[Federal Register: July 20, 2004 (Volume 69, Number 138)]
[Notices]
[Page 43399-43410]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20jy04-36]
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DEPARTMENT OF ENERGY
Bonneville Power Administration
Opportunity for Public Comment; Bonneville Power Administration's
Policy Proposal for Power Supply Role for Fiscal Years 2007-2011
AGENCY: Bonneville Power Administration (BPA), Department of Energy.
ACTION: Notice of Regional Dialogue policy proposal and opportunity for
public comment.
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SUMMARY: BPA is publishing a policy proposal stating how the agency
proposes to market power and distribute the costs and benefits of the
Federal Columbia River Power System (FCRPS) in the Pacific Northwest
for Fiscal Years (FY) 2007-2011. This proposal is intended to clarify
BPA's obligation to supply power to its regional power customers and
guide BPA in developing and establishing its firm power rates in the
future. Clarifying these issues will create valuable certainty for
customers over their BPA power supply. Final policy decisions will be
made by BPA in December 2004 after all public comments have been
reviewed.
DATES: Public comments will be accepted through September 22, 2004.
Public meeting dates are included in the SUPPLEMENTARY INFORMATION
section below.
ADDRESSES: Written comments should be submitted to Bonneville Power
Administration, P.O. Box 14428, Portland OR 97293-4428. Comments can
also be sent via e-mail to comment@bpa.gov or submitted on-line at
http://www.bpa.gov/comment The proposal is also available at http://www.bpa.gov/power/regionaldialogue.
Helen Goodwin, Regional Dialogue
project manager, is the official responsible for the development of the
Regional Dialogue proposal.
FOR FURTHER INFORMATION CONTACT: Helen Goodwin, Regional Dialogue
project manager, at (503) 230-3129.
SUPPLEMENTARY INFORMATION:
Schedule of public meetings:
1. August 17, 2004, 6 to 8 p.m., Seattle, Wash.--Mountaineers
Headquarters, Olympus Room, 300 Third Avenue West.
2. August 19, 2004, 6:30 to 8:30 p.m., Eugene, Ore.--Eugene Water &
Electric Board, 500 East 4th Avenue.
3. August 26, 2004, 6 to 8 p.m., Spokane, Wash.--Airport Ramada
Inn, 8909 Airport Road.
4. August 31, 2004, 6 to 8 p.m., Boise, Idaho--Boise Centre on the
Grove, 850 W. Front Street.
5. September 9, 2004, 6 to 8 p.m., Portland, Ore.--East Portland
Community Center, 740 SE 106th Avenue.
6. September 15, 2004, 5 to 7 p.m., Kalispell, Mont.--WestCoast
Kalispell Center Hotel, 20 North Main Street.
Any changes or additions to this meeting schedule will be posted on
BPA's Regional Dialogue Web site at http://www.bpa.gov/power/regionaldialogue
.
Table of Contents
I. The Origins of Regional Dialogue
II. Scope of the Proposal
III. Council Recommendations on BPA's Future Role
IV. Link to FY 2007-2011 Strategic Direction
A. The Report to the Region
B. Strategic Direction
C. Customer and Stakeholder Comments on the Agency Vision
V. BPA Loads and Resources FY 2007-2011
VI. An Integrated Strategy for FY 2007-2011
A. FY 2007-2011 Rights to Lowest-Cost Priority Firm (PF) Rate
B. Tiered Rates
C. Term of the Next Rate Period
D. Service to Publics with Expiring Five-Year Purchase
Commitments that Do Not Contain Lowest PF Rate Guarantee through FY
2011
E. Service to New Publics and Annexed Investor-Owned Utility
(IOU) Loads
F. Product Availability
G. Service to Direct Service Industries (DSIs)
H. Service to New Large Single Loads (NLSL)
I. Service to Residential and Small-Farm Consumers of Investor-
Owned Utilities (IOUs)
J. Conservation Resources
K. Renewable Resources
L. Controlling Costs and Consulting with BPA's Stakeholders
VII. Long-Term Issues
A. Proposed Long-Term Policy: Limiting BPA's Long-Term Load
Service Obligation at Embedded Cost Rates for Pacific Northwest Firm
Requirements Loads
B. Proposed Schedule for Long-Term Issue Resolution
VIII. Risk Analysis
IX. Environmental Analysis
X. Next Steps
I. The Origins of Regional Dialogue
BPA is engaged in the Regional Dialogue process as part of its
effort to provide clarity around key issues the agency and region will
face when the current rate period ends with FY 2006. BPA's immediate
goal is to decide issues for the FY 2007-2011 period that prepare the
way for setting rates for the next rate period while assuring that the
agency's long-term strategic goals and its long-term responsibilities
to the region are aligned.
BPA must make and carry out policy decisions that promote the
development of a cost-effective electric industry infrastructure and
protect the value of the existing Federal system for the region in the
long run without shifting risk to U.S. taxpayers.
These decisions will provide customers greater clarity about their
Federal power supply so that they can plan effectively for the future
and make capital investments in long-term electricity infrastructure,
if they so choose. This process and ongoing efforts within the Western
Interconnection and the Pacific Northwest to develop resource adequacy
metrics will provide necessary transparency to the region's load
serving entities regarding the amount of resources needed to serve
load. BPA's strategic interest is to improve this clarity soon to avoid
creating significant risk for the region's ratepayers that would come
from delaying the development of the necessary infrastructure. Delays
could create imbalance between supply and demand, which could in turn
cause excessive price levels and volatility.
The Regional Dialogue began in April 2002 when a group of BPA's
Pacific Northwest electric utility customers submitted a ``joint
customer proposal'' to BPA. This proposal focused on settling the
outstanding litigation on the Residential Exchange Program Settlement
Agreement signed in 2000, as well as on determining how to market
Federal power and distribute the costs and benefits of the FCRPS for 20
years. Although BPA agreed with substantial portions of the proposal,
there were also areas of disagreement, such as the methodology and
magnitude of benefits potentially offered to investor-owned utilities
(IOUs) for the benefit of their residential and small-farm consumers.
In June 2002, BPA and the Northwest Power and Conservation Council
(Council) jointly initiated a public process regarding BPA's marketing
of Federal power post-2006. In September 2002, several jointly
sponsored public meetings were held throughout the region for
interested parties to discuss their proposals and provide new ideas and
suggestions. BPA and the Council accepted comments and proposals from
all interested parties. This phase of the Regional Dialogue ended when
the Council submitted final recommendations on ``The Future Role of
Bonneville'' to BPA in December 2002.
In February 2003, faced with a continuing financial crisis, BPA
announced that it would proceed with a rate-setting process for the
Safety Net Cost Recovery Adjustment Clause (SN CRAC). Consequently, BPA
decided that the Regional Dialogue discussions
[[Page 43400]]
should take on a slower, more deliberate pace, focusing only on a
couple of key items, such as the level of benefits for the residential
and small-farm consumers of the region's IOUs, until the rate case
concluded.
In a June 5, 2003, letter, the governors of the four Pacific
Northwest states encouraged BPA and the Council to jointly restart the
Regional Dialogue. In response, BPA and the Council hosted a series of
informal meetings with customers and interested parties throughout the
region in the fall of 2003. Shortly thereafter, the Council released a
set of principles and an issue paper entitled ``Proposed Council
Principles for the Future Role of the Bonneville Power Administration
in Power Supply'' for public comment. Following the close of comment in
December 2003, the Council held several workgroup meetings aimed at
gathering input from customers and others to help guide its next round
of recommendations on the future role of BPA in power supply.
Following conclusion of the workgroup meetings, the Council
released in April 2004 its draft recommendations on ``The Future Role
of the Bonneville Power Administration in Power Supply'' and took
public comment. Those recommendations were finalized and sent to BPA in
May 2004.
In February 2004, BPA sent a letter to the region updating BPA's
plans for resolving Regional Dialogue issues. This letter included a
plan to present this policy proposal to the region for comment by the
end of June 2004.
II. Scope of the Proposal
BPA's current firm power rates expire at the end of FY 2006 while
nearly all of BPA's regional power sales contracts continue through FY
2011. BPA believes its first priority in the Regional Dialogue must be
to resolve policy issues that likely will influence the next rate case
and which must otherwise be made before 2007. This is the focus of this
proposal.
In the February 2004 letter, BPA identified issues that are a
priority to resolve for the FY 2007-2011 period. While this Regional
Dialogue proposal focuses primarily on the FY 2007-2011 issues, key
long-term questions remain unanswered. BPA is committed to resolving
the long-term issues soon after the conclusion of this current process.
