BPA's General Principles with Respect to Slice
In order to protect the interests of the region and all of BPA's customers, these general principles must be met.
A proposal for selling a Slice of the system must not:
- Shift risk or costs to other Pacific Northwest purchasers.
- Shift risk or costs to the taxpayer.
- Enable Slice purchasers to avoid current or future costs of fish protection and enhancement.
- Interfere with BPA's system operating decisions.
- Require change in federal law.
Before BPA can reopen Slice discussions, the following threshold requirements would need to be met (specifics taken from pre-March 12 Slice proposal):
- No Cost or Risk Shifts
The proposed Slice would shift costs and risks to non-Slice customers. For a Slice proposal to be viable it would have to remove or compensate for cost shifts such as:
- BPA's prices reflect hourly and seasonal variation in costs and purchasers attempt to minimize their power costs from BPA. Customers with generating resources do so by using their own resources to serve loads and purchase as little as possible when BPA's costs and prices are higher. Historically, PGP utility purchases from BPA illustrate that fact; their purchases have been weighted to lower-priced off-peak periods.
Slice creates a situation where purchasers with generating resources are enabled and encouraged to maximize their demand on FCRPS resources during periods of greatest value (peak hours). This exacerbates the demand on FCRPS resources during peak hours and increases the likelihood that BPA will have to purchase power and incur costs to meet other customers' loads.
The Slice proposal would exempt Slice purchasers from power purchase costs. Consequently, the cost of purchasing power to meet FCRPS demand that occurs during peak hours would get passed on to other customers.
- The Slice proposal to date specifically excluded certain costs that BPA is obligated to continue funding, potentially including Residential Exchange and new renewable resources, and other costs such as General Transfer Agreements (GTA) that may need to be funded through power rates. This shifts the burden of those costs to the non-Slice customers. PGP's March 13 letter appears to change this position.
- Slice would require BPA to provide market-sensitive information to Slice purchasers, driving down the revenues BPA is likely to receive from its short-term marketing, and driving up the costs BPA must recover from other customers.
- To the extent that Slice would increase prices of other BPA power products, it heightens BPA's risk of not making Treasury payments, unless BPA can recover these costs from other customers.
- Section 7(g) of the Northwest Power Act requires that the Administrator equitably allocate to power rates the following non-exclusive list of costs: conservation, fish and wildlife, uncontrollable events, reserves, excess costs of experimental resources, billing credits, operating services and the ability or inability to sell excess power. To the extent these costs, or any other costs (such as residential exchange costs, purchase power costs, etc.), were previously allocated to PF customers, and the Slice purchasers argue that the costs are not applicable to the Slice, there will be a cost shift. This is because the costs that were previously paid by the entire PF rate class (including the current Slice purchasers) would now be paid by a smaller PF rate class (PF purchasers less the Slice purchasers) thereby increasing the rate for the remaining PF purchasers.
Further, the Slice proposal will affect the calculation of BPA's rates. Under Slice, purchasers receive part of the federal system output; firm power, surplus firm power, and nonfirm, if any. They pay a part of BPA's revenue requirement, minus some specific costs, for example, costs associated with power marketing and some new expenditures. In order for the rate directives to work, the Slice load must be defined as PF load and all the costs of the resources allocated to serve that load (including exchange resource costs) must be paid by the Slice purchasers. The specific costs associated with, for example, power marketing and some new expenditures, however, would be reallocated to non-Slice firm power, including non-Slice PF, IP and FPS loads. This reallocation of costs away from the Slice purchasers will result in different outcomes of the IP-PF link calculation, the DSI floor rate test, and the 7(b)(2) rate test than if the original Slice reallocation of costs had not occurred. Simply put, different starting points result in different outcomes. These different outcomes shift costs between rate classes.
If some time in the future the federal hydro system becomes more valuable in relation to the west coast power market, the full benefit of market based sales will not go to the regional ratepayers. This is because the Slice purchasers will have internalized some of the benefits at the cost of production. Rates to non-Slice purchasers will be higher than they would have been otherwise. These different outcomes shift costs between rate classes.
