Summary of February 18, 1998 Meeting

The work group discussed timing of the rate case, pricing for negotiated products, a slice of system product, contract principles, and subscription implementation. About 50 people attended. Next meeting: March 18 -- place to be announced. [Update: The March 18th meeting will be held at the Airport Sheraton in Portland.]

• Openers
• To Bifurcate or Not
• Pricing Negotiated Products
• The Slice Gets Some Attention
• Subscription Principles
• Implementation

OPENERS

Shauna McReynolds of PNUCC distributed a draft outline for a "Federal Power Subscription Compendium," which will document work group activities, and asked people to call in their comments. Consultant Al Wright said it is up in the air whether the Transition Board will meet March 3, and that workshops on transition costs and transmission separation are set for March 10 and 17 in preparation for the March 19 T-Board meeting.

TO BIFURCATE OR NOT

Diane Cherry of BPA reported that a subgroup met twice to discuss BPA's proposal for a bifurcated rate case. [Click on the following dates to see versions of BPA's proposal as of January 30, 1998 and February 10, 1998, that were handed out at this meeting.] Since customers didn't like what was proposed, it was decided the subgroup should lay out issues to be addressed in the rate case at a March 11 meeting, she said. Nancy Parker of BPA said the agency is proposing to hold the power rate case this summer to develop power rates, the power revenue requirement, and a functionalization methodology. The transmission rate case would be held in 2001, she said.

Parker said BPA's proposal assumes the region has reached agreement on transition costs. She indicated parties expressed concern that unexpected costs, not in the power rate case, would show up in the transmission rate case. There was concern about how BPA proposes to determine the functionalization methodology, and that FERC will not approve power rates until it sees transmission rates and can review both under the Federal Power Act, she said. The parties wanted the rate cases combined, or much closer in time, but opinion on when to start the rate case differed, according to Parker. BPA decided after the discussions that staff should propose a new rate case strategy that would further the business interests of its business lines and also work for subscription, she said.

What's your alternative if a stranded cost solution isn't in place? Wright asked. If agreement can't be reached outside the 7(i) process, it probably can't be reached inside it, and we need to address that issue, said Cherry. Should we assume we'll have a power rate case this year? asked a participant. That's still the plan, although we need more discussions, Cherry replied. She said the new proposal would be posted on BPA's website.

PRICING NEGOTIATED PRODUCTS

John Elizalde of BPA said the first proposed pricing principle is that the value of negotiated products is determined by the interrelationships of these variables: term of contract; flexibility of scheduling (dispatchability); duration of purchase; price of capacity; time-differentiated values of energy, such as seasonality and day of the week; and risk or uncertainty involved. The other three principles are:

• Customers who purchase flexibility will use it to their maximum economic (and competitive) advantage if they can.
   
• The market value of the key variables is volatile, ill-defined in 1998, and extremely difficult to estimate eight years in advance.
   
• Customers will have choices and will compare BPA prices with those of competitors and select the best value of products, services and prices, regardless of BPA's pricing methodology.

What are "negotiated products"? he was asked. Any products not sold at posted prices, replied Elizalde. A participant inquired how, under this scenario, revenue in excess of the cost of certain products would be credited back to other products. We will need to determine that, responded Cherry. I don't know to what extent this Work Group has decided how many negotiated products there will be, Elizalde said.

Will you forecast market values and freeze them for setting rates in 2001-2006, or will you plan to adjust as you go along? asked a utility rep. We'll do actual product pricing on as real-time as we can, but for the rate case, we'll have to estimate the revenues we'll get from negotiated products and live with the consequences for the term of the rates, replied Elizalde. Have you determined there's a competitive market for these flexibility products? asked a customer rep. Yes, we've found markets for all of these so far, Elizalde answered.

A customer rep suggested another variable is the business relationship between BPA and a customer. One customer may want a broad-based relationship, while another may want just a product, he said. If this product closes the deal for a customer who wants to put a lot of load on BPA, you may want to think of that as a variable, he stated. Another customer rep suggested giving more thought to control area interaction.

Elizalde explained the "term of contract" variable, which involves the amount of time between when a contract is signed and when deliveries begin. Customers who want to negotiate a lot of flexibility today to be used in 2004 or 2005 will find prices higher than a customer who wants the same flexibility to apply in 1999 or 2001, he said.

What's the short list of new things you've heard today about these principles? a customer rep asked. Concerns about inventory, weekly scheduling, frequency of schedule changes, relationship of product quantity to frequency of schedule changes, and ramp rate, Elizalde said.