A proposed process and schedule for resolving these issues is included
in Section VII.B. BPA is strongly motivated to meet that schedule with
the greatest degree of regional alignment possible. However, even if
regional consensus does not emerge, BPA is committed to resolving the
longer-term issues of who has the obligation to serve. BPA intends to
make decisions based on the schedule outlined in Section VII.B.
III. Council Recommendations on BPA's Future Role
BPA thoroughly examined the Council's recommendations as it
developed this proposal. This review showed that BPA's proposal and the
Council's recommendations differ relatively little where the two
address the same issues. BPA has intentionally limited the scope of
this proposal primarily to issues that have to be resolved for FY 2007-
2011. Consequently, issues such as the long-term ``allocation'' of the
system are not addressed. As already mentioned, BPA agrees with the
Council over the importance of these long-term issues and proposes a
schedule for their resolution in Section VII.B.
Overall, BPA and the Council agree on the overall goals of the
Regional Dialogue process--resolution of BPA's long-term role in
providing power to regional customers at the lowest embedded cost-based
rate, and capturing that role in long-term contracts and rates as soon
as possible to create a durable solution. This proposal is the first
step toward meeting these goals.
IV. Link to FY 2007-2011 Strategic Direction
The financial impacts of the West Coast energy crisis of 2000-2001
led many utilities to examine their policies and approaches to their
power supply. BPA is no exception. Over the past year, BPA has invested
much time and effort in strategic planning. The agency is in the
process of finalizing its strategic direction with emphasis on FY 2007-
2011.
This re-examination of BPA's mission and values is, along with
comments and advice from the Council, customers, and other regional
stakeholders, informing the agency's approach to the Regional Dialogue
process.
A. The Report to the Region
In early 2003, BPA initiated a detailed examination of the events
that began in 2000 that led to the significant rate increases and
deterioration of BPA's financial condition. On April 18, 2003, BPA
released a Report to the Region that included lessons the agency had
learned, with the intention of translating those lessons into future
actions.
Among a number of other lessons, the report noted that the level of
BPA's costs and risks are driven heavily by the load obligations BPA
assumes. Meeting those obligations was a large driver of BPA's cost and
rate levels. The report pointed out that the amount of risk (market
volatility and uncertainty) to be managed in the region's power system
has grown substantially in recent years, and the fraction of that risk
that BPA can absorb has gotten smaller. The report also noted that BPA
must avoid the need to acquire large amounts of power on short notice
to meet demand. There were also a number of recommendations for process
improvement in cost management, decision making, risk analysis, and
communications that BPA has put into place agency wide and used in
developing this proposal.
The Regional Dialogue proposal has been developed specifically with
those lessons in mind, particularly to resolve the agency's load
uncertainty as soon as possible and provide customers with the
certainty they need.
B. Strategic Direction
The Report to the Region highlighted the need for BPA to have a
clear and steady strategy and manage to clear objectives. In response,
the agency devoted a significant amount of time in the last year to
clarifying its strategic direction.
BPA's strategic direction establishes the agency's most important
objectives and the actions that will help it manage to these
objectives. The strategic direction calls on BPA to advance the Pacific
Northwest's future leadership in four core values--high reliability,
low rates consistent with sound business principles, responsible
environmental stewardship, and clear accountability to the region.
It should come as no surprise that the subjects to be covered in
the Regional Dialogue process are well represented in the agency's
strategic direction, particularly with regard to BPA's role as a low-
cost provider and for clear regional accountability. The strategic
direction guiding this proposal includes:
1. Regional Infrastructure Development: BPA policies encourage
regional actions that ensure adequate, efficient, and reliable
transmission and power service.
2. Conservation and Renewables: Development of all cost-effective
energy efficiency to meet BPA loads, facilitation of regional renewable
resources, and adoption of cost-effective non-construction alternatives
to transmission expansion.
3. Benefits to Residential and Small-Farm Consumers of IOUs: The
post-2011 benefit that BPA provides to IOUs for their residential and
small-farm
[[Page 43401]]
consumers is equitable based on the Northwest Power Act.
4. Rates: BPA's lowest firm power rates to public preference
customers are consistent with sound business principles, reflect the
cost of the undiluted Federal Base System (FBS) and are below market
for comparable products, are predictable, and have low volatility.
5. Service to Direct Service Industrial Customers (DSIs): Explore a
post-2006 DSI service option with a known or capped value.
6. Regional Stakeholder Satisfaction: Customer, constituent, and
tribal satisfaction, trust, and confidence meet targeted levels.
7. Management: Collaborative customer/constituent/tribal
relationships are supported by managing to clear long-term objectives
with reliable results.
8. Cost Recovery: Consistent cost recovery over time.
9. Treasury Payment: BPA will plan to achieve and maintain a
Treasury payment probability (TPP) that is the equivalent of a 95
percent probability for a two-year period and 88 percent for a five-
year period. Options for achieving this goal include, but are not
limited to, Cost Recovery Adjustment Clauses (CRACs) and Planned Net
Revenue for Risk (PNRR).
10. Ratepayer and Taxpayer Interests: FCRPS assets are managed to
protect ratepayer and taxpayer interests for the long-term.
11. Best Practices: Best practices (with emphasis on cost
performance and simplicity) are obtained in key systems and processes.
12. Risk: Risks are managed within acceptable bounds. An additional
principle guiding the Regional Dialogue is:
13. Legal Criteria: Approaches or policy options should not require
legislative change and should minimize legal risk.
C. Customer and Stakeholder Comments on the Agency Vision
In the spring of 2004, BPA publicly released information about its
long-term strategic direction as a springboard for discussions with
customers and other stakeholders. The issues addressed in the strategic
direction, as mentioned above, serve as the foundation for the Regional
Dialogue. Account Executives held informal meetings and conversations
with customers and discussed and recorded their comments. Some
customers, as well as other constituents, also submitted written
comments.
In the process of developing this proposal, BPA analyzed and
considered 388 comments related to Regional Dialogue issues. Many who
commented said that allocation of the system is a high priority issue
and that the appropriate timing is now. They cautioned that discussions
regarding BPA's long-term obligation to serve at embedded cost rates
for Pacific Northwest firm requirements loads and related decisions
would be difficult, and their objections to tiered rates were much more
frequent than support. Commenters said that any allocation should be
done before entering into the process to tier power rates.
V. BPA Loads and Resources FY 2007-2011
In order to match BPA's firm power obligation for FY 2007-2011 to
its resources, this discussion needs to begin with a clear
understanding of BPA's current loads and resources.
For the FY 2007-2011 period, BPA projects that firm power sales
obligations will exceed firm Federal resources, with the difference
growing from a deficit of about 15 average megawatts (aMW) in FY 2007
to about 190 aMW by FY 2011. Although it will have to be carefully
managed, a deficit of this size does not create the same degree of cost
and rate risk exposure as that BPA faced in 2000-2001 when the agency
was preparing to solve the 3,300 aMW deficit it faced for FY 2002-2006.
Historically, the system has remained in balance either by BPA making
power purchases or through customer load reductions consistent with
then-effective contractual terms and conditions. The price of solving
BPA's 3,300 aMW deficit has been a 50 percent increase in BPA's
wholesale power rates.
BPA assesses its loads and resources in its annual Loads and
Resources Study, or ``Whitebook,'' as well as in the forecasts used to
set firm power rates. These studies, which are a compilation of load
and resource projections, provide a synopsis of BPA's loads and
resources analyses. They share three major interrelated components: (1)
BPA's Federal system load forecast; (2) BPA's Federal system resource
forecast; and (3) load and resource balances.
The Federal system load forecast is the forecast of firm energy
sales that BPA expects to make during the FY 2007-2011 period. It
comprises aggregated net requirements sales forecasts for public
utilities and Federal agencies, DSI customers, IOUs, and other BPA
contractual obligations.
The majority of BPA's public utility and Federal agency customers
have contracts that continue through September 30, 2011. A small number
of contracts terminate or contain off-ramps as of September 30, 2006.
For this estimate, BPA assumes public utility sales to Block and Slice/
Block customers will equal their current contractual amounts, including
step-ups in 2007, and that BPA will continue to serve those loads
during the FY 2007-2011 period. There are no sales to the DSIs and no
deliveries of power to the IOUs assumed during the FY 2007-2011 period
because contracts currently do not call for deliveries to any of these
customers. In fact, recently signed agreements with the IOUs explicitly
state that there will not be any power sales for FY 2007-2011.
