Opportunity for Public Comment, Regarding Bonneville Power Administration's Subscription, Power Sales to Customers and Customers' Sales of Firm Resources

DEPARTMENT OF ENERGY

Bonneville Power Administration

Opportunity for Public Comment, Regarding Bonneville Power

Administration's Subscription, Power Sales to Customers and Customers'

Sales of Firm Resources

AGENCY: Bonneville Power Administration (BPA), DOE.

ACTION: Notice of draft policy proposal.

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SUMMARY: BPA is publishing a draft policy proposal for addressing

certain issues under sections 5(b) and 9(c) of the Northwest Electric

Power Planning and Conservation Act, (the Northwest Power Act), Pub. L.

96-501, and section 3(d) of the Act of August 31, 1964 (the Northwest

Preference Act), Pub. L. 88-552, regarding the amount of Federal power

a customer may purchase under BPA subscription power sales contracts.

BPA is initiating development of a policy that will provide policy

guidance on implementation of the Power Subscription Strategy under

applicable statutes and describe how certain factual determinations

needed for BPA subscription power sales contracts will be made.

DATES: Public meeting dates: May 27, 1999, and June 2, 1999. Close of

comment date: June 11, 1999.

ADDRESSES: If you are interested in commenting on the policy proposal

regarding the amount of Federal power a customer may purchase under BPA

subscription power sales contracts, you have several options.

1. You can send written comments to Bonneville Power

Administration, P.O. Box 12999, Portland, OR 97212, or you can fax

comments to (503) 230-4019. If you wish to send your comments

electronically, email comments to: [email protected]. Comments must be

received by close of business Friday, June 11, 1999.

2. You also can attend one or both of the two public comment

meetings. One meeting will be held on Thursday, May 27, 1999, in

Spokane, Washington, at Cavanaugh's Inn at the Park, 303 W. North River

Drive. Another meeting will be held in Portland, Oregon, on Wednesday,

June 2, 1999, at the Sheraton Portland Airport Hotel, at 8235 NE

Airport Way. Both meetings will begin at 10:00 a.m. Comments also will

be collected on BPA's Standards for Service proposal. If any additional

meetings are scheduled, the information will be posted on the web site

listed below.

http://www.bpa.gov/Power/subscription

FOR FURTHER INFORMATION CONTACT: Mr. Michael Hansen, Public Involvement

and Information Specialist, Bonneville Power Administration, P.O. Box

3621, Portland, Oregon 97208-3621, telephone (503) 230-4328 or 1-800-

622-4519. Information can also be obtained from your BPA Account

Executive or from:

Ms. Ruth Bennett, Acting Vice President, Power Marketing, 905 NE 11th,

P.O. Box 3621, Portland, OR 97208, telephone (503) 230-7640

Mr. Rick Itami, Manager, Eastern Power Business Area, 707 W. Main

Street, Suite 500, Spokane, WA 99201, telephone (509) 358-7409

Mr. John Elizalde, Acting Manager, Western Power Business Area, 700 NE

Multnomah, Suite 400, Portland, OR 97232, telephone (503) 230-7597

SUPPLEMENTARY INFORMATION: On December 21, 1998, BPA published its

Power Subscription Strategy and Record of Decision for selling Federal

power under new contracts with its public utility, investor-owned

utility and direct service industrial customers. The Power Subscription

Strategy stated overall policies for determining the amount of power

that would be offered to Pacific Northwest public utilities and

investor-owned utilities under section 5(b)(1) of the Northwest Power

Act.

This Federal Register Notice presents BPA's draft proposal for

implementing the Power Subscription Strategy under its post-2001 power

sales contracts. The proposal recommends contract mechanisms for

determining the amount of electric power BPA will offer to public and

investor-owned utilities. It also proposes contract mechanisms for

determining the amount of electric power BPA will offer investor-owned

utilities, based on a firm power requirement load, in settlement of

their rights to service under the residential exchange program created

under section 5(c) of the Northwest Power Act. Based on section 3(d) of

the Northwest Preference Act and 9(c) of the Northwest Power Act, the

proposal recommends principles for determining the effect a customer's

sale of its non-Federal firm resources may have on the amount of

Federal power that BPA will offer to the customer under its BPA power

sales contract.

