NORTHWEST ENERGY REVIEW TRANSITION BOARD
Thursday, June 11, 1998
Doubletree Hotel City Center, Spokane, Washington
The Northwest Energy Review Transition Board took an interest in the saga of the slice and released new proposals for Federal Energy Regulatory Commission (FERC) regulation of BPA transmission and a "contingent cost recovery mechanism." All members were present, except Roy Hemmingway, who participated by phone. The audience was about 35.
Next Meeting: June 25 in Portland.
HEADLINES______________________________________________________________
Summertime and We Want Commenting to be Easy..................................................p. 1
T-Board’s Proposal for FERC Regulation of BPA’s Transmission............................p. 3
And Its Latest Thinking on a "Contingent Cost Recovery Mechanism"....................p. 6
ORDER OF BUSINESS___________________________________________________
Summertime and We Want Commenting to be Easy
Chairman John Etchart stated that a group of public interest entities had written to the governors complaining that the Transition Board’s schedule doesn’t afford sufficient opportunity for public input into the board’s activities. So let’s address the matter of schedule, he said. We will release proposals on FERC regulation of BPA transmission and transition costs today and will take public comment on them on June 25, Etchart explained. A month later, on July 23, we intend to adopt final versions of the proposals, he said.
Staffer Dick Watson reiterated that the public hearing will be held June 25 at 1:30 p.m. at the Council offices in Portland, and he said that written comment on the proposals will be taken through the end of June. He emphasized that members of the Transition Board and staff will be available for discussions and consultations through July 23. "It’s not a closed process by any means," Watson stated.
What’s the work plan for the entire Northwest chapter for national legislation? asked Jim Baker of the Sierra Club. These are just two parts of the chapter, he said. We are aiming for resolution on transmission regulation and the contingent cost recovery mechanism by July 23, replied Watson. These two pieces are silent on the subject of subscription, he noted. The board is cognizant of discussions and issues surrounding subscription, and it hasn’t decided what to say about subscription yet, Watson stated. If the board does decide to say something about it, the board fully intends to provide opportunities for public involvement in the development of that position, he said. The governors expect that the pieces will be delivered for their consideration by the early fall, Etchart noted. I think the time frame is September, he added.
Does the Slice of the System Product Have A Future?
Larry Weis, general manager of Pend Oreille County PUD and past president of the Public Generating Pool (PGP), defined the slice of the system product as the right of a customer to receive a defined percentage share of Federal Columbia River Power System (FCRPS) capability. It’s actual energy generation over time and the right to modify the rate at which such energy is produced within the bounds of operational and nonpower requirements, he said. This product is similar to the power contracts I have now with the city of Seattle, Weis noted. It’s a contracted share of the capability, and going along with that, is the obligation to pay a corresponding percentage share of costs, he said.
We want slice purchases to be a subscription product, and the terms of the contracts to be five to 20 years, Weis stated. Transmission would not be included, he pointed out. The slice product would include a proportionate share of the storage and shaping rights generally available to BPA, Weis said. There would be no protection against required spill, so a customer would face the same risks as BPA, he noted. We are currently discussing "flexibility accounts" -- rights to a share of the flexibilities of the FCRPS, with BPA keeping a running computation of constraints that would limit a purchaser’s take, said Weis.
BPA held its first public meeting on the slice on Monday, and three more public meetings are scheduled, he pointed out. We’ve been working on this type of product for a long time, Weis indicated. While generating utilities can use this more than non-generators, we’re not interested in a product that shifts costs among customers, he stated. As for possible risks associated with the product, we are used to handling risks, Weis said.
You say you don’t intend to shift costs, but there’s a history of cost shifting with the system, stated Mike Kreidler. Are you relating this to the past or the future? he asked. It depends whether the cost shifting is "micro" or "macro," replied Weis. Of course there is micro, but we don’t want to see macro cost shifting, he said. This product is the purest form of BPA’s cost of power there is, Weis stated.
Wouldn’t this change from the status quo to a system with a truer allocation of system costs cause anxiety on the part of small, full requirements customers? asked Kreidler. There is anxiety from some customers, acknowledged Weis. He said he talked with the Washington State Co-op Association on Monday, and there was anxiety, but "we worked through it and helped them understand the product better." It might be a product they want, and it is a product that will be open to all customers, Weis added. Who was at the meeting? asked Etchart. There was a good turnout and a wide range of interests, Weis replied.
