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Federal Power Subscription
Interests

Working Draft June 2, 1997

Table of Contents (Click item to move to topic)

  1. About This Document
  2. List of Common BPA/Customer Interests
  3. BPA's Future Role
  4. Business Relationship
  5. BPA's Financial Stability/Risk Sharing
  6. Subscribing
  7. Customers
  8. Contract Period
  9. Contracts
  10. Products
  11. Resale Rights
  12. Pricing/Costs
  13. Transmission
  14. Existing Contracts

About This Document

The business interests articulated in the following pages document the thinking of the participants of the Transition Board's Federal Power Subscription Work Group. This is a product of Task 2 in the Work Group's work plan. This document is dynamic and will expanded as new ideas arise.

This is a collection of individual's thoughts. In the text, the contributors to this list are acknowledged at the end of each particular thought. An attempt has been made to sort the many different thoughts into categories to assist in comparing and contrasting ideas.

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List of Common BPA/Customer Interests

After reviewing the complete Interests document a set of common interests was apparent. With regard to the subscription process, BPA and its customers have a common set of business interests including:

  1. BPA's power products are primarily available for the benefit of the region.
  2. A successful outcome to the subscription process (i.e. BPA's products are fully subscribed and its costs are fully covered through voluntary commercial transactions after 2001).
  3. Contract brevity and simplicity, reflective of diversity among customer needs.
  4. Ability to move quickly with BPA to capture business opportunities through bilateral agreements.
  5. Freedom to choose amount of reliance on BPA.
  6. A broad array of contract and pricing options must be available to customers to meet business needs (i.e. from full requirements to ancillary services).
  7. Prices for products that are competitive with the market over the long term and reflect an appropriate sharing of risks between BPA and the customers taking these products.
  8. Customers have the necessary operational and planning flexibility (products are tailored to meet customers' and end users' needs; displacement right limitations, if any, are defined on a bilateral basis).
  9. No constraints on planning and operation of non-federal resources, except those negotiated on a bilateral basis.
  10. Ability to buy a block of power at a fixed price for a short and/or long duration.
  11. Resale rights for take or pay power (or other forms of relief from the take or pay obligation).
  12. Ability to pool power purchases among customers.
  13. Protection from BPA marketing tactics which create undue risks.
  14. Restrain BPA from using its transmission business to advantage its power business and vice versa.

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BPA's Future Role

Bonneville's purpose is to meet its public responsibilities through commercially successful businesses. [BPA]

As a Federal entity, BPA should be a passive wholesale seller of existing federal power products and services. As a Federal agency, BPA should not take on the type of entrepreneurial risks that are typical of active power marketers that have stockholders that assume such risks in exchange for potential benefits. BPA must not purchase and resell non-Federal power that is not associated with the marketing of the FCRPS. [PacifiCorp]

The role of the federal government in a competitive electric power market that includes retail access should be one of a passive seller at wholesale of existing federal resources. "Passive seller" is a characterization in contrast to an "active seller" or "player" in the marketplace. [WWP]

The intent of the above characterization is to recognize the competitive advantages that the federal government (Bonneville specifically) has if it were able to behave as an unfettered competitor. The federal government operates under different requirements, oversight structures and laws than other competitors in the marketplace. The federal government has certain protection under law not available to other competitors. It is unacceptable to have the federal government aggressively pursuing retail customers given it's special status. [WWP]

The rationale that the federal government should pursue customers in the retail market in order to have an opportunity to earn higher margins or needs to pursue higher margins by being an "active seller" in the wholesale market is flawed. In the case of the federal government, those who truly bear the business risk is fundamentally different from other competitors. [WWP]

An "active seller " in any market may pursue increased margins that, by definition, require shouldering of increased risk. Fundamentals of economics tell us that in a robust competitive market margins will be proportional to risk. High margins may exist temporarily where risk may be relatively low, but new competitors will always enter the market and have the effect of lowering those margins. Pursuit of higher margins with the corresponding higher risk and unpredictability of cost recovery may be appropriate for non-federal competitors, but it is not appropriate for the federal government. [WWP]

The federal Treasury has not indicated that the citizens of the United States are willing to take risk. Bonneville must take guidance from the position of the Treasury and not pursue business that incurs anything more than the basic risk of disposing of the power from the existing federal system, at wholesale, and in manner that provides for a predictable revenue stream structured to cover all of it's costs. [WWP]

