Summary of December 3, 1997 Meeting

The Federal Power Subscription Work Group talked about product pricing and how BPA might manage subscription sales. About 30 people attended. Next meeting: December 17 at the Rates Hearing Room in Portland.

• 1998 Schedule
• Reports from Spokane
• Poking into the Umbrella's Price Algorithm
• How to Manage the Open Window
• Up Next

1998 SCHEDULE

Dick Adams, executive director of PNUCC, distributed a draft 1998 meeting schedule. The group decided to meet all day on the third Wednesday of each month and to reserve the first Wednesday for subgroup meetings or workshops on specific issues. [See the latest version of the 1998 schedule for Work Group meetings.]

REPORTS FROM SPOKANE

Adams said he had been "pleased and surprised" at the participation at the public meeting on subscription in Spokane November 25. Carolyn Whitney of BPA said over 50 people attended, including BPA customers, tribal representatives, and representatives of state and local governments. I was impressed by the level of interest and the good questions, she said, noting that BPA will post a summary of the meeting on the Internet.

What were the three main points you got from the meeting? she was asked. Customers emphasized the importance of preference, and asked how they can be assured BPA will stick to the price it starts with over the long term, given uncertain future costs, Whitney replied. There were questions about how much flexibility BPA will have, and whether BPA could be as flexible as we are trying to design it to be in this process, stated Syd Berwager of BPA.

I was amazed at the level of interest, said consultant Al Wright. Customers understand there are long-term benefits, but it's hard for them to sell the idea that they have to pay more now to keep the benefits in the future, he stated. It was also evident customers are used to thinking of the traditional roles of BPA customers and preference, and they may not favor some things this group has talked about that move away from that, Wright said. He urged BPA to have more public meetings. "There's a lot of people who don't know what you're doing in this room," Wright stated. Whitney said BPA is looking into additional meetings, and Berwager said BPA will gladly meet with anyone who wants more information on subscription.

F&W Workshop. A customer representative reported on the workshop on future fish and wildlife funding held November 17 and 18. Right now, "it's a jump ball," as to which group gets the future fish cost issue, he said. The three sovereigns want it, and the Fish Four of the Northwest Power Planning Council do too, he stated. When the subject lands, the federal family will begin to come up with a plan, and we ought to track it, he continued. Another meeting will be held December 12 at the Council's office, he said.

POKING INTO THE UMBRELLA'S PRICE ALGORITHM

A customer representative presented a proposed price algorithm for the umbrella agreement. It is designed to provide cost-based price assurance over the long run for products purchased under subsidiary agreements, he said. In order for the umbrella concept to work, customers need assurance about costs that will and will not be included in their rates, he stated.

The proposal describes how BPA would establish its power costs and revenue requirement and indicates when customers could invoke binding arbitration. "The assignment of costs to products sold under subsidiary agreements would be determined by prevailing industry standard cost allocation methods while also reflecting Northwest decisionmaking," the proposal states. It assumes BPA's reserve balance would be capped, and that stranded costs would be dealt with in another forum.

BPA staff said they helped develop the proposal, but that the agency does not agree with everything in it. There are "a host of issues buried in here for BPA," for example, the authority of an arbitrator versus the Administrator to make decisions, said Berwager. Questions and comments included:

• If the revenue requirement exceeds forecasts, how would the customer "offramp" work?
   
• What would be the standard for a decision in the arbitration?
   
• Prevailing industry standards are "out the window" in today's marketplace. The standard cost allocation will cause the "gaming" we've seen in the rate case. A market approach would be more definitive and prevent gaming and "cherrypicking."
   
• If the market were used for indexing, wouldn't it be a pretty short-term indexing alternative? Would that work for a five-year period?
   
• You could set all the prices at market, and if the revenue requirement is lower than expected, you could credit people back at equal percentages. This pricing algorithm is "the benefit people sign up for" -- if it is vague, you won't get them to sign up.
   