- BPA's power products recover costs of the system that are related to BPA's public purposes such as conservation, renewable resources, residential exchange and GTA costs. A viable Slice arrangement would need to recover these costs, as well. If not, the burden would shift not only to other customers, but to the taxpayers as well.
- No Off-Ramps
The Slice proposal would protect Slice purchasers, via "off ramps", from costs and risks of changes in system capability. BPA passes the cost of capability reductions directly to its customers. Shielding one customer group from these costs would heavily burden the remainder. For a Slice proposal to be viable, these off-ramps would have to be eliminated.
Proposed off-ramps were for significant increases in per-unit costs of power caused by events, such as:
- Breach of dams (e.g., the four lower Snake river projects) resulting in lost power production;
- Federally mandated draw-down of certain reservoirs that result in much loss of generating capability;
- Unspecified increases in BPA's costs beyond a threshold.
- No Operational Interference
The Slice proposal provided for after-the-fact dispute resolution or other remedies of differences over BPA operating decisions. A viable Slice proposal cannot interfere with BPA operating decisions.
- No Change in Law
It appears likely that legislation would be required to implement the Slice proposal. A viable Slice proposal would have to describe a relationship that would avoid these pitfalls and not require legislation. Examples demonstrating the need for legislation:
- The Northwest Power Act defines "requirements" as a load-based service from BPA. Slice was presented as a "requirements" service but Slice entitlements would be resource-based and not related to any load of a customer. Thus, Slice does not fit section 5(b)(1) authorization and is potentially inconsistent. Slice also does not fit within a surplus power sale under section 5(f) since such sales are "as available" and the Slice proposal seeks to make a percentage share of the system available to the purchaser at all times regardless of what BPA's other load service obligations are.
- Section 9(c) of the Northwest Power Act and section 3(d) of the Northwest Preference Act require BPA to reduce its obligation to a customer that sells hydro resources out of region or resources which are firm resources dedicated to serve the customer's regional firm power loads. Slice as a continuous percentage sale of FBS resource capability does not allow BPA to comply with this obligation.
- Slice is a percentage share of the Federal Base System (FBS) resource for the exclusive use of the purchaser and cannot be used to serve other obligations of BPA. As a sale for general requirements BPA would have to offer the Slice to IOUs and preference customers. Slice as a FBS capability purchase reduces BPA's ability to avoid insufficiency in meeting is total firm load contractual obligations. It prevents BPA from using that portion of FBS sold as Slice to meet all of BPA's preference customer regional retail load. BPA could not comply with the directive to use all the FBS to meet preference customer loads as directed by section 5(b)(5). Slice sold exclusively to one customer also prevents BPA from allocating the FBS only to preference customers in accordance with section 5(b)(6) in the event of insufficiency. BPA could not reduce the "Slice" purchased by the customer and reallocate it to other customers.
- Slice is a sale of a percentage share of FBS resource capability and BPA is not currently authorized to sell such capability. The Northwest Power Act authorizes BPA to sell electric power and defines electric power as electric peaking capacity, electric energy, or both. BPA sells power which is made available to BPA from the Corps and Bureau after meeting project needs, and the sale of capability would be a contract right to take and use the resource based on percentage of FBS and not a megawatthour or megawatt contract obligation. Slice does not meet the statutory purpose of making the most efficient use of the federal system to meet firm load obligations and may reduce overall efficiency of the FBS during a time when BPA's ability to meet its obligations from the FBS is shrinking.
(Note: Although there are likely to be additional legal issues, these have not been fleshed out. Legal investigation was postponed by mutual consent in order to concentrate on defining and resolving potential technical issues. Legal work was to follow if technical issues seemed capable of resolution.)
Information provided by: Angela Wykoff, BPA Power Business.
Web page posted on March 23, 1998.