| Monday, June 2, 1997 | NORTHWEST ENERGY REVIEW |
NWPPC Conference Room |
The Northwest Energy Review Transition Board approved a final version of the letter to Northwest members of Congress about recommendations for legislation. The board also heard the latest on Transmission and Federal Power Subscription work group activities. All board members were present. The audience was about 40.
Next Meeting: July 14 in Portland.
HEADLINES_______________________________________________________________
Subscription Work Group Wants to Accelerate
Three Big Enchiladas on the Transmission Work Group?s Plate
Letter to Congress Ready to Mail
A Transition Cost Process Will Move Forward
OPENING REMARKS______________________________________________________
Transition Board chair John Etchart noted that the date for the next meeting has been changed from July 17 to July 14. The meeting, at the NWPPC Conference Room in Portland, will begin at 1:30 p.m.
ORDER OF BUSINESS____________________________________________________
Subscription Work Group Wants to Accelerate
Dick Adams, executive director of PNUCC, reported that the Federal Power Subscription Work Group is thinking of accelerating its schedule by nine to 12 months. He noted that while the group?s timeline shows that the "key milestone" of defining products and pricing principles would occur in mid-1999, the current thinking is that by a year from now, BPA may be able to offer some products with prices.
Adams pointed out that other dates on the timeline, such as the deadline to "resolve fish and wildlife issues," are tied to a change in the products and principles milestone. If we move our schedule up nine to 12 months, we encourage you to try to get closure on fish and wildlife costs -- not necessarily on river governance, but on BPA?s budget costs, Adams told the board.
There are advantages to BPA in moving the schedule up, principally for our customer-service ethic, stated Syd Berwager of BPA. Our customers are getting offers from others, and they would like to see offers from BPA, he said. You?ve heard about "the 2001 cliff" we?re facing, and moving more quickly could bring some certainty to us, Berwager added.
The challenge for BPA is to meet the accelerated schedule -- to be able to establish prices that we could put in contracts at that time, he continued. We think we can do it; we don?t see any showstoppers right now, said Berwager.
Adams noted that the previous schedule called for an assessment of obstacles at the end of 1997 and the end of 1998. If we move the timeline up a year, those assessments would move up accordingly, he stated.
Does having to wait for the dates set out on this schedule disadvantage BPA vis-?vis the marketplace? asked Etchart. It depends on how many customers start filling up their portfolios, Berwager replied. What can a buyer do now for the post-2001 period? Are there sellers willing to make obligations post-2001? Etchart inquired. I understand some are making such offers, Berwager responded.
Adams distributed a 20-page document titled "Federal Power Subscription Interests." He noted that the group finished its task of defining business interests earlier than anticipated. It?s a working draft, Adams commented, adding, "it?s a collection of ideas, not a consensus." The document lists all the interests expressed and all the elements that the group has been talking about, he said. Often in work group environments, you find that 10 percent of the group does 90 percent of the work, observed Adams. That has not been the case with this group -- there has been collaboration and participation by all the members, he said.
Known Prices. Adams described themes and issues that have emerged thus far in the work group. First, customers are more interested in products that have a known price, in contrast to signing up for a Priority Firm rate and every few years doing a rate case to see what the cost is, he said. The known price could be a formula tied to an index, or it could sequence through time, Adams added. The key is that both the buyer and the seller know what it?s going to be, he emphasized. There?s more interest in known pricing than in a customer cost-control board, stated Adams. The issue of cost control is something we talk about at every meeting, he said.
A Menu of Products and Services. Another emerging theme is the notion of customers having a menu of products and services, instead of one contract fits all, reported Adams. Customers want a variety of products, and they want simple contracts, he said. We have spent a lot of time discussing who bears what risks, Adams stated. The Comprehensive Review addressed the issue of risk through an option price, he noted. The question of risk has come up at every meeting, and when we discuss products in more detail, we?ll have to focus on how to balance and mitigate risk, Adams said.
Shorter Contracts. Customers want shorter -- one, two, or five-year -- agreements, Adams said. We are beginning to discuss a 20-year umbrella agreement, with underlying specific product or service agreements that would be renewed every so often, he noted.
No Showstoppers. We don?t see any showstoppers at this point, Adams concluded.
We have talked about preference customers who leave and come back at market prices; what about that as a showstopper? asked Mike Kreidler. There are legislative rights to preference power, but we think there is some flexibility depending on loads, notice, and market conditions, replied Berwager. There?s some flexibility in the existing statutes in pricing Priority Firm, we think, but it is a delicate question, and one we have yet to answer fully, he added. To date, the work group hasn?t identified it as a showstopper, although we haven?t polled everyone on the work group on the issue, Berwager said. The issue is part of the business framework/relationship that we will be starting to talk about, responded Adams.
