Bonneville Power Administration (BPA)
Pacific Northwest Utilities Conference Committee (PNUCC)
Summary of July 28, 1998 Meeting827 Building, Portland, OR
The work group considered a revised approach to implementing subscription, the idea of a "cost-based, market-indexed product," and option fees. About 25 people attended.
Next meeting: August 12, 1-4 p.m.
- A New Way to Open the Window
- Cost-Based, Market-Indexed Product Draws Little Support
- Narrowing the Future Purchase Rights Alternatives
Robert Anderson of BPA presented a "refinement" of the implementation approach the group endorsed late last year. The implementation plan we've been working on has two objectives: timeliness, and flexibility, meaning it can work under various circumstances, such as whether BPA is over or undersubscribed, he said. With this approach, the first open window for bilateral contract negotiations would begin on October 1, 1998, and end September 30, 1999. All power sold prior to the end of the rate case would be sold "at a rate or differentiated rates, to be determined in the rate case." The proposal states that "all regional customers would be eligible for these sales, consistent with BPA's statutory obligations" and that a customer's negotiations may begin and end at any time during the subscription period.
BPA would project expected sales to each customer class based on estimates from its Account Executives. The Account Executives would conduct informal discussions in late 1998 when approximate pricing for subscription products would be known. The proposal states that BPA initially plans "to reserve some amount for sale to residential and small farm loads of actively exchanging IOUs." Any power not expected to be sold to preference customers or reserved for residential and small farm loads would be made available to other purchasers according to the priorities established by the Regional Review.
Preference customers would be able to sign up for "the difference between their firm loads and firm resources." Non-preference customers would "be able to sign final contracts for some of their firm power needs" and would "sign up for additional firm power on a contingent basis until BPA determines the amount of firm power available for such loads at the end of the first window." At that time, the proposal says, BPA would re-evaluate the progress of subscription and "plan future sales accordingly," and if firm inventory remains, BPA would open another subscription window.
According to the proposal, BPA would "manage" its way through subscription "in a way that meets customer needs, BPA business needs, and existing statutes." BPA would manage subscription so it has sufficient Federal Base System resources "to serve reasonably foreseeable preference customers' loads." As the first window progresses, BPA would adjust its sales targets based on sales experience and stated customer needs.
The proposal says if sales occur at a pace that meets BPA's business interests, all the power BPA initially identified as available for subscription would be sold through subscription. It says, however, that BPA would periodically review progress and if sales progress too slowly, some power would be released "to the best available markets."
Questions. How does this square with the Regional Review notion that Phase I and II subscriptions would be based on the average of a customer's highest two consecutive years of purchases from BPA? asked a DSI rep. It doesn't, replied Anderson. Given that the rate case won't start until January, the first window could slam shut before we have any rates, observed a public utility rep. It's important that people have adequate time to consummate transactions subsequent to knowing what the prices are, and this doesn't ensure that, he said.
We anticipate that the rate case will be finished in a reasonable amount of time, said a BPA attorney. We're saying that we need an end date for this, he stated. We want to test how soon that can be -- we can always extend the deadline, he added.
The proposal should not put customers in limbo, said a public utility rep. It should say these are the dates BPA will go with, but the cutoff period will be set so that it is no earlier than six months after the rate case ROD is issued, he urged. The previous implementation proposal envisioned gradually closing the window -- why did you change that? asked an agency rep. We thought leaving the window open for two and a half years was too long to close out BPA's public processes, replied a BPA attorney. Customers could be put in limbo during a two-year period, he said, noting that if a customer signs up the first month, it would have to wait almost two years to see if BPA "has a final process that is sustainable." We need to close this off, "hopefully much in advance of September 30, 2001," he continued. This proposal sets forth "a doable period," and if the rate case takes longer, we'll deal with it, he stated.
You should also put some language in this covering those utilities that had a deal in process when the presubscription window slammed shut, advised a public utility rep. You should allow those transactions to go to a conclusion, he said.
Will We All Sign Together or Separately? After contracts are negotiated and the rate case is done, will you issue the ROD and "have a mass signing" or will the contracts be signed as you go along? asked consultant Al Wright. We are not looking for everybody to sign on the same day, said a BPA attorney. There are customers waiting to conclude transactions with us, and we plan to let them do so, he stated. We think this will be customer by customer, he added. Wright asked how sales to the DSIs would relate to the amount of preference load already signed up. Whether we sell more to the DSIs will depend on the other requests we've gotten, replied the BPA attorney. BPA is saying if you don't make a request for service, we'll go through and meet the requests we've received, he stated. It doesn't mean that public customers couldn't request service in 2000 or 2001, he added.
