Summary of November 25, 1997 Update Meeting

Over 50 people turned out to hear an update on the activities of the Federal Power Subscription Work Group. The Bonneville Power Administration (BPA) and the Pacific Northwest Utilities Conference Committee (PNUCC) hosted the meeting to give members of the public an opportunity to comment on the subscription process and associated issues. Transition Board member Mike Kreidler explained that subscription carries forward one of the main recommendations of the region's Comprehensive Energy Review. He said subscription is a key piece of the "Northwest package" that the Transition Board will propose to the Northwest Congressional delegation next spring.

• Welcome
• Kreidler Describes the Context of Subscription
• Overview of Subscription
• Contract Principles and Business Relationships
• Implementation and Pricing

WELCOME

Dick Adams, executive director of PNUCC, said the purpose of the meeting is to "share our thinking to date on where the subscription effort is" and to gather the audience's opinions on what additional issues need to be addressed. The morning will consist of briefings and interactive discussions, he stated. In the afternoon, participants will have a chance to talk in-depth with BPA and PNUCC staff and ask specific questions, Adams said.

KREIDLER DESCRIBES THE CONTEXT OF SUBSCRIPTION

Mike Kreidler explained that the Transition Board is charged with overseeing the implementation of the recommendations of the Comprehensive Energy Review. He noted several events that have occurred since 1995, such as challenges by other energy suppliers to BPA's historical place as "the best deal in town"; BPA's cost-cutting; and the controversy in the region over the role of BPA and its ability to carry out its public purpose obligations, such as salmon recovery and conservation. The four governors established the Review in 1996 to "stabilize BPA," Kreidler said.

Kreidler reviewed a matrix of key issues facing the region and the recommendations of the Review. The "pieces of the puzzle," he stated, are: cost control, the fish and wildlife Memorandum of Agreement (MOA), transition cost recovery, federal power subscription, separation of BPA's transmission from its power marketing, and river governance. With respect to cost control, Kreidler said the Northwest Power Planning Council is responsible for keeping market pressure on BPA to make it less likely that stranded costs would need to be imposed on the region in the future and to be sure that BPA can meet its public purpose and fish recovery obligations. He pointed out that the MOA on fish and wildlife, negotiated in 1995, has been controversial. The question now, Kreidler said, is how to establish BPA's fish and wildlife obligations for the 2001-2006 time frame so that subscribers to federal power will know the extent of the agency's obligations. He noted that BPA had hosted a meeting earlier in the week that "opened the door" for initial discussions on the MOA and its future, but he added that more work needs to be done on the issue.

Kreidler said the Transition Board is addressing the issue of transition cost recovery. We need to reassure the Treasury that BPA can meet its obligations and reassure the rest of the country that the Northwest has a mechanism to meet its payments, he stated. We don't know yet whether a single transition cost proposal will come out from the Transition Board, but the board will narrow the issue with respect to how much and who pays, Kreidler said. Nationally, FERC uses the term "stranded costs," but in the Northwest, we call them "transition costs" because our costs don't fit the FERC description, he added.

Kreidler explained that the subscription process covers the post-2001 period when BPA's contracts expire. He said the transmission separation recommendations from the Review aim "to facilitate a reliable and competitive electricity market" and maintain BPA's ability to meet its financial obligations for third-party debt and fish and wildlife, and to the Treasury. The goal of the river governance process, he continued, is to establish how and by whom decisions about future river operations and system configuration are to be made. It's a way for the tribes, the states, and federal agencies to get to a governance structure based on a single plan so they don't have to "fight out issues" in a variety of forums, Kreidler said.

Kreidler reviewed a timeline for "fitting the pieces of the puzzle together" between now and 2001. Congress will pass a deregulation bill -- "it's not a question of if, but of when," he stated. In 1998, a lot of work will be done at the committee level in Congress, even if a bill doesn't pass, Kreidler predicted. The Gorton-Bumpers deregulation bill is the first legislation that clearly defines "a Northwest chapter," he pointed out. We need a proposal that deals with the Northwest issues of cost control, transition costs, subscription, and transmission, and the Transition Board thinks that the critical time period for the region to make these recommendations is March 1998, according to Kreidler. We need to "have our place defined early" and build it into what is going to be considered by the various committees, he stated. Our overall goal is to not lose control of the Northwest system that means so much to the economy of the region, Kreidler said.

