B-153294, FEB. 24, 1964

B-153294, FEB. 24, 1964

TO THE CHAIRMAN, FEDERAL POWER COMMISSION:

REFERENCE IS MADE TO CONTRACT NO. 14-02-0001-1002, ENTERED INTO ON MARCH 28, 1962, BETWEEN THE UNITED STATES BY THE ADMINISTRATOR, SOUTH WESTERN POWER ADMINISTRATION AND ASSOCIATED ELECTRIC COOPERATIVE, INC., THE RATE SCHEDULE OF WHICH CONTRACT WAS APPROVED BY YOUR COMMISSION ON APRIL 30, 1962 (DOCKET NO. E-6975), FOR THE PERIOD FROM DATE OF SUCH APPROVAL UNTIL JULY 1, 1967.

ARTICLE II, SECTION 1 OF THE CONTRACT PROVIDES THAT SPA SHALL SELL AND ASSOCIATED SHALL PURCHASE PROGRESSIVE AMOUNTS OF ELECTRIC CAPACITY (HYDRO PEAKING POWER) UP TO 288,000 KILOWATTS DURING THE CONTRACT YEAR BEGINNING JUNE 1, 1965, AND DURING EACH CONTRACT YEAR THEREAFTER. IN ADDITION TO HYDRO PEAKING POWER PURCHASED ASSOCIATED, UNDER THE PROVISIONS OF ARTICLE II, SECTION 1 (C) IS PERMITTED TO UTILIZE "/I) ANY OVERLOAD CAPACITY AVAILABLE AT THE BULL SHOALS DAM AND THE TABLE ROCK DAM, RESPECTIVELY, IN AN AMOUNT THAT, IN THE SOLE JUDGMENT OF SPA, WILL NOT RESULT IN UNDUE WEAR OR TEAR OR ELECTRICAL OR MECHANICAL DAMAGE TO SUCH GENERATORS, AND (II) ANY CAPACITY AVAILABLE AT THE BULL SHOALS DAM AND/OR THE TABLE ROCK DAM DURING PERIODS WHEN SUCH CAPACITY IS NOT REQUIRED BY SPA FOR THE PRODUCTION OF ENERGY * * * UNDER THE SPA-COMPANIES CONTRACT (NO. 14-02- 0001-1003) * * *.'

IT IS UNDERSTOOD THAT SECTION 1 (C) (I) WAS INTENDED BY BOTH PARTIES TO PROVIDE FOR PAYMENT BY ASSOCIATED ONLY FOR ENERGY AT 2 MILLS PER KILOWATT- HOUR WITHOUT ANY ACCOMPANYING DEMAND CHARGE AND THAT WHILE YOUR COMMISSION FIRST QUESTIONED THIS KIND OF ARRANGEMENT IT FINALLY APPROVED THE SALE OF THIS "OVERLOAD" POWER AT 2 MILLS FOLLOWING ARGUMENTS BY SPA THAT OTHERWISE THIS ENERGY WOULD BE CONSIDERED AS "DUMP" POWER FOR WHICH THE MOST THAT COULD BE REALIZED WOULD BE 1 1/2 MILLS.

IN OTHER WORDS, IT IS INDICATED THAT BOTH PARTIES UNDERSTOOD THAT "OVERLOAD CAPACITY AVAILABLE" WOULD BE "UTILIZED" BY ASSOCIATED WITHOUT ANY DEMAND CHARGE PAYMENT. SINCE THE WORD "UTILIZED" APPLIES EQUALLY TO BOTH SUBSECTIONS (I) AND (II), IT REASONABLY COULD BE ARGUED THAT SUCH UTILIZATION WAS INTENDED TO BE FREE OF ANY DEMAND CHARGES IN BOTH CASES, NAMELY "OVERLOAD APACITY" AND "ANY CAPACITY * * * NOT REQUIRED BY SPA" UNDER THE ASSOCIATED OR COMPANIES CONTRACTS. FURTHER SUPPORT FOR THIS FREE DEMAND POSITION MAY BE FOUND IN APPLICATION OF THE (II) CLAUSE PRIOR TO MIDNIGHT MAY 31, 1985 (THE EXPIRATION DATE OF THE ORIGINAL TERM OF THE COMPANIES CONTRACT), TO A SITUATION RESULTING FROM THE COMPANIES FAILURE TO SCHEDULE ENERGY EQUAL TO THE DEMAND THEY ARE COMMITTED TO PURCHASE. OTHER WORDS, A SITUATION COULD ARISE WHERE THE COMPANIES WOULD PAY A DEMAND CHARGE FOR MORE CAPACITY THAN THE KILOWATT-HOUR OR ENERGY ASSOCIATED WITH THAT CAPACITY. IN SUCH EVENT, SPA WOULD BE REQUIRED TO PERMIT ASSOCIATED TO "UTILIZE" THAT UNUSED CAPACITY (PRESUMABLY FREE) BY MERELY PAYING 2 MILLS PER KILOWATT-HOUR FOR THE ENERGY TAKEN. THIS SEEMS A REASONABLE CONCLUSION SINCE IT WOULD BE UNREASONABLE FOR SPA TO COLLECT A $14.40 PER KILOWATT DEMAND CHARGE BOTH FROM THE COMPANIES AND ASSOCIATED FOR THE SAME CAPACITY.