The Northwest Power Act provisions are:

5(b)(1) Whenever requested, the Administrator shall offer to

sell to each requesting public body and cooperative entitled to

preference and priority under the Bonneville Project Act of 1937 [16

U.S.C. 832 et seq.] and to each requesting investor-owned utility

electric power to meet the firm power load of such public body,

cooperative or investor-owned utility in the region to the extent

that such firm power load exceeds--

(A). the capability of such entity's firm peaking and energy

resources used in the year prior to December 5, 1980, to serve its

firm load in the region, and

(B). Such other resources as such entity determines, pursuant to

contracts under this chapter, will be used to serve its firm load in

the region.

5(b)(1) In determining the resources which are used to serve a

firm load, for purposes of subparagraphs (A) and (B), any resources

used to serve a firm load under such subparagraphs shall be treated

as continuing to be so used, unless such use is discontinued with

the consent of the Administrator, or unless such use is discontinued

because of obsolescence, retirement, loss of resource, or loss of

contract rights. 16 U.S.C. 839c(b)(1)

9(c) Any contract of the Administrator for the sale or exchange

of electric power for use outside the Pacific Northwest shall be

subject to limitations and conditions corresponding to those

provided in sections 2 and 3 of the Act of August 23, 1964 (16 U.S.C

837a and 837b) for any contract for the sale, delivery, or exchange

of hydroelectric energy or peaking capacity generated within the

Pacific Northwest for use outside the Pacific Northwest. In applying

such sections for the purposes of this subsection, the term

``surplus energy'' shall mean electric energy for which there is no

market in the Pacific Northwest at any rate established for the

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disposition of such energy, and the term ``surplus peaking

capacity'' shall mean electric peaking capacity for which there is

no demand in the Pacific Northwest at the rate established for the

disposition of such capacity. The authority granted, and duties

imposed upon, the Secretary by sections 5 and 7 of such Act (16

U.S.C. 837d and 837f) [16 U.S.C. 837d and 837f] shall also apply to

the Administrator in connection with resources acquired by the

Administrator pursuant to this chapter. The Administrator shall, in

making any determination, under any contract executed pursuant to

section 839c of this title, of the electric power requirements of

any Pacific Northwest customer, which is a non-Federal entity having

its own generation, exclude, in addition to hydroelectric generated

energy excluded from such requirements pursuant to section 3(d) of

such Act (16 U.S.C. 837b(d)), any amount of energy included in the

resources of such customer for service to firm loads in the region

if (1) such amount was disposed of by such customer outside the

region, and (2) as a result of such disposition, the firm energy

requirements of such customer other customers of the Administrator

are increased. Such amount of energy shall not be excluded, if the

Administrator determines that through reasonable measures such

amount of energy could not be conserved or otherwise retained for

service to regional loads. The Administrator may sell as replacement

for any amount of energy so excluded only energy that would

otherwise be surplus. 16 U.S.C. 389f(c) (emphasis supplied).

The Northwest Preference Act provision is:

3(d) The Secretary, in making any determination of the energy

requirements of any Pacific Northwest customer which is a non-

Federal utility having hydroelectric generating facilities, shall

exclude any amounts of hydroelectric energy generated in the Pacific

Northwest and disposed of outside the Pacific Northwest by the

utility which, through reasonable measures, could have been

conserved or otherwise kept available for the utility's own needs in

the Pacific Northwest. The Secretary may sell the utility as a

replacement therefor only what would otherwise be surplus energy. 16

U.S.C. 837b(d).

