1M (two months service)
• Loss of revenue impacts all rate payers
• Payment in advance could have reduced exposure

25
Credit Risk Mitigation

• Current environment - companies financial and
  credit status can change quickly
• Many of Westerns customers have no credit rating
• Payment in advance mitigates risks
• Many customers already pay for long-term
  transmission service in advance
• Firm Electric Service customers pay in advance

26
Schedule

• Revised rate brochure will be available on
  Westerns website by 2/12/07 at
  http//www.wapa.gov/dsw/pwrmkt/Intertie/RateAdjust
  
• Public Comment Forum scheduled for February 27,
  2007 at 1000 a.m. MST
• Consultation and comment period ends March 28,
  2007
• Questions not answered today will be answered in
  writing no later than 15 days prior to the end of
  the comment period.

27
Comments Questions

• Send written comments to J. Tyler Carlson,
  Regional Manager
• Comments may also be faxed to 602-605-2490, Attn
  Jack Murray, Rates Team Lead
• E-mail to Tyler Carlson, carlson_at_wapa.gov or
  Jack Murray, jmurray_at_wapa.gov
• All written comments must be received by the end
  of the comment period