IN SHORT, IT WOULD APPEAR REASONABLE TO ASSUME THAT (I) AND (II) BOTH WERE WRITTEN TO COVER A SITUATION WHERE IT WAS NOT EXPECTED THAT ASSOCIATED WOULD PAY ANYTHING BUT THE 2 MILLS PER KILOWATT-HOUR FOR THE CAPACITY MADE AVAILABLE TO IT UNDER THOSE TWO CLAUSES. IF THIS BE SO, IT WOULD SEEM UNREASONABLE TO SAY THAT THE SAME WORDS WOULD REQUIRE ASSOCIATED TO PAY A DEMAND CHARGE IF THE CAPACITY WERE AVAILABLE BECAUSE IT WAS NOT NEEDED TO SUPPLY THE COMPANIES BECAUSE OF THE TERMINATION OF ITS CONTRACT BUT, ON THE OTHER HAND, THAT ASSOCIATED WOULD NOT HAVE TO PAY A DEMAND CHARGE DURING THE LIFE OF THE COMPANIES CONTRACT WHEN THE CAPACITY WAS NOT NEEDED TO MEET THE COMPANIES REQUIREMENTS.

FOR THE FOREGOING REASONS WE QUESTION THE CONCLUSION MADE BY THE ASSISTANT SECRETARY OF THE INTERIOR IN HIS LETTER OF SEPTEMBER 6, 1963, TO THE ASSISTANT DIRECTOR OF OUR AUDIT DIVISION, COPY ATTACHED, TO THE EFFECT THAT PRIOR TO MIDNIGHT MAY 31, 1985, ASSOCIATED IS REQUIRED TO PAY BOTH A DEMAND AND ENERGY CHARGE FOR ANY POWER AND ENERGY IT RECEIVES UNDER (I) AND (II). IF THE ASSISTANT SECRETARY'S CONCLUSION IS ERRONEOUS FOR THE PERIOD PRIOR TO MAY 31, 1985, THERE WOULD APPEAR TO BE A SOUND BASIS FOR THE VIEW THAT HE HAS NOT PRESENTED A CONVINCING ARGUMENT AS TO THE CORRECTNESS OF HIS INTERPRETATION OF THESE PROVISIONS WITH RESPECT TO POWER AND ENERGY THAT MAY BE UTILIZED BY ASSOCIATED UNDER ARTICLE II, SECTION 1 (C) AFTER 1985.

WE WOULD APPRECIATE YOUR COMMENTS AND VIEWS WITH RESPECT TO THE FOREGOING MATTERS PARTICULARLY WITH RESPECT TO WHEN AND UNDER WHAT CONDITIONS THE PROVISIONS OF (II) MIGHT BECOME OPERATIVE PRIOR TO MIDNIGHT MAY 31, 1985, AND WHETHER IT IS YOUR UNDERSTANDING THAT SO LONG AS BOTH CONTRACTS ARE IN EFFECT, PAYMENT BY ASSOCIATED UNDER SECTION 1 (C) (I) AND 1 (C) (II) WOULD BE FOR ENERGY ONLY, RATHER THAN FOR BOTH ENERGY AND DEMAND.

WE WOULD ALSO APPRECIATE YOUR VIEWS AS TO WHETHER UPON TERMINATION OF THE COMPANIES CONTRACTS THE RATES AND CHARGES FOR THE CAPACITY PREVIOUSLY FURNISHED THEREUNDER WOULD BE REQUIRED TO BE SUBMITTED TO YOUR COMMISSION FOR CONFIRMATION AND APPROVAL UNDER THE REQUIREMENTS OF SECTION 5 OF ..END