If the publics submit requests, but a DSI customer wants to sign a contract, would that "trump" a request from a public? a public power rep inquired. When a public makes a request for firm load requirements, you can be assured there will be sufficient power available to meet the request, the BPA attorney replied. A public power rep asked if BPA's intention to review progress and release power to "the best available markets" if sales are progressing too slowly could occur before September 1999. We don't expect that would happen until after September 1999, but we won't say we would not do that under any circumstances, Anderson replied.
You should add language that says if the rate case runs longer than anticipated, there will be a six-month window available for contract negotiations after the ROD is issued, said a public utility rep. You should also look at your staffing and consider whether you can get 120-130 contracts negotiated and executed in the time frame that you've given yourself, he said.
A DSI rep asked when BPA anticipates making decisions about its inventory. If the demands exceed your fixed supply, you could turn down the demands, or you could consider acquiring resources to meet the additional demand, he said. It would be better to make those decisions during the subscription process, not at the beginning, he added. We'd start with an estimate at the front of what we'd need to buy, if anything, responded a BPA attorney. You should think more about the supply side of the management question, urged a DSI rep. The management of the supply portfolio depends on the demands placed on BPA -- the information on those demands will change during the subscription window, and the market could change too, he stated. This approach only seems to address half of the question, he added. An agency rep disagreed, saying he thought the purpose of this exercise was to get some indication of inventory up front, instead of leaving it to be "a continually, dynamic process."
Dick Adams of PNUCC asked when sales would be made to non-regional customers. It depends -- if you assume the publics will sign up certain amounts of load, based on what they've been saying, then new extraregional sales would occur after that, replied a BPA attorney. The expectation is that if we have success in the region, we wouldn't make many extraregional sales, but we can't guarantee that, responded Syd Berwager of BPA. We can't make a blanket rule of no sales to non-regional customers as BPA does its contracting over the next year and a half to two years, stated a BPA attorney.
Does "all regional customers" include those that are "not normal BPA customers," such as aggregators? an IOU rep asked. There's a statutory definition of a BPA customer in the Regional Act, replied a BPA attorney and customers would have to qualify under state law, stated Berwager. Where can I find the qualifications? an IOU rep asked. Section 5(b)(4) of the Act says a customer has to comply with BPA's standards of service, replied a BPA attorney. BPA has a policy on standards of service derived from various statutes, he continued. An aggregator is required to comply with the standards of service and to have state authorization in order to sell to retail load, he added.
Anderson stated that BPA would refine the implementation proposal, based on the group's comments, and Adams said a new version would be mailed out to the group.
Carl Buskuhl of BPA said that BPA has entered into contracts indexed to market rates with some of its customers, and he explained how such contracts work. BPA studies have concluded that there are circumstances where BPA is justified to take on a floating price risk, which can be done in several ways, such as buying options or entering into a "long-term swap agreement," Buskuhl said. We've talked to customers and have identified an indexed product that could be an alternative to a fixed price contract, he explained. The index would be adjusted create revenue expectation roughly equal to those expected under a fixed PF rate, according to Buskuhl.
This is not a proposal -- we are discussing with you the advantages and disadvantages to BPA of an indexed product, said Berwager. To what extent would this product be used as a tool in the context of subscription? asked a customer rep. There are a number of ways BPA can get "1,000 megawatts (MW) of floating price," and if the market is like it is today, customers might want some portion of that, stated Buskuhl. If BPA makes money, some have suggested it could be used for fish and wildlife funding, he noted.
What's the cost-based part of the product? asked a customer rep. The day we sign the contract, BPA locks in your obligation to buy and ties it to an index that leads to an expectation that revenues will cover our costs, Buskuhl replied. The benefit is that the customer can pick a time in the future to lock in the price through a financial swap, he said. Your power bill will go up and down, and the point is that you could get a lower price and BPA could get a higher price, according to Buskuhl. Calling it "cost-based" is a misnomer -- it's a market-based product, stated Wright. A subscriber would tie it to the PF rate, and others outside the region would use an index tied to the market, Buskuhl said. If this product diminishes the supply of cost-based subscription power, it will raise the cost of the cost-based product without giving revenue credits back to customers, said a public utility rep. That makes it unpalatable to the people I represent, he said. He called the product "a gamble that we'll make money off some dumb third party."
Some customers see the market differently than we do, said Berwager. This reduces the risk of industrial customers losing load, he stated. If you don't give a revenue credit to the publics, what's in it for us? asked a public utility rep. You'll get higher revenues and you may spend that money on fish programs or other things we may or may not favor, he said. In the contracts we've done, we lock in a certain percentage, and a certain percentage floats, stated Buskuhl. This is not done for speculation -- one reason to do it is to reduce purchase power cost risks, he noted.
