NWPPA Presentation

Legal Framework of the Final Settlement Agreement

Presented by:
Terry Mundorf, Partner Marsh Mundorf Pratt Sullivan & McKenzie

Introduction

Final Residential Exchange Settlement Agreement (Agreement) on the street Its a big deal and a topic on which reasonable people can differ Special role today - DDA Alternative view of Settlement Want to do four things
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Describe basic elements of deal Review ways this Agreement differs from prior settlements Talk about what happens if you do sign, and what happens if you do not Summary of some pros and cons of the Agreement

Elements of the Deal

IOUs get
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Fixed REP payments of $2.1 billion over next 17 years No repayment of benefits received under prior Settlement of about $500 million Idaho Power does not repay deemer account balance of $250 million Payment of interim amounts of about $52 million Get 14% of environmental attributes of FBS, if any Shielded from future REP cost increases Dismiss claims to additional repayment amounts arising from prior IOU REP Settlement of about $1.0 billion

Preference customers
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All signers seek Congressional action to prevent legal challenges

Specific Agreement Provisions

Agreement contains provisions not included in prior BPA settlements These provisions are worthy of consideration before we take the plunge
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Execution
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Required to execute before BPA decides if Agreement is legal and if it is a better deal than statutory rate test Once you have signed, you are bound if BPA signs it Requires dismissal of signers pending claims Also designed to moot pending claims of non-signers whether or not they want them dismissed Signers prohibited from challenging directly or indirectly the Agreement Agreement requires pursuit of Congressional ratification purpose is to preclude legal challenges by non-signers Designed to eliminate any opportunity to test legality of Agreement

Pending Litigation
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Legal Challenges to the Agreement

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Specific Agreement Provisions(contd)

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Agreement Enforceability
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With Congressional ratification binding arbitration with BPA at cost of losing right to get legal review of Agreement Without Congressional ratification retain right to get legal review of Agreement, but binding arbitration with BPA only if BPA wants to There is limited binding arbitration with IOUs source of mischief likely BPA, not IOUs Signers agree to continue to live under settlement deal even if BPA lacks authority to sign the Agreement First time I have seen a BPA deal that the parties agree to continue when BPA cannot Terms of the Agreement will supplant provisions of the Regional Power Act (5(c), 7(b)(2) & (3)) Replace statutory protection with a contract for both those who want to also for those who do not want to

Waivers
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Contract for Statute

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Need to think about how these precedents may be used in the future

What Happens If You Sign What Happens If You Dont

If you sign you accept certain obligations, some before BPA signs and some after
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Support adoption of Agreement by BPA in current rate case Support efforts to dismiss (or stay) pending litigation of signers and non-signers Support effort to obtain Congressional ratification can back out of effort if you think it is detrimental Without Congressional ratification, help defend Agreement if it challenged in court

If you decide not to sign, what happens to you depends

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For sure you do not have to support adoption, seek dismissal, support Congressional ratification or defend in court If nobody challenges Agreement, you get same rates as signers but without the obligations court
Odds of no challenge to the Agreement are small
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What If You Sign What If You Dont (contd)

Result potentially different for non-signers if Agreement is challenged

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All non-signers get outcome determined by Court whether you challenged the Agreement or not What that means depends on how challenge turns out
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If BPA prevails, get same rates as signers If challengers prevail, get outcome as determined by the Court Could be that signers get the Agreement rates, non-signers get statutory rates Court outcome could be better or worse than settlement - depends in part on treatment of pending claims

One interesting aspect of Agreement for non-signers

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Agreement designed to moot all claims and litigation arising from REP since 2002 If mootness argument gets preference customer claims dismissed, will have same impact on IOU claims Includes IOU threat to retrieve Lookback payments received by non-signers

Agreement Pros and Cons

PROs
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Fixed REP Payment Obligation REP payment fixed for 17 years. More certain than currently, where REP payment is determined in each rate case and is subject to BPA policies shifts. IOU Cost Escalation Fixed REP payments protects from IOU ASC increases from carbon taxes, resource portfolio standards, cap and trade legislation and resource additions. Lower REP Payment Obligation The Settlement REP payments are lower than BPAs current 7(b)(2) rate test implementation. IOU REP payment at the end of the Settlement ($286M in FY2028) is about the same as BPAs REP payment in current rate period REP ($295M in FY2013). Less Litigation After litigation of pending claims (if not dismissed) and the validity of the Settlement (if no ratification), likely less litigation and rate case controversy over the REP.

Agreement Pros and Cons (contd)

PROs (contd)
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Escape Clause Agreement can be terminated by preference customers if basic assumption of deal (embedded cost rates, ASC above PF rate) is changed by outside action in a material amount, and two-thirds of publics agree to do so. Focus on Other Matters Ending litigation over REP will afford preference customers more time to address other pressing issues, such as preserving FBS capability for preference load service, resolving transmission constraints and controlling BPA costs as examples.

Pros and Cons (contd)

CONs
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Fixed REP Payment Fixed REP payments shields IOUs from CRACs and BPA cost increases caused by dam removal, CGS retirement, or escalating BPA or fish costs. Statutory REP payments subject to these cost increases. Settlement Benefits in the Future Forecasts are always perfect, future is wrong. Whether future events show the Agreement to be a benefit or a burden only time will tell. Settlement and BPA Authority Agreement to stick to terms if BPA lacks authority to sign likely result in differing REP obligations for signers and nonsigners, splitting public power. Certainty of Agreement Agreement certainty depends on enforceability. If Agreement ratified (with loss of judicial review), likely enforceable against BPA. If not ratified (with retention of judicial review), Agreement likely not enforceable against BPA, subjecting Agreement to BPA policy shifts like Rate Test.

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Pros and Cons (contd)

CONs (contd)
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Litigation Peace Agreement designed to dismiss pending REP litigation, and preclude challenges to the Agreement, but will spark new round of litigation. If litigation peace achieved, comes at the cost of part of public power depriving another of relief from BPAs prior unlawful acts and right to test the lawfulness of the Agreement. This is divisive to public power, and sets troubling precedent. Substitutes Contract for Statute Congress fashioned REP to protect BPAs financial health and preference to the lowest cost federal power. Agreement substitutes BPA contract for these statutory protections. Substituting BPA contract for statutory cost protection may be an unwise policy choice, and may set a bad precedent for the future.

Please note that the number of Pros and Cons are identical

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