The forecast of available generating and contract resources
includes the output of Federally-owned hydro generation, non-Federally-
owned resources (hydro, thermal, and wind projects), exchange energy
associated with BPA's existing capacity-for-energy exchanges, power
purchases, and other BPA hydro-related contracts. Firm hydro resources
are based on 1937 critical water conditions under the 2000 Biological
Opinion that was implemented December 20, 2000, and incorporates
changes associated in hydro regulation 03SN67a and up to 172 aMW of
hydro improvements by FY 2012. The thermal firm resource is Columbia
Generating Station. Examples of non-Federally owned resources include
the Foote Creek 1, 2, and 4, Stateline, Condon, and Klondike Phase 1
wind projects; Ashland solar; Wauna cogeneration and Cowlitz Falls and
Dworshak hydro.
To calculate the BPA load resource balance, BPA compares Federal
system firm energy loads with Federal system energy outputs for each
month of the study period years. The results of this comparison yield
the monthly and annual firm energy surplus or deficit of the Federal
system.
VI. An Integrated Strategy for FY 2007-2011
A. FY 2007-2011 Rights to Lowest-Cost Priority Firm (PF) Rate
Most current 10-year Subscription contracts with public utility
customers contain a guarantee that BPA will apply the lowest cost-based
PF rates throughout the remaining term of the Subscription power sales
contracts. Three five-year contracts also contain this 10-year
guarantee.
Upon review, BPA believes this contractual guarantee is clear.
Accordingly, even if BPA were to adopt a tiered-rate design during the
term of
[[Page 43402]]
the existing contracts, BPA would not apply a higher priced PF Tier 2
rate to the purchases of customers whose contracts contain the rate
guarantee during the term of the contract.
B. Tiered Rates
BPA proposes in Section VII.A. a long-term policy to limit its
sales of firm power to its Pacific Northwest customers' firm
requirements loads at its embedded cost rates to approximately the firm
capability of the existing Federal system. Administrator Steve Wright
suggested in his December 9, 2003, letter to the Council that BPA
believes tiered rates should be fully explored as a means to achieve
that goal. In comments to the Council, many customers have voiced
concerns regarding implementing tiered rates in the rate period
starting in FY 2007. Most agreed with limiting BPA sales at embedded
cost, but urged that new long-term contracts defining rights to the
lowest embedded cost rate be developed before BPA puts tiered rates
into effect. In its May 2004 recommendations ``The Future Role of the
Bonneville Power Administration in Power Supply,'' the Council
acknowledged that tiered rates would be the clearest practical
indication of how BPA will be carrying out its role in the future.
However, it went on to say, if BPA defines its role as the Council
recommends, and if critical issues are resolved in a timeframe
consistent with the Council's request that new contracts be offered no
later than October 2007, then the Council would not press for tiered
rates under the current contracts for the next rate period.
BPA is obligated to serve customer net requirements, even if that
request is in excess of what the existing Federal system can supply.
BPA believes tiered rates in combination with new contracts are a
necessary part of the long-term solution to limit BPA's sales at
embedded costs for Pacific Northwest firm requirements loads to the
existing system. However, BPA also believes it is not critical to
implement tiered rates in FY 2007, because BPA loads and resources are
roughly in balance for the FY 2007-2011 period. Accordingly, BPA
proposes to exclude tiered rates in its FY 2007 initial rate proposal.
Instead, BPA proposes to explore tiered rates as part of an integrated
long-term contract and rate solution that would implement the proposed
long-term policy of limiting BPA sales at embedded cost for Pacific
Northwest firm requirements loads.
C. Term of the Next Rate Period
Most of BPA's current power contracts are effective through FY
2011. BPA's current power rates are effective through September 30,
2006. In early 2005, BPA will begin rate case workshops in preparation
for the FY 2007 rate case that will set rates for the next rate period.
Based in part on suggestions from customers and others, BPA has already
made a tentative decision to limit the duration of the next rate period
to less than five years. The primary reason for doing so is to reduce
the risk inherent in setting rates for longer periods of time, thus
allowing BPA to set rates lower than otherwise would be the case and to
reduce the need for rate adjustment mechanisms like the current CRACs.
BPA is proposing to limit the next rate period to either two or three
years. Before making a final decision on this, BPA would like to
consider public comments. The following are some considerations on the
length of the rate periods:
Two-year rate period (October 2006-September 2008): A two-year rate
period would likely result in lower rates, and lessen the need for rate
adjustment mechanisms due to reduced uncertainty. In Section VII.B.,
BPA proposes a schedule for developing new long-term power contracts,
with the earliest effective date of those contracts projected at
October 1, 2008. A two-year rate period would synchronize the start of
these new contracts with the start of the subsequent rate period, both
in FY 2009. However, proposing a two-year rate period is not without
risk. Putting new contracts and new rates in place by FY 2009 will
require a major effort in a compressed time frame by BPA and its
customers. The formal rate case to support these new contracts would
likely need to occur between January and August 2008. A separate rates
process to define a long-term rate methodology may also be necessary.
If new contracts are not in place by October 2008, but rates expire on
that date, BPA would either have to extend then-effective rates or
conduct a new rate case.
Three-year rate period (October 2006-September 2009): A three-year
rate period would enable the Power Business Line's (PBL) rate period to
coincide with the BPA Transmission Business Line's (TBL) rate period
starting in October 2009, as requested by some customers and other
interested parties. It would reduce the risk of not completing long-
term contract negotiations on schedule and having to conduct a new rate
case or extend rates. If BPA's long-term policy decision and subsequent
contract negotiations are concluded earlier, BPA would have to replace
those rates with new rates that reflect the new Regional Dialogue
contracts.
D. Service to Publics With Expiring Five-Year Purchase Commitments That
Do Not Contain Lowest PF Rate Guarantee Through FY 2011
The majority of BPA's public body, cooperative, and Federal agency
customers signed 10-year Subscription contracts during the 1999-2000
Subscription period. However, seven public customers entered into five-
year Subscription contracts, representing 307 aMW of load, expiring on
September 30, 2006.
BPA assumes that these customers will request either an extension
of their current contracts through September 30, 2011, or follow-on
contracts. Three of the seven customers have contracts containing
language that guarantees service through September 30, 2011, at the
lowest applicable cost-based power rates provided under the applicable
PF rate schedule. The remaining five-year customers have informed BPA
that they would like BPA to offer them the lowest-cost PF rates through
September 30, 2011. This would provide them with the rate certainty for
FY 2007-2011 they are seeking.
Besides the five-year customers described above, four public
customers signed 10-year contracts that contain five-year options,
giving them the right to either remove or add load (i.e., PF off-ramp,
PF on-ramp). These customers seek rate certainty for FY 2007-2011 for
any purchases they elect to make under their options. The load
associated with the five-year options is 524 aMW.
In addition, in 2002, BPA officially extended the United States
Navy's five-year Subscription contracts for Naval Submarine Base
Bangor, Naval Station Bremerton, and Naval Radio Station Jim Creek
through September 30, 2011. Because the window for Subscription closed
prior to the contract amendments, the Navy's contracts do not contain
language that guarantees the lowest PF rates for the FY 2007-2011
period. The Navy has informed BPA that it would like BPA to apply the
same rate treatment to the Navy that will be applied to the customers
with five-year purchase commitments that do not contain the lowest PF
rates guarantee.
Customers with five-year purchase commitments, as well as the
United States Navy, are seeking clarity about post-FY 2006 rates, and
BPA is seeking early load certainty from customers in order to
facilitate better resource and
[[Page 43403]]
rates planning. In addition, the agency is looking to create parity
among all public customers by proposing to place the public customers
with five-year purchase commitments that do not contain the lowest PF
rates guarantee on equal footing with the 10-year customers from a
rates perspective. Such alignment will facilitate BPA's move toward
developing and offering new long-term contracts.
As a means of achieving the aforementioned goals, BPA proposes to
offer all of the public customers with expiring five-year contracts
that do not contain the lowest PF rate guarantee an amendment to extend
the term of their existing contracts through September 30, 2011, which
would make them consistent with the other 10-year Subscription
contracts. The amendment would include language providing the same
guarantee of the lowest PF rates (except for New Large Single Loads
(NLSL)) as other customers have. The guarantee of lowest cost-based PF
rates would also be extended to the United States Navy. In addition,
BPA proposes to recalculate the firm power load net requirements of
each of the affected public customers for the FY 2007-2011 period for
purposes of load and resource planning, rate setting, and contract
offers. BPA proposes to make such an offer well in advance of BPA's
next section 7(i) power rate case. Public customers would have a 60- to
90-day period, specified by BPA, in which to accept BPA's offer. This
window would close no later than June 30, 2005. This timeframe would
allow BPA to incorporate the results of the net requirements
calculation into the FY 2007 initial rates proposal. BPA is also
proposing the offer be for the same power products and services as the
customer currently purchases, as addressed in Section VI.F., Product
Availability. Customers who choose not to accept the offer during this
time frame may still request a new contract, but they will not be
eligible to receive the lowest PF rate guarantee. The product choices
available would be those described in Section VI.F.