Net Requirements

The term ``net requirement'' means the amount of Federal power that

a public utility, cooperative or investor-owned utility is entitled to

purchase from BPA to serve its regional consumers' loads. The

definition is based on section 5(b)(1) of the Northwest Power Act of

1980 under which BPA offers to sell firm power in excess of a

customer's own firm resources. In calculating net requirements

obligation to any customer, Congress directed BPA to consider exports

of the customer's non-Federal resources outside the Pacific Northwest.

These considerations are based on section 9(c) of the Northwest Power

Act as well as section 3(d) of the Northwest Preference Act.

The method of calculating net requirements is an important issue

because it determines the amount of Federal power an eligible customer

can receive for its firm consumer loads in the region. Section 5(b)(1)

of the Northwest Power Act says that a BPA customer is entitled to

purchase an amount of cost-based Federal power needed to meet its net

requirement. A customer's net requirement is equal to the difference

between its regional consumer firm loads and the amount of its non-

Federal generation and firm power purchase contracts that the customer

uses to serve those loads.

BPA first implemented the net requirements mandate of the Northwest

Power Act through mechanisms in its 1981 contracts including the Firm

Resource Exhibit (FRE), the Assured Capability Exhibit and other

contract provisions. A FRE is a list of firm resources to be used by

the customer in serving its regional load. A firm resource is one that

can contribute a specific amount of electricity for operational and

power planning purposes to serve a customer's loads. All of the current

power sales contracts negotiated in 1981 will terminate by October 1,

2001 and must be replaced. The wholesale electricity market has

undergone major changes since 1981. As a result, this is only the

second time, since the Northwest Power Act became law that BPA has

addressed the issue of how net requirements should be determined for

its utility customers.

The Context: Net Requirements in a Changing Market

In 1992 Congress passed the National Energy Policy Act deregulating

the wholesale power side of the electric industry. BPA sells Federal

power at wholesale under contracts with eligible customers.

Deregulation has changed the playing field of the wholesale electricity

marketplace causing BPA and other utilities to change the way they do

business. These changes have forced BPA to re-assess how it implements

sections 5(b) and 9(c) of the Northwest Power Act and 3(d) of the

Northwest Preference Act. The following provides a general overview of

the context of these changes and how they may affect BPA's

determinations of a customer's net requirements.

The Market as a Firm Resource

In 1981 relatively few BPA customers owned generating resources

that were used to serve a portion of their load. The operation of most

of these resources was managed by the region through the Pacific

Northwest Coordination Agreement as if all of the region's Federal and

non-Federal generating resources were operated by a single utility. The

region's utilities knew who owned what resources and what loads they

served. Increasingly, BPA's utility customers are relying less on

generation and more on market power purchases to serve their firm

consumer loads. Others have developed new generation resources which

they have chosen not to apply to their consumer load and do not specify

in their Firm Resource Exhibit in their current BPA power sales

contract. Most investor-owned utilities have not taken their consumer

load service from BPA and have not made power purchases under the 1981

contracts. In 1996, BPA offered a number of contract amendments to its

public utility customers allowing them to reduce their purchases from

BPA and serve a portion of their load from the wholesale marketplace.

These examples mean that BPA, working with customers and other regional

constituents, needs to re-assess how a customer's use of the

marketplace should be factored into BPA's calculation of net

requirements.

Separation of Utilities' Transmission and Power Sales Business Lines

The purpose of passage of the Energy Policy Act of 1992 was

deregulation of the wholesale electricity market. Federal Energy

Regulatory Commission orders 888 and 889 accelerated this process.

Among the requirements of FERC order 889 is that utilities functionally

separate their transmission and power marketing business lines so that

a utility's power marketing business has access to no more information

about its transmission system than any other participant in the market.

The intent of functional separation is to encourage full competition in

the wholesale electricity market by providing all marketers equal

access to the means of delivery. BPA has chosen to voluntarily comply

with the FERC orders. One of the ways BPA identified a customer's

export of its non-Federal resources when determining a customer's power

requirements under its 1981 contracts was by examining transmission

schedules of non-Federal utilities to other utilities outside the

Northwest. Under FERC order 889, BPA's Power Business Line no longer

has access to this information.