Don't offer this product -- it's to the detriment of those who will buy at a cost-based rate, said a public utility rep. If you tried this with 1,000 MW, would your subscription inventory then become 5,800 MW, instead of 6,800 MW? asked Wright. No, 1,000 MW of subscription sales would have this pricing, replied Berwager. Could a customer execute a fixed-price subscription contract and then try to convert some of it to floating? asked an agency rep. We don't envision it working that way, said Buskuhl.
I'm of the school that we are introducing more risk by selling products at this indexed rate, even though you are telling us it isn't so, stated a public power rep. Both the idea and the magnitude of these assumed sales have measurable rate implications, said a public utility rep. I would suggest that a lot of customers would argue there won't be any money left over from this because dollars earned would have to go back as revenue credits, he stated. If this proposal is to convince the fish people there's an upside to structuring subscription this way, I'm sympathetic to the problem, but "this loaf isn't half-baked," he added.
The Fish Connection. I think BPA is using this package to get the Administration to buy off on its fish strategy, said a DSI rep. You say it is optional, but positions have a way of hardening, and it could harden to 10 percent, he continued. One thousand megawatts seems like a large amount, he said. You should "lower the public statements" BPA has been making about expectations of demand for this, he advised. No one in the year and a half this group has been meeting has brought this up as something they want, he said. Buskuhl referred to future circumstances that might involve "deconstructing dams" and changes in both the market and power supply.
I'm not ready to venture into market-based rates when we are paying at cost, said a public power rep. A public utility rep noted a political risk of "letting the camel's nose into the tent of moving away from cost-based power." This idea doesn't deviate from BPA's mission or customers' interests, said an agency rep. "It's not a get-rich scheme" -- it's intended to address BPA's and customers' risks, said Buskuhl.
In three different fish forums, I've heard this touted as "a $2 billion fish program by 2006," said Wright. It's being talked about as a new BPA rate to generate dollars "to bust dams," stated a customer rep. If a customer wants a market rate, BPA could act as an agent, suggested a DSI rep. BPA could go into the market and extend the supply to meet those interests, but don't take the power from the fixed supply, he said. Such an approach would take away your ability to make lots of money, but you could still meet customer interests, he added. That's a good idea, said Buskuhl, promising that he would take the group's comments on this product back to BPA personnel.
A customer rep reported that a small group proposed four alternatives for getting "rights to follow-on contracts." They are:
- Status quo. Subscription power contracts do not address the price of future power purchases or related fees.
- Lowest cost-based, no fee. "Any regional customer purchasing firm power from BPA at a cost-based rate pursuant to a commercial or umbrella contract will have a provision in its contract granting it the option for a follow-on contract to purchase a like amount of power at the applicable lowest cost-based rate." The option would be available as long as the customer continuously purchases power from BPA.
- Lowest cost-based, with fee. The same as Alternative 2, plus a requirement that a payment, negotiated by BPA and the customer, be made for this right.
- Contractual defined mechanism, with negotiated fee. "Any regional customer purchasing firm power from BPA pursuant to a commercial or umbrella contract for a negotiated period of time will be offered the option of including a provision in the contract which will secure the rate at which power may be purchased from BPA in the future." BPA and the customer wishing such a provision would bilaterally negotiate: the mechanism to contractually determine the price at which power can be purchased from BPA in the future; the duration of the price protection and the quantity of power to which it applies; and the price to be paid to BPA for including such a provision in the contract.
An IOU rep noted that the alternatives posit different risks for BPA. As a practical matter, the attraction of these options is based on whether there are tiered rates or not, said a public utility rep. There has yet to be a definition of the lowest, cost-based rate, noted a public power rep. Let's propose Alternative 2 for follow-on rights, but leave Alternative 4 on the table in case some customers want to pursue it, suggested a DSI rep. And leave Alternative 1 on the table for those who want the status quo, said a customer rep. The language in Alternative 2 should be changed to indicate that having the provision in the contract is not obligatory, said a public utility rep. It concerns me that it may not be BPA, it may be NMFS that is willing to pre-sell, stated an IOU rep. I agree that there is an issue there, said a public power rep. There are questions that arise if a minimum period of purchase is not indicated with respect to the rights to a follow-on contract, said Berwager. For instance, is this group suggesting that someone who signs up for only 2 years should have a free option to renew (or not renew) for years 3 through 5, at the same rate as someone who takes on the obligation to buy for all 5 years. That makes no sense.
I move Alternatives 2 and 4 be adopted as "live options" and that the language in Alternative 2 be adjusted to make it permissive, said a customer rep. BPA is not saying it agrees, said Berwager. This is different than what we thought -- we thought that those who signed up for a short period should have to pay an option fee to secure the right to buy at the lowest cost-based rate for the subsequent years, he stated.
Adams said the proposal would be updated to reflect the comments made at the meeting and mailed out to the group.
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