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Business Relationship

The needs of customers are likely to be in a constant state of flux, both now and in the future. The general thrust is likely to be for deals of shorter duration, and multiple transaction for each customer as opposed to one, omnibus contract. [WPAG]

The electric industry in the region has shifted from a consensual group pursuing a common interest to a multitude of individual entities pursuing their own economic self-interest. This fundamental shift has changed the environment in which BPA conducts its business, and the needs of its customers. This results in the following business interests, to which BPA must be responsive. [WPAG]

  • Customers will increasingly do transactions for economic gain, not merely to serve load, resulting in far higher volumes of activity. BPA must be prepared to handle these increased volumes, and should encourage and facilitate, rather than resist, this change. [WPAG]
  • There will be a multiplicity of smaller, specialized transactions rather than a limited number of large deals. BPA should capture as many of these smaller, specialized deals as possible, rather than attempting to mold its customers into a few, large, one size fits all transactions. [WPAG]
  • The market environment will encourage innovation and flexibility. BPA must be capable of responding promptly to innovations brought forward by customers. [WPAG]
  • BPA needs to be able to consider, evaluate and quickly consummate transactions at the local level, since time will always be of the essence. [WPAG]

Achieve High And Continually Improving Customer Satisfaction. Keys to customer satisfaction are:

  • Efficient, reliable, forthright business relationships.
  • Attractive products and services
    • Designed to meet customer needs
    • Offered at competitive prices
    • Offered in a straightforward manner (e.g., simple contracts)
  • Flexibility, to accommodate
    • Differences among customers
    • Changing conditions and customer needs
      (BPA should avoid most-favored-nations' contract clauses.) [BPA]

Environment for retail utilities will be intensely competitive for commodity service. Must be able to meet and beat competition, and speed of response is key. Need strategic partner that is capable of offering an array of services at market prices on demand, and that can strike a deal immediately. Would prefer this strategic partner be BPA, but if not, will find someone else. [WPAG]

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BPA's Financial Stability/Risk Sharing

Achieve And Maintain Financial Integrity. A major goal of subscription is to stabilize BPA's revenues and secure its financial integrity over the long term:

  • Improved probability of payments on BPA's Treasury debt. (BPA must have an adequate andreliable revenue stream.)
  • Alignment of the benefits and risks of access to Federal power. (Prices should reflect the degree to which BPA and the customer are sharing risk.)
  • Timely opportunity for BPA to market to customers before they make commitments to other suppliers. (Process schedule should reflect market realities and BPA needs flexibility to do limited sales to customers who approach BPA prior conclusion of subscription process.) [BPA]

Bonneville, its customers and the region have embarked on a process to determine the basis for sale of the Federal Base System (FBS) resources. It is in our interest to assure that there is a successful conclusion to this subscription process such that all BPA power is sold at cost and resulting revenues are sufficient to meet all BPA obligations. [PNGC]

DSIs want the subscription process to succeed. A success is defined as an outcome where BPA has adequate revenues to cover its costs, and these revenues are received entirely through voluntary commercial transactions. No costs are imposed as "stranded costs" on anyone. [DSI]

The subscription process should balance risk and reward such that it is economically and politically stable in a future that includes direct retail access to electric power markets. [WWP]

The public interest will be best served by a successful subscription process. The determinants of success are that BPA's available product is fully subscribed and produces a return that allows it to fully meet its transaction and public agency obligations. Obligations include costs associated with actual transactions, and risks allocated in such transactions. [Duncan]

A transition cost (stranded cost) authority to recover costs associated with BPA's historical generation investments must be devised, applicable to all historical customers, for use only if sales revenues fail to fully meet agency obligations. Absent another mechanism, BPA should reserve its rights to recover such charges through a transmission surcharge to traffic on its system. [Duncan]

Stranded costs associated with BPA Power products sold for a term that precludes availability for the subscription process should not be passed through to the customers, but absorbed by Treasury as a "risk of business ownership." [MPC]

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Subscribing

Public Agency And Cooperative Preference Must Be Maintained. Preference bodies must always have access to the FBS resources to the extent they are available. In other words, a one year purchaser of priority firm power must be able to invoke preference at the termination of that contract without paying a premium (option), provided preference power is available. There should not be a requirement that BPA reserve this power for the eventual use of a public body or cooperative. [PNGC]

