BPA Product Choice Board Memo_2

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                                                               EUGENE WATER & ELECTRIC BOARD
                                                                       Power Resources Division

TO:              Commissioners Simpson, Farmer, Brown and Menegat
FROM:            Brenda Sirois
DATE:            May 13, 2008
SUBJECT: Executive Summary Regarding New BPA Products, Contracts, and Tiered Rate

Staff’s primary goals for the May 20th Board meeting is to have Commissioners leave the
meeting with a clear understanding of their role in upcoming BPA contract decisions and
the approach staff is taking to support you in your decision-making.

BPA’s current schedule indicates that by the end of December 2008, BPA’s customers will
need to sign new twenty-year BPA contracts for service beginning in October 2011. BPA is
proposing to do three things:

    1. Allocate the existing low cost Federal Base System (FBS) resources (with some
       limited augmentation) among the region’s preference customers using a Tiered
       Rate Methodology (TRM).
    2. Offer three product choices for Tier 1 service.
    3. Allow customer choices on how to serve retail loads above their allocated Tier 1
       amount with various Tier 2 services available from BPA.

This is a significant paradigm shift from relying on BPA to meet a utility’s annual retail
growth by melding low cost FBS resources with higher cost new resources to a system
where each utility is “allocated” a share of the benefits of these low cost resources and
pays the “real” costs of service above that allocated share.

In the old paradigm, a utility had an “entitlement” to power from BPA equal to its load
(excluding any New Large Single Loads, like Hynix) less power from the utility’s declared
resources. Under the new paradigm, a utility will have a High Water Mark (HWM) and a
portion of its net requirements that may be served by BPA1.

Each of the new BPA Tier 1 product choices are based on the annual firm amount of
energy BPA calculated for EWEB’s post 2011 allocation or HWM.

1 If Commissioners choose to purchase additional energy from BPA to meet EWEB’s retail load growth then
EWEB would do so under BPA Tier 2 contracts. Commissioners do not need to make a decision regarding
whether to rely on BPA for Tier 2 power until 2009.

g:\wp-docs\Sirois\BPA Product Choice                                                                      1
The product choices for Tier I include Load-Following, Block, or Slice/Block Combination2.
These Tier 1 product alternatives that BPA is offering for the next contract are functionally
the same as those offered for the current contract. The Load-Following product still has
BPA managing a customer’s load uncertainty. With the Block Product BPA sells blocks of
Heavy Load Hour (HLH) and Light Load Hour (LLH) power. There is still the ability to
purchase Shaping Capacity as an extra cost option to the Block product. The Slice/Block
product provides customers a share of the FBS for part of their BPA HWM, with the rest
supplied by Block.

The associated BPA proposed rates and charges for each of these product choices is
based on the energy amount allocated to EWEB. Charges for the base annual energy
amount will be recovered through a composite customer charge and reflects the bulk of the
costs of the BPA system. There are specific services and billing determinants particular to
each of the products and EWEB’s monthly/diurnal need for the power and capacity. EWEB
product choice will depend upon which of the options best meets our business needs,
balancing the associated cost and risks.

As staff is formulating our sense of advantages and disadvantages for the various
alternatives, we have engaged with a number of BPA product experts in the region
including other utilities, the Public Power Council (PPC), lawyers and consultants to get a
better understanding from these different viewpoints on their sense of these new products
and the tiered rate methodology. In summary, all have indicated that the contracts from
BPA are still in a significant state of flux, that there is no inherent bias in pricing or contract
terms between the products, and that each of the product choices and associated
contracts has risk from external events associated with them. Ultimately, product choice
will depend primarily on each utility’s retail load profile, existing resource capabilities, and
long-term portfolio objectives.

To support Commissioners in understanding the fundamental differences staff has
constructed the following table (page 5) showing some of the potential decision criteria and
our current view of each of the products. Between now and our next discussion in
September, staff will be receiving final form contracts from BPA and will be doing further
analysis of the products. Like other utilities that we have contacted, EWEB staff is leaning
toward the product that is most like our current product choice, in our case Slice/Block.
However, EWEB staff is also following a path similar to other larger BPA customers by
conducting analysis of all of the available product offerings.

Attached to this Executive Summary is a more detailed memorandum that provides greater
context for the Board regarding the new twenty-year BPA contracts. During the May 20th,
2008, Board meeting staff will go over the salient points provided in the memorandum and
be available to Commissioners to answer any questions you may have.

2. Must have at least 30% Block.

g:\wp-docs\Sirois\BPA Product Choice                                                             2

Over the course of 2008, staff will keep Commissioners advised of any major shifts from
the BPA proposed schedule or content of the BPA new products. Below is a table
summarizing the dates currently reserved for additional Board discussions. The most
significant milestone occurs in December of 2008 when staff will be asking Commissioners
to approve a Resolution authorizing EWEB’s General Manager to sign the new twenty-year

g:\wp-docs\Sirois\BPA Product Choice                                                  3

       New BPA Contract Milestones & Board Decision Points                                               -
                                                                         1st    2nd      3rd    4th
                                                                         Qtr    Qtr      Qtr    Qtr

                            Post 2011 allocation process, initial FHWM
Work Session                results & BPA Tier 1 product choice          2/12
Information                 information.

Opportunity for             Staff assessment of BPA Tier 1 product
Board Discussion            choices

Opportunity for             Review draft BPA contract(s) for post 2011
Board Discussion            BPA Tier 1 Power
                            Sign 20 yr contract for BPA Tier 1 product
   Board Decision                                                                              12/1
  Opportunity for
 Board Discussion

