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Federal Power Subscription Work Group
Sponsored by:
Bonneville Power Administration (BPA)
Pacific Northwest Utilities Conference Committee (PNUCC)

Summary of May 7, 1997 Meeting

Portland Airport Sheraton
 

The Federal Power Subscription Work Group reviewed a summary of business interests and discussed a proposal for structuring federal power contracts. About 40 people were present. The next meeting will be May 21 at the Airport Sheraton Hotel in Portland.

Index (click item to move to topic)

KICKOFF

Dick Adams, Executive Director of PNUCC, opened the meeting. He noted that because of the abbreviated agenda he agreed with several members' suggestion that the group adjourn at noon.

 

BRIEFLY ON THE BRIEFING

Carolyn Whitney of BPA reported that on April 28, Steve Hickok briefed Congressional staff about BPA's power business line. BPA is aware of Congressional interest in the issues related to subscription, she explained, and the agency's message was: you may be hearing about the issues, we want to deal with them in the Northwest, and BPA wants to handle them administratively.

A couple of group members asked if there were indications of where the delegation might be leaning with regard to subscription. Whitney said there appeared to be a willingness to have the region propose a comprehensive solution. She added that members of the delegation are looking at the Regional Review's recommendations and are interested in seeing them implemented. "There are fingers tapping on the table," but there is also a disposition to let the Northwest work it out, she said.

 

COMING TO TERMS WITH DEFINITIONS

Wally Gibson of the Northwest Power Planning Council staff provided definitions for cost and price, which he said are intended to keep confusion out of the subscription discussions. The definitions are: Cost: The sum of required payments by Bonneville to its suppliers of goods and services. Price: The charge by BPA to its customers.

Another participant offered the following definition of market price(s): the price at which products and/or services are bought and sold in the wholesale market. As the group writes documents, we should scan them to see that we're using the terms as defined, Adams stated.

 

SUMMARY OF BUSINESS INTERESTS

The group reviewed a 14-point list of "common BPA/customer interests" compiled by one of the group members. The list summarizes and captures the themes in the 15-page statement of interests that was developed in previous work group meetings.

Several members of the group raised questions about whether the list reflects customers' interests more clearly than BPA's interests. One participant suggested that BPA has not offered its interests in the same way the customers have. He suggested it may be time for BPA to bring in such a list. Whitney responded that as the agency gets a clearer understanding of what customers want, it would be better able to state its interests.

One customer noted that "the devil is in the details" and that the group should figure out how to focus on "packages of what people want." Others debated what it means for BPA to take on more risk and how to compare the amounts of risk present in various proposals. A group member said there is almost no sharing of risk with BPA, there is only sharing from one customer group to the next. BPA itself cannot take on risk, but can shift it from one place to another, he stated, adding that "if someone makes a great deal, others pay."

Another participant pointed out the risk to other sellers represented by BPA's operating capability. With all of the pondage in the federal hydro system, BPA has a huge operating advantage, he said. How much risk should BPA take with operating the system? he asked.

There were several suggestions that customers should be shielded from any risk of BPA's "aggressive marketing activity." One customer representative suggested BPA segregate risky activity from its other business by setting up "a house account," as brokerage companies do. Another said the risks and benefits of each kind of contract need to be identified. BPA needs to set up "a risk management plan" and come to an agreement with customers and the Treasury with regard to risk, he added. One customer said the concept of an ownership-like arrangement solves many of the problems because it would put customers "in the driver's seat."

"I'm not here to talk about owning BPA -- I'm here to talk about what I want to buy from BPA," a customer representative stated, adding that "no one is serious about a proposal that defaults on payments." He suggested that the goal should be "limiting" rather than "protecting" customers from risk. Another group member suggested it is necessary to have some way to measure the risk being put on the Treasury. It is important to solve stranded costs so that they are imposed only on customers for whom they were incurred, a participant added.

One participant said it would be helpful for BPA to make a report on its Firm Power Products and Services (FPS) rate, which is required under the terms of a settlement in the 1996 rate case. The discussion concluded with the suggestion that participants submit comments on the short list of interests within a week.