Also in this next step, the group will begin to define specific products and get closure on those products, Adams explained. We?ll look at such questions as, should BPA offer the product? Does it need some boundaries around it? he said. We will assemble a list of products the group anticipates wanting that BPA is willing to offer, Adams stated. Then we will get to talking about prices, he said.
It?s evident people want to buy short, not long, and that predictability on fish costs is desired, said Kreidler. There are other cost-recovery mechanisms out there, he noted. There?s a need to discuss more than just fish cost control, and I hope you will, Kreidler added. Yes, there?s more than fish to look at in BPA?s costs, including a large debt, Adams agreed.
What About Residential and Small Farm Customers?
Steve Weiss of the Northwest Conservation Act Coalition (NCAC) said the Subscription Work Group has made some progress and is working hard, but hasn?t gotten to the question of buying at cost versus market yet. The issue I want to raise today, he said, is ensuring access to BPA power for IOU residential and small farm customers. Weiss noted that in order to buy BPA power at cost in the future, residential customers, as a block, must sign up during the first power subscription period. The question is who is the proper party to represent IOU residential and small farm customers in the subscription design and contract process? he said.
The subscription meetings have so far been mainly attended by utilities, Weiss noted. We submit that the IOUs cannot represent these customers because they have a number of conflicts of interest, he said. For example, IOUs get to purchase power in tier 3, following the residential customers, and the less these customers get in tier 2, the more is available in tier 3, which can be resold at a profit, he said. The states should be the advocates for these customers, Weiss recommended. He urged the Transition Board to "work in the legislative process" to enable residential and small farm consumers to receive BPA power regardless of decisions by the IOUs, and to have each state immediately appoint an entity to represent the tier 2-eligible customers in the subscription and transmission work groups. Ensuring residential and small farm customers access to BPA power is in BPA?s best interests because the residential load is the most stable and has a load shape BPA can serve at less cost than can competing suppliers using fossil generation, Weiss suggested. In addition, he said, "that?s where the votes are." If Congress sees that much of BPA?s power is serving the residential Northwest "instead of being brokered for private profit," the delegation can make a stronger case for keeping the benefits here, Weiss stated.
I have surfaced the question of the need to expand access to BPA resources to all residential and small farm customers before, noted Todd Maddock. The Comprehensive Review limited it to those now using the exchange, he stated, adding, I think it is important that we are sensitive to the needs of that class of customers.
You have two concerns, responded Weiss. First, the Review said only historical exchangers could take advantage of BPA power. I agree that was a mistake, and I think all residential customers should have access to BPA power, he said. Second, who?s representing these customers? The IOUs have done a great job in these meetings, but they have a conflict of interest on this particular issue, stated Weiss. State government representatives have come to the meetings, but only as observers so far, he noted.
Three Big Enchiladas on the Transmission Work Group?s Plate
Consultant Al Wright reported that the Transmission Work Group has identified about 12-14 issues with respect to legal separation, and that it is now focusing in on three of these:
- FERC regulation of BPA?s transmission equivalent to FERC regulation of IOUs. We?ve found this is not an easy issue, and there is not an easy piece of legislation that can deal with it, he said. It?s a question of the federal government regulating the federal government, and it looks like it will take legislation that is quite involved, Wright explained. We have not explored doing it administratively, through something like a Presidential Order, he added. It?s more complex than we thought, Wright acknowledged.
- Financial issues, such as the BPA fund and the security and tax-exempt status of the Supply System bonds. The issue of legal separation is complicated by the fact that BPA collects revenues from various sources and puts them into a single fund, Wright noted. There is also the issue of the priority of payments that is the basic security of the bonds, he said. If you want the easiest path to satisfy bondholders, you don?t want to separate the funds, Wright stated. We?ve discussed having two funds, but what?s emerging is the idea that we should go ahead and do the separation, and leave the fund alone because it is tied to the bonds, he said.
- The allocation of costs between generation and transmission. The most controversial issue is, can BPA put non-traditional costs on transmission and in the transmission revenue requirement? Wright stated. Paul Murphy of the DSIs wrote a paper stating why the law doesn?t allow you to do so, he said. BPA has a paper that says, we disagree, and that while it?s not normal, "in dire circumstances," BPA can use transmission as a revenue-collection mechanism, Wright said. We are trying to narrow this debate to what we agree on and what is purely an issue of interpretation of the law that we?ll never agree on, he continued. Once we do that, we?ll bring it to you, Wright said. It?s a debate of policy and law, he observed, adding, if we were to decide we want to do it, I think we are hearing agreement to do it only on an emergency basis.
Among the other issues that need to be debated by the group, according to Wright, are: how requirements, such as the priority use of BPA?s transmission system for federal loads, are compatible with the concepts of FERC Order 888; BPA?s role in an Independent Grid Operator (IGO); what a regional IGO is or should be; and form and governance of the two generation and transmission organizations when they are separated. Will they be federal corporations? Will they look like two BPAs? We haven?t discussed this yet, Wright said.