                            Commitment to BPA on how we will serve our
   Board Decision           load that is above our RWHM for FY 2012-

g:\wp-docs\Sirois\BPA Product Choice                                                                        4
                        Load-Following                 Block                             Slice/Block
Net Power           No apparent bias in product construction and pricing.
Supply Cost         Plan modeling effort to determine if any potential difference.
EWEB                EWEB “in the market”      EWEB “in the              EWEB “in the hourly market” less
Market              least of 3 products.      market” when hourly       often than Block to manage hourly
Activity            Just to manage surplus    load swings exceed        load swings because of Slice
                    or deficit EWEB           EWEB generation           flexibility.
                    generation.               flexibility.              EWEB “in the market” more often
                                                                        than Block to sell daily and monthly
                                                                        surplus secondary Slice generation
                                                                        much of the year.
Variability in      EWEB exposure to          Same                      EWEB is exposed to these costs
BPA Cost            these risks is delayed                              annually through the Slice True-up.
                    to next Rate Period,
                    but not eliminated.
Contribution        Limited within two-       Slightly higher risks  Most risk of volatility due to
Margin              year rate period to       because EWEB must      uncertain secondary revenues.
Volatility          EWEB resources and        manage load and        Bad outcomes are reflected
                    trading.                  resource risks.        immediately.
                    BPA hedges according                             EWEB has ability to hedge these
                    to its view of risk.                             exposures to its own risk tolerance,
                    Cost included in rates.                          but at a cost in staff time and option
Non-Market          Non-Market Risks to BPA power include; higher fish costs; Snake River Dam
Risks               removal; CGS nuclear plant operation; federal money grabs; DSI power subsidies;
                    Residential Exchange, etc. Non-Market Risks are intended to be allocated to all
                    products equally.
Financial           Least reserves required   Slightly higher           EWEB must carry higher financial
Reserves            because BPA carries       reserves required         reserves because Slice volume is
required            financial reserves        because EWEB must         uncertain and Slice True-up
                    needed to back-up         make more hourly          happens annually, while Rate Cases
                    rates during two-year     buys and sells to         are every two years and have more
                    Rate Period               match loads and           notice. BPA provides no reserves.
                                              BPA carries financial
                                              reserves needed to
                                              back-up rates during
                                              two-year Rate Period.
Counterparty Largely managed by               Largely managed by        Managed by EWEB.
Credit       BPA.                             BPA.                      Impact seen immediately.
Exposure     No impact in current             No impact in current
             period. Losses rolled            period. Losses rolled
             forward into future              forward into future
             rates.                           rates.

g:\wp-docs\Sirois\BPA Product Choice                                                                     5
                                                       EUGENE WATER & ELECTRIC BOARD
                                                               Power Resources Division

TO:              Commissioners Simpson, Farmer, Brown and Menegat
FROM:            BPA Product Choice Project Team
DATE:            May 12, 2008
SUBJECT: Post 2011 BPA Product Choices

New twenty year BPA contracts are currently scheduled for negotiation and utility signature
in December of 2008. This is an opportunity for EWEB to evaluate which of the new
products BPA is offering under its new-tiered rate approach that will provide EWEB the
most benefits and the least amount of risk.

Since the mid 1990s, the Bonneville Power Administration (BPA) and customers have
been discussing BPA’s future power supply role in the Pacific Northwest. These
discussions began during the 1996 Comprehensive Review of the Northwest Energy
System, the 1997 Cost Review, the 2002 Joint Customer Proposal and the 2005
recommendations by the Northwest Power and Conservation Council regarding BPA’s
future power supply role. During this period, the Pacific Northwest utility industry has
experienced significant events, including deregulation of wholesale transmission service,
development of a competitive wholesale power market and the 2000-2001 West Coast
energy crises. Throughout these events, BPA and regional interests have struggled to
define the optimal future role for BPA in terms of its power supply obligations, resources
and rates in a way that provides greatest value to BPA’s customers and stakeholders.

The Regional Dialogue (RD) is the most recent phase of this study concerning BPA’s
future role. During the past few years, the region has been engaged in focused discussion
about BPA’s power supply and its marketing role. These discussions reached a significant
milestone in February 2005, when BPA announced its policy direction to limit sales of firm
power at its lowest cost rates to an amount approximately equal to the firm capability of the
existing Federal Based System (FBS) and to charge a higher tiered rate for increments of
power service above that. Policy implementation will require new long-term contracts and
rates for power service after the current contracts expire in 2011.

g:\wp-docs\Sirois\BPA Product Choice                                                         6
The goals of BPA’s Regional Dialogue Proposal include:

    •    Lowest Costs with Tier 1 Rates3
    •    Durability/Stability/Contract Enforceability
    •    Customer/Regional Support and Equity
    •    Certainty of Obligations for All Parties
    •    Promote Infrastructure Development Consistent with the Northwest Power Act
    •    Consistency with BPA Stewardship Obligations
    •    Legality
    •    Simplicity
    •    Advance National Objectives

Staff has engaged the Board on numerous occasions over the last few years with details
regarding discussions coming out from the BPA regional dialogue work. Most recently,
during the February 18th work session, staff provided Commissioners with information
regarding staff’s best guess at EWEB’s post 2011 BPA Tier 1 allocation, what this
potentially means in terms of EWEB’s total retail load-resource position, a high level
description of the new product choices and associated rates, and upcoming milestones
worthy of Commissioner’s attention.

The remainder of this memorandum will focus on staff’s most updated understanding of
EWEB’s share of low cost BPA Tier 1 power, the annual amounts of BPA Tier 2 EWEB is
eligible to purchase, and the product choices available to EWEB.

2.1 Forecasted Tier 1 BPA Power
BPA’s new Tier Rate Methodology (TRM) includes a number of steps for calculating
access to BPA’s low cost Tier 1 power. This is referred to as a customer’s High Water
Mark (HWM). The plot thickens though because there is a forecasted high water mark for
the BPA’s federal based system, there is a planning HWM available to preference
customers in 2010, and there is what the FBS actually produces in the year the contract
takes affect. And, each customer has a forecasted HWM (FHWM), a contract HWM
(CHWM) and an individual rate period HWM (RHWM). Each specific customer HWMs are
a function of each individual customers loads, their dedicated resources, and the amount
of power available in the FBS with minimal augmentation in Tier 1 of no more than 300

Below is a chart illustrating staff’s best guess at EWEB’s contract HWM. This number is
subject to change and these changes are based on many factors outside of EWEB’s
control or influence.