BPA Gives an Updated Prognosis
We had a "tissue reject reaction" to this proposal earlier this year, stated Paul Norman of BPA. Since then, we have talked to the PGP, and they have persuaded us that we misunderstood the proposal and that they are willing to change parts of it, so we’ve re-engaged the discussion on the slice, he said. The talks have been between PGP and BPA, and we think it’s important to broaden the discussion to involve the public, Norman stated. We are making a sincere effort to "find a variant of the concept that complies with the basic principles we’ve laid out," he said. I don’t know if we can find that, but we’re willing to work on it, Norman added.
PGP members are concerned "the subscription train will leave the station" before the slice is defined, according to Norman. We aren’t going to do that -- we want customers to know about the slice choice before they make subscription decisions, he said.
I know BPA has a reluctance about this product due to concerns about cost shifting, said Kreidler. What are those anxieties, and what are you hearing from customers? he asked. Cost shifting has been the biggest worry, replied Norman. We all now know the tests this proposal needs to meet, he stated. I don’t know what the outcome will be, but we’re trying to find "a variant" that accomplishes what these customers want without hurting other customers, said Norman.
Under current contractual arrangements, we take risks there could be bad water years, and the risks we take with this product if we don’t have the water are real, and we’ll have to explain that to our boards, said Weis. There’s a risk going both ways, and that is something that should be understood, agreed Kreidler.
Are you months, weeks, or years away from having something that works? asked Etchart. We have a schedule out to August, replied Norman. I think we need to have a resolution by then and find out "what flavor of this meets the principles" BPA has laid out, he said, adding that such a product would have to be taken to the rate case.
Does the interest in participating in this extend beyond the PGP? asked Kreidler. I think it does, answered Weis. I can’t speak for others, he said, but he noted that there have been discussions by the Pacific Northwest Generating Cooperative (PNGC) and others about joint purchase arrangements. As BPA goes through the public process, it’s a good time to try to flush that interest out, Weis stated.
Can you do as good or better job of risk management than BPA does? asked Kreidler. No, but we think we have the capability of operating our own resources, Weis replied. We think we can handle this concept and the risk real well, he said.
How much interest is there in contracts beyond five years in duration? asked Todd Maddock. It varies among PGP members, responded Weis. My utility is interested in a 20-year deal, and there are others interested in contracts longer than five years, he said. The longer term it goes, the more risks there are that need to be defined, including looking at off-ramps, Weis noted. It gets perplexing from BPA’s perspective and from ours, he added.
Are you suggesting entities without their own resources may want to participate? asked Kreidler. "I think there’s a darn good chance of it," replied Weis.
T-Board’s Proposal for FERC Regulation of BPA’s Transmission
Watson explained that the proposals being offered for public comment result from the Transition Board’s consideration of comments received on the staff "strawman" proposals. These are not final recommendations -- the board is still open to and interested in the views of people in the region, he said. A public hearing will be held June 25, and written comments taken until the end of June, Watson noted. Members of the board and staff will be available for discussions and consultations beyond the end of the written comment period, he emphasized.
Consultant Al Wright said the Transition Board’s proposal on FERC regulation of BPA transmission is written in the same format as the staff strawman proposal and that he would highlight the changes from that proposal to this one. The first issue is "legislative starting point," he noted. The board debated two approaches: one that begins with BPA’s "organic" statutes and modifies them as appropriate "to redefine FERC’s authority," and a second that begins with the Federal Power Act (FPA) and FERC’s authority over investor-owned utilities (IOUs) and makes modifications to reflect BPA’s special circumstances, Wright explained. The strawman proposal started with FERC’s authorities under the FPA, with modifications for BPA, and the Transition Board decided to stay with that approach in the proposal released today, he said. The proposal includes recommendations about sections of the FPA to be amended, Wright noted. It also indicates other sections on which there is disagreement in the region, and about which the board is not yet prepared to make recommendations and is seeking public comment, he said. The proposal includes an attachment titled "What Sections of the Federal Power Act Should Apply to BPA?," which discusses the areas of the FPA where disagreement exists, Wright pointed out.
If BPA is put under FERC regulation, because BPA is not an IOU and has no stockholders, we need to tell FERC what it can’t do to BPA that it can do to IOUs, Wright continued. The Transmission Work Group will meet June 16 to discuss six modifications to the FPA, which, he said, while not trivial, "are not deal-breakers." They are:
-- Total transmission cost recovery.
-- Nothing in FERC’s regulation of BPA should adversely affect BPA’s priority of payments or the security of its third-party debt.
-- Users of BPA’s transmission should, to the extent possible, be able to gain access to meet their environmental obligations.