Retail Load Loss for BPA Customers

Changes are occurring in the retail electricity industry as well as

in the wholesale market. In most states each utility has a service area

in which it is the exclusive supplier of electric service

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to retail consumers. BPA sells its power to these utilities on a

wholesale basis and they resell the electricity to their retail

consumers. Under retail electric market deregulation, a utility may

continue to operate its distribution system but other marketers may

compete to supply electricity to residential, commercial and industrial

consumers. The substitution of electric power suppliers raises a risk

of retail load loss for some BPA customers. As more states deregulate

their retail electricity markets, the effect of retail load loss on a

customer's net requirements in the region becomes increasingly

important. One concern is how the loss of industrial and commercial

load by a BPA customer will change BPA's obligation to provide net

requirement load service. The Northwest Power Act does not distinguish

between the various types of consumer loads when calculating BPA's net

requirements. Loss of load service by the utility to another provider

may affect the total amount of power a customer could continue to buy

from BPA.

Effects of Sales of Generating Resources and Other Assets on Net

Requirements

As a result of deregulation, some utilities have sold or are likely

to sell generating resources on the market which have historically been

dedicated and used to serve Northwest retail consumer load. The buyers

of these resources will likely sell their output for the highest price

they can receive, either inside or outside of the region.

By law, BPA is required to make factual determinations regarding

the sale of certain resources and its effect on BPA's service

obligations to all customers and BPA's cost-based rates. Section 9(c)

of the Northwest Power Act and section 3(d) of the Regional Preference

Act require that BPA reduce the amount of power a utility receives

under its BPA contracts based on findings regarding its exports out of

the region. Complying with this legal mandate in a competitive market

is much more complex now than when the wholesale market was regulated

and there were comparatively few customers with non-Federal generating

resources.

Other utilities have decided to sell portions of their electricity

supply and distribution businesses in certain parts of the region. In

certain instances, new public power entities are forming and proposing

to take over the business formerly provided by investor-owned

utilities. Section 5(b)(1) directs BPA to sell power to meet the firm

power loads of a utility customer in the Pacific Northwest. BPA must

address how changes will be made to the amounts of power BPA sells a

customer when that customer no longer serves a particular regional load

or serves new loads.

Proposed Principles

BPA is offering the following draft proposal as an approach to

determining firm power net requirements obligations. It is intended to

answer the following general questions:

1. In negotiating a new post-2001 power sales subscription

contract, how should BPA determine a customer's net requirement based

on the customer's use of firm resources and its consumer loads?

2. How will changes in a customer's net requirement be made during

the term of its subscription contract?

3. How will BPA determine, as required by section 9(c) of the

Northwest Power Act and section 3(d) of the Regional Preference Act,

the effect of a customer's export of its resources on BPA's net

requirements obligation to supply power to the customer?

4. How should BPA implement its policy on the factual

determinations for treatment of customer's firm resources under its

statutes?

I. Initial Determination of Net Requirements

In the remainder of this notice, proposed principles are in regular

type with explanatory material in italic.

This section describes how BPA will contractually limit and define

its obligation to provide power to a customer under the Power

Subscription Strategy. It is based on language in the Northwest Power

Act that requires BPA to offer power to serve a customer's regional

consumer load. Some products meet a utility's full load minute by

minute, while other products provide power services based on the

difference between a customer's own resources used for load and their

BPA purchases. Two products offer service on a planned or forecasted

load, a fixed block product and a SLICE product. For these products,

the amount of Federal power offered must be based on reasonable and

verifiable estimate of the customer's regional consumer load. BPA's

Power Products Catalog of the Power Subscription Strategy proposed a

principle in which the fixed block products and the SLICE products are

based on the customer's existing regional consumer load without

consideration of changes for load growth. These products use an annual

estimate of consumer loads, which is done once, at the start of the

contract. They assume the customer and not BPA will serve any load

growth. Thus, there would be no increase in the amount of the purchase

over the term of the agreement. Under these products, the customer

agrees to provide non-Federal resources to serve its load growth.