What's the significance of the distinction between stranded costs and transition costs -- are you including more in transition costs than FERC would allow? asked a participant. There's a debate going on currently about transition cost issues and the applicability of FERC regulations, and different customer interests have different positions, Kreidler replied.

I've heard that the IOUs have gone off to Congress with a bill of their own, stated another participant. The IOUs and DSIs are frustrated that things are not moving as quickly as they'd like, responded Kreidler. The IOUs have made a proposal in response to Senator Gorton's request, but they have said they will work through the Transmission Work Group, which represents a broad range of interests, he stated. The IOUs say they're not pushing their proposal at the national level, Kreidler added.

OVERVIEW OF SUBSCRIPTION

Adams offered an overview of subscription, noting that "success" would be defined as "fully subscribing federal power, thus ensuring BPA will be financially stable and will avoid stranded costs." To do this, the challenge is getting customer interest in BPA products, he said. Adams described BPA's "revenue cliff" in 2001, when most existing power sales contracts expire, and he indicated how a successful subscription "could take out the cliff." Subscription is the solution to give BPA a sense of longer-term financial stability, he stated.

Adams said Phase 1 of the subscription effort has included a preliminary identification of business interests, and of products and services in which customers have an interest. We are working on defining business relationships between BPA and its customers and deciding on an implementation approach, he reported. So far we haven't encountered major legislative obstacles to subscription, Adams stated. One of our goals has been to do subscription in a way that doesn't require new legislation, he added.

Phase 2 of the subscription process, which we expect to begin in mid-1998 and run through 2000, will encompass a BPA rate case and activities to comply with the National Environmental Policy Act, according to Adams. It will also include a "subscription period," in which BPA and customers sit down and bilaterally work out individual contracts within the context of subscription, he said.

Do you think a rate case can begin and be completed in two quarters? a participant asked. Yes, Adams replied. There will be a lot of talk about pricing during the subscription process that precedes the rate case, and we hope that will "jump-start the rate case," he said. BPA and the work group have been talking about a four to five-month rate case, Adams pointed out.

Adams reviewed a list of business interests identified by work group members. "It's a whole new world," he commented. Customers want flexibility, no more one-size-fits-all, and they want BPA to be nimble, Adams said.

Questions and Comments. Are tribes part of the work group? If they are not, where will they exercise their government sovereignty to make sure their issues are on the table? a participant asked. A consultant to the tribes has been attending the work group meetings, and the meetings are open to everyone, replied Adams. The tribes are working on the overall governance issue, as well as what will be included in the MOA and in transition costs, noted Kreidler. The governors take the sovereignty of the tribes seriously and are willing to sit down and talk about this at a government-to-government level, he added. We'll do whatever it takes to make sure everyone is comfortable, said Kreidler. Syd Berwager of BPA said BPA is willing to meet one-to-one with anyone in the region who wants to get their concerns about subscription on the table. He encouraged people to call BPA and ask for such meetings to be set up.

The important thing is what customers think about what you're doing, an individual commented. If I were you, I'd go to great lengths to see that your customers are involved. I'd weigh more carefully what your customers, mostly public utilities, say, he stated, adding, I don't see public preference on your major interests list. Another person suggested that the interests of residential and small farm customers of IOUs and their ability to participate in the subscription process were important interests for BPA to address.

If your goal is fully subscribed power, unless you want to overturn the relationship between BPA and its existing customers, you need to focus on what products are of interest to the customers, a participant commented. Otherwise, he said, you "turn the whole relationship of BPA and its customers on its head." Working to satisfy the interests of customers is the theme of all the work group's efforts, said Adams.

CONTRACT PRINCIPLES AND BUSINESS RELATIONSHIPS

Berwager explained that the work group is looking at what principles ought to be dealt with in the subscription contracts. The group is considering: subscription rights, subscription contract types and features, and the issue of load loss, he said. A subscription right would be the right to buy an amount of power at BPA's lowest cost-based price for a defined period of time, Berwager stated.

Berwager also described basic contract features and how BPA would address load loss. BPA will absorb load loss risk for small, full-service customers and will offer a product that offers load loss protection, he said. BPA wants to structure contracts so that customers can resell power if load is lost, or BPA could remarket the power and credit a customer's bills with the revenues, Berwager stated.

