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Question 11: It has been suggested that the residential exchange program rewards less 

 efiScient utilities. Are revisions to the exchange agreements necessary? If 

 so, what changes would you suggest? 



Answer: BPA disagrees with the suggestion that the Residential Exchange Program 



rewards less efficient utiUties, and believes revisions to the exchange agreement 

 are not necessary. Competitive pressures, reinforced with scrutiny by regulators, 

 BPA, and customers under the existing review mechanism, require utilities to 

 manage all their costs efficiently. 



Competitive pressures in the energy marketplace are the primary force pushing 

 utilities to be efficient. UtiUties must recover 40 to 70 percent of their costs from 

 commercial and industrial customers. They strive to keep their rates as low as 

 possible to such customers because they are subject to increasing competition 

 from other energy suppliers. Commercial and industrial rates are not affected by 

 the Residential Exchange Program. Utilities around the region are very concerned 

 about reducing their costs in order to compete in the maricetplace, regardless of the 

 effect of the program. 



Utility costs are subject to outside scrutiny, including such considerations as 

 efficiency and prudence, before they are filed with BPA. The Pacific Northwest 

 Electric Power Planning and Conservation Act (Act) required BPA to develop a 

 methodology consistent with the Act to calculate the average system cost of 

 utilities participating in the exchange. BPA consulted with the Northwest Power 

 Planning Council, BPA's customers, and the appropriate state r^ulatory bodies. 

 The resulting Average System Cost Methodology (ASCNf) was adopted as a 

 FERC r^ulation, and is considered a part of all exchange agreements. 



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