    •    3
          Basically, BPA proposal is to tier its rates to give customers the “undiluted” benefit of the low cost
         Federal hydro system. Critical to this is establishing each BPA customer’s high water mark (HWM). This
         HWM defines a customer’s access to Tier 1 low cost power. By setting a HWM BPA thus limits the
         amount of power it will augment the existing Federal system and, according to BPA documents gives
         greater economic incentives for customers to develop its own resources, including conservation and

g:\wp-docs\Sirois\BPA Product Choice                                                                          7
                                      Graph Depicting EWEB Forecasted Net Requirements and
                                                      Contract HWM (CHWM)
                                    EWEB's Forecasted Net Requirements ("entitlement" to BPA power)





            100                                           BPA TIER 1 (EWEB's Forecasted Contract HWM)















2.2    Forecasted BPA Tier 2 Power

In the graph above, staff assumes an annual retail load growth rate (net of conservation) of
about 1.3 percent. This growth in retail load is the primary driver of determining EWEB’s
annual net requirements, or what used to be referred to as BPA entitlement. On a planning
basis, the difference between EWEB’s forecasted contract HWM and forecasted net
requirements is the portion of EWEB’s total retail load that is eligible to be served by BPA.
Annual BPA Tier 2 eligibility is shown below.





                                                                                    Portion of EWEB's Load
                                                                                    Eligible for BPA Tier 2

















g:\wp-docs\Sirois\BPA Product Choice                                                                                                                                                                             8
2.3       Forecasted Load-Resource Balance

The graph below includes all of EWEB’s firm resources available to serve retail load and
includes the same assumption for forecasted retail load of 1.3 % annual growth and a BPA
take post 2011 of 272 aMW on annual firm basis.

                                  EWEB Forecasted Total Retail Load-Resource Balance


















                     -40                                                                                        Deficit





This graph and underlying data does not include using the portion of EWEB’s load eligible
to be served by BPA Tier 2. Staff, in the not too distant future, will either invoke the current
Integrated Electric Resource Plan (IERP) or engage a new IERP process that provides
viable strategic alternatives for serving EWEB’s retail load growth and EWEB’s overall
business objectives. EWEB’s options to meet the growing gap between loads and
resources include a one or a combination of the following:

                                                 •      BPA Tier 2
                                                 •      New Resources
                                                          o Power Purchase Agreements
                                                          o Equity Share
                                                 •      Power Market Purchases

2.4       BPA Post 2011 Product Choices

The three product choices are:

      •    Load-Following product where EWEB has the choice to declare, either in specific
           or unspecific terms, additional resources from its portfolio that has not been
           previously declared.
      •    Block product either shaped or flat.
      •    Slice/Block Combination with no less than 30% block.

g:\wp-docs\Sirois\BPA Product Choice                                                                                                    9
Each of the product choices and BPA’s associated rate constructs is presented and
discussed in detail for the remainder of this document.

Because of BPA’s extensive use of acronyms and new terms in the new BPA contracts,
staff has included, as Attachment A, a summary of the full text associated with the
acronyms, for your convenience.


The Load-Following product supplies the customer firm power to meet the customer’s Total
Retail Load (TRL), less the firm power from the customer’s dedicated non-Federal
resource generation amounts.

Under the Load-Following product, when a customer elects to use its non-Federal
resources to serve a portion of its load, it must do so consistent with section 5(b)(1) of the
Northwest Power Act. Depending on the type of resource and the resource output shape,
additional Resource Support Services (RSS) from BPA may be required. When these
resource services are supplied from sources other than BPA, a customer will have several
options for shaping its resources to load, which are described below. If a customer selects
BPA as their provider for these additional services, the services will be priced at the
marginal costs of providing the service.

Customers taking RSS from BPA for their non-Federal resources are allowed to have
actual resource amounts applied to load different from planned amounts. Customers
serving their load with declared and non-BPA supported specified or unspecified resource
amounts must apply those resource amounts as planned, otherwise they will face
applicable penalties, such as the unauthorized increase charge (UAI).

Customer-Owned, Non-Federal Resource Declarations
BPA recognizes that many customers have small resources located within their distribution
system and “behind the customer’s meter” where the administrative cost of tracking
resource amounts would exceed any benefits derived from doing so. For this reason, BPA
will not track individual resources with less than 200 kW in nameplate capacity. In addition,
for resources exceeding the 200 kW threshold, BPA will allow up to 1 MW in aggregate
nameplate capacity to be considered as load variations and effectively “net metered”
against load. RSS will not be required unless customer resources exceed these

For generating resource amounts dedicated to the customer’s firm load that is greater than
1 MW in nameplate capacity, RSS will be required either from BPA or a non-Federal
source. If BPA RSS is selected, the monthly resource shape will be based on the expected
or historical generation.

g:\wp-docs\Sirois\BPA Product Choice                                                        10
Service to Load Above RHWM
A customer may choose to have its net requirement above its Rate High Water Mark
(RHWM) served by BPA at Tier 2 rates or may acquire resources, purchase market power
or some combination of all the options.

Meeting Energy and Capacity Resource Adequacy Standards
BPA is responsible for meeting energy and capacity adequacy standards for the portion of
a customer’s TRL that is served by BPA. Customers are responsible for meeting energy
and capacity standards for the portion of TRL not served by BPA.

Load Growth Tier 2 Rate and Shared Rate Plan
Under the Load-Following product customers will have a one-time right to sign up to
receive their firm power service through the Load Growth Tier 2 Rate. If they do, they may
also sign up for the Shared Rate Plan (SRP). The SRP provides that all service to the
customer’s load above its RHWM will be at a melded rate, reflecting the individual
amounts of Tier 1 power available to each customer in the SRP with all remaining load met
by the Load Growth Tier 2 rate.

Resource Support Services
RSS is available for resources of the customer that are dedicated to load. These services
include: Flattening Services (FS), Forced Outage Reserves (FOR), Secondary Crediting
Service (SCS), and (on an availability basis) Resource Remarketing Service (RRS).


The Block product provides firm power each month to meet a customer’s planned annual
net requirement. The product is not a Load-Following product and does not provide for
hourly changes in planned power amounts, except for allowable changes in conjunction
with the optional shaping capacity. The customer is responsible for balancing loads and
resources by buying and selling in the market.