Questions and Comments. There are other ways to look at this, for example, the slice of the system approach -- are you looking at alternatives like that? Berwager replied that some customers, especially the Public Generating Pool, are very interested in pursuing the slice of the system as a model for the business relationship. We are exploring it, but it hasn't been defined to a point where BPA would put it on the product list, he said. There are still many operational questions to be answered about it, Berwager stated.

• Is the subscription right like a call option? Berwager explained the two approaches to obtaining long-term subscription rights being considered. They are: making a commitment to buy an amount of BPA power at BPA's lowest cost-based price for a specified period of time; and making a commitment to buy BPA power at that rate for an initial period and purchasing an option to buy that amount of power at the lowest cost-based price for the period beyond the initial commitment.
   
• So you can't just have "a plain old option?" The work group has discussed a straight option, Berwager replied.
   
• Will a customer know the price of the power in the first five years? Yes, at the time of the contract, prices for the first five years will be known, and we are exploring the possibility of a price algorithm for the next five years, responded Berwager.
   
• Are you assuming renewal of the MOA on fish? We are anticipating more understanding than we have now, and that we will have, if not a single number, at least a range, before we get to the rate case, replied Adams.
   
• What about having a "third window" in which a customer would not pay an option fee, but would be required to decide early, by 2003 or 2006, whether they want to buy beyond the period of initial commitment? This would enable BPA to market the power if the customer decides it doesn't want it, a participant said. BPA staff noted the suggestion, along with others that will be taken back to the work group.
   
• If a preference customer decides not to purchase power in 2001, what rights would that customer have in the future? That customer would not have a subscription right, which is the right to the lowest cost-based rate, but that is different from a preference right, Berwager responded. Under the law, certain customers have the right to come to BPA and be served, but the cost basis for the power would be different, he said.
   
• Preference doesn't do me any good if it's 10 times the market price -- do you envision separating customers into tiers? The group has really been struggling with this issue, trying to figure out what the incentive is for customers to sign up now, said Adams. "It's not an issue of timing, it's price," the commenter responded.
   
• Why should a customer sign up long term if we are moving from a regional monopoly to a free-market system? Shouldn't I wait to see what happens with the market? We think BPA costs will be close to the market, and in the long term, as some of our debt goes away, BPA's cost-based rates will be a good deal, said Berwager. We're trying to let folks lock into that during the subscription process, he added.
   
• In the long term, it will be great, but what about the fact that we have to survive in the short term? That's an important point, responded Berwager.
   
• Why not make your product displaceable? We envision offering a flexible product that could be displaced, Berwager answered.
   
• This process seems "set up to provide a future for BPA," not to provide the least-cost product to electric consumers in the region or to help distribution utilities. Nothing in it says that success consists of low-cost rates for consumers or a stable economy for the region. "It's simply protecting BPA," an individual stated. In response, Kreidler pointed out that the federal power system provides benefits to the region, and "that's what we are talking about when we say BPA." We are talking about things like bringing power to rural communities, about paying for the region's investment in nuclear power, and continuing to pay for salmon recovery and BPA's public purposes, he said. We have a large stake as a region in BPA meeting its commitments, Kreidler continued. In the end, BPA power will be a very good deal, and we don't want to lose control in the short term, he said. We could end up with the power system being sold outside the region, and then it would be "a national resource, not a regional one," according to Kreidler. There's not a presumption that BPA will succeed in subscription unless it offers products to customers at a price they want to pay, added Berwager. "BPA's success lies with the success of its customers, and that's how BPA should look at it," responded another participant.
   
• How do you define "load loss?" Load loss includes things like an economic downturn, population loss, a warm winter, and losing load to a retail competitor, Berwager replied. We'll take all the load loss for a small, full-service customer, he added.
   
• How do you define "small" customer? We're wrestling with the definition -- it's a question of what threshold you set, Berwager said. We've thought of small as 1 average megawatt or 5 average megawatts, he stated, but he added that the work group needs to talk more about this.
   
• Would you be amenable to a group of customers buying a block of power as a group and sharing losses and gains? Yes, we'd encourage that kind of thinking, answered Berwager.
   