• How does this balance customer protection against the Administrator's discretion to include reasonable and prudent costs in rates? BPA is liable to have capital cost "spikes and valleys," and it's not clear how to deal with them, except to leave BPA flexibility, which probably defeats the purpose of this proposal. There's an authority issue here "that circles around the Administrator's exercise of discretion in setting and recouping costs," said a BPA staffer. The question is, to what extent can you turn over those decisions to an arbitrator, who is a non-federal official? he said.
   
• The solution may be that it's not what the Administrator has the discretion to do, but what recourse a customer has. The solution may lie in fashioning the remedies.
   
• This proposal represents a direction we have to go in -- to understand what customers are paying for and to make subscription work. There are similarities with the Mid-Columbia contracts, in which purchasers have a right to review and debate costs and take them to arbitration. But if FERC imposes fish costs, the purchasers are on the hook to pay them.
   
• Suppose a powerhouse sustains costly damage, and 60 percent of the publics want it replaced, and 40 percent don't. If the repairs are made, can the 40 percent take it to arbitration? That would mean you've "broken through the barrier," binding arbitration would be invoked, and you would work through the issue, was the response. Parties to the Mid-Columbia contracts debate those kinds of situations all the time, commented an individual.
   
• The umbrella agreement should have a revenue requirement cap to ensure that customers don't end up paying "cost-plus," in the event of undersubscription.
   
• BPA should have an incentive to beat its five-year rate; for example, it could get an increase in reserves if it does so. "Bonuses," a participant suggested.
   
• Subscription is the notion that customers will pay a premium up front to get long-term benefits. You have to define the benefits to make them worth anything. The ability for customers to bail out isn't an adequate remedy. To have subscription, we have to make something like this work.

The group agreed more work should be done on the proposal and applauded its author.

HOW TO MANAGE THE OPEN WINDOW

Adams said the draft approach to implementation calls for a rate case next summer, followed by a two-year window, "in which BPA is open for business." A key question, he said, is how BPA will manage the priorities of providing power to public and regional customers. Scott Wilson of BPA said the agency's proposed options for "managing the window" assume, for illustrative purposes, a "subscription" amount of 8,000 average megawatts (aMW), and different load amounts in accord with the phases recommended in the Regional Review. These are: Phase 1 (publics and federal load at BPA cost-based rates), 4,500 aMW; Phase 2 (3,500 active exchange load, 2,000 DSI load at cost-based rates) 5,500 aMW; Phase 3 (all remaining regional load) 12,500 aMW; and Phase 4 (extraregional loads). BPA has posed three options, he said:

• Option 1: Limited Reservation Approach. BPA would reserve some amount of power for Phase 1 and Phase 2 customers. The amount of power reserved would decline as subscription progresses. Reservation amounts would be reduced if sales exceed expectations or, to the extent sales lag behind, unsold power would be made available to other purchasers. The rest of the subscription power would be sold to whomever will purchase it at cost-based rates. BPA would initially allow sales of up to 1,000 aMW to extraregional parties and might increase that as it reviews the success of subscription.
   
• Option 2: BPA Exercises Discretion. BPA would sign a contract with anyone in Phases 1, 2, or 3 that wants to commit to rates that cover BPA's costs. "Once the amount available for subscription is sold, rates for additional requests would be at the market price BPA would pay to acquire that power." BPA would initially allow sales up to 2,000 aMW (including the 1,000 aMW of secondary energy identified in the FPS rate settlement) to extraregional parties and might increase that as it reviews the success of subscription. Under this approach, BPA would use existing deal-specific notice policies.
   
• Option 3: Open Sales with "Triggered" Progress Reports. BPA would establish "trigger" amounts and provide public notice when sales reached a level that resulted in only the "triggered" amounts of energy left for Phase 1 and Phase 2 sales.if sales don't add up to expectations, making the power available to each class of customers in the phases identified in the Regional Review. Questions and comments about the options included:
   
  • How does the list of subscription and non-subscription products relate to these options?
     