 

A PROPOSAL FOR A TWO-PIECE CONTRACT

Customers spent the remainder of the meeting discussing a paper submitted by a DSI representative that outlines a contract framework. The proposal, entitled "Reconciling Customers' Needs for Price Certainty with BPA's Need for Cost Recovery in the Subscription Process," was described as an alternative to the idea that long-term commitments for power are the only arrangements that will meet the goals of the Regional Review and provide sufficient revenue for BPA to cover its costs.

The paper suggests that BPA base its subscription process on a set of principles, including: BPA must offer prices that are fixed or predictable for reasonable periods of time; BPA must close the gap between its costs and the market value of power; purchase commitments must be long enough to average out fluctuations in costs and hydro supply; BPA must have a reliable means to cover variations in cash flow; and customers must be assured that their cost exposure is a matter of contract. The proposal also says that BPA and the Treasury must be willing to accept the risk of commercial activity or exit the power business.

The proposed framework is in two parts: a long-term "umbrella agreement" with each subscribing customer, and periodic "subsidiary agreements" to define actual power transactions. Under the umbrella agreement, a subscription amount is defined, and the customer is guaranteed the right to purchase the amount at prices that reflect BPA's costs. This is referred to as the "cost-cap guarantee." The customer would not be obligated to purchase power, but the umbrella agreement would specify that failure to purchase would lead to reduction or elimination of the cost-cap guarantee. The subsidiary agreements, which are envisioned to be about five years long, would be negotiated between BPA and the customer. These agreements would specify price, length of sale, and amount of power to be purchased.

The DSI representative said the framework is an attempt to create a mechanism for a customer to buy from BPA at cost without having to make a long-term commitment for power at an uncertain price. He noted that customers could enter into a number of subsidiary agreements with BPA under the umbrella. He also suggested that this would be a way for BPA to collect "some premium" over market for its subscription power. The premium would be implicit in the negotiated price and would reflect the value a customer places on the long-term cost guarantee.

Q and A. Several work group members had questions about the proposal. One participant pointed out that the premium was what a customer would be willing to pay over and above an available market price to preserve the benefits of buying from BPA. A public power representative questioned how "preference" would be treated within the contract framework, and another asked how the phases of the subscription process would be recognized.

One participant opined that the proposal did not meet the "public purposes" vision that came out of the Regional Review. He suggested BPA should market to residential customers, who he said are willing to pay for that vision. A number of questions arose about whether the framework would encourage BPA to hold its "cost-cap" price high. Why wouldn't BPA want to discourage subscriptions and reserve power to sell later at market prices? a participant asked. Could BPA impose stranded costs on these contracts? another customer inquired. An IOU customer observed that the proposal is attractive "because the market would drive the value BPA could get for its product." Another said that the advantage of the approach is it allows you to see "the larger consequences" in terms of where the costs and risks go over time. One participant suggested that it would be difficult to draft a "watertight definition of costs that the government could not evade."

We need to be careful about focusing on one solution, a participant cautioned. We don't want to discard any ideas now; let's get all constructs for subscription out on the table; we need to define the universe before we get to specific issues, others concurred. One participant said the presentation on BPA's financial position, which is scheduled for May 21, would be helpful in coming up with a framework.

 

CAN WE IMPOSE A DEADLINE?

Rob Walton of the Public Power Council said the Transition Board and the Northwest Power Planning Council are hosting a meeting May 15 and 16 to address river governance. For the subscription process to work, customers have to know what BPA's fish and wildlife costs will be, he said. Walton suggested the work group ask the river governance forum to come up with a five-year fish and wildlife budget (2001 to 2006) within one year.

A couple of participants questioned whether the work group could enforce a deadline. BPA will eventually have to "bite the bullet" and come up with a number, one participant said, and another suggested that customers be given a range of costs.

 

WHAT'S COMING UP NEXT?

  • BPA's Financial Data. The work group offered BPA several questions to address on May 21. Is "two cents in 2000" anything more than a slogan? How does BPA plan to achieve the figure? What do forecasts predict will be the result?
     
  • Framing More Contract Structures. Adams said he would talk to work group participants and find out who wants to present proposals for contract structures at the next meeting. Some members asked for more than two weeks to prepare a proposal.
 
Adjourn
   

Archive of content originally posted or last updated on:  May 12, 1997.
Content originally provided by:  Carolyn Whitney, BPA Power Business Line.
Content currently provided by:  PBL Requirements Marketing - PS.
Page maintained by:  BPA Web Team.
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