(A) BPA's initial offer will be based on the utility's actual loads

or a reasonable and verifiable estimate of the utility's retail load in

the region identified in its projected business plan at the time of the

offer.

This principle is based on section 5(b)(1) of the Northwest Power

Act. BPA is to offer power to serve a customer's firm consumer load in

the region. In a deregulated market, the longer the term of the

contract, the greater the likelihood that changes will occur in a

customer's regional consumer load. This principle seeks to address this

concern by limiting the application of the forecast used to initially

determine a customer's net requirements to one year. Principle II.A.

below requires a mechanism for a BPA annual review of a customer's net

requirements load.

(B) Except as provided in I.D. below, BPA will require that the

utility continue to apply all current generation and long-term power

purchase contracts to serve that customer's regional consumer load

under a subscription contract. These resources are included in the Firm

Resource Exhibit of a BPA customer's current 1981 or 1996 power sales

contracts for the 1998-1999 operating year. BPA also will require all

current long-term surplus power purchase contracts or excess Federal

Power purchase contracts that extend beyond 2001 to be applied to serve

a customer's regional consumer load under a subscription contract.

(C) BPA will consider any purchase contract that terminates after

September 30, 2001, to be a long-term power purchase contract that

extends beyond 2001.

(D) BPA will offer the customer power products and services at the

Priority Firm (PF) rate and without a PF surcharge for consumer loads

that are no longer served by generation resources and long term power

purchase contracts due to resource retirement, obsolescence, or other

loss of resource, or loss of contract right. Purchases of Federal

surplus power and Excess Federal power that extend beyond 2001 are

treated as long term power purchase contracts. Post-2001 PF power sales

for resource replacement shall commence on the dates such resources are

lost, provided that BPA has been notified in writing of the resource

loss in time to permit the agency to include the additional load in the

BPA rate process and that the generating resource or

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contract meets the standards described in II.E below.

Principles I. B., C. and D. are based on sections 5(b)(1)(A) and

5(b)(1)(B) of the Northwest Power Act. The Subscription Strategy stated

that a customer must continue to serve its loads currently served by a

customer's generating resources or long-term power purchase contracts

that continue beyond 2001. Principle I.B. clarifies that the resources

a customer is required to apply to load is limited to those resources

included in the customer's current Firm Resource Exhibit for the 1998-

1999 operating year. These principles state that all power purchase

contracts with termination dates beyond 2001 are included in the

customer's firm resources. Under the subscription contract, the

customer must use these resources to serve its regional consumer loads.

These long-term power purchase contracts that continue beyond 2001

include presubscription contracts and other long-term contracts to

purchase Federal power from BPA. The principles also acknowledge that

there are a number of these power purchase contracts which customers

know will expire prior to the end of the BPA rate period.

The proposed principle allows the customer to purchase net

requirements load service from BPA at the PF rate and without the PF

surcharge as long as BPA is informed of the expiration dates of the

contracts and the cost of such service has been identified and included

in BPA's rate case. The customer must consult with BPA and obtain BPA's

agreement in writing to receive requirements load service from BPA for

a generating resource the customer believes should be permanently

discontinued due to obsolescence or retirement. Resources or contracts

that are lost after BPA submits its final rate case to the Federal

Energy Regulatory Commission will incur a PF surcharge to cover any

additional power costs BPA faces to serve the additional load.

BPA considered whether the customer's use of the market as a

resource should also be considered. Many customers who use the market

as a resource would likely face a loss of contract right for their

short-term contract purchases. Additionally, some customers have been

serving their consumer load in the region with generation resources not

included in their Firm Resource Exhibits of their current power sales

contract. Instead of the market, they are using their own non-Federal

generation to serve their load. The proposed principles address a

customer's use of those resources in serving its regional load based on

section 9(c) of the Northwest Power Act. 16 U.S.C. 839(f)c.

