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

Summary of July 15, 1998 Meeting

BPA Rates Hearing Room
 

The work group discussed partial service and renewable resource products, load issues, option fees, and what it should do next and when it should do it. About 40 people attended.
Next meeting: July 29, 1-4 p.m.. [Note: The July 29th meeting was rescheduled to July 28, 1-4 p.m.]

Index (click item to move to topic)

THE LATEST ON THE SCHEDULE

Syd Berwager of BPA went over a "draft decision road map," pointing out that BPA has announced a new schedule for opening subscription and for making decisions on issues related to subscription. He noted that customers and parties outside of BPA have been meeting to see if they can reach a "global settlement" of these issues. BPA will support those discussions through the end of July and hopes to receive a proposal from that group by August 6, Berwager stated. If there is no external proposal, BPA will take on a different role at that point, he explained. BPA will go into a "leadership and consultative mode" and present its thinking on what "the grand proposal" ought to be, Berwager said.

Consultations would be held in August, and on August 26, BPA would publish its proposal, dealing with such issues as stranded costs, General Transfer Agreements, resource acquisition, availability, and the "slice," according to Berwager. The proposal would be followed by a 30-day public comment period, which will include public meetings and more consultations, he continued. BPA would announce its decision on October 5, and subscription would begin, Berwager said. The decisions would be reflected in BPA's initial proposal for the power rate case, which would begin in January 1999, he stated.

Questions. Berwager was asked how the timeline for the PGE residential exchange settlement decision fits with this schedule. That decision will be timed to match the schedule laid out here, Berwager said. We need to make the exchange decision early next month, he added.

A DSI rep asked for more information on a BPA plan to offer a "cost-based, market index product" that he recently heard about. It is not a different product, it is just a different way to price, Berwager stated. Such a product would have an index price set so that BPA gets the same revenues over time that it would get if someone were paying a cost-based rate, he said. For example, you could adjust the COB-NYMEX index so BPA would get as much revenue as it would have gotten if it just collected the posted price, Berwager stated. The question is whether, in an increasing market, BPA should be setting fixed rates now, he said. It's a pricing issue, not a product design issue, Berwager added. So it would always be "x" amount above the NYMEX? he was asked. Yes, but the index would not necessarily be the NYMEX, Berwager responded.

Would this be product-specific? asked a public power rep. It would apply to products that have a cost-based component to their price, and it would require two parties who agree on what the index is and what the differential is, Berwager said. It would apply during a five-year rate period, he added. The potential exists for this to be an attractive product, but it has to be symmetrical and reflect the downside risk, said a DSI rep. Berwager suggested the group discuss this product at the next meeting.

Could we get an update on the schedule for running the power repayment study? asked a utility rep. BPA will have a draft of its revenue requirement to rate staff on August 26, replied a BPA staffer. We are waiting for a decision on fish costs, he said. We will have a final revenue requirement by the end of September or early October, he added.

 

PARTIAL SERVICE UPDATE

Maureen Flynn of BPA said the partial products team was convened to meet three objectives: 1) to make sure BPA develops a subscription product line that addresses the needs of diversified and non-diversified customers; 2) to design service to diversified customers that is equitable to the service to non-diversified customers; and 3) to make sure BPA's risk in providing partial products is no greater than its risk in serving full-service customers. She described the products the team is discussing and noted that there is more work to do. The degree of customer satisfaction in the partial products team's results is related to "the complications of their own lives as utilities," Flynn observed. The team will meet again on July 22, August 6, and August 12, she noted. Flynn said the team has been referring in its discussions to issues that have yet to be resolved, such as service to load growth and the PF'/PF" proposal. These will have to be addressed in our product descriptions, she stated.

What issues have come up with respect to equity between full and partial customers? an agency rep asked. One is how to deliver a comparable product to a customer with a diversified resource base that is dispatchable hourly, Flynn replied. We haven't worked that out yet, and it will depend on the price level we arrive at in the rate case, she added. Do you see any "showstoppers"? asked Dick Adams of PNUCC. No, Flynn responded.

Slice Tidbit. A BPA attorney reported the "lawyers' committee" on slice met this week and talked about BPA's list of concerns about the slice product. There is another lawyers' committee meeting July 22, and a public meeting on slice July 23, he said.

