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

Summary of October 15, 1997 Meeting

BPA Rates Hearing Room
 

The Federal Power Subscription Work Group discussed a draft paper that outlines an approach to implementing subscription, and BPA presented a set of draft subscription contract principles. About 30 people were present. Next meeting: November 5 at the BPA Rates Hearing Room in Portland.

Index (click item to move to topic)

NEGOTIATE BEFORE OR AFTER A 7(i)?

Dick Adams of PNUCC explained a draft approach and timeline for implementing subscription, which he said "a handful of folks" had developed during the past week. The draft includes four elements: presubscription sales, products and prices defined, 7(i) rate proceedings, and subscription sales. The draft sets out an approach in which BPA's presubscription sales would continue until bilateral subscription negotiations begin. Products and prices would be identified by June 1998, and BPA would announce target prices for its core products. BPA would then do what is required for ratemaking under Section 7(i) of the Regional Act, with the goal of completing that proceeding within three to four months. Subscription negotiations and sales would start in late 1998 or early 1999, when ratemaking is completed.

Adams explained that there would be "an open season" of six to 12 months for bilateral negotiations. All customers would work with BPA during that time to negotiate contracts, and all products and services would be open for discussion, he said. BPA would attempt to get closure on contract terms, assuring in the process that contracts comply with statutes on preference, Adams stated. The negotiations would be completed by the third or fourth quarter of 1999, he said.

The customers raised a number of questions, suggesting the order of events might need adjusting. Wouldn't BPA run the risk of underrecovering revenues if it establishes firm rates before there are negotiations? a customer representative asked. Syd Berwager of BPA responded that there is a danger that BPA's price would become "a sitting duck." Competitors would know it and set their price just below it, he added.

Buying subscription products would give a customer the right to buy at cost in the future, a participant said. The BPA price may be "a little over market," but if there is not too much difference between cost and market, people will subscribe to secure the future right, he stated. He also noted that "if you don't define how cost-based rates are to be calculated, no one will pay anything for the right." Another customer representative suggested that the cost-based rate be defined in a way that gives BPA "downward flexibility" once negotiations start.

Defining cost-based. Others said they were confused about how "cost-based" is being defined. How do you have the flexibility for "a range" if the price is cost-based? asked one participant. There are ranges within the assumptions, another participant pointed out. "We need to get creative so BPA will have the flexibility it needs in a competitive environment," he said. You can't set rates without knowing loads, a customer representative said. This would need to be an iterative process, he stated, in which customers give BPA an initial "nonbinding statement of interest."

A utility representative said that subscription itself and the right to buy at cost in the future should not create any stranded costs for BPA. By definition, selling at cost means covering all the costs and not leaving any stranded, he said. Another customer representative agreed, describing a scenario in which "everyone buys 10-mill power and then the other shoe drops, and we face a billion dollars in stranded costs."

One participant suggested that instead of having the 7(i) process at the beginning, there could be less formal workshops, in which BPA develops assumptions about loads and makes a first cut at rates. BPA could then negotiate in iterations with customers, with the results ratified in a rate case, he proposed. I would caution that the iterations are not something everyone has to go through, he added, suggesting that BPA "ought to be able to close" at any point.

The basic issue is what kind of business relationships do customers want to have with BPA, and what are the products and services, another customer representative stated. I like the suggestion about workshops, stages of iteration, and a 7(i) to ratify what we've done, he added. If BPA is underrecovering revenue, cost-based rates would go up, observed a utility representative. I'd like to explore "a firewall" between products and rates to make sure the shortfalls don't spill over, he said. "This all turns on how much faith you have in Bonneville," a participant stated. "I think BPA will be smart and get as much money as it can," he said.

Are we in agreement? I'm sensing some consensus, one participant observed. What is it we are going to do for nine months before we get on with this? he asked. Let's accelerate the schedule, he suggested. An Oregon PUC representative observed that state laws for open access are not yet defined. The Oregon legislature is likely to take up the issue in 1999, he said. Will customers commit to a contract without knowing the outcome? he asked. Another participant expressed concern about the IOU residential exchange load, if things happen too soon. How does that load sign on to subscription? he asked.

From mid to late 1998, there would be a series of workshops that would conclude with customers making an initial indication of interest, a customer representative summed up. There would be an algorithm for determining the cost-based price, a business relationship described, and a general price, she continued. The subscription negotiations would then take place, and at the conclusion, the rates would be finalized in a 7(i) process, she stated. We also have to know what transmission rates are going to be before things are finalized, she added.

Paul Norman of BPA said in talking to customers, he has detected "a lack of patience" with the process leading to signed contracts. "I'm hearing 'I just want to make a deal,'" he said. I don't know how much patience there would be with these iterations, he cautioned. The market is volatile, Norman continued, and there will be "little windows" in which we can make sales at full cost. "The windows will open and close," he said, adding that he is nervous about waiting too long to begin negotiations. "I was aiming for July 1998 to start making sales at cost," he stated.