-- There should be no expansion of FERC authority over BPA’s power costs, except to the extent FERC may be given authority over BPA’s stranded costs.
-- FERC’s redefined authority should apply only to transmission tariffs and other transmission matters proposed to be effective on or after October 1, 2001.
-- BPA should be permitted to join a FERC-regulated independent system operator (ISO).
The first two are the most important of these, according to Wright. FERC has to recognize that BPA has to be able to recover its costs so that "it doesn’t stiff the Treasury," and nothing in FERC regulation should adversely affect BPA’s priority of payments or the security of its third-party debt, he noted. As for the sixth issue, Wright pointed out that the strawman proposal said there should be no impediments to BPA joining an ISO. He pointed out that FERC is now considering whether it can mandate IOUs to join an ISO, and the Transition Board chose not to go any further in its recommendations about BPA joining an ISO until FERC acts on the question.
Another major area is "process," Wright explained, stating that all parties agree that the decisionmaking authority needs to be given to one entity or another -- to FERC or the BPA Administrator -- and that a "fuzzy, half-and-half situation" should not be created. The board thinks that is good guidance, and the process laid out in the proposal clearly leaves FERC as the decisionmaker, he said. There are no changes in the process from the strawman, Wright noted, adding that the BPA Administrator has the discretion to keep matters from going to FERC.
Kreidler pointed out that the Northwest Power Planning Council approved a letter to FERC the previous day that takes a stronger position on FERC mandating utility and BPA participation in an ISO than does this proposal. Etchart asked why the process says appeals of FERC decisions can go to the Ninth Circuit or the District of Columbia Circuit Court of Appeals. Normally with FERC, it’s the District of Columbia Circuit, but because BPA has traditionally been in the Ninth Circuit, some attorneys said, "let it be a horse race to the courthouse," Wright replied. BPA likes its relationship with the Ninth Circuit, and others like the District of Columbia court, so we left it open-ended, he said.
Comments and Clarifying Questions
Shelly Richardson of the Public Power Council referred to the sections of the proposal that say the board thinks the approach of starting with the FPA would be "simpler" because it involves making "an explicit list of modifications to the FPA," rather than combing through BPA’s organic statues "to find all the places where changes are necessary"; and that "it will be necessary to include language that overrides sections of BPA’s organic statutes that conflict with the proposed authorities of FERC." What’s your thinking on what sections might need to be overridden? she asked. That language comes from work group discussions, and from comments which stated that while starting with the FPA is a simpler approach, somebody will have to go through the FPA and through BPA’s organic statutes and see if they apply -- that’s all it means, Wright replied. Would you do a detailed examination of each statute? she asked. Most think that a blanket statement or statements would suffice, but there will still be a need to go through the BPA statutes, Wright said. There’s a fair debate about whether the blanket approach is appropriate, Richardson commented.
With respect to the "total transmission cost recovery" issue, Richardson noted that there’s a legal requirement for total system cost recovery for BPA, and that it doesn’t limit cost recovery to just transmission system costs. She referred to the letter the Council sent to FERC, which says FERC "will need to order ISO participation" to ensure transmission pricing reform and that if FERC does order ISO participation by jurisdictional utilities, it "should seek a mechanism to ensure the federal power marketing administrations, such as BPA, participate as well." Have you considered whether this could lead beyond BPA and extend to non-jurisdictional, consumer-owned utilities? she asked. No, I assume FERC would deal with non-jurisdictional issues as well, replied Wright. This issue has a broader reach than BPA when it is discussed in terms of mandated participation, Richardson stated. We told FERC yesterday that if it wants open access, the Council’s opinion is that FERC should mandate participation in an ISO, said Etchart. FERC should develop a mechanism to effectuate participation by non-jurisdictional utilities, he added.
Richardson referred to language in the proposal that says the board’s proposed process for FERC review of BPA transmission rates is "intended to be identical to that followed for IOUs, except that hearings on BPA rates would be held in the Pacific Northwest." Does that mandate a hearing in the Northwest or is it permissive? she asked, adding the proposal "seems to give FERC several choices." The hearing is permissive to the extent that if all the parties say the filing is okay, FERC can proceed without a hearing, Wright replied. So BPA makes a filing and before FERC accepts or rejects it, parties would comment to FERC on whether a hearing is necessary? she asked. They would intervene, and FERC can send the filing back to BPA if it wishes, Wright said. There has been a lot of concern that if you remove BPA from the decisionmaking, there should be an opportunity for a hearing to be held in the region, Richardson stated. The parties I represent are very concerned about having that, she added.