BPA proposes similar action for public customers with expiring
options for FY 2007-2011. BPA would offer each customer a contract
amendment to provide an early opportunity to elect to cancel its PF
off-ramps or on-ramps and add language that guarantees service at the
lowest PF rates (except for NLSL), consistent with language in other
current 10-year contracts. BPA would calculate the net requirements of
those customers, reflect the amount where appropriate in the contract
amendment, and provide service for the returning off-ramp or on-ramp
load based on the results of the net requirements calculation. Again,
customers would have to accept the offer within a 60- to 90-day period
to be specified by BPA. As with the window for customers with the five-
year contracts, this window would close no later than June 30, 2005.
If customers do not accept BPA's offer during the prescribed
timeframe, they would be subject to the applicable rates determined in
FY 2007, which will include a proposed Targeted Adjustment Charge (TAC)
or its successor, reflecting the cost and risk entailed in delayed
certainty about the size of BPA's purchase obligations for the rate
period starting in FY 2007.
By calculating the net requirements of customers, particularly
those with options affecting the second five years, it may be
reasonable to expect a reduction in the amount of load BPA will be
obligated to serve during FY 2007-2011. This should reduce the need for
BPA to acquire firm resources on an annual basis to serve its firm load
obligations, help prevent adding high costs to the FBS, and help lower
firm power rates.
E. Service to New Publics and Annexed Investor Owned Utility (IOU)
Loads
Selling power to new public utilities is consistent with BPA's
mandate to encourage the widest possible use of Federal power. Since
enactment of the Northwest Power Act in 1980, the agency has been
obligated to sell power to serve the regional firm power requirements
loads of public bodies (including new public utilities), cooperatives,
and IOUs net of such entities' non-Federal resources used to serve
their load. BPA is also authorized to sell power to Federal agencies in
the region.
Over the last 20 years, BPA has supplied new public utilities with
approximately 300 aMW of power. This section addresses the proposed
conditions under which BPA would propose in its rate case to serve new
public utilities (public body, cooperative, and Federal agencies)
between October 1, 2006, and September 30, 2011, at the lowest PF rate.
In addition, it addresses service to IOU loads annexed by public
utility customers.
New Public Utilities: Under law and BPA policy, in order to receive
service from BPA, entities that form new public utilities must meet
BPA's Standards for Service criteria and request firm power service
under section 5(b) of the Northwest Power Act. For purposes of the FY
2007-2011 period, BPA proposes that in order to receive power at the
lowest PF rate, new public customers would need to meet these criteria
prior to June 30, 2005. If these criteria are met, the customer would
be eligible for future rate treatment comparable to other BPA public
utility customers.
Conversely, BPA proposes that new public utilities which meet BPA's
Standards for Service, and request firm power service from BPA after
June 30, 2005, will be served at the PF rate plus a charge or rate that
covers any incremental cost incurred by BPA to serve the new publics.
The charge would be similar to the current TAC and would be applicable
for the rate period that begins in FY 2007. Long-term applicability of
a PF plus incremental cost-based rate to such new public utilities will
be part of subsequent long-term Regional Dialogue discussions and
future rate cases.
Annexed IOU Loads: To the extent an existing public utility
requests firm power service for load that is annexed from an IOU, BPA
proposes that the residential and small-farm load proportion receiving
residential exchange benefits through the IOU will offset any
applicable incremental cost charge, such as a TAC, in an amount equal
to its proportionate share of benefits received from the IOU. BPA will
continue to treat such annexed load as it does today under existing
contract terms and conditions with its customers.
BPA has reviewed its contingent Subscription power sales contracts
and has determined this proposal creates no impact on entities holding
such contracts because these customers have contractual rights to
qualify prior to a date certain. This proposal limits BPA's risk
associated with new public customer loads by assuring that loads to be
served at the lowest PF rate are known before rate case decisions are
made. Commitment by a date certain provides earlier certainty about
BPA's firm power obligation.
F. Product Availability
BPA is addressing which products it will offer its net requirements
purchasers in the FY 2007-2011 period, specifically, what products
customers can purchase in addition to or instead of the products
currently being purchased in existing power sales contracts. Most BPA
regional power sales contracts are effective through FY 2011, and the
rest expire in FY 2006. BPA has also considered whether customers may
decrease the amount of power they are obligated to purchase from BPA
during FY 2007-2011.
To date, issues that are of concern to customers and other parties,
as well as
[[Page 43404]]
recommendations from the Council, focus on the following three
questions:
1. Which products can customers with contracts that expire in FY
2006 purchase during this period?
2. Can customers with contracts that expire in FY 2011 switch
products in FY 2007 or change the allocation of products they currently
purchase?
3. Can customers with contracts that expire in either FY 2006 or FY
2011 acquire and use non-Federal resources to serve their firm loads
and thereby reduce their net requirements service from BPA in the FY
2007-2011 period?
The Council recommends that BPA provide customers the opportunity
to choose the products that best meet their needs.
Under existing contracts for service, BPA sells Full Service,
Partial Service for customers with non-Federal resources, Fixed Blocks,
and Slice. Partial Service is provided for customers with fixed
resources and for customers with hydro resources dedicated entirely to
serve load. BPA's proposal is as follows:
Products for Customers Whose Contracts Expire in FY 2006 or Are New
Public Customers
BPA proposes that any customer whose contract expires in FY 2006
may simply request a contract extension with no product changes under
the terms described in Section VI.D., above. Any new public customer or
customer whose contract expires in FY 2006 and who elects to execute a
new contract may select its choice of any of the following core
requirement products--Full Requirements Service, Simple Partial
Requirements Service, Partial Requirements Service with Dedicated
Resources, and Block Service (with the optional feature of Shaping
Capacity). The terms of the contract will be consistent with the terms
described in sections VI.D. and VI.E., above.
No customers currently have the Complex Partial (Factoring) and
Block with Factoring products. BPA does not intend to offer either of
these products in future contracts because of the lack of interest
shown and the expected complexity of administering and billing the
products.
Product Switching or Changing the Allocation of Products Currently
Purchased by Customers With Contracts That Expire in FY 2011
BPA has received indications that most customers whose contracts
expire in FY 2011 want to keep their current product selections.
Therefore, BPA does not see a need to offer contract amendments that
would allow changes in the power products and services purchased by 10-
year Subscription contract holders. However, a few customers have
expressed interest in purchasing Slice in FY 2007 or in increasing or
decreasing the amount of the current Slice contract amount.
BPA is very reluctant to deny requests to change Slice purchases
when those requests come from customers who may feel strongly that it
is in their strategic interest to make such a change. However, after
extensive review and discussion of the issue, BPA believes it would not
be prudent to propose a change in FY 2007 in the number of Slice
customers or the Slice percentage sold. A primary reason for the
proposal is the major importance placed by BPA and most customers on
moving promptly to develop new long-term contracts and rates to
implement the BPA power supply role proposed in this document. BPA is
concerned that changing Slice elections by customers within existing
contracts, and dealing with the associated inter-customer equity issues
and technical issues, would be a complicated undertaking that would
become a major diversion from the goal of new long-term contracts. The
schedule proposed in this document creates a customer option to move to
new contracts in FY 2009. BPA believes that focusing BPA and customer
effort on meeting the schedule for those new contracts should be a
higher priority than making adjustments to Slice purchases under
existing contracts. Additionally, there is ongoing litigation
pertaining to the annual true-up of the Slice product whose outcome
will be uncertain for some time. BPA's view is that one outcome of this
litigation could result in a significant cost shift from Slice
customers to non-Slice customers. Increasing the amount of Slice
purchases while such a cost shift risk exists is a significant concern.
BPA therefore proposes no changes to the number of Slice customers or
Slice percentage sold in FY 2007.
Customer Acquisition of Additional Non-Federal Resources to Reduce Net
Requirements by Customers With Contracts That Expire in Either FY 2006
or FY 2011
BPA proposes to consider, on a case-by-case basis, requests from
load-following customers to add non-Federal resources to their existing
contract declarations. Such action could assist in relieving BPA's
load-serving obligation post-2006 without increasing costs or risks for
other customers. BPA will make such a determination at the time a
customer makes its request.