The ability to control costs ties back to the subscription process, and governance is an important factor to enable you to better control costs, noted Maddock. Will that get more of your attention? he asked. Cost control is as important for transmission as subscription, and it will get a lot of attention, Wright replied.
If you decide that some non-traditional charges can be placed on transmission, would that mean there would be conditional membership in IndeGO -- have you discussed that? asked Kreidler. We have talked some about a threshold charge -- for example, if you impose one mill, maybe you can live with it. But if the charge is higher, would entities try to bypass the BPA transmission system? said Wright. BPA is looking into this issue and will come back in a month with a presentation on how easy it is (or isn?t) to bypass its system and what the ramifications would be, he said. What does one mill on the system raise? asked Roy Hemmingway. Something close to $100 million, estimated Randy Hardy.
Letter to Congress Ready to Mail
Staffer Wally Gibson reviewed the latest changes in the letter to Northwest members of Congress regarding which recommendations of the Comprehensive Review would require federal legislation. For example, he noted that the transmission section now refers to "BPA?s transmission responsibilities under its organic authorities" in addition to the 1986 Supplemental Appropriations Act as possible constraints to BPA?s participation in a regional IGO. The subscription section now notes that the work group is trying to accelerate its schedule, he said. The section on BPA cost control has been expanded and states that the board is considering working with BPA to establish a "cost-control forum to assist BPA in controlling costs in preparation for a post-2001 subscription process."
The stranded costs section of the letter has been retitled "transition costs," and it now says that "developing a realistic process for BPA?s possible transition costs will take time and should not be postponed." The letter says that the board intends to carry out a process to discuss BPA?s potential transition costs and that it should go forward "parallel to, but somewhat slower than, the subscription process." It states that the hope is this process will not distract from the subscription discussions and that the objective is "to analyze options for a contingent transition cost-recovery mechanism at a pace that will be measured enough so as to not disrupt subscription and timely enough to provide the basis for legislation if required."
The letter now contains a section on public purposes that recognizes the states are working to address retail access legislation, including public purposes, and many utilities are continuing efforts to secure conservation and renewable resources. The letter notes that only one Northwest state has enacted legislation and that it is unlikely the board will know by June 30 whether the regional standard called for in the Review is being met. It mentions that retail competition legislation that contains provisions for funding public purposes has been introduced in Congress and states that "it is possible that the region will be seeking provisions in that legislation establishing a minimum standard for public purposes consistent with the recommendations of the Review." After a few clarifying questions on the revised letter, Etchart asked the other members of the board if they had any additional comments on the letter, and they did not.
A Transition Cost Process Will Move Forward
Wright explained that the new language on transition costs in the letter to Congress responds to concerns that while there is a transmission process and a subscription process, and the states are working on public purposes, nothing is being done on transition costs. Staff is recommending, he continued, that a process for "contingent transition cost-recovery mechanisms" be developed. We think it is appropriate that we use a different name than "stranded costs" because what we are talking about is not the same as the definition evolving at the national level, said Wright. We don?t want this effort to interfere with the subscription process, he added.
The staff is preparing a seven-to-10 page background paper that explains why the problem is on the front burner and what other places in the country are doing about it, Wright stated. It will contain no recommendations, he pointed out. We want the paper to be out by the end of the month, and we suggest that members of the Transition Board begin talking with interested parties between now and July 14, Wright said. We suggest you talk about developing a set of principles to govern transition cost mechanisms and starting a scoping process "to see how big or little a problem this is," he stated.
We?ll put this issue on the July 14 agenda, but we don?t know what the exact content will be until the board has discussed it with interested parties, Wright said. After that meeting, we suggest you proceed with a regional discussion of these issues to explore what options are available and the consequences of using any of them, he continued. That effort would probably take us into the fall or late 1997, Wright noted. The key thing is to not do something that focuses everyone on this and distracts the subscription and transmission processes, he stated.
You note that mechanisms being used elsewhere in the country are not applicable to stranded costs in the Northwest, but we think there are some fundamental principles, commented Mike Steward of Puget Sound Energy. They are that power costs should remain power costs and not become transmission costs, and that costs incurred on behalf of particular customers should remain with those customers, he said.
You have built in the idea that this process would be slower than the subscription process, noted Weiss. There?s a big cost-shifting issue here, and an integral part of the subscription process is to figure out what the contingencies will be, he said. Most customers want to know the rules before they sign up, Weiss continued. I think the two processes should run in parallel, and I don?t know why this one should be slower, he stated.
I think there is a concern to not force people in the subscription process to only talk through their attorneys -- we don?t want that, said Kreidler. This approach is trying to find a compromise, he stated. The intent is not to delay; we are trying to look for possible solutions, Kreidler said.
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).