All regional wholesale customers and existing direct service customers should have a fair and equitable opportunity to purchase Federal power products and services in the subscription process. [PacifiCorp]

A fair opportunity to buy. Similarly situated customers should have a fair opportunity to buy federal power at the same time and under the same conditions. [WWP]

Rights to purchase BPA power at cost should be contingent on continuous service. Any part or all of a customer's historical load that is removed may subsequently return, but at a market-determined price. [Duncan]

All regional wholesale customers and existing direct service industries desiring to purchase from BPA should have a fair and equitable opportunity. [MPC]

The subscription of BPA power should be accomplished in a manner that balances risks and benefits for BPA and its customers. [MPC]

Comparable open access to BPA Transmission should be facilitated by FERC regulation of BPA Transmission equal to that of IOUs. [MPC]

The Subscription Process should be structured such that BPA products sell at "market relative" prices that maximize revenue sufficient to cover its costs. [MPC]

All BPA power products should be sold both in a disaggregated manner and in packages that customers desire. [MPC]

The IOUs opportunity to buy BPA power products in Phase 2 equal to "actual residential exchange load" should be at prices, terms, and conditions equal to that available to the Public utilities in Phase 1. [MPC]

All interested regional wholesale utilities and DSI participants opportunity to buy BPA power products in Phase 3 should be at price, terms, and conditions equal to that available to the Public utilities in Phase 1. [MPC]

All interested participants opportunity to buy any remaining BPA firm power products and all non-firm power products in Phase 4 should be based on highest competitive bidding at auction, with no preferential treatment. [MPC]

One business relationship that should be offered is an "umbrella contract" or "master agreement".

  • Conceptually similar to the PTP service agreement: a simple contract that enables the business relationship, plus exhibits that define specific services, interconnection standards, prices, a "long term" amount of firm power (i.e., greater than one year), and procedures for requesting and getting prompt responses to requests for shorter-term products
  • supports integration and coordination of separate power and transmission contracts
  • umbrella contract could last 20 years; exhibits could change during the 20 years
  • some or all of the federal power should be deliverable at a variety of points of delivery on reasonable notice
  • shorter-term products should be offered on a standardized basis, e.g., a block of LLH energy, a block of flat power, capacity with a variety of energy return options, and daily load factoring
  • standardized procedures for purchasing shorter-term products:  who to call, how far in advance to call (for some products), how soon BPA will respond, whether the response will contain a firm price or not [PGP]

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Customers

BPA Should Sell To Aggregators Of Preference Customers. PNGC wants to be able to purchase Bonneville's power on behalf of its customers that are utility customers of BPA. Contracts would be between PNGC and BPA. [PNGC]

Flexibility in Load Aggregation Utilities need purchasing flexibility from BPA in order to take advantage of economies of scale and to potentially gain benefits from increasing load factors. This will include joint purchasing alliances among utilities and an ability to pool power within the alliance. Utilities will also need flexibility in the subscription process to pursue loads outside of their service territory in an open-access environment. [NRU]

Federal power products and services should be marketed in a manor that fairly and equitably allocates the benefits of the Federal Columbia River Power System to all the citizens of the Region. [PacifiCorp]

Customers want the ability to purchase power as group of customers (for example: through the aggregation of public utility loads). [PRM]

Combining activities of public utilities, whether in power purchases, scheduling, transmission or other areas, offers the opportunity to capture economics of scale. Power and transmission arrangements should permit, and encourage, public utilities to engage in such pooling activities. [WPAG]

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Contract Period

Contract Terms That Vary In Duration From 1 To 20 Years. Pricing and other conditions would also vary in reflection of the different BPA risks. [PNGC]

Incentive For A Longer Term Contract. We need to design incentives for customers that are considering signing contracts beyond a period of known rates, such as 10 or 20 years. This includes reasonable controls on cost, so that prescribed limitations are not exceeded or new items added to BPA's costs. If conditions are violated, a customer needs the flexibility to leave regardless of the remaining term of the contract. [NRU]

Customers want the ability to choose among contracts of varying lengths (short-term and long term). A customer may want to take a long term block of power and may also want to take shorter term blocks of power from BPA. [PRM]

Rights to renew for contracts shorter than 20 years should be secured by payment of a market-determined option charge. [Duncan]

To preserve the value of the federal resource for the Northwest and reduce the risk to federal taxpayers, long-term contract should be offered, with fixed prices through 2006 and clearly defined options after 2006.