(E) In determining a customer's net requirements load, BPA will

follow the Declaration Parameters included in the Power Products

Catalog under Actual Partial Service in establishing the capabilities

of the customer's firm resources under the Subscription contract.

Principle I.E. follows the approach established in BPA's Power

Products Catalog for Actual Partial Products for determining the

capabilities of the customer's resources to be applied to its loads.

BPA considered whether there might be a simpler method for determining

customer resource capability. However, there are enough unique customer

perspectives on estimating resource capability that this approach

appears to best meet the needs of resource determination in a

deregulated market.

(F) BPA will determine what, if any, amount of thermal and/or

hydroelectric peaking capacity and electric energy a customer has

exported from the region that could be conserved or otherwise retained

for service to regional loads. The customer's net requirements must be

reduced to the extent that BPA determines the exported energy increased

BPA's obligation to any customer to provide power to meet regional

loads.

Principle I.F. is based on section 9(c) of the Northwest Power Act.

This principle states that BPA will implement section 9(c) by

determining whether a customer has exported power from a thermal

resource, whether BPA's net load requirements have increased as a

result and whether the power could be conserved or otherwise retained

for service to any regional loads by reasonable means. The proposed

principle states that BPA will implement section 3(d) of the Regional

Preference Act by determining whether a customer has exported power

from a hydroelectric resource and whether the hydro resource could be

conserved or kept available. In its 1994 9(c) policy, BPA adopted a

policy stating that a customer's hydroelectric resources could always

be applied to load in the region. This principle also continues BPA's

past determinations for specific resources that resulted in reductions

in net requirements of customers.

Il. Changes in Net Requirements During Term of the Contract

This section addresses reductions in BPA's net firm load

requirements obligation due to changes on or sale of a customer's

system which will change the amount of regional firm consumer load

served by that customer or that reduce its net requirements. The

principles are based on sections 5(b)(1) and 9(c) of the Northwest

Power Act and 3(d) of the Regional Preference Act. The following

principles propose a contract mechanism for making additional sales of

power to utilities and the circumstances under which BPA would apply

the PF Surcharge, Targeted Adjustment Surcharge to such purchases by

public agency customers, or the NR rate for purchases by investor-owned

utilities (IOUs). The actual rates that apply to any increased amounts

of power sold for net requirements loads will be established in the BPA

rate case.

These principles focus on the transition from the 1981 contract

model to the Power Subscription Strategy model. Under the 1981

contract, BPA obligated itself to serve the entire regional load of a

utility based upon notice periods and availability of power for

acquisitions. A BPA goal under the Power Subscription Strategy is only

to acquire new resources to serve a customer's net requirements load

increase beyond its initial subscription amount based on a bilateral

agreement in which the requesting customer takes all the financial

risk. (Note: The initial subscription amount includes load growth for a

customer purchasing that right.) BPA will still have to meet all of its

total regional load obligations to all customers. Accounting for

reductions in loads is part of meeting BPA's total regional firm load

obligations.

(A) BPA will require, at least annually, that a customer report

specified events causing a reduction in its consumer load. For fixed

block and SLICE purchasers, if the reductions cause a customer's net

requirements to fall below the amount of power being purchased from

BPA, the agency will implement the mitigation measure for retail load

loss specified in the customer's contract. For investor-owned

utilities, BPA will provide the remarketing product option.

Principle II.A. is based on section 5(b)(1) of the Northwest Power

Act which limits BPA's net requirement obligation to a utility's firm

consumer load in the region. This principle addresses the issue of the

loss of retail consumer load by a utility and the use of the

remarketing product mitigation measure specified in section IV.H.2. of

the Subscription Strategy. This remarketing provision provides a

financial benefit to residential loads for IOUs that no longer can

purchase requirements power due to the utility's retail load losses.