Block Product Shapes and Alternatives for the Shaped Block
Customers may choose between two shapes for the Block product. One is a Flat Block,
which delivers an equal amount of power in all hours of the year. The second is a Shaped
Block which is available to customers for that portion of a customer’s block service that is
charged at Tier 1 rates, shaped to the customer’s forecast monthly net requirement.

The monthly shape of the Shaped Block for amounts of power priced at Tier 1 rates will be
the monthly shape of the customer’s load measured for CHWM purposes in FY 2010,
adjusted by the resources used to establish the CHWM (firm resource amounts for FY
2010 as of September 30, 2006, and adjustments established in BPA's Regional Dialogue
Policy (RD Policy). These resource amounts will be applied in the same monthly shape as
established in the customer's subscription contract. The resource adjustments provided for
in BPA’s RD Policy would be applied as a flat annual block. The monthly block amounts
will be established either in a flat monthly amount or in flat monthly diurnal amounts with
up to 60 percent of the megawatt hours in the monthly HLH period, not to exceed the HLH
net requirement amount.

g:\wp-docs\Sirois\BPA Product Choice                                                      11
Once the shape for the Shaped Block is established it will not change during the contract
term. Customers choosing the Block product will also be able to add a shaping capacity
product to it, if their net requirement load allows for it. Shaping capacity allows the Block
customer to pre-schedule a reshaped HLH block from its planned flat average HLH block.

Service to Load Below the RHWM
The annual net requirement load service charged at Tier 1 rates will be the smaller of the
customer’s net requirement or its RHWM and is updated annually. Such power amounts
will be provided either flat in all hours of the year, or in the shape allowed under the
Shaped Block. While the shape of the block amounts charged at Tier 1 rates will not
change during the contract term the annual average megawatt amount may change.
Therefore, the monthly Block amount may change. If the annual average megawatt block
amount charged at Tier 1 rates changes, BPA will increase or decrease all of the monthly
HLH and LLH amounts by the same percentage.

Service to Load Above-RHWM: A customer may choose to have a portion of its planned
net requirement load above its RHWM served by BPA at Tier 2 rates or may acquire
resources, purchase market power or some combination of all the options.

Meeting Energy and Capacity Resource Adequacy Standards
BPA is responsible for meeting energy and capacity adequacy standards for the portion of
load that is served by BPA. Customers are responsible for meeting energy and capacity
standards for the portion of TRL not served by BPA.

Resource Support Services (RSS)
Firming and shaping services are available for renewable resources dedicated to customer
load as a specific resource. Any other RSS will be at BPA’s discretion, on an as available
basis and subject to mutual agreement. All RSS for Block customers will be provided under
the Federal Power System (FPS) rate schedule.

Block with Shaping Capacity Product
BPA will offer customers that purchase the stand-alone Block product a right to add
Shaping Capacity to their block purchase. Monthly Shaping Capacity amounts would be
based on the measured FY 2010 variance between the customer’s monthly HLH
customer's system peak and average HLH load for the month, and cannot exceed the
customer's net requirement load amount for the month. The Shaping Capacity amounts will
be established by the time delivery begins under the contract (FY 2012) and will remain
fixed for the contract term.

This shaping product will establish a daily range for each month within which a customer
may reshape the daily HLH energy amount established for each month. Any Shaping
Capacity a customer contractually adds to its purchase will be take-or-pay.

BPA has indicated it will limit Shaping Capacity (SC) to only 200 MW in total for all
purchasers of the Block. If net requirement load service at Tier 2 rates is purchased, the
calculation that determines the purchased amount of shaping capacity will not be affected
by the increased block quantity.

g:\wp-docs\Sirois\BPA Product Choice                                                       12

The Slice/Block product is based on a customer's annual net requirement load. The Slice
service provides power in the shape of BPA's generation from the FBS resources over the
year. It provides firm power on a planned monthly basis and an amount of energy based
on FBS that can include surplus power. Block amounts are fixed amounts of power
provided on a monthly basis for each hour of the month.

Block Service
The Block service provided under the Slice/Block product will be provided as a Shaped
Block with all monthly amounts to be flat in all hours of the month. No variance is allowed
between HLH and LLH periods and Shaping Capacity is not available for the Block service
included in the Slice/Block product.

Slice Service
The Slice component provides power in the shape of BPA's generation from the FBS
resources over the year. The Slice power purchased amount is based on a calculated
percentage. This value is equal to a selected portion of the customer's planned net
requirement load divided into the planned firm power from the Federal system resources.
This percentage is then multiplied by the actual power from the FBS resources. The Slice
percentage is calculated on a planned annual firm basis. The amount of Slice power
cannot exceed the customer's net requirement when combined with the Block power. In
certain periods of the year Slice will deliver more power than in other periods based on
water conditions and system operations. Slice includes an advanced sale of surplus power

Slice power is made available in quantities and shapes based on Slice system resource
generation and certain power purchase contracts (augmentation) available for load service
in FY 2011 at the Tier 1 rate. A Slice customer has the right to schedule power from BPA
based on a set of limits that reasonably represent the power and other defined services
available for an hour, all within specified delivery limits as determined by BPA. The
availability and limits may change hourly, daily, and weekly depending on system
conditions. The Slice product will include a pro rata share of the FBS storage. While the
customer’s storage rights reside only in numerical accounts, the actual stored power is
subject to changes in system conditions, including spill.

In addition, there is no guarantee that power made available under the Slice product will
meet a customer's load need during any particular timeframe, be it hourly, daily, weekly,
monthly, or annually. Customers who buy the Slice/Block product will be obligated to
provide their own resources on all hours in which their TRL is in excess of the amount of
Slice power available for load and their planned purchase amounts of Block power.

Some of the risks in the purchase of the Slice product include:

         •    Slice power will be less during low water years, and may be less than the
              planned firm power based on critical water planning at the beginning of each
              contract year.

g:\wp-docs\Sirois\BPA Product Choice                                                         13
         •    Expected advanced sales of surplus Slice energy need to be hedged during the
              second quarter of each year to maximize the value of this expected secondary
              surplus Slice energy not needed by EWEB to meet TRL.
         •    Loss of FBS generation or changes in FBS generation will be reflected in the
              Slice system resources on both a planning basis year to year and an operational
              basis hourly. Such changes can increase or reduce Slice power availability.
         •    Additional non-power constraints, such as fish operations (resulting in increased
              flow or spill requirements, nitrogen saturation reductions, or other measures),
              may affect the amount of Slice power available.