  • Value of an option to purchase federal power "at cost" after 2006 is negligible under current institutional arrangements; therefore, customers' willingness-to-pay for this option is probably zero
  • follow-on rights after an initial contract period must be clearly defined
  • options offered for the post-2206 period must have commercial appeal; examples might include the ability to purchase a fixed quantity at a specified price, with notice of the price provided by BPA in 2005 [PGP]

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Contracts

No Assumption of Take-or-Pay Contract in a Retail Wheeling Environment. Smaller utilities without generation resources expect BPA to provide firm power to meet their net loads. In a post-2001 retail wheeling environment, there will be load changes reflecting BPA's costs compared to market alternatives. It is reasonable to expect some continuing attrition of load to other suppliers that is initiated by the consumers of the BPA customer. (This is different than the utility changing suppliers.) BPA should accommodate these changes without trying to place any responsibility of disposing of "abandoned power" on the utility. This may involve the purchase of a service from BPA beyond energy supply to pay for this risk.

This is not to preclude utilities from entering into block power sales from BPA with active resale rights if that is how they prefer to proceed in lining up power supply. [NRU]

Short and simple contracts and pricing structures. Customers want contracts and pricing structures that are easily understood and readily comparable to those contracts and pricing structures that are offered on the market by other power providers. [PRM]

Simple is better. For both cost-based and market-priced contracts we want them to be simple, straightforward, and standardized. Contracts with complex "billing factors", or multiple rate components are not only difficult for EWEB to analyze, they reduce our confidence in the price certainty of the entire product itself. [EWEB]

BPA should also have the ability to offer customized products and services. This is not a contradiction to our request for "simple and standardized". What we mean here is that if we desire an 18 month contract, we don't want BPA to response, "We've got 1 year and 2 year products, nothing in-between." It's just as feasible to have an 18 month contract that is simple and straightforward as a 2 year contract-- the price is the only difference. [EWEB]

Scale is also important. Standardized contracts sold in small MW block units have the potential to greatly simplify resource planning by making resource decisions more incremental and easy to resell should our requirements change. [EWEB]

A goal of simple contracts will help guarantee the success of the subscription process.

  • No customer obligations beyond purchasing and paying for federal power
  • Short, "commercial grade" contracts
  • neutral resolution of disputes and disagreements
  • price certainty at request of customer
  • exit windows based on simple criteria (e.g., stipulated notice)
  • options to increase purchases during the contract period clearly defined
  • options for purchases beyond initial period clearly defined [PGP]

Customers must have contractual rights to mitigate the risks they will face in more competitive markets after 2001.

  • Resale or remarketing rights
  • flexibility in points of delivery
  • off ramps permitting reductions in amounts purchased on specified notice
  • transmission contracts that support comparable treatment of federal and nonfederal power [PGP]

PGP utilities will look for contractual options that help them respond to hydro and other conditions; examples might include:

  • continued reliance on a "best efforts" obligation to operate non-federal hydro resources, recognizing constraints imposed by coordinated planning
  • a defined ability to shift the purchase obligation within a month, between the months of an operating year, and perhaps between operating years
  • a specified amount of capacity combined with minimum load factors by hour, day, week, month, and year
  • continued reliance on a fixed price for a variable load factor product within specified limits, plus a charge for displacement below certain levels [PGP]

PGP utilities will look for well-defined procedures that govern the choice not to purchase specific components of a bundled power product; examples might include:

  • specific notice to shift the utility's load to another (i.e. nonfederal) control area
  • specific engineering criteria, to maintain reliability, to be met before load can shift to a nonfederal control area
  • notice to eliminate the purchase of load shaping or to change the limits on a variable load factor product [PGP]

PGP utilities will look for contractually specified mechanisms to implement public and regional preference, including:

  • workable procedures to permit exercise of a "first right of refusal" on purchases of amounts of federal power above an initial "subscription" amount, during the initial rate period (e.g., 2002-2006)
  • procedures that define the right of the customer to purchase federal power after an initial period of a known and fixed price (e.g., renewal in FY2007) [PGP]