 

HERE'S WALDO

Berwager noted that full-service contracts will be take-or-pay, and that if retail access legislation passes and utilities lose load, they will have a continuing obligation to pay for the load they signed up for. Customers have told us they are concerned about this eventuality, and that's why this issue is back on the agenda, he said. Carolyn Richardson of BPA explained a concept BPA is looking at for full-service customers, known as "WALDO." Beginning October 2001, a full-service customer could purchase less load than its traditional amount if one of its end-use consumers has chosen to purchase power from an alternate energy supplier, she explained. In such a case, a specified portion of load would be "walled off" from the utility's service territory, and the utility would be responsible for serving only the remaining portion of the load, Richardson said. We want to test this concept with you today, she added. This differs from partial service in two ways, Richardson noted. First, the consumer, not the utility, has decided what energy supplier will serve its power needs, and second, BPA provides the forecast of customer load and small resources, she said.

The walled-off load must be a separately metered load, and if a walled-off load returns to BPA service, BPA reserves the right to charge a rate higher than PF', Richardson stated. After a contract has been signed, walling off load is not an option, she noted. This is a good idea, but don't state that a 5(b)1(B) resource must be designated to serve the walled-off load, advised a public utility rep. You've identified the right problem, but there are different ways to work it out, stated a customer rep.

How large a problem will this be? asked an agency rep. I hoped to find that out from this group, replied Richardson. We can make this narrow, as few as four customers, or we can set a percentage amount of total system load or a megawatt amount, she said. How would a customer do this in the absence of retail choice or a pilot program? a participant asked. There would have to be a pilot program, state retail access legislation, a utility "acquiescing" voluntarily to retail load loss, or bypass, a customer rep offered. A private utility rep suggested BPA needs to address the relationship between a walled-off customer and BPA's Transmission Business Line. Another customer rep recommended that BPA further clarify the differences between this full-service product and partial service products. A DSI rep suggested BPA look into the "reverse of WALDO," in which a full requirements customer decides to serve a new load.

What about the status of state legislation and how it will play into this? asked a customer rep. A number of utilities are doing retail choice voluntarily as a service to their industrial customers, noted consultant Al Wright. This is a good product that will encourage more of that, and that's what utilities want, he added.

 

GREEN POWER MAKES SOME SEE RED

Al Ingram of BPA presented the proposed renewable resource product, noting there is in-region and extraregional customer interest in it. BPA is trying to put together a product line it can be ready to offer in subscription, he said. These are premium-price products that offer BPA the opportunity to increase its revenue, Ingram continued. The product description he distributed states that the product "recognizes the environmental characteristics of some resources and attempts to stimulate markets for renewable resources."

Ingram explained the difference between "new renewable resources" and "environmentally superior resources." New renewable resources involve power generated by new or existing facilities driven by wind, solar, geothermal, or qualifying biomass, he said. Environmentally superior resources are those that are "consistent with criteria established by others," according to Ingram. Examples include power from small hydro sited in locations that do not block anadromous fish passage, and from hydropower facilities "where specific projects and/or system operations are guaranteed to be available" and "have been endorsed by Northwest public interest groups as environmentally superior power resources," he said. The key point with the environmentally superior resources is that they are existing resources, Ingram stated. The definition of green power is still up in the air nationally, and in the region, he noted.

How would this work for full-service customers? a participant asked. If a customer doesn't take this product, it won't change its subscription amount or load profile, Ingram replied. Taking this product will change rates, but it will be by customer choice, he said. Surveys show that about 20 percent of residential households want to "green their power purchases," Ingram stated. BPA has a commitment to do a base-level investment in green resources, based on the Regional Review, he pointed out.

Will you be able to show consumers the amount of green power being delivered at any given hour? a participant asked. That's the key part of all the certification schemes, Ingram replied. There will be a monthly true-up, and we are committed to monthly reporting on this product, he said. Say you have a wind machine, and it goes down, and it draws on the system for backup, what are the rate implications? a utility rep asked. We will integrate that into the costs, replied Ingram. A participant asked about the statement that "BPA will guarantee the availability of the resource during the term of the sale." If a resource underperforms, will you back it up with the system or another green resource? he inquired. We'll back it up with another green resource if possible, and if we can't deliver, we will make a financial settlement if need be, Ingram said.

