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BPA, TVA, Salt River: Playing Fair in Power Markets?

Fortnightly Magazine - July 1 1998

West Energy, and do not flow to New West Energy's customers in California. SRP is in full compliance."

In a March 2 letter to the Department of the Treasury, SRP General Manager Richard Silverman explains the federal power agency's position.

"While voluntarily opting to treat New West Energy as a taxpaying entity, SRP has also been careful to assure that New West Energy is not a private business user of bond-financed assets," Silverman writes. "SRP is not selling power to New West Energy from the tax-exempt financed portions of its generating system.

"SRP has, and will, carefully monitor projected sales to New West Energy, as well as any other power marketing arrangements, to ensure that no private business use of the tax-exempt bond-financed portion of the system is expected."

Charles Bayless, president of TEP parent Unisource Energy, compares the situation with New Energy Ventures, or NEV, its own subsidiary. "Okay, so you have a tax-paying entity. That still, in our mind, doesn't address the question."

"With our [TEP's] little subsidiary, New Energy Ventures, the California utilities rightfully say NEV will be billing their customers for everything: distribution, generation and transmission," the CEO says. "Then we will turn around and pay Southern California Edison, or PG&E, or whoever, for the transmission and the distribution. So we're going to be holding millions, tens of millions, of dollars of their money. And so they're saying, 'New Energy Ventures, you're a very small company. You've got to put up a bond under the affiliate interest rules under Arizona.'

"But we cannot guarantee NEV¼ It's illegal."

SRP, he says, doesn't operate under these rules. "They can just go in and guarantee their subsidiary," Bayless says. "So we're out paying millions for bonds. And they aren't."

As explained by an SRP media spokesman, Salt River is essentially an agricultural improvement district, set up under federal reclamation law, "owned" by landowners within its water utility service territory. It's governing board and council are elected on a the basis of "one acre, one vote." SRP has voluntarily complied with FERC Orders 888 and 889, but remains exempt from regulation by the Arizona Corporation Commission, including rules governing utility marketing affiliates, though it provides electric service to much of the Phoenix region.

Bayless isn't through, however. He notes that TEP has to earn an equity rate of return. "They don't," he says. "And¼ I'm not directing these comments to SRP - there's always room for mischief here. Say you set up a tax-paying subsidiary. SRP goes out and buys power for one cent. Now, let's say the California market is three cents. They buy it at one. They turn around and sell it to New West for three. New West then sells it for three. And New West says, 'Oh well, we pay taxes on our income.' Well, they don't have any income. They had all the income hit the tax-free entity. So effectively, the tax-free entity is out attacking the market, but still shielding all the income by taking all the gain."

In Washington, D.C., the issues are under review