BEFORE THE DEPARTMENT OF PUBLIC SERVICE REGULATION

OF THE STATE OF MONTANA

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TO: All Concerned Persons

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1. On January 31, 2008, the Department of Public Service Regulation published MAR Notice No. 38-2-201 regarding notice of public hearing on the proposed amendment and repeal of the above-stated rules, at page 93 of the 2008 Montana Administrative Register, issue number 2.

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2. A public hearing was held on March 5, 2008. One person testified at the hearing. One written comment was received by the March 5, 2008 deadline.

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3. The department has thoroughly considered the comments and testimony received. A summary of the comments received and the department's responses are as follows:

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COMMENT #1: Dr. Larry Nordell, representing the Montana Consumer Counsel, thanked the department for recognizing that a decision not to acquire an equity interest in a generation resource is a resource acquisition decision and incorporating that recognition into the proposed rules.

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RESPONSE: The department acknowledges and thanks Dr. Nordell for his comment.

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COMMENT #2: Dr. Nordell requested that the department include language in ARM 38.5.8221(2)(b) that allowed for an exception to the lower of cost or market test for pre-existing generation resources if it is shown that rate basing of a generation resource, even at a value greater than cost, benefits ratepayers.

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RESPONSE: The department recognizes Dr. Nordell's concern but believes that it has adequate flexibility to address those situations in which a utility proposes acquisition of a pre-existing resource at a price that exceeds the lower of cost or market. The rules in ARM Title 38, chapter 5, subchapter 82 are guidelines. Reasonable reading of the rules would not preclude the department from permitting a deviation from the lower of cost or market standard when there is a demonstration of net benefits to ratepayers from the deviation. To make clear that the department is not bound always to use the lower of cost or market standard, the department has changed the proposed amendment.

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COMMENT #3: Dr. Nordell stated that he believed ARM 38.5.8228(2)(n) is problematic. He described the manner in which NorthWestern Energy's Technical Advisory Committee (TAC) functions and its purpose. He opined that members of the TAC might be reluctant to express their views if they know that their expression may become part of a public record.

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RESPONSE: The department acknowledges Dr. Nordell's concern. The department also recognizes that the TAC has implemented procedures and ground rules that prohibit the utility or any member from disclosing the position and statements of any other member. The department also recognizes that the TAC seldom takes votes of its members to reach a decision. Therefore, the department agrees with Dr. Nordell and has changed the proposed amendment to remove the proposed ARM 38.5.8228(2)(n).

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COMMENT #4: Mr. Don Quander, of Holland & Hart, LLC, representing the Montana Large Customer Group (LCG) requested that the department not amend ARM 38.5.6006 in a manner that would repeal ARM 38.5.6006(6). He wrote, "While not all customers may be interested in the component charges in their bills, many are, and no substantial reason has been presented to deprive those customers of this information." He also asserted that customers must understand the costs included in the bills if future technologies are to enable customers to make intelligent choices.

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RESPONSE: The department agrees with Mr. Quander that many customers are interested in the component charges that appear on their bills. The department is not intending to deprive customers of this information. However, ARM 38.5.6006(6) implemented 69-8-409, MCA which was repealed by Sec. 21, Ch. 491, L 2007. The department no longer possesses specific statutory authority to promulgate ARM 38.5.6006(6). The department believes that it is more appropriate to require billing detail in utility-specific cases and orders. The department declines Mr. Quander's request.

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COMMENT #5: Mr. Quander requested that the department not amend ARM 38.5.8211 in a manner that deletes ARM 38.5.8211(2). He asserted that this section contains a substantive requirement for correct cost allocation and that there is nothing in House Bill 25 that requires or anticipates elimination of a provision that prevents shifting of electric supply costs to transmission and distribution rates. He also stated that the proposed amendment represented a new policy action by the commission and justification required substantial evidence in the record. He represented that LCG was unaware of any evidence that would justify or support such a rule change.

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RESPONSE: The department acknowledges Mr. Quander's comments, but respectfully disagrees with his assertions. Section 69-3-201, MCA, requires the department to regulate utilities in a manner that results in just and reasonable rates. Section 69-8-210(1), MCA requires the department to establish a cost recovery mechanism that allows a utility to fully recover prudently incurred electricity supply costs plus additional costs determined to be reasonable and in the public interest. Therefore, the substantive requirement for correct cost allocation derives from statute, not department administrative rules. The department cannot eliminate the statutory requirements that prevent cost shifting. Rates that included cost shifting would not be just and reasonable. The department is not changing its policy toward correct cost allocation. The department rejects Mr. Quander's request.

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4. The department has amended ARM 38.5.6001, 38.5.6002, 38.5.6004, 38.5.6006, 38.5.6007, 38.5.6008, 38.5.6010, 38.5.8201, 38.5.8202, 38.5.8203, 38.5.8204, 38.5.8209, 38.5.8210, 38.5.8211, 38.5.8213, 38.5.8218, 38.5.8219, 38.5.8220, 38.5.8225, 38.5.8226, 38.5.8227, and 38.5.8229 exactly as proposed.

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5. The department has amended the following rules as proposed with the following changes from the original proposal. New matter to be added is underlined. Matter to be deleted is interlined.

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38.5.8212 RESOURCE ACQUISITION (1) through (1)(c) remain as proposed.

(d) analyze the feasibility and economic costs, risks, and benefits of rate basing versus wholesale alternative electricity supply arrangements;

(e) through (5) remain as proposed.

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38.5.8221 AFFILIATE TRANSACTIONS (1) through (2)(a) remain as proposed.

(b) The burden of proof is on a utility to demonstrate that costs it incurs through any affiliate transactions are just and reasonable and in the public interest and, as such, are recoverable through regulated rates. Since, by definition, such transactions cannot be presumed to be conducted on a truly arm's-length basis, inevitably leaving room for gaming, self dealing, and certain subsidies, the commission will subject these transactions to greater scrutiny to reasonably protect ratepayers served under regulated rates from harm. This higher level of protection is referred to as the "no harm to ratepayer" standard. This standard has evolved over time from long standing regulatory practices and policies that require affiliated transactions to be fair, reasonable, and in the public interest before the associated costs are recoverable through rates. In keeping with the "no harm to ratepayer" standard, the commission generally will judge the reasonableness of affiliate transactions-related costs in relation to the lower of cost or market at the time of contract execution. For purposes of this rule, cost, by definition, is the applicable regulated cost of service structure, including a return on the capital invested, to provide the relevant affiliated services;

(c) through (f) remain as proposed.

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38.5.8228 MINIMUM FILING REQUIREMENTS FOR UTILITY APPLICATIONS FOR APPROVAL OF ELECTRICITY SUPPLY RESOURCES

(1) through (2)(k) remain as proposed.

(l) a complete description of each aspect of the resource for which the utility requests approval; and

(m) testimony and supporting documentation describing all pre-filing communication; and .

(n) testimony and supporting documentation related to any advice received from the utility's stakeholder advisory committee regarding the proposed resource and actions taken or not taken by the utility in response to such advice.

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6. The department has repealed ARM 38.5.8001, 38.5.8002, 38.5.8003, 38.5.8004, 38.5.8005, 38.5.8101, and 38.5.8102 as proposed.

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/s/ Greg Jergeson

Greg Jergeson, Chairman

Public Service Commission

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/s/ Robin A. McHugh

Reviewed by Robin A. McHugh

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Certified to the Secretary of State, March 17, 2008.

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