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resources. It is important to recognize that, to date, this funding mechanism has been made 

 possible by the use of a melded wholesale power rate that blends the cost of new resources in 

 with lower-cost FBS resources. Recently, there has been increasing pressure to move BPA 

 toward a tiered rate design. Again, there are various motivations for this including an interest 

 in sending an incremental price signal for new resources to promote more efficient resource 

 choices by BPA's customers. But, to the extent that tiered rates eliminate the melding of costs 

 for new and existing resources, they will fundamentally affect BPA's ability to serve as a funding 

 vehicle to regionalize the cost of new resources. 



Additional, very difficult issues must be solved before tiered rates could be implemented. For 

 example, the PGP supports creating a first tier made up of FBS resources and basing the rate for 

 first tier power on the cost of FBS resources. However, allocating this first tier among BPA's 

 customers will require solving some significant technical and political issues. 



BPA Wholesale Power Rates Should Be Cost-Based and Should Allow Cost-Effective Resource 

 Acquisition 



One way to continue regionalized fimding for new resources without a melded BPA \^olesale 

 power rate might be to imbundle and price some BPA services above cost and use the proceeds 

 to subsidize new resources. However, the PGP strongly recommends against such an approach, 

 except as a solution to one transitional problem that I will describe in a moment. We are 

 concerned that if BPA were to begin setting its rates to create extensive cross-subsidization 

 between services, it would lead to reduced accountability, less efficient BPA programs, more 

 acrimonious BPA rate cases, and restricted ability of BPA customers to make cost-effective 

 resource choices. Further, if BPA were to gain the ability to shift its costs among different 

 services, the resulting lack of rate stability would frustrate the Act's intention that BPA be 

 available as a reliable partner to work with its customers in the development of new resources. 



Thus, if a decision is made to move away from melded BPA wholesale power rates, the PGP 

 recommends that rates for specific BPA services be set to the greatest extent possible at BPA's 

 actual cost to provide those services. For example, rates for FBS power sold to public preference 

 customers should be set at the actual cost of the FBS resources and rates for power from any new 

 generating resources that BPA acquires should be set at the actual cost of those new generating 

 resources. 



In addition, any restructuring of BPA's rates must provide for a smooth transition to a more 

 efficient and competitive market for new resources. Again, we believe that this can best be 

 accomplished by setting rates for each of BPA's major services — marketing FBS power, providing 

 transmission for federal and nonfederal power, and new resource acquisition — at the actual cost 

 of those services. As noted above, this will give BPA's customers the most efficient price signal 



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