Non-Slice Requirements Service to Load
A Slice/Block product must include at least 30% Block.

Service to Load Below RHWM
The annual net requirement charged at Tier 1 rates will be the smaller of the customer’s
net requirement or its RHWM. If a Slice/Block customer’s purchase amounts at Tier 1 rates
must change due to changes in either net requirement or the RHWM, the block service
amounts will be all that is changed, as long as the block amounts can absorb such
changes. The block portion of the Slice/Block product that is charged at Tier 1 rates is a
planned amount of monthly power that is either flat in all hours of the year, or shaped to
the customer’s monthly net requirement load. The shape of the block priced at Tier 1 rates
is not subject to change during the contract term. Annual average megawatt purchase
amounts for each year may change due to changes in the RHWM or a customer’s net
requirement, as affected by resource removal rights. If the annual average megawatt block
amount priced at Tier 1 rates must change, BPA will do so by increasing or decreasing all
of the monthly HLH and LLH amounts by the same proportional amount.

Service to Load Above-RHWM
A customer may choose to have a portion of its load above its RHWM served by BPA in a
flat annual block of energy at Tier 2 or acquire resources, purchase market power or some
combination of all the options.

Meeting Energy and Capacity Resource Adequacy Standards
BPA is responsible for meeting energy and capacity adequacy standards for the portion of
load that is served by BPA. Customers are responsible for meeting energy and capacity
standards for the portion of TRL not served by BPA.

Resource Support Services
Firming and shaping services are available for intermittent renewable resources dedicated
to customer load as a specific resource.

g:\wp-docs\Sirois\BPA Product Choice                                                        14

The current Tier 1 rate proposal consists of three elements:

      •    Customer Charges
      •    Load Shaping Charge
      •    Demand Charge

The charges and rates applicable to each of these products are summarized below.
Although BPA has a very complicated rate methodology, another way to absorb the details
is to think of the tier rates as if all the product choices start with the same basic costs
(composite rate) and then, depending upon the different services a customer might choice
to purchase from BPA Tier 1, additional charges will apply.
                                               SUMMARY of BPA PRODUCT TIER 1 COSTS DETERMINANTS
                                               Customer Charges3                        Load Shaping4                     Demand Charges
                                                                                                                   Demand Charge        Fixed Cost of
                                       Composite     Non-Slice
                                                                   Slice Rate     Energy Rate    Capacity Charge       Billing            Marginal
                                         rate          Rate                                                                     5
                                                                                                                    Determinant           Resource

               Load-Following              X            X             NA               X               NA                 X                  X

                   Block or                X            X             NA               X               NA                NA                 NA

            Block with Shaping
                 Capacity1                 X            X             NA               X                X                 X                 NA

                     Slice2                X           NA              X              NA               NA                NA                 NA

            1.Shaping Capacity is available only with a 100% Block purchase. This Optional Shaping Capacity provides limited flexibility during Heavy Load Hours.

            2.The Slice Product must be purchased with a minimum of 30% Block. For simplicity data applies only to the Slice product.

            3.These charges are based on annual Tier 1 Cost Allocator (TOCA) and a customers Contract High Water Mark (CHWM)

            4.Rate which is market based for purchase of energy to re-shape from LLH to HLH on monthly/diurnal basis.

            5.This value is a function of a customer's single highest heavy load hour (MW) in each month with adjustments.

BPA’s proposed rates, charges and underlying billing determinants will be used by staff as
the basis to assess the relative costs associated with these BPA products. EWEB’s BPA
costs are also a function of the shape of the total retail load and the total electric resource

2.5.1 Customer Charges, Tier 1 Cost Allocator (TOCA) and Rates

In each rate period, BPA will calculate three customer charges:
    • Composite Customer Charge: This cost applies to all customers with a CHWM
       regardless of product choice and its purpose is to recover the costs allocated to the
       composite cost pool. This charge is the bulk of the costs for any of the BPA
    • Non-Slice Customer Charge or Credit: This charge/credit applies to all three
       products although only to the block portion of the Slice/Block product and its
       purpose is to recover costs allocated to the non-Slice cost pool or to credit
       customers for their portion of the revenues for sales of non-firm power.

g:\wp-docs\Sirois\BPA Product Choice                                                                                                                                15
     •    Slice Customer Charge: This cost applies to customers with a CHWM Contract
          that purchased the Slice product and its purpose is to recover the costs allocated to
          the Slice Cost Pool. This cost is relatively small and specific to recovering costs
          specific to managing the Slice product such as models and communication tools.

In addition, BPA will determine each customer’s annual TOCAs. The TOCA is a customer’s
percentage share of the total charge, and is calculated as the lesser of the RHWM or
forecasted net requirements divided by the sum of all BPA customer HWMs.

Three TOCAs will be calculated to determine Slice/Block Product customer charges:
   • An annual TOCA that combines the customer’s Slice and Block product purchases
      (used for determining the Composite Customer Rate).
   • An annual TOCA for the customer’s Block product purchases (used for determining
      the Non-Slice Customer Rate).
   • An annual TOCA for the customer’s Slice product purchase (used for determining
      the Slice Customer Rate).

To calculate the customer charges BPA proposes the following rates:

    •    Composite Customer Rate -This applies to all customers purchasing Tier 1 power. It
         is the annual rate expressed as a dollar per one percent and is calculated by
         dividing the Tier 1 cost allocated to the Composite Cost Pool by the sum of TOCAs
         for all Tier 1 purchasers as forecast in each rate case.
    •    Non-Slice Customer Rate -This applies only to the customers purchasing the
         Load-Following or Block products, including the Block portion of the Slice/Block
         product. It is the annual rate expressed as a dollar per one percent and is
         calculated by dividing the Tier 1 cost allocated to the Non-Slice Cost Pool by the
         sum of TOCAs for Load-Following and Block purchasers plus non-Slice TOCAs for
         Slicers. In most cases this will actually be a credit to the customer bill.
    •    Slice Customer Rate -This applies only to the Slice portion of the Slice/Block
         product. It is the annual rate expressed as a dollar per one percent and is
         calculated by dividing the Tier 1 cost allocated to the Slice Cost Pool by the sum of
         TOCAs for Slicers.