For additional information on the products offered, please see
BPA's Web site http://www.bpa.gov/power/psp/products/catalog.shtml For wind integration, see http://www.bpa.gov/Power/PGC/wind/BPA_Wind_Integration_services.pdf.
G. Service to Direct Service Industries (DSIs)
DSI Subscription contracts expire September 30, 2006. The original
1,500 aMW of DSI contracts have been significantly reduced by load buy-
downs, contract terminations, smelter bankruptcies, and other DSI
financial difficulties. Only half of the original contracts are still
in effect, and the highest monthly total for power provided under these
agreements has never exceeded 400 aMW.
The Council recommended that BPA continue to provide some service
to the DSIs. The Council suggested ``there may be an opportunity to
provide a limited amount of power for a limited duration under
specified terms and conditions. If power is to be made available to
DSIs, the amount and term should be limited, the cost impact on other
customers should be minimized, and Bonneville should retain rights to
interrupt service for purposes of maintaining system stability and
addressing temporary power supply inadequacy.'' BPA also continues to
be interested in finding ways to provide limited service to DSI
customers but recognizes that the agency's ability to affect the
viability of the aluminum industry in the Pacific Northwest continues
to be greatly limited by other factors beyond BPA's control. Global
aluminum markets continue to make Pacific Northwest DSI economics
appear highly challenging. These global markets and the construction of
new, efficient, lower-cost smelters elsewhere in the world have pushed
Pacific Northwest smelters from their former role as base-load plants
to either swing plants or worse, excess capacity.
Although BPA has no statutory obligation to serve the DSIs, it
recognizes that the DSIs have been an important part of the Pacific
Northwest economy for decades. BPA is committed to exploring DSI
service options that would result in a known, or capped, cost to other
Federal power customers. BPA proposes providing up to 500 aMW worth of
service benefits to DSIs. Under this proposal, any benefits would be
targeted to DSIs that are creditworthy and have fully met their
obligations under their Subscription contracts. BPA proposes providing
these benefits only if such actions actually enable
[[Page 43405]]
aluminum production and maintain Pacific Northwest jobs.
Within these proposed boundaries, BPA continues to look at a number
of alternatives for continuing service to the DSIs as explained in the
following paragraphs.
Financial Incentive to Operate: BPA is examining offering eligible
DSI loads a defined and limited financial incentive to operate. This is
the agency's current preferred approach. This benefit would be paid
based on each eligible DSI demonstrating that it has used power
purchased from the market to produce its product. To implement this,
BPA would need to be assured that the cost impact on its other
customers would be roughly no greater than if BPA had exercised its
discretion to serve the DSI customers directly. This approach would
allow eligible DSIs to make their own operating decisions recognizing
the availability of the financial credit from BPA. It eliminates the
direct sale of Federal power to the DSIs and, thereby, the associated
credit and ``take-or-pay'' issues for all parties.
Continue Industrial Power (IP) Service: Providing IP power would
appear not to meet BPA's principle of finding an alternative with a
known or capped cost because the approach would require augmentation of
the BPA system at an unknown cost. If, however, the cost could be fixed
and limited in an acceptable fashion, then this alternative may hold
promise.
Surplus Firm Power: BPA has explored ways to serve the DSIs with
surplus firm power. Efforts to date have not found a product that
appears to make economic sense for the smelters. The shape of BPA's
surplus relative to the flat load of the DSIs and the fact that the
smelters need a steady power supply do not align well. Finding a viable
surplus product at a sufficiently low price is particularly difficult
when coupled with the reality that smelter operations incur significant
costs when they shut down and start up. In addition, getting power to
DSIs could be challenging since BPA's Pacific Northwest public
customers have priority access to BPA's low-cost surplus.
Credit Support for New DSI Generating Resources: The argument that
is made for credit support from BPA is that it would enable smelters to
operate without further reliance on power from BPA. With this option as
well, BPA would need to be assured that the cost impact on its other
customers would be roughly no greater than if BPA had exercised its
discretion to serve the DSI customers directly. Credit support could be
structured to cap and limit BPA cost and risk, though it would carry
significant market and transactional risk to BPA, up to these limits.
However, the cost of new resources continues to be much higher than
what is needed for profitable smelting. Efficient gas-fired combustion
turbines produce power at prices that appear too high under expected
future natural gas, alumina, and aluminum market prices.
BPA is interested in public comment on whether BPA should continue
to offer service to DSIs and whether the agency's current preferred
approach is the way to deliver such benefits. BPA is also interested
and willing to explore other ideas to provide qualifying DSIs benefits
at a known or capped value that would be roughly no greater than if BPA
had exercised its discretion to serve the DSI customers directly.
H. Service to New Large Single Loads (NLSL)
In June 2001, BPA opened a public process on three specific issues
regarding BPA's NLSL policy. Two of the issues, transferability of
Contracted For Committed To (CFCT) status and closing of the window for
applying for CFCT status were subsequently resolved in a BPA record of
decision (ROD) signed March 27, 2002. A decision on the third issue of
transferring former DSI load to a preference customer in 9.9 aMW
increments was postponed. BPA stated that this issue needed more debate
on a broader scale and that it would be decided within the Regional
Dialogue process.
The specific DSI NLSL policy issue raised was ``whether BPA should
change its NLSL policy to allow current and former DSI customers'
production load served at BPA's IP rate, or any other rate, to transfer
and receive power service in 9.9 aMW increments from a public body,
cooperative, or Federal agency customer with power purchased at BPA's
PF rate.''
This issue arose in part because two BPA preference customers with
DSI plants in their service territories expressed the view that they
should be able to acquire an additional 9.9 aMW of BPA power per year
at the PF rate to serve local DSI plant production load. One utility in
late 1999 began serving 9.9 aMW of DSI plant load by entering into a
contract with the DSI that limited the amount of utility-provided
service to 9.9 aMW. (The remainder of the DSI load was served with
other contract resources.)
BPA and the utility disagreed on whether the applicable BPA
wholesale rate was the PF rate or the New Resources (NR) rate. The
question of which rate applied had no financial consequence prior to
October 1, 2001, because during the 1996 rate period the PF rate was
equal to the NR rate. The utility, the DSI involved, and BPA
subsequently entered into a ``standstill'' agreement pending completion
of a BPA DSI NLSL policy review that would establish which rate was
applicable to DSI load transferred to local utility service in 9.9 aMW
increments.
BPA proposes to continue its current NLSL policy with regard to a
DSI transferring service to a local utility in 9.9 aMW increments. Any
DSI load transferred to local utility service would be a NLSL and
subject to the NR rate if served with Federal power unless the DSI
qualifies for the cogeneration and renewables exception described
below.
Besides affirming its current NLSL policy with regard to DSIs
transferring service to a local utility in 9.9 aMW increments, BPA
proposes to adopt an on-site cogeneration and renewables exception to
its NLSL policy based on a similar exception contained in the 1981 BPA
Utility Power Sales Contracts.
Section 8(e) of the 1981 Utility Power Sales Contracts stated, ``If
a Consumer of a Purchaser provides a renewable or cogeneration resource
to serve all or a portion of a load associated with a facility which
would otherwise be a New Large Single Load, and thereby reduces the
demand on the Purchaser, that portion of such load on the Purchaser, if
any, shall not be a New Large Single Load, unless the load or portion
thereof on the Purchaser is 10 aMW or more; provided, however, that if
a Consumer sells, displaces or removes a resource or portion thereof
from service to the Consumer's load at such facility, all such load
shall be a New Large Single Load. * * *''
BPA proposes the exception be restricted to renewables and on-site
cogeneration. Providing this exception would allow former DSI load to
take a total of 9.9 aMW of service from a local utility at the PF rate
if the rest of its plant load was served by renewables or on-site
cogeneration. This may make it economically feasible for some DSI load
to operate while limiting the amount of former DSI load that could be
served at a PF rate. It also supports the development of cogeneration
and renewable resources.
I. Service to Residential and Small-Farm Consumers of Investor-Owned
Utilities (IOUs)
BPA is obligated to implement its Subscription contracts throughFY
2011. These contracts implemented BPA's 1998 Power Subscription
Strategy, which BPA designed to provide an
[[Page 43406]]
equitable distribution of the benefits of the FCRPS throughout the
region.