BPA considered other alternatives such as a conditioned consent to the

removal of customer

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resources dedicated to serving regional load under their subscription

contract. Under such an alternative, BPA would allow a customer to

reduce the amount of resources serving its load equal to the reduction

in requirements service caused by the retail load loss. BPA is

interested in comments on this alternative and other alternatives to

address this issue.

(B) BPA will reduce a customer's net requirements by the amount of

any exports of hydroelectric or thermal resources if BPA determines

such resources could have been conserved or otherwise retained to meet

regional firm power requirements of any BPA customer. On an annual

basis, BPA will determine whether a customer's export of thermal or

hydroelectric resources could have been conserved or otherwise retained

to serve any regional loads.

Principle II.B. is based on existing BPA policy for export sales of

hydroelectric resources and thermal resources applied to regional load.

See 1994 Non-Federal Participation Capacity Ownership, and Section 9(c)

Policy. Reductions in BPA power requirements obligations due to a

customer's export of power from its resources can come at any time. For

example, a customer could end a contractual sale to another customer,

where such other customer had dedicated the power purchase to serve its

firm loads. By giving six months' notice, the customer losing the power

purchase could request additional service from BPA at the PF Surcharge

rate. If the customer owning the resource has sold power from its

resource on the market after it was withdrawn, then it would face a

section 9(c) determination and would potentially be subject to a

reduction in its net requirements. In this example, the withdrawal of

the power could cause BPA's obligation to the second customer to

increase. BPA's policy on hydroelectric resources under section 3(d) of

the Regional Preference Act is hydroelectric resources can always be

operated or applied against regional load by reasonable means. BPA's

policy on thermal resources applied by a customer to its regional

consumer load is that such resources can be conserved or retained for

service to regional load. BPA is proposing changes in its policy on

export of thermal resources under this Federal Register Notice.

(C) Within the following limits, BPA will reduce a customer's take-

or-pay obligation by an amount equal to the customer's dedication for a

specified contract period of new renewable resources developed by that

customer. Alternatively, a customer may develop new non-hydro renewable

resources and export these outside the region without reducing its net

requirement. This right to reduce BPA purchases shall apply only to the

first 200 average megawatts of all new renewable resources developed by

all BPA customers within the region. The new renewable resources must

meet the standards for BPA's conservation and renewable resources

discount, and be dedicated to serving the customer's load.

Principle II.C. is based on the regional interest to encourage the

development of renewable resources and follows statutory language in

section 5 (b)(1)(B) of the Northwest Power Act that allows the

Administrator to consent to resources changes under a requirements

contract. This principle would allow customers to dedicate a new

renewable resource to serve their retail consumer load. BPA has

consistently interpreted section 5(b)(1) as allowing the Administrator

to specify by contract the customer's dedication of additional

resources to serve its load. BPA's Subscription Strategy requires

customers to take the risks on their non-Federal resource placement

commensurate with BPA's risks in covering future costs of Federal

resources.

BPA requires customers to specify the amount of firm resources they

dedicate to serve their retail consumer loads for the term of their

contract. BPA is willing to sign a Subscription contract for terms

ranging from 1 to 20 years. This renewable resource principle provides

an exception to the policy that a customer's firm resources must be

known and dedicated at the start of the BPA contract and for the entire

term of a contract. The exception provides for the Administrator's

consent to the addition of new renewable resources during the term of

the contract and allowing removal of such renewable resources at a

point prior to the end of the contract. BPA has placed two conditions

on this exception: (1) qualified renewable resource dedications are

limited to the first 200 average megawatts of renewable resources that

customers request to dedicate during any year; and (2) only resources

that would qualify for BPA's conservation and renewable resources

discount are eligible.

(D) BPA will provide net firm requirements service under the PF

Surcharge rate or the New Resource Firm Power (NR) rate for a

customer's regional loads not included in the rate case and which are

served by the customer's dedicated generation resources and its long

term power purchase contracts that extend beyond 2001, if such

dedicated resources are lost for specified reasons described in

principle II.E. during the rate period.