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Products

A Full Range Of Ancillary Products Should Be Offered. In addition to energy and capacity, Bonneville should offer ancillary products such as reserves, load factoring and load regulation. Any of these ancillary products could be purchased separately. [PNGC]

Full Requirements One product that BPA should offer would include the following elements:

  • Longer term agreement (10-20 years).
  • Provides full service to all or portion of utility load.
  • Service follows load up and down.
  • Rate based on BPA costs.
  • Customer has right to periodically reduce or terminate service. [WPAG]

Fixed Supply One product that BPA should offer would include the following elements:

  • Fixed quantity of power with variable load factor.
  • Fixed duration of supply.
  • Price known and determinable (fixed, index) [WPAG]

Planned Supply One product that BPA should offer would include the following elements:

  • Fixed yearly amount based on load and resource situation.
  • Limited dispatchability.
  • Limited displacability.
  • Price fixed or determinable. [WPAG]

Non Firm One product that BPA should offer would include the following elements:

  • Right of BPA to supply at market for displacement. [WPAG]

Control Area Services One product that BPA should offer would include the following elements:

  • Ability to purchase discrete control area services. [WPAG]

Storage One product that BPA should offer would include the following elements:

  • Ability to store within and between operating years. [WPAG]

Real Time Schedules One product that BPA should offer would include the following elements:

  • Ability to change preschedules for economic transactions. [WPAG]

Power Products Should Be Made Available That Could Be Displaced. PNGC would like to actively manage its resources through the ability to displace some of its purchases when the market permits. There could be a range of displacement provisions, each of which would have a different pricing determination. [PNGC]

Customers want displacement rights that are clearly expressed and more broadly defined. [PRM]

BPA Market-Based Products. There may be a number of key customer groups where BPA will have to provide a power product that is equivalent in price to the competition in order to maintain existing loads, or to allow utilities to compete for new loads. Such a product may be priced lower than cost-based power for the definable short term. However, if customers switch over to it, the loads served by it might effectively remain at market in the long-term. [NRU]

Flexibility to Mix and Match BPA Products. Utilities need to be able to buy various combinations of power from BPA that meets the interests of their consumers. This could include both priority firm as well as surplus firm and non-firm energy. [NRU]

All Federal power products and services should be offered in the subscription process. [PacifiCorp]

Customers want a range of products that are competitively priced when compared to the prices for these products in the market. This would include the price of energy and capacity as well as other power products. [PRM]

Operational flexibility. Customers need to have sufficient operational flexibility as the electric industry faces the changes ahead. Example include: greater displacement rights, ability to pick and chose who supplies what types of products, and the ability to offer customers with different load shapes competitively priced products. [PRM]

Customers want a market-priced product that would be available from BPA to retain existing loads. [PRM]

To the extent that FERC allows, BPA should consider offering bundled products that include delivery as well as unbundled products. [EWEB]

Requirements service

BPA should offer requirements and partial requirements services, although at this point we are undecided whether we will want partial requirements service or a defined MW purchase service from BPA. [EWEB]

BPA post-2001 requirements and partial requirements services should recognize the potential for Retail Customer Choice in their design and pricing. [EWEB]

Other services

Other possible services that we might desire include:

  • Load shaping,
  • "Virtual" CT,
  • half-hour dispatch option,
  • financial products. [EWEB]

All BPA's firm power products should be offered through the subscription process at prices that recover BPA's expected costs. [MPC]

All firm power products not sold in the subscription process and all non-firm power products should be sold to the highest bidder. [MPC]

Customers should be free to choose only the type and the quantity of products and packages they desire. [MPC]

BPA should offer a variety of options, terms, and conditions for both the subscription products and the residual products sold to the highest bidder. [MPC]

The benefits associated with the various products, prices, terms, and conditions should have commensurate balancing risks and obligations. [MPC]

BPA should offer firm prices for varying terms and reasonable customer input to cost control mechanisms. [MPC]

Customers with firm prices should have no cost control input and customers with varying prices should have cost control input commensurate with their purchase commitments. [MPC]

The ability to capture market opportunities by displacing firm purchases has substantial value. Ability to displace, to some degree, is an option that will be sought in all purchase arrangements. [WPAG]