T-Board’s Latest Thinking on a "Contingent Cost Recovery Mechanism"
Watson pointed out that the "share-the-benefits" provision that was in the strawman proposal is not in the new version, and that the concept of a directed transmission charge is also gone. He noted that over the past months, the Transition Board has developed the view that there is a good chance there will be substantial value in BPA’s system in the near term and the long term. But, Watson continued, the board also recognizes there’s the possibility of "a near or mid-term cash flow issue" that BPA might have to deal with, and also a chance that BPA "could be in a deep hole," under certain conditions.
In developing the contingent cost recovery mechanism proposal, the board attempted to satisfy certain objectives, Watson said. The mechanism should:
-- Align the incidence of future benefits and future risks, to the greatest extent possible.
-- Not disadvantage those who subscribe for BPA power relative to their alternative of purchasing on the market.
-- Minimize and bound the uncertainty to which purchasers of BPA power are subject.
-- Provide incentives for BPA to control its costs.
-- Provide for broad regional participation to ensure cost recovery consistent with the above objectives.
-- Not allow BPA to use its monopoly power in transmission to recover power system costs if power subscribers are paying significantly less than market prices.
The proposed mechanism has three stages, and Treasury deferral is still the trigger, Watson explained. In Stage 1, "use of credits and reserves," any revenue insufficiency would first be addressed through application of 4(h)(10)(C) credits to the extent possible as well as the use of financial reserves, he said. In Stage 2, "capped rate adjustment clause," if financial reserves are exhausted, and BPA is forced to defer a Treasury payment, the Administrator would implement a "capped rate adjustment mechanism" for BPA’s power rates. This would raise subscriber rates to the lower of: 1) the level necessary to eliminate the revenue shortfall, or 2) a predetermined cap. The cap would be set in the rate case leading to the subscription period and be based on a commonly accepted independent forecast or indicator of market prices during the rate period, according to Watson. This mechanism is intended "to provide clarity to potential power subscribers" about their possible exposure to upward rate adjustments before they subscribe, he said.
In Stage 3, "uniform transmission charge," if all the earlier actions prove insufficient, any remaining unrecovered costs would be recovered through a uniform transmission charge, Watson stated. The charge would be limited to $100 million in any year, up to a total of $500 million, and the duration would be 15 years, he said. This stage is intended to result in "broad regional participation in helping address BPA’s cash flow problem, while not disadvantaging BPA’s power customers relative to the market," according to Watson.
Any recovery from the transmission system would be treated as an obligation of the Power Business Line (PBL) to the Transmission Business Line (TBL) that would be repaid when and if conditions permit, with interest calculated at BPA’s cost of capital, he continued. Through this mechanism, power subscribers would repay the TBL out of their future benefits, and if there are no future benefits, there would be no repayment, Watson said. Any power customer that chooses not to re-subscribe to BPA power would have an obligation to repay its share of any PBL obligation to the TBL, he stated.
Watson pointed out the proposal says that if BPA is to experience cost recovery problems, they will probably occur in the 2007-2012 time frame, and it encourages BPA to set rates to ensure an adequate level of reserves entering that rate period. The proposal states that customers and others need confidence there are safeguards to ensure BPA has incentives to manage its costs effectively, particularly in Stage 3, where BPA has monopoly power over the transmission system, he explained. Safeguards include the requirement that the Administrator make full use of authority under Section 4(h)(10)(C) of the Northwest Power Act before implementing contingent cost recovery, and that such cost recovery could only be implemented in the case of an actual Treasury deferral, Watson said. BPA would have to hold a rate case to implement Stage 3, and the Administrator’s decision to impose a transmission surcharge would be reviewed by FERC, he stated. The function of FERC review would be "to see that BPA is adequately mitigating the stranded costs through opportunities to reduce costs and increase revenues while fulfilling its legal obligations," according to Watson. FERC would not have authority to make judgments on the prudence of past expenditures, he added.
Comments and Clarifying Questions
John Saven of Northwest Requirements Utilities asked if the cost recovery mechanism is contingent on federal legislation, and if so, "do you assume the legislation would pass before these events transpire, or that they would transpire in advance of the legislation?" I think this could be done contractually in power and transmission contracts, replied Watson. I have a concurring view, but am not going to testify today, said Saven.
Since the time schedule for major restructuring legislation nationally is in doubt, it would be up to the delegation to decide what vehicle to use, said Kreidler. I assume from your comment that we could proceed with subscriptions and contracts now, stated Saven.