Do you know how much of BPA's revenue requirement is tied up in these products? asked a customer rep. No, Elizalde said. BPA is simply telling us "this is the theoretical construct" for how it would approach flexibility products, said another customer rep. The nub of the discussion, he continued, is how many such products there will be, if any.

Are some negotiated products linked to subscription products and some not? asked an agency rep. Customers will decide, replied Elizalde. So there are as few links as possible? Our current product description note our current thinking as to what extent certain products will be linked to the purchase of other products, Berwager said. Does BPA assume the subscription process will satisfy regional preference? asked Wright. Sales of these products will be part of the subscription construct, Elizalde stated. Who has the first option is a different issue from pricing of products, commented a customer rep. There are inventory implications around that, and I assume the implementation construct will address them, said Elizalde.

THE SLICE GETS SOME ATTENTION

A consultant for the Public Generating Pool (PGP) presented a "slice of system" product, defined as "the right to receive a defined (in percentage) share of Federal Columbia River Power System (FCRPS) actual energy generation over time, combined with the right to use the same share of the capabilities of the FCRPS actually available to BPA to modify the rate at which such energy is produced in real time." This is an embedded-cost product where the customer would pay a percentage of BPA's defined revenue requirement which could change over time, he said.

We think this product has to have a minimum term, and that it could start before 2001 if parties agree to terminate existing contracts, he continued. It does not include transmission, he said. Load growth, load variation, and generation reserves are also not part of the product -- they are customer responsibilities, he stated. There would be annual agreement about what the revenue requirement would look like, with "true-up mechanisms" on an annual basis to cover variations in the budget or revenue requirement, he said.

Over the last month, PGP and BPA have worked on questions associated with this product, he explained. Further discussions are open to anyone interested in purchasing this product, he said. We have to address how the slice product fits with the rate case and subscription, he continued. We assume it would be a standard subscription product and are working with an initial term of five years, he said. There will need to be a discussion of the kinds of costs subject to the annual true-up mechanism, what costs would be out of bounds, and what extraordinary conditions would trigger off-ramps, he stated.

"Merrill Schultz and Phil Mesa have solved most of the operational problems," he said. We've discussed such things as who's responsible for reserves, working with Canada, scheduling, and how to share the risk of spill, he noted. We've talked about information transfer issues between customers and BPA, and the concept of a "firewall group," hired by customers to manage confidentiality issues, he said. Legal issues mainly involve how this works with the Northwest Power Act, he noted.

What do you do with "mid-term surprises" that change costs or system capability? asked a customer rep. Until the off-ramp is put in effect, the "slicer" is stuck, in an operations sense, with what happens to the federal system, said Merrill Schultz, a consultant to the PGP.

Angela Wykoff of BPA noted that so far BPA has made no commitment to offer this product, although it did commit to working on it. One of BPA's concerns is whether adding this product to the rate case would substantially lengthen the rate case, she said. If we decide to offer it, according to Wykoff, BPA has to choose from three approaches: accept it as a rate case product; do it after the rate case as a separate 7(i) process; or design a small-scale test pilot to "uncover any problems" with it. It's a totally new way of doing business for BPA, and it has lots of merit, but lots of unknowns, she said. BPA, she added, has heard concerns about: preventing cost shifts among customers who buy this and those who don't; how BPA would cover increased fish costs; and how to deal with "system de-optimization."

Questions. How would a pilot program work? Every major operating agreement started with a one-year agreement through which it was tested, said Phil Mesa of BPA. The slice is a "dramatic new concept," and a pilot would shake down interaction problems between BPA and customers, he said. Sale of a limited quantity in a pilot may not give useful information on the effects on system operations -- were you thinking of a narrow scope or a broad exercise for a short duration? We haven't discussed it yet, was the answer. Since a lot of customers may want to participate, I suggest you limit the duration of the first go-round, rather than the quantity of participants, said a customer rep.

I have an apprehension there could be cost shifts from this, said another customer rep. The question of duration is important -- saying I want the equivalent of ownership of the system for 20 years is different from saying I want five years with an off-ramp if things don't work out well, he stated. The slice "appears to be gaining interest," said another customer rep. My clients have concerns about whether the slice is usable to small utilities without large generating resources, and we hope you'll be flexible in discussing our concerns, he added.

Schultz noted it would be easy for control area utilities to jump on the slice bandwagon, but smaller systems would have to invest in the hardware to enable them to participate. A shorter-term pilot might make it more difficult for smaller systems to be involved, he stated. I see a difficulty in making it any less than a five-year pilot, said a utility rep.