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Resale Rights

Customers Should Have The Ability To Resell BPA Power. To give Bonneville the maximum assurance of recovering its costs, future contracts may require "take or pay" provisions (at least to the extent the contracts are not "all requirements"). Customers cannot accept "take or pay" conditions without the ability to adjust for unexpected loss of load by having the ability to resell those surplus resources. Alternatively, Bonneville could assume the loss of load risk and sell power on a "take AND pay" basis. [PNGC]

Customers want resale rights for any take or pay power. [PRM]

Customers should have resale rights for power purchased from BPA, provided: a) that for public utility customers, BPA should be willing to repurchase power available as a function of loss of single large loads; and b) BPA should have a first option to reacquire, at the purchase price, power purchased by a DSI but not employed to meet the DSI customer's site load. [Duncan]

All products should be resellable. [MPC]

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Pricing/Costs

Price

The Shorter The Contract Duration, The Firmer The Pricing. It is unreasonable for BPA to give guaranteed pricing to its customers for 20 years, but a one year contract should definitely contain price certainty. For those years in between, the price guarantees should be less firm as the duration increases. BPA should be able to guarantee pricing for five years, as it does today. Beyond that, Bonneville could establish the bases for future price determination without casting the actual rate in concrete. [PNGC]

DSIs are interested in a subscription business relationship with BPA where the commitment to purchase a quantity of power from BPA is made for the same duration and at the same time that BPA can commit to a known price for providing the power. This relationship could have numerous forms, including: 1) a short term contract with fixed price and take-or-pay purchase commitment (like the existing 5-year DSI "block sale"); 2) a "rolling forward" commitment to purchase at a known price (such as 5 year blocks with renewal rights if mutual agreement is reached on price, or a 5 year block with annual reups on quantity and price, etc.); and, 3) a long-term (e.g. 20 year) contract with periodic off ramps that allow the purchaser to reduce its purchase amount without penalty for certain events, such as an unacceptable increase in BPA rates. [DSI]

Cost-Based Priority Firm Power Constrained by Markets. BPA should determine and project its costs over time, and develop either fixed price products and services of a know duration, or, additionally, prices with a formula adjustment over time. In establishing price, BPA needs to recognize the short term competitive pressures of the marketplace and should attempt to maintain a high level of subscription. All efforts need to be made to reduce or control costs, including an agreement on spending levels for fish recovery for a prescribed period of time. The short-term price has to be attractive, even if customers view BPA as a solid and dependable resource, with the prospect of long-term benefits of a cost-based system. [NRU]

Low Density Discount. For utilities signing up for cost-based power, we need to ensure that a competitive product can be available in the rural and low density areas that have higher distribution costs. [NRU]

Rate Certainty. The current five-year rate works well. Known rates for five years should be continued, at least for the 2001-2006 period. There needs to be a mechanism to update this rate periodically, allowing customers enough lead time to respond in advance on new rates going into effect. A rolling five-year rate would be useful. [NRU]

Customers want the ability to buy short term products without paying an option fee. [PRM]

As EWEB constructs its post-2001 resource plan we want some portion of our portfolio to be cost-based and some to be market-priced. Because BPA is our largest single supplier, it is likely we will want to buy both cost-based and market-price electricity from them. I realize this presents a dilemma to BPA. How to differentiate the pricing for what is, after all, an identical product--kW and kWh-- and still have both products be viable in the market. [EWEB]

From my perspective, what will differentiate cost-based and market-priced products is the difference in the relative risks and benefits. An analogy that might help is thinking about stocks and bonds. A purchaser of stocks acquires an ownership interest in a company, and takes on a set of risks and potential rewards that is different from a purchaser of a bond. A bondholder is willing to take reduced risk for reduced potential rewards. For BPA to have both kinds of products succeed in the market they need to get the right balance of risks and rewards in each. [EWEB]

An attached table will, I hope, help to delineate some of the differences. (See Table 1). [EWEB]

The following concepts are based on our view that BPA's costs are likely to still be "above market price" even after 2001. However, the subscription process we design needs to work no matter whether BPA's prices are above or below market, for nobody can forecast with certainty. I believe that these ideas will work even if BPA's prices are "below market". In the latter scenario concerns over stranded cost and treasury repayment go away, and are replaced with fairly allocating the BPA system among competing buyers. [EWEB]

