Summary of May 12, 1998 Meeting

The work group considered BPA's newest power inventory numbers, discussed recall rights and load growth issues, and sweated the schedule for getting its work done by the end of June. About 40 people attended.
Next meetings: May 27 and 28.

• A New Game Plan Raises Questions
• A Look at BPA's Power Inventory
• Recall Rights and Long-Term Subscription
• Debate on Load Issues Gets Under Way

A NEW GAME PLAN RAISES QUESTIONS

Dick Adams of PNUCC presented a new meeting schedule, which he said is "our attempt to show how we get from now to being done." The schedule indicates which agenda items will be "finalized" at which meetings between now and June 17, proposed as the group's last meeting. Success may be that you feel you've gotten answers on various topics, you understand the path BPA is headed down for subscription, and possibly even you agree on some things, Adams said. "Done" may mean we've framed the controversy, and that's it, commented a participant. Trying to "finalize" some of these issues that we've hardly discussed comes as a bit of a surprise, said a customer representative. Others asked for more clarification of the disposal of issues between the subscription group and the rate case.

What are the mechanics of the subscription window opening? asked a customer rep. It means that customers who want to sign up with BPA can notify their account executive -- "that will be the road into BPA," replied Syd Berwager of BPA. We won't have specific prices -- we'll probably say you will pay the PF or IP rate coming out of the rate case, and we'll try to have terms that reflect what this group has discussed, he said. Subscription will start July 1, and BPA will be open to do business with customers who want to fill up their post-2001 portfolio, Berwager continued. Our intention is to limit the amount of inventory we sell, but that could change, depending on what customers think, he added.

The notion of ending this group's work without knowing what subscription contracts will contain is inappropriate, said a utility rep. That gives no assurance that all customers will be bearing the same risks, and that's a key concern, she added.

Does this schedule indicate we will revisit the implementation plan we thought was pretty well set? asked an agency rep. Yes, two things have happened -- BPA's price now looks lower than the market, and we have revised our inventory numbers, replied Berwager. We need to test those developments against the implementation plan, he said.

I'm concerned about having the subscription process get under way, given the number of outstanding issues still unresolved, said a customer rep. Potential exchange customers also have concerns if we are dealing with a more attractively priced product, less of it, and the potential need to allocate that product, said a public interest rep. You need to leave room in the subscription window for potential exchange customers, he urged.

How would the pre-rate case subscription contracts be structured? asked an IOU rep. We are thinking of using the PF and IP rates for subscription contracts, with some kind of conservative rate test in them, replied Berwager. Would you negotiate with each customer or have standards? asked another IOU rep. My thought is the price would be standard, responded Berwager.

If you mean by "rate test" an exit clause, that seems inconsistent with the position that customers "can't take a second bite of the apple," said a customer rep. The alternative is to say the PF and IP rates are what they are, but my guess is customers won't want to take that kind of risk, Berwager stated. Why would you give customers an out? asked a participant. Customers have said they would like a ceiling, replied Berwager. You could price it as a "put" option, said a customer rep. We're trying to do business in a market-based environment, yet we are in a zero-sum game, commented an IOU rep. If BPA gives all the benefits away, I'm affected, he said. If we don't get some organization to what's going on here, none of us will be confident that "the other guy isn't getting a sweetheart deal" and soon "this will all unravel," he said. We have to understand where the risks are being shifted among us, he added.

Is there a consensus in the group that if BPA does pre-rate case contracts they should not contain a rate test? asked Berwager. BPA will set the rate at a level that gives them some head room, commented a participant, adding if it's 1 mill higher than what you anticipate your costs will be, it would be okay. The purpose of the rate test is "to prevent you from buying a pig in a poke," said an IOU rep. If BPA's price is above market, as long as BPA is meeting the rate test, a customer would have to stay, noted Berwager. I'm not sure there is consensus in this group, he added.

We need more time on the schedule to talk about contract provisions, said several participants. And we need to wrestle the implementation issue to the ground, stated a utility rep. Adams said he would prepare information on implementation and mail it out before the next meeting to help shape the discussion. Tell us where the group got to before, and what's changed, urged a public power rep. Given the number of unresolved issues I've heard about today, BPA should revisit the question, is it realistic to tell subscribers they can talk contracts July 1? said consultant Al Wright.