Are you talking about acquiring small hydro? asked a DSI rep. No, replied Ingram. How will you price the portion of the Federal Base System used for this? the DSI rep asked. For the subscription product, it is the cost of the endorsement program, responded Ingram. We will work with the BPA Environmental Foundation, he continued. The Foundation will say which part of the resource portfolio meets its standards, and we will be able to use that endorsement in marketing our product, Ingram said. This arrangement required that we make a contribution to the Environmental Foundation, he noted. Who is the cost of the "bribe" passed on to? asked the DSI rep. It's only the customers who buy this product, replied Ingram. What rule of thumb should I use for the portion of the Federal hydro system that is likely to be deemed environmentally superior? asked the DSI rep. It's around 100 average megawatts (aMW), but it could be a larger or smaller number, answered Ingram.

How much do you envision selling in the region and out of the region? asked an agency rep. If we set the number at 100 aMW and that is bought in the region, there won't be any left to sell outside the region, replied Ingram. We won't market this outside the region until subscription is done, he added. Would the 100 aMW be deducted from the 6,380 aMW available for subscription? asked a participant. No, it's an offer to reprice a small portion of the subscription inventory -- it doesn't add or subtract from the inventory, responded Ingram.

Wright referred to two examples of the Environmentally Superior products on the handout, namely, "operations of hydropower facilities due to seasonal flows mandated in accordance with the Endangered Species Act or other required flow management directives" and "operations of hydropower facilities during offpeak hours during the months of April, May, June, or July of any year." Those examples represent "a huge chunk of energy," and given that we are allocating around 6,000 aMW, you could have an issue here, he said. We aren't likely to expand this through the "fish flow issue" -- I don't foresee that happening, said Ingram.

How Green Is My System. What's bothering me about this is that we are sitting on a tremendous renewable hydro resource, and with this approach, we take "slivers" of it and "get these people to bless them" and say they have "special value," commented an IOU rep. But the rest of the hydro system is the same, he stated. When NMFS issues a Biological Opinion, it's saying that the system is environmentally acceptable, he continued. Why take 8,000 MW of mainstem hydro and say it's "dogmeat?" he asked. Not all customers think the whole hydro system is green, replied Ingram. These are the parts of the system we can get certified as an environmentally acceptable resource, he stated.

Is this BPA's whole role in providing new renewable resources or one piece of it? asked a public interest rep. It's one piece of it -- it's the marketing part of our green power offer, responded Ingram. Why are you doing this? Why take the bulk of your renewable resource and "put it in the bad pile"? asked a DSI rep. We are trying to change the perception in other venues about the rest of our product, Ingram stated. This is a narrow discussion of a small part of our inventory, he said. In California and in other parts of the country, large hydro is deemed not renewable, Ingram stated. That's a political perception, not a market perception, observed a DSI rep. The perception of hydro is mixed in the eyes of customers, responded Ingram. Wind and small hydro resonate as good, but it's been difficult to represent a large hydro system as a green resource, he said.

Can we look forward to this pricing being part of the rate case? asked a DSI rep. Probably, Ingram replied. We plan on our core products being priced in the rate case, said Kathy Hoffman of BPA. This is a customized product, and the power portion of it would be priced as PF, while the endorsement would be a negotiated price, she stated.

 

FUTURE PURCHASE RIGHTS

Scott Wilson of BPA recounted that the Regional Review proposed that customers pay an option fee to secure the long-term benefits of purchasing BPA's power at cost. He noted that the business relationship principles the work group agreed to addressed option fees and said that pricing terms and conditions would be determined in bilateral negotiations. Wilson presented a proposed framework BPA would use in the bilateral negotiations on option fees. He defined a "basic follow-on right" as the right to continue to purchase BPA power at the then-available, posted, lowest cost-based rate and said the right would expire if the future power purchase is not committed to one year before deliveries under the contract end. The key feature, Wilson said, is that the option would be available only for the amount of power the customer commits to purchase in its contract that begins in 2001. Basic follow-on rights are included for free in contracts with terms of at least 10 years, with no offramps to reduce or stop the BPA purchase, he stated.