2.5.2 Load Shaping Charge or Credit

This charge or credit is based on the need to shape the firm critical output of Tier 1
Federal resources to the monthly/diurnal shape of a customer’s Tier 1 load. This charge is
only applicable to the Block and Load-Following products, and the Block portion of
Slice/Block combo. BPA will forecast revenues from the load shaping charge for inclusion
as a credit to the Non-Slice pool.

Load Shaping Billing Determinant, Rates and Charges
BPA will develop a System Shaped Load for each customer. BPA will compare a
customer’s System Load Shape to its actual Tier I load shape to establish Load Shaping
Billing Determinants. If the customers forecasted need for power ends up being less than
actual loads a credit will be given the customers. On the other hand, if the forecasted need
for power is greater than actual a charge to the customer will apply.

g:\wp-docs\Sirois\BPA Product Choice                                                        16
The firm critical output of the Tier 1 Federal system resources is the basis for the Load
Shaping Billing Determinants. For each rate period, BPA will forecast the HLH and LLH
firm critical output each month (24 monthly/diurnal energy values); use this number to
calculate the customer’s forecasted load served at Tier 1 Rates (expressed in the shape of
the forecast firm energy output of Tier 1 System Resources for each monthly/diurnal period
by multiplying the above with the customer’s TOCA; then using this information, calculate
the monthly/diurnal Load Shaping Billing Determinants.

The load shaping rates will be BPA’s forecast of the power market prices for each
monthly/diurnal period. BPA will then calculate the load shaping charges by multiplying the
Load Shaping Billing Determinants by the Load Shaping Rates. If, for a particular month,
the Load Shaping Determinant is greater than zero (actual Tier 1 Load minus System
Shaped Load, a charge will appear on the customers bill. Conversely, if this number is less
than zero for a particular month then a credit is awarded.

2.5.3 Demand Charge, Billing Determinants, and Demand Rates

The demand Charge is applicable to customers purchasing Load-Following and Block with
Shaping Capacity products. The customer’s single highest heavy load hour in each month
is determined and referred to as the Customer’s System peak (CSP). The CSP, with
adjustments is the basis for calculating the demand charge-billing determinant.

The demand charge-billing determinant is a function of the CSP, the average heavy load
hour energy use each month (aHLH), the customer Contract Demand Quantity (CDQ), and
the amount of Super Peak Resource Credit provided above the capacity included in the
same amount of energy provided flat across the monthly/diurnal Heavy Load Hour period.

BPA will calculate the CDQ by applying the adjusted HLH load factors to the customer’s
average hourly HLH BPA energy purchases as allowed in Tier 1.

Lastly, BPA will develop a demand rate based on the annual fixed cost (capital and O &M)
of the Region’s marginal capacity resource. The marginal capacity resource and
associated fixed cost will be determined each rate period.

2.5.4 Other Tier 1 Rates and Charges

BPA indicates that it may develop rates or charges applicable to customers who switch
products during the new BPA twenty-year contract term. In the TRM, BPA indicates
additional charges that were unforeseen may apply in the future during these
20-year contracts.

g:\wp-docs\Sirois\BPA Product Choice                                                     17
2.6    BPA Significant Milestones

The following table highlights past and upcoming milestones. Items 6 through 12 are the
significant events occurring over the next 6 months.

BPA’s schedule is subject to change. However, there is considerable motivation on BPA’s
part to have contracts signed by the end of 2008. Basically, by the end of 2008 BPA would
like its customers to have committed to their product choices.

g:\wp-docs\Sirois\BPA Product Choice                                                   18
                       BPA PRODUCT & RATE
                                                          TARGET DATES
      1 Formal BPA Policy Proposal Released                  Jul-06

          Public Comment on Proposal                         Sep-06

          BPA Review of Comments                             Nov-06
        Published Regional Dialogue Policy and Record
      4 of Decision (ROD)
          Draft Templates for Product Contracts              Apr-08

          Public Review of Templates                         May-08

          7(I) Process to Establish Long-Term Rate

      9 BPA Provides Draft Supplemental RD Policy            Jun-08

          Finalize Contract Templates                        Jul-08
       Individual Contracts Developed Based on
       Template and Customer Board Consideration             Dec-08
    11 (customers sign first!)
       New Long-Term Contracts Signed by BPA and
    12 Customers
       7(I) Process to Set Rates for Existing Contracts
    13 for FY 2010-2011
       7(I) Process to Set Rate for New Contracts for
    14 FY Y 2012

          Service and Rates under New Contracts Begin        Oct-11

          Service under New Contracts Ends                   Sep-28

g:\wp-docs\Sirois\BPA Product Choice                                     19

The three Tier 1 product alternatives BPA are offering for the next contract are functionally
the same as those offered for the current contract. The Load-Following product still has
BPA managing a customer’s load uncertainty. With the Block Product, as the name
implies, BPA sells blocks of HLH and LLH energy. There is still the ability to purchase
Shaping Capacity as an extra cost option to the Block product. Finally, with the Slice/Block
product customers get a virtual share of the FBS for part of their BPA HWM, with the rest
supplied by Block.

However, there have been some significant changes to each of the product choices. For
instance, the new Block and Load-Following products have very different rate structures
than the current product. The Load-Following product requires EWEB to deliver its
resources in flat, diurnal shapes or else pay an additional fee to BPA. The Slice/Block and
Block Shaping Capacity have new operational restrictions that reduce the flexibility, but
exactly how much the Slice/Block flexibility is reduced will not be known for a while.
Finally, BPA is introducing the TRM into this product contract decision.

In preparation for this memo and upcoming Board meeting staff engaged new BPA
contract experts in the region to come talk to us about the three products. All of them
indicated that the products are still in a significant state of flux, but they believe there is no
inherent bias in pricing or contract terms between the products.

Although EWEB staff has the most familiarity with the Slice/Block product, we are
evaluating all the BPA product choices equally. Between now and September staff will
continue tracking these issues, engaging the region in issues yet to be resolved, and
developing both quantitative and qualitative models to assist us in evaluating the products.
In the following sections staff frames the issues, as we currently understand them. A
summary table of these issues is found in Attachment B.