A LOOK AT BPA'S POWER INVENTORY

Berwager presented the numbers on "resources, sales, and inventory," which he called "our latest thinking" for the FY 2002-2006 period. Our estimate is that BPA will have gross firm resources under critical water of 7,818 average megawatts (aMW), he said, noting that an earlier estimate was 8,300 aMW. He noted that the figures are five-year average numbers. What's causing the change? asked a participant. Spill has greatly increased due to the 1995 Biological Opinion and the steelhead Biological Opinion, and about 500 aMW of energy have been lost compared to the 1996 rate case, said a BPA staffer. Of the 7,818, 1,507 aMW has been obligated to loads not eligible for subscription, such as Treaty obligations, Berwager explained. That leaves 6,311 aMW of inventory available for subscription, he said.

Berwager said the agency's estimates show a "secondary inventory" of 2,115 aMW. This is what was traditionally called nonfirm energy, he noted, pointing out that BPA has talked about firming up some of this resource so it could be used for subscription. Of the 6,311 aMW inventory for subscription, BPA has signed up 804 aMW in subscription-eligible firm contracts to regional preference customers, including the Hungry Horse sale, Berwager continued. In addition, the PGE residential exchange settlement makes 360 aMW available for PGE purchase, he noted, adding that that agreement is now out for comment. So of the 6,311 aMW, 1,164 aMW has been negotiated and 804 aMW sold, Berwager summed up.

Of the 804 aMW, how much does BPA assume counts against the 4,500 aMW reserved for preference customers for subscription? asked a public interest rep. It's close to 100 percent, replied Berwager.

Loads by Phases. Berwager went over figures showing loads categorized into the phases laid out in the Regional Review. Phase I, he said, totals 4,290 aMW and includes PF purchases by preference customers and FPS deals priced at PF. Phase II includes exchange and DSI loads totaling 5,410 aMW, and Phases I and II total 9,700 aMW. Phase III includes about 3,700 aMW of preference customer load, about 1,500 aMW of DSI load, and about 7,200 aMW of IOU load, he said. The total load in the region is estimated at 22,100 aMW, with 6,311 aMW available to sell for subscription, Berwager said. A public power rep questioned the basis for deriving the 4,290 aMW of eligible preference customer load, which the graphic showed as the "highest of two-year average purchases from BPA FY 97-01," and including "PF-equivalent long-term FPS." That's inconsistent with the implementation approach this group agreed to, and we'll need to talk about that, she said. Is the assumption that BPA will meet the 3,370 aMW load for the exchange in Phase II by contract, as opposed to exchange? a participant asked. The Regional Review thought we would make sales, replied Berwager, but he added that there is 9,700 aMW of load and only 6,311 aMW available in inventory.

What's the conclusion you draw from this? asked a participant. That we have work to do, replied Berwager. I think it says BPA has 500 fewer megawatts to sell, but it has the same fixed costs and fewer megawatt-hours to spread it over, commented a customer rep.

Questions were raised about the 2,290 aMW identified for Phase III loads currently served by 5(b)(1)(B) resources and the 1,410 aMW identified for Phase III loads currently served by 5(b)(1)(A) resources. When we talk about standard contract provisions at the next meeting, I want to flag that it's unclear what notice provisions and resource exhibits will be in the contracts, said a customer rep. We have to talk about whether BPA is in the resource acquisition business or not and the extent to which customers plan to use the resources they have, said a BPA staffer. Does this discussion mean that 1,000 MW might move from Phase III to Phase I? a participant asked. It's a legal issue, an IOU attorney responded.

A public interest rep raised the issue of whether BPA would firm nonfirm "as an agency exercise" to increase the inventory of firm power or whether BPA "would stick with the Regional Review characterization" and do this only if a customer wants BPA to act on its behalf to firm a resource. It's an important distinction in BPA's role, he stated. As part of the residential exchange discussion, BPA has analyzed firming some of our nonfirm, and we are open to that idea in order to make some additional inventory available to meet parties' needs, Berwager said. How would you wrap it into the inventory and price it? he was asked. It brings up resource acquisition and risk shifting issues, a customer rep stated. We'll discuss resource acquisition policy May 27, Adams said. Let's discuss that before we revisit the implementation and inventory issues, urged a customer rep. Have we evolved to this contradiction with the Regional Review -- that exchange loads can't be met without resource acquisition? inquired an agency rep. That's not necessarily true, responded an IOU attorney.