The negotiated contracts BPA favors have more risk to BPA than slice, said a utility rep. With slice, the risk is transferred from BPA to people who buy the slice -- you need to look at it differently, he urged BPA. We made an agreement to try to develop a product that would work, said Syd Berwager of BPA. We're getting to the point where we have to make a decision. The other products we are talking about are fairly traditional, but this is fundamentally different from what we've ever done before, and when we try to merge it with the way we offer other products, there are issues to deal with, he continued. Can you give us a timeframe for when you'll make the decision? he was asked. Within the next month, replied Berwager.

Don't put a "hard and fast deadline" on this product, urged a customer rep. There's a lot of momentum building for it; there needs to be a joint decision on it and on the timing of the rate case, she suggested. One way to explore it further is to start writing a contract, suggested a utility rep. That's premature, said the proposal's presenter. If we go to a slice product, I'll want to talk about its consequences for BPA serving the rest of its load and BPA's need to acquire resources, said a customer rep.

Could "an Enron" come in and say, I want to buy 10 or 20 percent of the system? Yes, assuming it comes in in the right pecking order, said the proposal's presenter. Is the assumption that BPA would be obligated to sell to whomever shows up in the right pecking order, or would it be discretionary? If BPA wanted to ensure a broad customer base, could it? BPA will manage its way through subscription ensuring public and regional preference are implemented, but the details of allocation haven't been worked out, replied the proposal's presenter.

If BPA has a cost item, like conservation, would it go in everyone's rates, but not the slicers'? The slice is "a cost of the system at a point in time," replied the presenter. If certain BPA decisions would be included and others wouldn't, this "raises some caution flags," said a public interest rep.

SUBSCRIPTION PRINCIPLES

Kip Moxness of BPA presented five "subscription principles" to guide contract development, produced by a subgroup. The principles address contract types, power sales, contractual rights to cost-based power, product availability, and load loss. Moxness went over a "few tweaks" that BPA made in this "final form" of the principles. He noted new language stating that option fees, which customers can negotiate bilaterally with BPA to "secure the price at which power may be purchased from BPA in the future," may require a 7(i) rate process. This nine-word parenthetical insertion drew a lot of interest.

It reads like an oxymoron to have bilateral decisions that at the same time are subject to a 7(i) process, said a customer rep. The rates people advised me to give a "heads-up" on this, stated Moxness. If this is a negotiated product, why isn't its price set by the market? asked a utility rep. You can't go to someone else and get BPA requirements service, said Berwager. You could sell it to others, was the response. I'm not sure it's a tradable commodity, replied Berwager.

There's the price of the option, and there's what the option gets you, said a public interest rep. It guarantees you a price in 2007, and that affects other subscribers, he stated. If BPA sells options too low too soon, it will affect others, he said. A way to solve this is to do it in public so other customers can keep cost shifts from happening and BPA "from making stupid deals," he added.

I'm concerned about BPA "squeezing individual prices from different customers," said a utility rep. This is a valuable right, and I'm uncomfortable with individual negotiations -- I want the same product at the same price offered to the same people, he said.

If you want final approval of this today, I want to delete the parenthetical language, said a customer rep, and some others concurred. I'll talk with BPA's rate folks and get back to members of the subgroup, and if we need to pursue this more, I'll let you know, said Moxness.

IMPLEMENTATION

Scott Wilson of BPA distributed the latest draft approach to implementing subscription. When will subscription begin? he was asked. July 1998, and we're saying that's when the rate case starts too, Wilson said. Customers may not want subscription to begin in July -- my clients think you should have a known priced product before you begin negotiations, said a customer rep. I don't think it should be a date certain -- it should be the end of the rate case, and that may be 1998 or 1999, said another customer rep. I suggest BPA keep its power reservation whole until the stranded cost issue is resolved, said a utility rep. What's the timetable to know if WNP-2 will be withdrawn from subscription? asked an agency rep. We'll know before the rate case, said Berwager.

A customer rep said the section dealing with "initial reservation amounts" for power for sale to residential loads not served by public utilities raises "a meaty issue" and needs more discussion. It should include language that says a physical sale of power is contingent on settling the financial transactions, said another customer rep.

Given that the Administration told the region to solve stranded costs before beginning subscription, how is that being worked out? asked an agency rep. We're trying to clarify whether that means no rate case without a stranded cost solution, said Wright. I thought the Administration said resolve the issue, not put a stranded cost mechanism per se in place, said a customer rep. The reference to the mechanism is getting firmer all the time, said Wright. We can't do all this work and then have DOE say, "you're on hold," he added.