IOU consultant Jim Litchfield said the objective that the mechanism "not allow BPA to use its monopoly power in transmission to recover power system costs if subscribers are paying significantly less than market" appears inconsistent with Stage 2 of the proposal. He noted "there’s little trust in independent forecasts" and that "no forecasts are accurate." You should rethink how to achieve the objective because the rate adjustment mechanism may not be effective, Litchfield advised.
If customers had fixed-rate contracts with BPA that put them above market costs, would you be concerned? asked Kreidler. If people are in five-year deals, and the power market is below BPA’s rate, that’s unfortunate for the purchasers, but they still are expecting future benefits, Litchfield replied. This proposal implies that if BPA is having financial problems, customers are making decisions about being with BPA or in the market, but those aren’t the options, he said. The options are, do you subscribe for five years or longer? Litchfield stated. BPA needs a commitment from customers to agree to pay costs over the longer term, he said. The benefit of subscription is that you get to pay cost, Litchfield stated.
Jim Baker of the Sierra Club stated that his initial reaction to the proposal is that it’s "a step backwards" from the strawman, and "it’s regrettable." The proposal does a good job of setting a ceiling for cost recovery, but doesn’t say much about a floor "or even a basement," Baker said. If all the cost recovery mechanisms are used, and there’s still a problem, who loses -- what doesn’t get paid for? he inquired, adding is it the Treasury, or is it fish and wildlife mitigation? Who loses if the ceiling is too low? Baker asked.
The possibilities are, as the delegation said in a letter to the vice president, there would have to be a way to share additional costs of the nonpower system, or the deferral of a Treasury payment, Watson replied. The latter could bring the attention of other states to the way electricity is delivered and priced in the Northwest, said Baker. Given you are "playing with that kind of gunpowder," why isn’t there a requirement for adequate reserves? he asked.
BPA can include net revenues for risk in its rate case, but these are basically capped by the market, replied Watson. We can’t dictate what they will be, he added. We could say reserves need to be at the highest levels while BPA costs exceed market, suggested Baker.
Steve Weiss of the Northwest Energy Coalition cautioned about setting up a system in which none of the Stage 2 actions occur until reserves are run down to zero. You could go into the first rate period with $500 million, and at the end, be at zero going into the second rate period, which would mean more problems are likely, he said. It would be better to have the Stage 2 mechanisms kick in if there is a forecast that says reserves could go below the end-of-rate-period target level, Weiss stated. If forecasts show you won’t meet the target, that’s when Stage 2 should kick in, he said.
Richardson asked about FERC review of the Administrator’s imposition of a transmission surcharge. What if FERC finds that BPA hasn’t adequately mitigated stranded costs? she asked. It would allow a trigger at a lower level, replied Watson. Once the Administrator decided to impose the surcharge, would FERC have the authority to say you didn’t adequately mitigate stranded costs so the trigger could be at a lower level or not at all? asked Richardson. The intent is to have someone other than the BPA Administrator decide how much of a charge to put up on the transmission system, stated Watson. If you’ve invoked the Stage 2 rate adjustment clause, and FERC says BPA hasn’t adequately mitigated stranded costs, what happens to the shortfall? Richardson inquired. As a federal agency, FERC would have a problem recommending deferral of a Treasury payment, Watson said. In practice, the only thing FERC can do to BPA is say, there are costs out there you are intending to incur -- don’t incur those costs, said Wright. FERC can’t deal with costs that have been incurred, he added.
Under this proposal, FERC would be taking actions in excess of actions it has taken with respect to BPA power rates in the past, said Richardson. It’s true that it gives FERC authority it doesn’t have now, responded Wright. In the event FERC determines the Stage 3 mechanism shouldn’t be used, we need to address what the fallback would be, stated Richardson.
Final Thoughts
Etchart reiterated the opportunities for public comment on the proposal. I encourage everyone to share their thoughts with us in advance of the June 25 hearing, said Kreidler. We’re under strong requirements to submit a report to the governors in July, and we plan to meet that deadline, he stated. The subscription process and rate case are contingent on us addressing these issues, Kreidler said. We hope everyone will communicate their concerns to us, he added.
Meeting Adjourned
Transition Board Members: John Etchart, Montana Governor’s Representative; Roy Hemmingway, Oregon Governor’s Representative; Mike Kreidler, Washington Governor’s Representative; Todd Maddock, Idaho Governor’s Representative. This meeting report is a service provided by the Northwest Power Planning Council, with financial assistance contributed by the Pacific Northwest Utilities Conference Committee (PNUCC).