Cost-based products

A short-term, cost-based product makes no sense to me. Why would I want to buy an above market contract that would expire just when it has the potential to bring benefits? Therefore, I assume all cost-based contracts will be long-term contracts, 10 to 20 years (or more). [EWEB]

Our foremost concern for the cost-based products we buy from BPA is whether or not our customers will reap any benefits in the long-run after paying above market premiums in the short-run. With long-term, cost-based purchases we do not expect absolute price certainty. EWEB has no cost certainty with its own generation resources, surprises and changes in regulation sometimes happen. [EWEB]

As others have commented, BPA should offer price certainty for as long as they can, but at least for 5 years. After the fixed price period has expired, we expect control over the kinds of expenses included in a cost-based purchases. and clear language in the contract that defines allowable expenses and administrative overhead. The goal is to be able to evaluate a long-term cost-based purchase from BPA as having similar cost certainty to an EWEB owned and controlled resource. [EWEB]

Finally, we think that all buyers of cost-based products should pay the same prices for the same products. However, there will be allocation issues when not all customer want the same cost-based products. For instance, one buyer might want a fixed amount of capacity and energy, while another buyer might want to purchase a percentage slice of the FBS output, almost like an ownership share, and take the hydro output variability. How costs get allocated between these two products is potentially controversial. The Regional Review suggested a Customer Advisory Committee. This committee would be appropriate place to reach consensus on such cost issues before the contracts are signed. [EWEB]

Market-priced products

When I say "market-priced" I mean either a contract price that is set based on the current market conditions, or index based pricing, where the contract price is based on future market prices. (Only the formula has been included in the contract.) The key difference from a cost-based contract is that the price or price formula will not be affected by BPA's costs or changed for the term of the contract. [EWEB]

The challenge of offering market priced products is how can BPA guarantee it's Treasury repayments in the near-term. I do not know the solution to this. However, I do know that EWEB wants to have a portion of its resource portfolio in market-priced contracts, so if BPA wants to be able to serve that need they need to find a solution. (We all do.) [EWEB]

For me, the appropriate risk/reward relationship for market-priced contracts is that since the purchaser has left the risk of Treasury repayments with BPA, they also leave to BPA any potential for positive benefits that BPA might be able to obtain from operating the system. [EWEB]

I am uncertain if BPA should be allowed to offer a guaranteed price in a long-term, market-priced contract. If BPA is unable to keep their costs below a contract price that potentially shifts cost-recovery to those who have signed the cost-based rates. While this is also true in short-term contracts, the uncertainties surrounding long-term contracts are much higher. [EWEB]

Customers should be able to secure short-term (five year) at-cost contracts with BPA that include not-to-exceed price ceilings. Price ceilings can be based on five year agency budgets (including for fish and wildlife costs). Customers can judge the relative risk that prices would reach or fall short of the ceiling. [Duncan]

BPA should price its products for subscription in a manner that ensures a successful process by recognizing their market value, and maximizes revenue sufficient to cover costs. [MPC]

The price of the packaged products should be the sum of the prices of the disaggregated products in the package. [MPC]

The cost allocation method for determining subscription product pricing should reflect the marginal market values of the disaggregated products. [MPC]

Market based prices are determined by open highest bidder auction. [MPC]

Northwest customers must be offered pricing choices in the contractual relationship with BPA for the post-2001 period (all dates here are FY).

  • Fixed pricing for a period up to five years (PGPs preference)
  • other pricing methods if requested (e.g., market indexes) [PGP]

The risk of price changes during and after an initial contract period must be clearly identified; possibilities include:

  • fixed prices through 2006
  • floors and ceilings on prices after 2006
  • formula prices after 2006
  • identification of specific risks to be borne by the customers and by the federal government [PGP]

BPA, its customers, and the region should expect that a substantial portion of federal power will be sold at fixed price contracts after 2001. [PGP]

Costs

The DSIs have no interested in subscribing to BPA at cost -- whatever those costs turn out to be. The proposed customer advisory committee is not a sufficient means for cost control. [DSI]

Known Costs Including Fish By Time Of Subscription Offering. By July of 1999, or earlier, BPA is scheduled to begin bilateral contract negotiations with utilities. We need to know what the BPA costs will be for the years 2001-2006, including fish, so prices of products can be determined. This committee should push the Governors' Transition Board, working with BPA and NMFS and other interested parties, to initiate a process to develop a fish budget for 2001-2006 that establishes and limits BPA's financial participation. [NRU]