Wilson also described a proposal for "follow-on rights with fixed price offer after purchase commitment," pointing out that the business principles require that BPA offer a contract provision to "secure a rate at which power may be purchased from BPA in the future." This would be a right to purchase BPA power at a specific price when a customer's purchase commitment expires, and it would only be available for purchases that occur after September 30, 2006, he explained. In order to avoid creating risk for other customers, the price would be "whatever it costs BPA to secure the option in the financial market," according to Wilson. If a customer also wants basic follow-on rights, it would have to purchase that right separately, he said. The proposal addresses the question of who takes risks in 2006 and beyond by indicating that BPA would find a third party in the financial market to take the risk, Wilson stated.

Why do customers need a fixed price in the second five years? asked an IOU rep. If I want price certainty, I don't need BPA -- I can go to the financial markets, he added. What does BPA get out of this by acting as an intermediary between the customer and the financial market? asked a public interest rep. Are there customers who would like BPA to set a fixed price for 2006-2011? Wilson asked the group. I question if this is an appropriate role for BPA, said an IOU rep. An appropriate role is for BPA to offer contracts that give you a "re-up right" to a cost-based rate, he stated. People will pay to continue to secure the right to cost-based rates, he added. "Particularly if they don't have it already," said a public utility rep. This concept lets BPA get around the time limit it has on setting the PF rate, said a BPA staffer.

Back to the Umbrella. We could find some creative mechanisms in contracts to ensure long-term certainty -- this financial market approach is not worth pursuing, said a DSI rep. None of this precludes what BPA can do in sitting down and negotiating with a customer, Wilson noted. This is going down the path of having public power pay more for a right it already has, said a public utility rep. Let's go back to the option concept the group originally discussed and not bring this up, he added. This was to tell you what BPA is thinking of now -- there may be other approaches, stated Wilson. Let's go back and dust off the umbrella and subsidiary contracts approach, urged a DSI rep.

I thought the option wasn't something you had to buy, said a public power rep. The publics still have the right to buy requirements at the lowest, cost-based price, she said. The option fee depends on how valuable a customer thinks the option is, said a DSI rep. If you are a public customer and think you have the right, you'd be unwilling to pay much for it in bilateral negotiations, he stated. The idea was people would have a choice based on "how lucky they feel" about what the market will be in the future, said a public interest rep. For 10 years? asked a public power rep. That's something we've added, replied Wilson. We'll need to revisit that, said the public power rep. The work group's principles said, leave it to BPA to see how this would work, so we came up with this, Wilson said. There's a unified view here that the financial markets have no place in this, stated a public interest rep. If a customer says it wants to negotiate a long-term fixed price option, we're signaling that we don't expect BPA to take on much of that risk -- we'd immediately go hedge that risk, stated Berwager.

Are you looking at a customer being able to buy an option in lieu of buying power? asked an agency rep. No, the options are all tied to the purchase of power, responded Wilson. A DSI rep suggested that the option right should not expire until after rates are set, rather than what is in the proposal.

A subgroup of customer and public interest reps agreed to meet with BPA staff to work more on the option concept and to reconsider the umbrella and any other means that might get the job done.

 

BREAKING UP IS HARD TO DO

Should this group meet again? asked Adams. There would be value to BPA in having a meeting of this group before it publishes its proposal to test whether there are any "fatal flaws," said Berwager. When do we get to see the package the subscription work group developed -- issues such as allocation, PF'/PF", load growth, and others are "still pretty loosely defined," said a public power rep. I'm thinking the work group won't come to a consensus on a lot of these items, but that BPA will need to move forward and develop its proposal, Berwager stated. Where is the document that says "this is how subscription will be implemented"? asked a public power rep. I thought that all we have talked about in this group would come to conclusion in what BPA proposes, said a DSI rep. But what's the basic implementation? When will the door open and who lines up, how? asked an IOU rep.

"It's not a letting-go thing," but I think there are items this group still needs to discuss, said a customer rep. The group decided to hold more meetings to talk about: the cost-based, market index product; option rights and the umbrella concept; and the implementation approach. Adams and Berwager said they would send out a schedule of August meetings.

 
Adjourn
   

Archive of content originally posted or last updated on:  July 27, 1998.
Content originally provided by:  Syd Berwager, BPA Power Business Line.
Content currently provided by:  PBL Requirements Marketing - PS.
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