Adams recapped the topics the group identified to be put on the schedule for follow-up at the next meetings: 1) subscription sales that occur before the rate case; 2) 5(b)(1)(B) resources and load implications; 3) contract provisions, including options for getting in and out; and 4) firming nonfirm and how those costs are treated. We've operated on one contractual framework for the past 17 or 18 years, and we need to decide what the framework is going to be for the next five years, commented a customer rep.

RECALL RIGHTS AND LONG-TERM SUBSCRIPTION

Berwager explained that the Regional Review recommended BPA offer regional customers contracts of up to 20 years to lock in the benefits of BPA's power for those willing to make a long-term commitment, and the review said the price should be the same for all regional customers making such purchases. BPA would like to explore how to offer up to 20-year sales to anyone willing to take on a subscription obligation, he said. The principle is that those who take near-term risks and help BPA cover its costs in the initial period should have the opportunity to garner the benefits in the long run, Berwager stated. The fact that BPA's inventory may be limited raises issues of priority of service, firmness of BPA sales, and whether some sales would be subject to recall, he said. Recall would damage a customer's assurance it would receive long-term benefits, Berwager added. BPA's ability to recall power depends on the class of purchaser and type of power sale, he said. The issue is to look at how to "tweak" FPS contracts to make the Regional Review's recommendations work, Berwager stated.

Scott Wilson of BPA said the agency could implement subscription by signing three types of long-term contracts that would not be subject to recall: public utilities purchasing requirements service at PF rates or surplus power service under applicable rate schedules; in lieu power purchased by IOUs or public utilities under the residential exchange at the PF exchange rate; and DSIs purchasing at the IP rate if BPA has enough power available. BPA may sell power not needed to meet obligations under these categories as surplus power or Excess Federal Power (EFP) using a surplus power rate schedule, he noted. Wilson identified four circumstances that would call for use of the surplus power rate schedule (FPS) to achieve the goals of the Regional Review: load loss; to achieve PF rate price equivalence; if it is the "only way to access BPA power," for example, an aggregator for regional load may not be eligible to buy under a PF or IP rate schedule; and if a customer's business interests require more flexibility than is offered through the PF rate schedule.

Wilson described five options for BPA to be able to make 20-year sales when customers are ineligible for the PF, PF exchange, or IP rates:

1. Don't make 20-year sales for these loads -- "the status quo."
    
2. The "7,7,6 option," which would include notice not only of the first seven years of a sale, but also notice of a follow-on sale for seven years, followed by a sale for six years. Once the sale was made, the contract would essentially be for a 20-year duration, and no further notices would be required.
    
3. "Partner with or create new publics."
    
4. An "indemnification clause," so recall provisions in subscription contracts would include an obligation for BPA to indemnify a customer if BPA exercises recall provisions.
    
5. Recall limitation, in which regional parties reach an agreement that no recall would apply as long as the customer serves the subscription load for which the contract was signed.

Has BPA ever made an in lieu sale? Wilson was asked. No, BPA staff replied. BPA can't do the third option -- why is that in there? a customer rep asked. If an aggregator wanted to purchase from BPA, BPA might suggest it approach a public utility and put something together, Wilson replied. In Washington, there is a lot of interest in aggregation of the public sector load, particularly with cities, noted an agency rep. It may mean new kinds of entities could be formed, noted another agency rep.

BPA can't offer prices beyond five years -- are you saying there would be firm prices into the future to non-preference customers? asked a utility rep. We're looking at ways to make FPS contracts similar to PF contracts in terms of the assurance the supply will be there, replied Berwager. Why? he was asked. The problem is that IOU customers don't have long-term access without some solution like this, said an agency rep. The mechanism is an in lieu purchase, noted a BPA staffer, and a discussion of the ground rules for in lieu transactions ensued.

A utility rep asked about the statutory basis for the 7,7,6 option and whether the assumption is that the ability to recall starts when deliveries begin or at the signing of the contract. It is an idea on the table, responded a BPA attorney. The construct is based on EFP legislation, which says deliveries are firm for seven years, and power is not recallable during that time, he said. I'm confused "why this contortion," said a utility rep.

A customer rep asked why option #4 doesn't give BPA all the flexibility it needs. Can we boil all this down to the fact that the status quo gives you the flexibility to make the sales and that #4 is just part of the status quo? he asked. I see it as a natural complement to the PF' and PF" concept, said Berwager. The cost shift flows to the person who comes to BPA and makes the request that forces BPA into recall mode, and cost flows back to the party paying the PF" rate, he said. A public power rep questioned attaching a dollar value to recall in light of BPA's statutory obligation to serve the requirements load of preference customers. You would be penalizing one set of customers for load variations and "rewarding" the IOU load if you have to exercise BPA's statutory recall right, and the indemnification would come from the publics' side of the ledger, she stated. There's a potential for an inequitable result, she added.