  • Suppose in 1998, a preference customer wants to buy its full load, and BPA's cost-based rate is 20 mills. The customer says Enron will sell at 18; can BPA offer 19 mills? The mechanics of this proposal won't aren't intended to prohibit negotiated price sales to preference customers, Wilson said. The question is, how likely are we to cover our costs if we start selling significant amounts of power below cost at the beginning? stated Berwager. But this says you will not make market-based sales until October 2000, a participant said. We will do all we can to sell power at cost-based rates, and in the beginning, cost-based sales to Phase 1 and 2 customers are the first priority, replied Berwager.
     
  • The people in Spokane last week were confused about how this arrangement will work. If a preference customer wants to wait, will BPA guarantee the power will be available in the future? I said in Spokane that the subscription window closes slowly, and that the customer may have to pay the PF'' rate, stated Berwager.
     
  • If a Phase 1 customer waits and then comes back and requests power and is told, "you're the 8,001 aMW sale," what would happen? You wouldn't receive subscription rights -- the 8,000 aMW subscription amount would be gone, replied Wilson.
     
  • If there is a restructuring bill in a state legislature, and people want to stay on the sidelines until it is resolved, will you continue to reserve power in light of that? We will adapt the plan so it makes sense, said Wilson.
     
  • You should import into Option 1 the flexibility to change what you will sell depending on events and new information.
     
  • Option 2 should only allow initial sales of 1,000 aMW to extraregional parties.
     
  • Option 2 is inconsistent with preference and the Regional Review's phasing approach.
     
  • Rather than tell preference customers what's available, BPA should ask what they want.
     
  • BPA should clarify whether historical purchases of preference customers affect or limit their subscription purchases.
     
  • If you start with historical purchases to determine the amount of power to reserve for preference customers, but then get newer and better information from customers, you should change your numbers. If Seattle City Light says it wants to buy 300 aMW at cost and will sign the first year, you should include that in the power you reserve for preference customers, regardless of what Seattle bought in the past. Base the reservation amount on what customers tell you they are going to buy. The notion of phases shouldn't stand between you and consummating at-cost transactions with customers who have said they want to buy.
     
  • If you start assigning amounts of power to individual customers, there'll be problems.
     
  • Option 2 is preferable because it treats the whole region as a block.
     
  • I'm concerned about having long reservations when other customers are willing to buy at cost. If there are competing claims to power, there are laws -- the publics and in-region first. You should open it up, and if the publics want it, they should buy it.
     
  • If we're going to throw out the Regional Review's recommendations, we should do it in front of the Transition Board. If we do, we should address why exchange customers have to share the allocation with the DSIs, who signed a stranded cost shield in their contracts. If Seattle wants to buy more than its historic purchases, it is a Phase 3 customer. I don't want residential customers to suffer if Seattle wants to buy 1,000 aMW. Would allowing Phase 3 customers to buy in the first year violate the Regional Review? asked Berwager. If we think we'll sell all 8,000 aMW in the first year, "we've inhaled," he said, so I don't think allowing some Phase 3 loads to buy in the first year would create a problem.
     
  • Let's not fight in front of the Transition Board. Let's try it, and we'll find that it will turn out not to be that different from what was envisioned in the Review.
     
  • I'm concerned about the bluntness and frequency with which BPA is suggesting it is going to acquire new resources. If you have bilateral contracts, you don't need PF''.
     
  • Why not combine the options? Option 1 sets the "stair step" of reserved power, Option 2 provides flexibility, and Option 3 requires BPA to provide notice. Clearly, some people are going to wait, but you can't have it both ways. If BPA puts out notices, everyone will know how much power remains and that they could lose the right to cost-based power.
     
  • What the Regional Review did with phasing is "not completely irrelevant." But if you decide to let some Phase 3 loads go early, it has to be all Phase 3 loads. If we open up to Phase 3 loads, and get a preference customer request, we'll meet the preference request first, said a BPA staffer. Maybe we could say, we'll set aside power for any Phase 3 load that wants to buy in year one, suggested Berwager.
     

UP NEXT

A subgroup will work more on the "open window" proposal at a Dec. 12 session, and BPA will bring a new version to the next meeting. BPA will distribute a report on two subgroup meetings that have been held on standard power product descriptions.