The Subscription contracts require BPA to provide 2,200 aMW of
power or financial benefits to the residential and small-farm consumers
of the region's six IOUs during FY 2007-2011. BPA recently signed
agreements with all six regional IOUs that provide certainty in the
amount and manner that benefits will be provided to their residential
and small-farm consumers under their Subscription contracts. These
agreements provide certainty by defining benefits as financial payments
and not power deliveries, defining a mark-to-market methodology that
uses an independent market price forecast in calculating the financial
benefits; and, establishing a floor of $100 million and a cap of $300
million per year for these financial benefits.
BPA expects this approach will successfully implement the
Subscription contracts. However, these agreements are under legal
challenge. Since a fundamental goal of this Regional Dialogue proposal
is clarification of BPA and customer load obligation for the FY 2007-
2011 period, BPA seeks to clarify how it will proceed if the new
agreements were set aside. Accordingly, in the event a court sets aside
the new agreements and amendments but leaves the underlying
Subscription contracts in place, BPA will notify the IOUs that BPA will
exercise its Subscription contractual right to provide financial
benefits and not power benefits during FY 2007-2011 under those
contracts. In such an event, the financial benefits will continue to be
based on a forecast of the market price of power developed in the BPA
rate case. If the Subscription contracts are successfully challenged in
court, the agency will follow the court's instructions in negotiating
new contracts under the Northwest Power Act.
As indicated, BPA proposes to provide financial benefits rather
than physical power to the residential and small-farm consumers of the
region's IOUs for a number of reasons. BPA hopes that clarifying now
which entity is responsible for acquiring resources to serve the IOUs'
load will help spur development of regional infrastructure. This need
for certainty supports BPA's current decision to exercise its
contractual right to provide financial benefits rather than physical
power instead of waiting until October 1, 2005, to make that decision
as allowed by the Subscription contracts. In addition, BPA is seeking
to minimize the acquisition of additional amounts of power that could
result in an increase in the average cost of the existing FBS
resources. Providing financial benefits eliminates the need and
associated risk of BPA purchasing power in the market to support power
deliveries to the region's IOUs. BPA believes this approach will
continue to provide equitable benefits to the residential and small-
farm consumers of the region's IOUs while balancing the costs to BPA's
other customers.
J. Conservation Resources
Conservation has been a core resource for over two decades in the
Pacific Northwest. BPA's programs have captured savings equivalent to a
large nuclear power plant; and, consistent with guidance from the
Council, conservation will remain a major portion of the agency's
resource portfolio in the future.
Continued commitment to conservation is consistent with the
priority outlined in the Northwest Power Act to increase the efficiency
of all electric energy consumption. Further, BPA's support of
conservation has been essential to helping maintain the necessary
regional infrastructure to ensure energy efficiency programs are
successful.
While there has been much discussion of how conservation
development might be regionally structured for the post-2006 time
frame, BPA has not determined what the specifics will be. Similar to
the recommendations made by the Council, BPA proposes five principles
to guide development of the specific elements for conservation. These
general principles are:
Use of the Council's plan to identify the agency's share
of cost-effective conservation. BPA has been working closely with
Council staff to ensure those targets are a reflection of the true
cost-effective conservation potential in the region.
The bulk of the conservation to be achieved is best
pursued and achieved at the local level. There are some initiatives
that are best served by regional approaches (e.g., market
transformation through the Northwest Energy Efficiency Alliance
(NEEA)). However, the knowledge local utilities have of their consumers
and their needs reinforces many of the successful energy efficiency
programs being delivered today.
To contribute to meeting the financial challenges facing
the region, BPA will seek to meet its conservation goals at the lowest
possible cost and lowest possible rate impacts. While only cost-
effective measures and programs are a given, the region can benefit by
working together to jointly drive down the cost of acquiring those
resources. For example, Conservation and Renewables Discount (C&RD)
reporting to date indicates a cost for installed conservation measures
in the range of $2.2 million per aMW while Conservation Augmentation
(Con Aug) is averaging about $1.3 million per aMW versus NEEA programs,
which are costing just under $1 million per aMW. Regarding the C&RD
conservation costs, the $2.2 million figure excludes the customers'
low-income expenditures claimed under the program and is an average
cost reflecting that some utilities are booking conservation measure
savings at a rate of $4 million per aMW. The wide variance in cost per
aMW offers a significant opportunity for the region to pursue an
important cost-saving option.
BPA funding for local administrative support to plan and
implement conservation programs has been essential. In the future, this
support should be retained, with the appropriate level of funding open
for discussion.
Financial support for education, outreach, and low-income
weatherization are important initiatives that complement a complete and
effective conservation portfolio. However, these types of programs
often yield no measurable savings or considerably more expensive energy
savings (e.g., low-income weatherization). These program efforts have
been successful and should continue to be funded.
These principles are consistent with Council recommendations.
However, there is a need for significant detail to be developed before
these principles can be transformed into a specific program structure
that best serves the region. BPA envisions some form of collaborative
planning process in which experienced individuals can develop a fully
defined proposal for conservation that can then be brought to the
entire region for consideration. This joint planning process can
accomplish the blending of appropriate policy guidance with the
flexibility to ensure conservation can meet the huge variance of
conditions and needs that exist in the region.
The C&RD and Con Aug, complemented by regional initiatives such as
NEEA, may provide a solid foundation for establishing viable program
elements so the region can be effectively served going forward.
Finally, as BPA pursues opportunities to reduce long-term costs to
ratepayers, conservation, as well as other demand side management
options, will be carefully considered as part of the
[[Page 43407]]
solution to transmission constraints. Conservation can be part of a
Non-Wires Solution, which will not only provide low-cost power
resources, but also will reduce or defer the need for transmission
construction.
K. Renewable Resources
A key purpose of the Northwest Power Act is to ``encourage, through
the unique opportunity provided by the FCRPS, the development of
renewable resources within the Pacific Northwest.'' \1\ In meeting this
purpose, BPA is to consider cost-effective renewable resources before
acquiring other conventional resources while fulfilling its obligation
to serve its customers' regional firm power loads.
---------------------------------------------------------------------------
\1\ Northwest Power Act, Section 2(1)(B), 94 Stat.,
2679.
---------------------------------------------------------------------------
In recent years, BPA has supported a range of renewable research
and development (R&D) activities. BPA currently purchases 198 megawatts
(MW) of output from new renewable resources to serve regional firm
power load. Going forward, BPA proposes to engage in an active and
creative facilitation role with respect to renewable resource
development. This signals a move away from large-scale renewables
acquisition toward a greater focus on finding ways to reduce the
barriers and costs interested customers face in developing and
acquiring renewables. As an added benefit, BPA believes its
facilitation role would also help non-BPA customers develop renewable
resources in the region. This direction is consistent with several of
BPA's major strategic objectives.
Facilitation Options: There are many tools available to BPA to help
facilitate the development of renewable resources in the region. BPA
proposes to use a combination of these tools and asks for input as to
which set of tools would best accomplish BPA's facilitation goal,
within the financial limits described below. The tools BPA sees as
being available include the following:
Integration services: BPA recently developed two new wind
integration services in the spirit of regional facilitation. These
services, and other intelligent and prudent uses of the flexibility of
the Federal hydro system, will serve as the centerpiece of a renewable
resources facilitation effort. BPA also intends to work with regional
stakeholders to reduce transmission barriers facing renewable
resources.
Transmission system improvements: Another option is participation
in regional efforts to construct strategic transmission lines to foster
the development of the region's excellent wind resources as well as
finding ways to make more efficient use of existing transmission
infrastructure.
Rate Discount: Approximately 30 customers devoted a portion of
their C&RD funds to renewables in this rate period. Continuing such a
rate discount mechanism is another facilitation option.
Limited Acquisition Role: Temporary acquisition of output from a
renewable energy project as an ``anchor tenant'' for such projects is
another facilitation option. However, it should be noted that among
various options available to help facilitate renewables in the region,
direct acquisition places the greatest financial demands on BPA and
would be subject to rigorous financial and risk tests before approval.
BPA will apply a careful cost-effectiveness screen in considering
which of the above-mentioned facilitation actions receive the most
emphasis. The goal is to maximize the ratio of new megawatts installed
per dollar spent. BPA will also consult with regional stakeholders as
it considers facilitation options.