• Will BPA find a way to make a transmission agreement for the 47 customers that are using the General Transfer Agreements, which are expiring? We're willing to make delivered power sales and to negotiate GTA costs, but we haven't decided how to handle delivered power yet, replied Berwager. Remember that BPA's Transmission Business Line will be FERC-regulated in the future, and those arrangements will be subject to FERC approval, noted consultant Al Wright. I understand that the customer would be responsible for the GTA cost, but there would still be an advantage to BPA negotiating the GTA's on a broad basis, commented a participant.
   
• Does FERC regulation mean that BPA has its own separate regulations or will BPA abide by the regulations for everyone else? The Transmission Work Group is wrestling with this, responded Wright. BPA could try to get special legislative treatment, or BPA could be treated as equivalent to the IOUs, he said.
   

Products and Services. Berwager described "basic subscription products": full service to meet all customer needs; a pre-defined block; simple partial service; and moderate-partial. (A fifth basic subscription product would be a renewable energy product that could be shaped according to the four described.) BPA will offer a wide array of other products besides these, he said, providing a list of those products. Of the 16 products listed, Berwager said that numbers 6 through 16 are "opportunity cost" products, in response to a question about their pricing. Products 1 through 5 on the list would have embedded cost-based prices, but we haven't committed to that for the other products, he added. Berwager encouraged people to contact their BPA account executive to talk more about the products. In the end, he said, BPA's success depends on the products on the list being the products customers want and need.

My experience in the past has been that BPA's ability to negotiate prices is limited after a 7(i) proceeding, commented a participant. We intend to have a published price only for the first two products on the list, full service and firm power block, Berwager responded.

IMPLEMENTATION AND PRICING

Adams explained that the work group is just starting to develop an approach for implementing subscription. He said that the current thinking is: the rate case would define prices in July 1998 before subscription; the subscription period would run from the fall of 1998 to the fall of 2000; all customers would be eligible; and BPA would develop a plan to manage the priority order of sales in some way to ensure compliance with existing statutes.

Questions and Comments. What if the resulting subscription products aren't that attractive? "What if BPA gets out its order book and no one wants to buy?" What will you do if the products don't sell? BPA will decide whether to sell the power long term or short term -- there are dozens of things BPA could do, Adams replied.

• In essence, BPA will have to "privatize" how it does things. You talk about being "nimble" -- you will have to do it to survive, because your competitors are nimble, and they're already moving fast and calling up your customers, an individual observed.
   
• Are customers eligible at their total load historically or at what their load has become, after some have diversified? What customers want drives this process, was the answer.
   
• If an IOU as an agent of an exchange load wanted a 20-year subscription, what assurance would it have that in the 10th year, if a preference customer wanted BPA power, that its contract would be honored? The work group is attempting to answer that, said Adams. Do you have a suggestion? -- we're looking for ideas, stated Berwager.
   
• Can BPA make a firm sale with a known duration that would limit the size of Federal Base System (FBS) sales in the future? It's a legal question, and BPA needs to be able to answer it, commented a participant. We could have a legal argument, or we could try to figure out an arrangement that works for all the parties in the region, replied Berwager. You could have a "put option," a participant suggested. An IOU could have the right to resell power back to BPA so BPA can meet preference requests, he added.
   
• You are making a big mistake if you don't plan for what happens if you miss with the subscription process. You need to spell out what you will do if BPA is undersubscribed, and what you will do if BPA is oversubscribed. There's "game-playing going on here" -- you're saying, we don't know what we'll do to you in the future, an individual commented.
   
• Why wouldn't a preference customer want to buy in the first place? Is it because the power will be overpriced? an individual inquired. There's an element of risk for everyone, stated Kreidler. The Transition Board is trying to make BPA power such a good deal that preference customers would be foolish not to take advantage of it and will overcome their temptation to go short term, he said.
   
• How do stranded costs get factored into the right to buy? If BPA is oversubscribed, the Transition Board should consider customers who have diversified under different circumstances and customers who have paid stranded costs. You need to have a category that deals with such nuances among customers, a participant said.
   
• If BPA is undersubscribed, and preference customers have paid stranded costs, that should be considered to be the same as purchasing an option. Having to buy an option and pay stranded costs hits preference customers twice, it was suggested. So a customer who pays stranded costs due to undersubscription would have subscription rights in the future and not have to purchase an option? said Adams. Yes, was the reply.
   