There has to be a way to establish "a benchmark cost-based price," observed a participant. Some people may take a long iterative process, and others may be ready to act, he said. A public interest representative suggested that for customers closing contracts early, the "option" for a future right to buy at cost could be sold separately. Toward the end of 1999 when people know what "the new world" will look like, the option could be purchased, he suggested. That way if someone wants to lock down a contract early, it doesn't disadvantage someone who is deciding later on, he stated.

Preference. A participant asked how BPA will ensure preference in an open-season negotiation. What if Enron comes in early to buy 500 megawatts? he asked. One participant suggested BPA "would have to exercise judgment." BPA is going to have to be able to survive in a commercial environment, he said. There are statutes BPA has to pay attention to, responded another participant. How does BPA sell to Enron, then tell a full requirements customer that no power is available? he asked.

A BPA staffer pointed out that the small group that developed the draft approach favored going through the subscription step once. The question is whether this is a structure that works, he stated, noting it is a departure from the Regional Review's recommendation of phasing subscription. We could get binding offers, but would not execute them until all were received, he suggested. BPA could preserve the right not to sign a contract if there is a conflict with preference, a customer representative suggested. That wouldn't work for everyone, another participant pointed out. I'm inclined to give BPA more discretion to execute a contract, he said.

We're all used to defining BPA's process so "it's nice and neat," a customer representative observed. I don't think this will work out that way, he said. "I'd like to see a process that is as loose as possible and still works," he stated. As a public that would be first in the queue, I'm concerned about the open season, one customer said. "I want to know how BPA will work within its statutory obligations," he stated.

This process collapses everything into a commercial negotiation, a participant said. How much distinction do you need among customers and phases to keep subscription in line with the statutes and the Regional Review's goals? he asked. There's little distinction here between preference customers and those who operate in the open market, he added. This is "all go at once, but retain preference," responded a customer representative. "If there is oversubscription, preference prevails," he stated.

 

SUBSCRIPTION CONTRACT PRINCIPLES

Berwager outlined a set of subscription contract principles BPA has drafted. The principles were grouped into the following five categories:

  • Contract types. Berwager said BPA does not have a preference for the contract type. "It's the terms and conditions that are important," he stated.
     
  • Subscription power sales. BPA is thinking of this as power priced at cost, Berwager said. We intend to get our cost structure in line with the market, he added. While we anticipate success, if we are unable to recover all costs through sales, we would exercise whatever "unrecovered cost mechanism" is in place, he stated.
     
  • Long-term rights to cost-based power. Berwager explained the proposals for how a purchaser would secure the right to buy BPA power at "the lowest cost-based rate" in the future. These include making a commitment to purchase at cost for up to 20 years beyond 2001; purchasing at cost for some period beyond 2001 and paying an option fee; and choosing a 10-year power purchase and negotiating "an off-ramp."
     
  • Cost-based products. BPA would offer a number of subscription products at "fixed, published, cost-based rates." These would include full service and firm power blocks, Berwager said. BPA would also be willing to negotiate "a customized variant of these products," he said.
     
  • Addressing load loss. BPA wants to give customers with take-or-pay contracts maximum flexibility to dispose of power if they lose load, Berwager said. He offered several ways BPA would work with customers to address load loss, including having BPA absorb the risk for small customers, at a price; giving customers resale rights; and offering a product that manages the risk of load loss.

Several participants asked what was considered to be a "subscription product" that would entitle a customer to future rights. Berwager said that full service, firm power block products, the two partial service products, the new renewables product, and a variable load factor product would be among such products. Purchasing other products, such as ancillary services, would not qualify, he stated.

What is the option fee? asked a customer representative. Berwager said it is an idea "straight out" of the Regional Review recommendations, and he indicated that the amount has not been determined. There were a number of questions about how the option fee would be applied and whether it would be linked to the duration of a contract. One customer representative suggested that the option fee be determined in a bilateral negotiation. Another suggested states should be able to purchase options so IOU exchange loads could purchase at cost from BPA in the future.

Berwager acknowledged that the draft was BPA's attempt "to come out of the chute consistent with the Regional Review." We need to define something that makes sense, a customer representative said. "If we go back and start reading the Regional Review report, it's a huge step backwards," he stated. BPA indicated that it would work on the principles and present another draft.

 

WHAT'S COMING UP NEXT?

  • To be Continued. Implementation and contract principles discussions.
     
  • Slice. A report on efforts to define a slice of the system product.
 
Adjourn
   

Archive of content originally posted or last updated on:  October 20, 1997.
Content originally provided by:  Syd Berwager, BPA Power Business Line.
Content currently provided by:  PBL Requirements Marketing - PS.
Page maintained by:  BPA Web Team.
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