Program Funding: Consistent with its current approach, BPA proposes
to continue to support its renewables program up to a net cost of $15
million per year. Calculation of net cost is the actual cost of all
acquisition of current and any future renewable energy, plus internal
support costs, less the value of energy produced by the renewable
resources based on the long-term cost of power from a combined-cycle
natural gas-fired power plant, and minus Green Tag and green energy
premium revenues. The costs associated with the $15 million renewables
fund would be recovered through BPA's firm power rates. In addition to
the $15 million annual net cost, during the current FY 2002-2006 rate
period, $6 million per year has been available for renewables
development through the C&RD program. BPA proposes to continue this
level of support in addition to the $15 million net cost, though as
described above, BPA has not concluded whether a C&RD-like mechanism is
the best vehicle for use of this level of financial support. BPA's
renewables facilitation activities will be subject to a risk review to
ensure that they are consistent with the agency's financial objectives.
L. Controlling Costs and Consulting With BPA's Stakeholders
BPA seeks to renew and strengthen its role as a reliable business
partner with its customers and to maintain the trust and confidence of
the region's stakeholders. A key feature of this effort is designing
structures and mechanisms that allow stakeholders to provide input on
long-term cost control and on revenue requirements and especially
before starting the FY 2007 rate case. BPA believes these actions
directly support several of the agency's strategic objectives,
including:
Best practices (with emphasis on cost performance and
simplicity) are obtained in key systems and processes,
Increased transparency in processes, decisions, and
performance, and
Customer, constituent, and tribal satisfaction.
During the last two years, BPA has responded to customer and
constituent requests for greater transparency in its finances and
decisions that affect BPA's ability to control its costs. BPA has
participated in the customer-organized Customer Collaborative process,
which was set up to provide greater insights into BPA's financial
performance, cost drivers, challenges, and controls. BPA also created,
at the request of customers and constituents, the Power Net Revenue
Improvement Sounding Board. The Sounding Board is a broad cross section
of customers and constituents that provided BPA with input on how best
to achieve $100 million in cost reductions and revenue enhancements
during FY 2004-2005. BPA has been conducting regular monthly technical
updates on financial conditions for customer staff.
Moreover, during the last year, BPA improved its financial
reporting. These efforts include creation of new standardized financial
reports and implementation of a new financial disclosure policy.
BPA proposes to continue the mechanisms described above. Forums
such as the current Customer Collaborative structure, as an executive-
level customer-led forum, is an effective way for customers to be at
the table to discuss BPA's financial performance and related issues
(for example, the effects of debt optimization on the power function or
of new security cost increases). Likewise, the Power Net Revenue
Improvement Sounding Board has served well as a means for providing
leaders of both customers and non-customers better insight and input
into BPA cost control efforts. The monthly technical financial update
meetings with customers and constituents have been useful, and BPA is
willing to continue such forums.
For the term of existing contracts (through FY 2011), or until new
contracts go into effect if that is earlier, BPA proposes to continue
to focus on non-contractual means that promote transparency under BPA's
financial
[[Page 43408]]
disclosure policy, allow for public input on agency costs and
demonstrate management of those costs. The additional actions being
proposed are described below.
Collaborative Forums: BPA is willing to participate in
collaborative forums with both customers and non-customers in a
structured approach similar to the Sounding Board and current Customer
Collaborative. BPA believes that such forums should include the
following:
1. Stated expectations, purpose, membership appointment,
attendance, procedures, schedules, norms, roles and responsibilities,
and disclosure requirements.
2. A focus on both standard routine financial updates and specific
discussions aimed at understanding cost structure and drivers.
3. A summary of standardized information each quarter on how the
effects of risk were factored into decision making.
4. As desired by the Collaborative participants, discussions aimed
at understanding and providing individual participant input to specific
issues BPA faces.
Financial Reporting with Customer and Constituent Input: BPA
intends to make further advancements in its external financial
reporting in order to increase awareness and understanding of BPA's
financial performance by both experts and laypersons. Such information
will also be posted on BPA Web sites.
Business Process Improvement: BPA also expects to develop and
implement a plan to respond to the recommendations in the Business
Process Improvement/Benchmarking initiative currently underway. Reports
communicating BPA's progress against the resulting plan will be made
available.
Power Function Review: Beginning in the fall of 2004, BPA plans to
conduct a regional discussion regarding PBL program budgets and
expenditures similar to the TBL's Programs in Review process. Toward
that end, PBL will meet directly with customers and constituents and
hold workshops as part of a Power Function Review public process. The
goal of the Power Function Review is to allow for substantial review
and public comment on PBL program levels prior to the next power rate
case. Areas to be discussed include program challenges expected over
the next seven years proposed program capital and expense levels, and
program drivers.
Criteria for Public Comment on Cost Issues: In its effort to make
cost decisions more transparent, BPA believes it is prudent to
establish criteria by which to assess the need to subject pending
discretionary BPA decisions that affect power costs to public review
and comment.
First as a threshold, the decision or action must be a
discretionary cost decision within BPA's control, not including short-
term power purchases and associated revenues. It can include
environmental, policy, or regulatory actions as well as new contracts,
contract modifications, actions changing BPA's load-serving obligation,
and BPA power marketing policies.
BPA will engage customers and other interests to determine specific
criteria to be used to decide whether a discretionary action BPA is
contemplating is appropriate for a public review and comment process
and when BPA will inform the region of non-discretionary decisions. BPA
believes that the factors below should be considered and addressed:
Whether the cost action establishes a precedent.
The effect on BPA, its customers, constituents, and other
stakeholders.
Whether and when public support is required for effective
implementation of the cost action.
The particular segments of stakeholders that can be
expected to be interested in the cost action.
The time available for public review and comment.
The existence of concurrent public review and comment
activities on similar or non-discretionary cost actions.
VII. Long-Term Issues
A. Proposed Long-Term Policy: Limiting BPA's Long-Term Load Service
Obligation at Embedded Cost Rates for Pacific Northwest Firm
Requirements Loads
Most of this proposal deals with FY 2007-2011 issues. However, BPA
is also proposing a long-term policy regarding its load obligations.
BPA's proposal is to limit its sales of firm power to its Pacific
Northwest customers' firm requirements loads at its embedded cost rates
to approximately the firm capability of the existing Federal system.
BPA is further proposing a policy that firm power service beyond what
the existing system can supply would be provided at a higher tiered
rate that would reflect the incremental cost of purchasing power to
meet those additional loads. BPA proposes to implement this long-term
policy through new long-term contracts and rates on the proposed
schedule presented in the next section. As stated in Section VI.B.,
Tiered Rates, BPA does not propose to implement tiered rates in FY
2007.
The agency is making this proposal for several key reasons:
It would help reduce BPA's firm power rates by sharply
limiting the past practice of acquiring power and melding its costs
with the lower cost of the existing system, thereby ``diluting'' the
low-cost existing system with higher-cost purchases.
Greater assurance is needed that necessary electric
infrastructure will be developed. Many BPA utility customers and other
market participants are willing and able to invest in needed electric
infrastructure, suggesting that the capability exists to supply the
infrastructure without a continued buy-and-meld role for BPA. But these
utilities need clarity about their load responsibilities versus BPA's
if they are to move forward on infrastructure investment. This policy
will help provide that clarity.
A closely related benefit is that this policy will help
utilities ``see'' market price signals as they make decisions about new
resources, conservation investments, and load additions. This should
lead to more efficient decision making throughout the regional electric
industry.
This policy does not prevent utility customers from
continuing to rely on BPA to serve all their loads in the future if
that is what they choose; consistent with BPA's legal requirement to do
so.
This policy will increase the certainty that BPA can repay
the Federal taxpayer's investment in the Federal system by creating a
higher likelihood that BPA rates stay well below market and fluctuate
less with the costs of power purchases.
There is strong support from BPA's utility customers for
this policy direction. This is important because these utilities would
be assuming more of the responsibility for new resource development
over time.
This policy direction is likewise consistent with the
recommendations to BPA from the Council in its May 17, 2004,
recommendations on ``The Future Role of the Bonneville Power
Administration in Power Supply.''
By itself, this policy is not enough to accomplish all the benefits
listed above. It is only one step. For example, fully realizing those
benefits requires that individual utilities know specifically how much
power they will receive from BPA at the lowest embedded cost rate, and
how much they will pay for increments beyond that amount. Creating that
certainty will require subsequent development of new power contracts
and rates. The proposed schedule for these additional steps, assuming
the proposed long-term policy
[[Page 43409]]
decision described here is sustained, is described next.
B. Proposed Schedule for Long-Term Issue Resolution
Although this proposal focuses primarily on resolving issues for
the FY 2007-2011, BPA and the region have a strategic interest in
resolving a number of key long-term issues. BPA is strongly inclined
towards 20-year contracts assuming we can reach agreement on reasonable
terms. This interest centers on providing BPA customers certainty over
load service obligations and enabling customers and the market to
respond with the necessary electric industry infrastructure
investments. Other key strategic interests include general market
stability, BPA risk management, and long-term assurance of funding to
repay the United States Treasury. BPA's interest in resolving those
long-term issues is shared by most BPA customers and with the Council.