• My utility may be one of the first to commit to BPA. But if in six to eight months, the deal for BPA power gets better, "we might have hung ourselves." Is there any reason to sign up early? The power may not be there if you sign up later, but we hear what you are saying -- don't give later signers a better deal, responded Berwager. BPA should carefully consider the penalties and rewards for signing early for the first two products on the list, advised a participant.
   
• It shouldn't be "first come, first served." If power is oversubscribed, BPA will have to allocate, an individual stated. Under the management plan, subscription "is a two-year window that is slowly closing," Berwager responded. The idea is that for the initial period, we'd reserve what is necessary for preference customers, he stated. But as we get to the end of the two years and our sales are lagging, and find that others are willing to pay cost-based rates, we'll need to make sales to those parties, Berwager said. If we go through the two years, and everyone is waiting, we'll have to have the ability to sell cost-based power to those who are willing to buy, he stated. But we want it to work for sales to in-region customers, Berwager said. Customers "can't have it both ways" -- we have to decide if BPA is competitive or not, and there's some risk involved, observed a participant.
   
• What about the eligibility of new publics, such as cities? They would be eligible if they meet the eligibility criteria; in what priority is a different question, replied Berwager.
   
• BPA needs to find a process to say, here's the window, and here's what happens if you sign up on the first day or the last day, "without any game-playing." "Develop the rules and don't change them on us," a participant urged.
   

Pricing. Adams said the work group "has been noting questions" about product pricing, but has put off a full-blown discussion until after the first of the year. One question involves whether BPA can do a rate, or rates, for its requirements customers, he pointed out. BPA has indicated that there is authority under Section 7(b) of the Northwest Power Act that authorizes the agency to develop "a rate or rates" for preference customers' requirements loads, Adams said. The subscription right is the right to the lowest of those rates, he added. Adams said a PF' rate would be the average embedded cost of FBS resources and would be the lowest rate. But, he noted, BPA might develop a second rate, if it is not fully subscribed, which would be the blended cost of higher cost FBS resources, but not lower than PF'. If BPA were fully subscribed, and a preference customer who had not subscribed wanted power, BPA could have a rate that would reflect the highest cost FBS resource or the cost to acquire power to serve load, but not lower than PF', Adams continued. The details of this have not been developed, he pointed out.

• Does the second rate mean that if BPA is not fully subscribed that "you jack up the price?" To whom? This is for later on, beyond 2006, for example, replied Adams.
   
• You could index BPA's product price to a California-Oregon Border (COB) market price or a mid-Columbia price. Maybe you could index it to 5 percent below the mid-Columbia price, it was suggested.
   
• These are cost-based products, and BPA needs to identify a ceiling for them. If you're selling a 10-year commitment; the question is, what will you do to get Congress to guarantee that after year five, costs don't skyrocket? I can live with a fixed price, but there's an open-ended liability hanging out there, for example, with regard to fish or tearing down dams. We've got to have a ceiling because as costs come down, and "BPA is sitting there looking fat, who knows what will come out of the woodwork?" a participant said. This goes to the need for the region to reassure Treasury in the short term -- the time of risk -- that we can meet our obligations, responded Kreidler. The stronger we step up to it now, the stronger the commitment we have to keep the Northwest system for Northwest customers, he said. You can determine a maximum fish cost, but you'll have to ask how politically realistic it is, Kreidler continued. I'm worried more about the use of the federal system to cover costs for Social Security in the future, he stated. But if we give greater certainty to Treasury, there's a stronger likelihood the Northwest will be able to have the system into the future, Kreidler said.
   
• I've heard that BPA's prices in the long term could be at market or below, but has BPA done any studies that validate that this can happen, or is it just what you'd like to happen? We've done some analyses on long-term debt service, Berwager noted. Customers won't believe an analysis; what they will believe is what's in a rate schedule or a contract, he added.
   
• "It's a two-headed sword" -- you are asking us to step up and support Northwest resources, but in a year or two down the road, we could "have the rug pulled out from under us" by national restructuring legislation. If we do step up, the Northwest chapter of the restructuring legislation has to make sure that "we get a fair shake and are on a level playing field," commented a participant.
   

Adams closed the morning session by noting that the Subscription Work Group will continue to meet twice a month and that anyone is welcome to attend the meetings. He also urged participants to contact BPA or PNUCC if they would like additional information on the subscription effort.