3.1 BPA is effectively allocating the FBS by use of Tiered Rate Methodology
As discussed above, BPA is effectively allocating the existing FBS to customers by
creating Tier 1 and Tier 2 rate categories. Tier 1 rates will be set to reflect the low cost of
existing FBS, but each customer will be limited to how much Tier 1 they can purchase. Tier
2 rates will be set at levels to recover BPA’s cost of acquiring new resources. EWEB is not
obligated to purchase Tier 2 power from BPA. At this point, staff are not inclined to
recommend EWEB purchase Tier 2 power from BPA, but that is a decision for next year
when we will have more information.

Staff supports these changes as we have long advocated that BPA allocate the FBS and
charge those customers that want BPA to meet their load growth the actual cost of those
new resources.

3.2 BPA is making major changes to its rate structure for the non-Slice products
As discussed above, BPA is restructuring the Tier 1 rates for the Load-Following and Block
product to look more like the Slice rate, which is based on the cost of the FBS. Then BPA
is charging customers market-based rates to alter deliveries from the native shape of the

g:\wp-docs\Sirois\BPA Product Choice                                                           20
FBS to the actual shape its customers require. Staff supports these changes, as they send
a price signal to BPA customers of the true cost of new resources. We expect that more
conservation will make economic sense as a result of these changes, and hence, fewer
new resources will be needed to meet load in the region.

3.3 Slice is still the only BPA product that gives EWEB real-time flexibility
If EWEB desires flexibility from our BPA product to help EWEB integrate existing and
future EWEB resources then Slice/Block is the only choice that will be able to do that. With
the other two products EWEB would have to rely on market activity to balance our own
resources. The Block HLH and LLH amounts are set years in advance. The optional
Shaping Capacity offered with the Block product is set at preschedule and cannot be
altered in real-time. The Load-Following product requires EWEB to deliver its own
resources in flat HLH and LLH shapes, with minor exceptions.

3.4 BPA is reducing Slice flexibility
After much discussion, both BPA and Slice purchasers agreed that it would be good if BPA
produced a more accurate model of the Federal hydro system. BPA complained that the
current model, which they developed over the last eight years, does not accurately
represent constraints in the hydro system.

EWEB and other Slice purchasers agreed with BPA that a more accurate model is in
everyone’s interest. We want the Slice product to be above criticism that it is shifting costs
on to other products and other BPA customers. We ask to receive what we pay BPA for, a
percentage of the FBS capability in exchange for paying a percentage of BPA’s costs.

Over the summer staff will be attempting to assess how much this change will reduce Slice
operational flexibility, and therefore, how much will it reduce the value of the Slice/Block
product. This will of necessity be an estimate, because BPA will not complete the new
model until after EWEB must sign the 20-year contract.

3.5 BPA is reducing Shaping Capacity flexibility
BPA has indicated they will limit the total Shaping Capacity sold to all customers who
chose this option to 200 MW. Depending upon how many BPA customers sign up for this
service will reveal how limiting a total of 200 MW of capacity may be.

3.6 There are risks and rewards to EWEB if other utilities stop taking Slice
Currently there are 11 BPA customers with a Slice/Block contract taking 22% of the FBS. If
that number were to shrink significantly then Staff sees potential “political” risks with the
Slice/Block product. Past experience has shown that BPA is (somewhat) more constrained
in making unilateral contract changes when the change affects a large amount of
preference customer load.

On the flip side, Slicers receive valuable information about the market. If there were fewer
Slice purchasers EWEB would have longer to take advantage of the information before it
became widely known. This would likely increase EWEB’s sales prices or decrease
EWEB’s purchase prices.

g:\wp-docs\Sirois\BPA Product Choice                                                        21
3.7 The Slice/Block requires EWEB to carry greater financial reserves
With the non-Slice products BPA carries reserves to ensure it can sell power over the
course of a two-year Rate Period and still have sufficient funds to cover its Treasury
Payment. Therefore, there is more certainty because EWEB will have a higher degree of
short-term rates and thus greater certainty that it can meet financial obligations during
those two years.

With the Slice, EWEB is immediately exposed to the financial consequences of poor water
or low market prices. Also, the Slice product is subject to an annual true up, instead of a
two-year rate period.

Ultimately, the Load-Following and Block products will also be impacted by the
consequences of poor water or low market prices, but not until the next rate cycle.

3.8 All products will require EWEB Staff to trade its resources
Even with the Load-Following product, EWEB Staff will be needed to plan, trade, schedule,
and invoice actual generation of EWEB existing and future resources: unless EWEB
purchases RSS for all of its resources.

3.9 The Block trades off rate certainty for operational flexibility
The Block, like the Load-Following product, has rates set for two years. But because the
Block does not have any real-time flexibility, it means that EWEB staff will always have to
rely on market purchases and sales to balance loads with resources. With the Slice/Block
flexibility EWEB traders have another tool to manage that balance.


Staff has no recommendations at this time. This memorandum is informational and serves
to provide context to the Board for when staff presents an analyses of the product choices
and to support commissioners in their future deliberations of the appropriate new BPA
contracts for EWEB.