If BPA faces stranded historic costs (i.e. WPPSS costs) those costs must be recovered from the specific historic BPA power customers for whom those costs were incurred and not recovered as a charge across all transmission customers or from existing long-term surplus power customers (contracts executed prior to FY 1996). [PacifiCorp]

The obligations to protect fish and wildlife must remain an environmental obligation of the federal power customers and must not be shifted to the federal transmission customers. [PacifiCorp]

Costs should not be shifted unfairly. The legal separation of federal power marketing from transmission is important to prevent cost shifts and to ensure an adequate level of independence, which is currently prevented by statute. [WWP]

Cost Control

DSIs would like to see BPA control its costs so that it can offer cost-based subscription products that meet or beat the market. If BPA's costs are above market, it will need to offer market-priced products for subscriptions to be successful. BPA must offer products that are commercially viable and competitive with alternatives in the market. Pricing of these products should be "cost-based" if possible, but "market-based" if necessary, to be competitive and result in successful "subscription." [DSI]

Be The Lowest-Cost Producer Of Power And Transmission Services. The principal long-term benefit that subscription can provide to customers is low-cost federal power:

  • BPA must make unrelenting efforts to control costs in all aspects of its operations.
  • Fish and wildlife mitigation costs are a major source of uncertainty in BPA's costs. [BPA]

BPA cost control is essential to its ability to offer products that are competitively priced. Of particular importance is control over those costs that are laid on BPA by other entities (fish and wildlife costs, Corps and Bureau costs and Supply System costs) [PRM]

BPA should diligently seek added cost-of-service savings, with regional (not just customer) oversight. Savings initiatives may involve lowering BPA's marketing costs by modifying its marketing role from active competitor to auction seller. [Duncan]

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Transmission

BPA Transmission Pricing At Cost. Bonneville's pricing for transmission should be strictly cost of service without additional surcharges or fees to reflect non-transmission costs. [PNGC]

BPA Deliveries Should Not Have Pancaked Charges. Transmission services should eliminate pancaking when other systems are utilized to deliver to utility customers. In other words, the present General Transfer Agreements (GTA) should continue because affected utilities were told that BPA could better provide GTA deliveries than the utility could construct needed facilities. BPA's participation in IndeGO should resolve this problem. [PNGC]

No Further Segmentation Of BPA Transmission Rates. Bonneville should not separate out any more of its transmission facilities from the grid system and require separate payment for the affected facilities. A recent example of this segmentation was the imposition of a new BPA charge for low voltage deliveries. [PNGC]

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Existing Contracts

DSI interest in subscribing to BPA power post-2001 could be enhanced if the arrangement included a reduction in the rate for power purchased from BPA under existing arrangements prior to 2001. BPA has an opportunity that none of its competitors has to lower the cost of power under existing purchase arrangements as part of a package to secure longer term sales with customers. [DSI]

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Table 1 [EWEB]
(attachment to "Pricing/Costs" section above)
 
Product Cost-based Defined MW Cost-based Requirements Market-priced Defined MW Market-priced Requirements
Description/ example New product 50 MW for 20 years, allowable cost spec'd in contract PF SP contract, 50 MW @ 24 mills for 5 years New product
Contract term Probably only long-term contracts signed Probably only long-term contracts signed Limit on term? Limit on term?
Risks to BPA Least     Highest
Customer has absorbed Treasury repayment risk for portion or project Customer has absorbed Treasury repayment risk for portion or project Customer does not take Treasury repayment risk Customer does not take Treasury repayment risk
  BPA takes on risk of variable customer load due to Choice   BPA takes on risk of variable customer load due to Choice
Benefits to BPA Depends on whether you think cost recovery is a good deal     Negative in short-term, High in long-term
Risks to Customers Highest in short-term
Uncertain in long-term
Customer take on load uncertainty
    Least
Benefits to Customers Negative in short-term,
High in long-term because customer (may) get power below market
    Depends on whether you think power at market price is still a good deal if the market is 90 mills in 20 years

Return to "Pricing/Costs" section above

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Archive of content originally posted or last updated on:  June 6, 1997.
Content originally provided by:  Carolyn Whitney, BPA Power Business Line.
Content currently provided by:  PBL Requirements Marketing - PS.
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