As a practical matter, wouldn't it be that if a public asks, BPA would not recall the power, but would continue to sustain the load and acquire resources, and then the question is cost, said a customer rep. You need to pass along the costs to the party making the recall request, said an agency rep. Publics don't make recall requests -- they request service from BPA, and the only issue is pricing at a melded rate or a marginal rate, the customer rep responded. If price is an issue, the indemnification clause exacerbates it, said a public power rep. In a market, there isn't a shortage -- it's all about price, said an IOU rep. There will always be power -- the critical thing is making PF' and PF" work, he added.

Option #6. A public power rep suggested another option: if recall is imminent, BPA could release customers from their take-or-pay obligations and see how much load is freed up. The 7,7,6 option doesn't have much prospect because preference customers won't waive their rights, Wright observed. It's "too cute" to be sustainable, said a customer rep. Option #3 doesn't belong on BPA's list, and as a practical matter, you might as well scratch #5, he continued. That leaves you with #4, which you should flesh out more, and option #6 is "a creative suggestion," he stated. Wilson said he would flesh out those options, and the group was instructed to bring back any other ideas on the subject to the next meeting.

DEBATE ON LOAD ISSUES GETS UNDER WAY

Garry Thompson of BPA said the load issues discussion involves load growth, load loss, and retail access load gain and loss. He described two load growth options. The first would be for BPA to cover load growth for full service customers only. This option meets the Regional Review's recommendations and has the least risk and cost to BPA, but comparability is a problem, he said. Thompson stated that BPA estimates this would require about 5 MW a year.

Under the second option, BPA would cover some amount of load growth for full and partial service customers, he explained. We could say we would cover 1 percent of load growth at the PF rate for these customers, and we estimate it would require 45 MW a year, or 225 MW over a five-year period, Thompson said. There would be comparability, but it increases the risks to BPA, he noted. This option exceeds the Regional Review's recommendations and raises the question of do we firm up nonfirm to get to 225 MW, or do we go out and acquire the power, which is contrary to the Regional Review, Thompson said.

A utility rep suggested BPA "forget about option #2." You should meet all load growth of full requirements customers -- full service means you meet load growth, he said. Some partial service customers may want BPA to meet load growth, but BPA is supposed to be out of that business, he stated. I assume BPA will subscribe in 2001 and will need to acquire resources to meet the load growth of full service customers, he added. There shouldn't be a distinction between partial and full service customers for load growth, said a public power rep. We could have a PF rate that includes load growth and one that does not, said Thompson. There isn't a statutory basis to distinguish between prices to meet the loads of preference customers -- if there is, you're talking about tiered rates, said a public power rep. BPA has the obligation to meet load growth, and we reached the principle a year ago that pricing should follow the benefits, she said. In the past, if you have a statutory right to preference power, BPA didn't charge extra for load growth, she continued, adding that forecasted load growth is part of the rate. That sounds like getting BPA back into the resource acquisition business, said a utility rep. BPA's obligation to serve is not consistent with bilateral arrangements for load growth, she responded, adding BPA has the obligation to meet the requirements load of the publics, and the statute doesn't distinguish between load and load growth.

If comparability is a problem, I'd support a proposal where full service customers have bilateral contracts -- that's preferable to the other options, said a utility rep. If prices are volatile, there may need to be "a separate, staple-on load growth rate" for every customer depending on when it signs up, said a utility rep, comparing it to different mortgage rates that depend upon when you sign up.

A public interest rep urged BPA not to set aside power to meet future load growth now. An agency rep asked how the needs of small, full requirements utilities experiencing little growth would get treated. Option #1 says take care of the full service folks -- that's the Regional Review, but the second option says, let's forget about the past and get BPA back into the resource business and grow the system, and "here we go again," said an IOU rep. A public interest rep said the issue should be treated in conformance with the Regional Review's recommendations and that load growth coverage should be written in as a contract provision for customers in Option #2.

The group was anxious to continue discussion of this topic at the next meeting and to get into other load issues, such as load loss, retail access, and load gain. Thompson urged people to give some thought to firming nonfirm for the load growth options. It was agreed load issues would be taken up on May 27; Adams noted it would probably be an all-day meeting.