No requested action at this time.

g:\wp-docs\Sirois\BPA Product Choice                                                     22
                                       ATTACHMENT A

g:\wp-docs\Sirois\BPA Product Choice                  23
aHLH                                         Average Heavy Load Hour
aMW                                          Average Megawatt
BPA                                          Bonneville Power Administration
CDQ                                          Contract Demand Quantity
CGS                                          Columbia Generating Station
CHWM                                         Contract High Water Mark
CRAC                                         Cost Recovery Adjustment Clause
CSP                                          Customer Super Peak
DSI                                          Direct Service Industrial Customers
FBS                                          Federal Base System
FHWM                                         Forecasted High Water Mark
FS                                           Flattening Services
FOR                                          Forced Outage Reserves
FPS                                          Federal Power System
FY                                           Fiscal Year
HLH                                          Heavy Load Hour
HWM                                          High Water Mark
IERP                                         Integrated Electric Resource Plan
kW                                           Kilowatt
LLH                                          Light Load Hour
MW                                           Megawatt
NT                                           Network Transmission
OMB                                          Office of Management and Budget
RD                                           Regional Dialogue
RD Policy                                    Regional Dialogue Policy
RECs                                         Renewable Energy Certificates
RPS                                          Renewable Portfolio Standard
RRS                                          Resource Remarketing Service
RSS                                          Resource Support Service
RWHM                                         Rate Period High Water Mark
SCS                                          Secondary Crediting Service
SRP                                          Shared Rate Plan
TOCA                                         Tier One Cost Allocator
TRL                                          Total Retail Load
TRM                                          Tiered Rate Methodology
UAI                                          Unauthorized Increase Charge
aHLH                                         Average Heavy Load Hour

g:\wp-docs\Sirois\BPA Product Choice                                               24
aMW                                    Average Megawatt

                        ATTACHMENT B
                   Summary Table of BPA Post 2011
                        Product Choices

g:\wp-docs\Sirois\BPA Product Choice                      25
                                  Load Following                    Block                        Slice(2)
          Basic Product        EWEB commits own            BPA sells to EWEB            BPA commits pro rata
          Characteristic       resources in Peak and       blocks of Peak and           share of FBS output.
                               Offpeak blocks to supply    Offpeak power to             EWEB uses variable
                               partial load.               supply partial load. (1)     Slice output plus its own
                               BPA serves remaining        EWEB serves                  resources to serve
                               load, including hourly      remaining load,              remaining load, including
                               swings.                     including hourly swings.     hourly swings.
          EWEB                 For all three products EWEB will be required to commit the firm capability of
          Resource             existing resources to serve a portion of EWEB load.
          Operations           For all three products EWEB will require Staff to plan, trade, schedule, and
                               invoice actual generation of its resources.
          EWEB Market          EWEB “in the market”        EWEB “in the market”         EWEB “in the market”
          Activity             least of 3 products. Just   when hourly load             less often than Block to
                               to manage surplus or        swings exceed EWEB           manage hourly load
                               deficit EWEB                generation flexibility.      swings because of Slice
                               generation.                                              flexibility.
                                                                                        EWEB “in the market”
                                                                                        more often than Block to
                                                                                        sell daily and monthly
                                                                                        surplus secondary Slice
                                                                                        generation much of the
          Market Risks:        BPA manages EWEB’s          Slightly higher risks        EWEB manages
          Hydro volume;        exposure to the hydro       because EWEB must            EWEB’s exposure to the
                               volume, market price, &     make more hourly buys        hydro volume, market
          Market price
                               counterparty risks of       and sells to match           price, & counterparty
          Counterparty         FBS during each two-        loads with resources.        risks of FBS.
                               year Rate Period.                                        Bad outcomes are
                               EWEB exposure to                                         reflected in EWEB
                               these risks is delayed to                                contribution margin
                               next Rate Period, but                                    immediately. EWEB has
                               not eliminated. EWEB                                     ability to hedge these
                               has no knowledge by                                      exposures to its own risk
                               which to hedge these                                     tolerance, but at a cost
                               risks.                                                   in Staff time and option
          Non-Market           Non-Market Risks to BPA power include; higher fish costs; Snake River Dam
          Risks                removal; CGS nuclear plant operation; OMB money grabs; DSI power
                               subsidies;Non-Market Risks are intended to be allocated to all products
                               equally, and will impact at next Rate Period.
          Non-Market           EWEB exposure to            Same                         EWEB is exposed to
          Risk Collection      these risks is delayed to                                these costs annually
                               next Rate Period, but                                    through the Slice True-
                               not eliminated.                                          up.
                                                           (1)                          (2)
                                                              Optional Shaping              BPA is limiting
                                                           Capacity provides            customers to a
                                                           limited hourly flexibility   maximum of 70% Slice,
                                                           during the Peak period.      with the remainder made
                                                           Preschedule only, no         up of Block. For
                                                           realtime changes.            simplicity this column will
                                                           This option is available     only describe
                                                           only if we buy all Block,    characteristics of Slice.
                                                           with no Slice                Optional Block Shaping
                                                           percentage.                  Capacity is not available
                                                                                        for the Block portion if
                                                                                        any Slice is selected.

g:\wp-docs\Sirois\BPA Product Choice                                                                                  26
                            Load Following                  Block                       Slice
 Financial              Least reserves required    Slightly higher reserves   EWEB must carry
 Reserves               because BPA carries        required because           higher financial reserves
 required               financial reserves         EWEB must make             because Slice volume is
                        needed to back-up rates    more hourly buys and       uncertain and Slice
                        during two-year Rate       sells to match loads       True-up happens
                        Period                     and resources.             annually, while Rate
                                                   BPA carries financial      Cases are every two
                                                   reserves needed to         years and have more
                                                   back-up rates during       notice. BPA provides
                                                   two-year Rate Period.      no reserves.

 Tiered Rate            It appears BPA has designed Customer Charge in the Tiered Rates
 Impacts                Methodology (TRM) to promote fairness between the three products so that
                        any differences between the prices paid for the three products will be due to
                        differences in services taken by EWEB. However, the TRM Initial Proposal
                        has just been released and Staff has not reviewed yet, nor are we certain this
                        proposal will be adopted in final form.
 Net                    The calculation of High Water Mark is independent of the product EWEB
 Requirements &         chooses. Therefore, the amount of firm, Tier 1 power EWEB receives is the
 High Water             same for all products.
 FBS Secondary          None                       None                       Slice receives a %
 Power                                                                        share of the FBS energy
                                                                              above firm energy. (i.e.
 Oregon RPS             EWEB is not required to purchase RECs or renewable power to displace any
 Compliance             long-term BPA Tier 1 contract purchases under the Oregon RPS.
 RECs from BPA          Almost all Tier 1 power provided by BPA FBS creates no RECs because it is
 Tier 1                 too old. To the extent that BPA acquires new, qualifying renewable resources
                        and rolls those purchases into Tier 1, EWEB would be entitled to receive its
                        pro rata share of those RECs.

g:\wp-docs\Sirois\BPA Product Choice                                                                      27

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