To become effective, almost all the decisions must be captured in
new long-term contracts and rates. There is a range of opinion within
the region on what commitments and decisions can be made in contracts
versus those that can be made in rates. BPA's view is that customers
and BPA must work together to develop a logically-linked set of new
contracts and rates, and that neither by itself will be sufficient to
accomplish the long-term goals. This split between contracts and rates
must be discussed and decided.
With respect to rates, BPA wishes to discuss with customers the
merits of establishing a long-term rate methodology to accompany the
contract. Another key question is when to execute new contracts and
when to begin performance of the contracts. A key constraint is most
customers have existing contracts that run through FY 2011. Many
customers may be willing to sign new contracts well before FY 2011, but
only so long as performance does not begin until their existing
contract expires. BPA is also willing to explore other ideas to reach a
goal of providing certainty to customers such as the option of offering
contract amendments that would include a more limited list of issues,
while providing customers with the load service certainty they are
seeking.
Why BPA Believes These Issues Need To Be Addressed Now: It is in
the strategic interest of BPA, BPA's customers, and the region as a
whole to encourage regional actions that ensure adequate, efficient,
and reliable transmission and power service. Waiting until near FY 2012
to create the clarity of obligations to develop resources would create
a significant risk of waiting too long to create the necessary
infrastructure. It would also create a longer period of risk to the
region of losing the Federal system benefits and increase the risk that
the taxpayers' investment in the Federal system would not be repaid in
a timely fashion. Although executing contracts within the next few
years to replace the current Subscription contracts carries significant
risk, BPA is convinced that it is more risky to delay the necessary
decisions. Nothing short of new contracts and rates will create
sufficient clarity for individual utilities about their resource
development obligations so that they can act with confidence on those
obligations to develop the necessary electric infrastructure.
Next Steps: Given the complexity of developing new 20-year
contracts, BPA needs to create a policy ``blueprint'' as soon as
possible to guide development of new contracts and rates. The scope of
this policy ``blueprint'' would be all the major policy issues needing
resolution. Ideally, BPA's decisions on the issues will be informed by
the broadest possible regional agreement. To that end, BPA intends to
engage very actively with its customers, other stakeholders, and the
Council to help achieve that agreement.
However, BPA has been encouraged by customers and the Council to
establish and meet decision making deadlines and not defer decisions in
hopes more time will yield consensus. Accordingly, after considering
comment on the draft schedule below, BPA intends to establish a
schedule and then make decisions on that schedule. The policy
``blueprint'' will also include a step for ensuring compliance with the
National Environmental Policy Act (NEPA).
Proposed Schedule: BPA intends to begin now to operate on the
schedule outlined below, subject to change based on public comment. The
Council recommended a schedule that had new contracts offered in
October 2007. This schedule has contracts offered almost a year earlier
than that. This schedule is ambitious, but BPA agrees with the
perspective of the Council and many customers that the region has a
core interest in the earliest practical completion of this process.
Proposed Schedule for Achieving Long-Term Contracts and Rates
------------------------------------------------------------------------
Milestone Date
------------------------------------------------------------------------
BPA Administrator Issues Long-Term July 2005.
Regional Dialogue Proposal for Public
Review and Comment.
BPA Administrator Signs Long-Term Regional January 2006.
Dialogue Policy.
New Contracts Offered..................... December 2006.
Contract Signature Deadline............... April 2007.
Earliest Contract Effective Date.......... October 2008.
------------------------------------------------------------------------
This proposed schedule does not include rates decisions, which are
a key component, because BPA wishes to have further discussion of the
concept of a long-term methodology rate case. The final schedule will
include rates milestones.
Challenges in Achieving Our Goal: BPA understands that achieving
this schedule will be challenging. Challenges that both customers and
the agency will have to manage include:
1. Ability of BPA, customers and other interests to find a solution
to provide long-term benefits to residential and small-farm consumers
to IOUs.
2. Ability to structure long-term contracts to protect taxpayer and
ratepayer interests.
3. Managing changes to existing products and other contract terms
and conditions that will allow meeting an aggressive schedule.
4. Managing the interaction of all power-related issues with the
evolution of transmission issues including the TBL rate case and Grid
West.
5. Developing regional resource adequacy metrics/standards to
provide clarity and mechanisms to assure the development of needed
electrical infrastructure.
6. Ability of customers and other interests to invest the necessary
time, especially in view of the concurrent activity on BPA's FY 2007
power rate case and a variety of other issues.
7. Ensuring BPA and customers can administer new 20-year contracts
for several years concurrent with contracts of customers who choose to
retain their existing Subscription contracts through 2011.
8. Willingness of customers to sign new 20-year contracts before
the supporting rate case concludes.
VIII. Risk Analysis
BPA undertook an analysis of risks associated with this proposal.
The analysis identified the most potentially significant risks to be
centered on load
[[Page 43410]]
uncertainty and load placement and the absence of any effective ways to
manage them given the statutory obligation to serve in the Northwest
Power Act.
The amount and type of risks BPA takes in the area of load
placement are central to development of the Regional Dialogue proposal.
Augmentation, with its potential to leave BPA short in a volatile
market, can and has led to significant rate increases. BPA's strategic
direction, on the other hand, is heavily weighted toward stabilizing
rates through a combination of better cost controls, risk management,
and maintenance of key financial indicators such as Treasury Payment
Probability (TPP). BPA found the primary areas of load uncertainty and
potential risk concern to be service to new publics and service to the
DSIs.
IX. Environmental Analysis
BPA staff is in the process of conducting a review under NEPA and
its implementing regulations of the potential environmental effects of
this proposal. As part of this review, BPA is evaluating how the
proposal fits within BPA's Business Plan Final Environmental Impact
Statement, DOE/EIS-0183, June 1995 (Business Plan EIS).
The Business Plan EIS evaluates the environmental impacts of a
range of BPA business policy alternatives. This range includes BPA
Influence, Market-Driven BPA, Maximize BPA Financial Returns, Minimal
BPA Marketing, and Short-Term Marketing alternatives. The EIS also
contains various policy ``modules'' for key issues such as rate design,
DSI service, and conservation and renewables. These modules can be used
to vary the alternatives. The alternatives are compared in terms of
market responses, and the market responses are then used to determine
potential environmental impacts. In addition, the Business Plan EIS
identifies representative response strategies that could be implemented
to address revenue shortfalls.
In August 1995, the BPA Administrator issued a ROD (Business Plan
ROD) that adopted the Market-Driven Alternative from the Business Plan
EIS. This alternative was selected because, among other reasons, it is
the alternative that best allows BPA on balance to: (1) Recover costs
through rates; (2) achieve strategic business objectives; (3)
competitively market BPA's products and services; (4) continue to meet
BPA's legal mandates; (5) meet legal mandates and contractual
obligations; and (6) establish rates that are easy to understand and
administer, stable, and fair.
An initial review of the Regional Dialogue proposal indicates that
its potential environmental effects have been largely evaluated in the
Business Plan EIS and that it would be consistent with relevant aspects
of the Market-Driven alternative identified above. The proposal
generally continues many of the business decisions and approaches taken
by BPA in recent years that already have NEPA coverage, either through
the Business Plan EIS itself or through subsequent RODs tiered to the
Business Plan and ROD. For those areas in which the proposal may vary
from current business decisions and approaches, the range of
alternatives in the Business Plan EIS appears to provide coverage.
Furthermore, implementation of this policy would be consistent with the
response strategies identified in the Business Plan EIS and adopted in
the Business Plan ROD. If further review confirms these consistencies,
BPA likely would tier its policy decision under NEPA to the Business
Plan EIS and ROD. All necessary NEPA review and documentation for this
proposal would be completed prior to or concurrently with the
Administrator's final ROD for this proposal.
X. Next Steps
The BPA Administrator intends to make final policy decisions for
this part of the Regional Dialogue and sign a ROD in December 2004.
Updated information will continue to be posted on BPA's Regional
Dialogue Web site at: http://www.bpa.gov/power/regionaldialogue.
Issued in Portland, Oregon on July 7, 2004.
Stephen J. Wright,
Administrator and Chief Executive Officer, Bonneville Power
Administration.
[FR Doc. 04-16446 Filed 7-19-04; 8:45 am]
BILLING CODE 6450-01-P