(E) Generation resources and long term power purchase contracts

extending beyond 2001 are considered lost if they are permanently

discontinued during the rate period due to retirement, obsolescence,

loss of the resource, or loss of a contract right. Loss of a resource

must result from factors beyond the reasonable control of the customer

and which the best efforts of the customer are unable to remedy. BPA

will consider such resources lost due to permanent discontinuance

because of obsolescence or retirement only if the customer has

consulted with BPA and BPA has agreed in writing to such

discontinuance.

Principles II. D. and E. continue BPA's existing contract standards

regarding a customer's loss of firm resources. These principles have

worked for 20 years and allow BPA to consider all the facts in

determining when BPA must replace a customer's lost resource with

Federal resources.

BPA will provide replacement firm power service for the regional

consumer load served by the resource as net requirements power only if

the customer has lost a resource or lost a contract for the reasons

specified above. For example, expiration of a customer's non-Federal

power purchase contract is considered a loss of a contract beyond the

reasonable control of a customer, and which the best efforts of the

customer are unable to remedy. If a customer requests additional power

purchases from BPA for its regional firm load served by its resources

for any other reasons, BPA would make such purchases of replacement

power from the market under separate contracts and its section 7(f)

surplus power rates.

(F) BPA will assume the market will provide resources to the

customer to serve any increased consumer loads. BPA load service for

new annexed loads resulting from open access or actual annexations or

mergers will be provided under the Targeted Adjustment Charge or the NR

rate. Additional service for lost generation resources and lost long

term power purchase contracts extending beyond 2001 will be provided at

the PF Surcharge or NR Rate, upon the customer's request for service

and notification to BPA that such an event has occurred. Service to

replace the above qualified renewable resources at the end of their

dedicated contract period will be provided at the PF rate. BPA will

provide firm power service for annexed loads, lost resources, and

replacements of qualified renewable resources six months following

[[Page 24381]]

determination that such event has occurred or as mutually agreed.

Principle II.F. states that BPA will provide firm power

requirements service to annexed loads or for lost resources for all

customers. However, the rate arranged for such service may include an

adjustment for costs BPA incurs to provide the additional service. BPA

considered making changes to its net requirements service only at its

annual review of load or customer resource changes when determining any

reductions in the customer's net requirements purchase. However, BPA

decided that a rolling notice period for annexation or loss of resource

would better serve the sporadic nature of these events. BPA has assumed

that six months would be the minimum time needed to determine the facts

surrounding the annexed load or loss of resource and allow BPA to

prepare to provide service. It would also give BPA time to purchase any

additional resources necessary to serve the load. Principle II.F. would

give BPA the discretion to provide service on shorter notice if it is

able to do so.

lll. How BPA Will Determine if a Customer Has Exported a Resource

From the Region Requiring a Reduction in the Customer's Net

Requirements

Section 9(c) of the Northwest Power Act requires BPA to make

several factual determinations when customers sell or dispose of power

from their resources on the market for export outside the region.

Section 3(d) of the Northwest Preference Act requires BPA to reduce its

sale of requirements power to any customer that sells or disposes of

hydroelectric power outside the region which cannot be conserved or

kept available for use. These determinations are particularly difficult

in a deregulated market where sales are often made to marketers at the

generator busbar, and where schedules of transmission are not available

to BPA's Power Business Line. Adding to the difficulty is the fact that

merchant activity by all customers is confidential so that commercial

information is not readily available for factual determinations.

(A) Subject to certain showings, the output of any customer's

thermal generating resource existing on the date the subscription

strategy was published and that has been used to serve regional firm

load at some time during its life will be treated as exported from the

region in a manner that increases the firm energy requirements of the

Administrator. The customer's net requirement will be reduced unless

the customer can demonstrate one or more of the following:

1. The resource fits within the definition of a ``market resource''

as described in section III. D. 2. of Appendix B of BPA's NFP Section

9(c) Policy;

2. The resource is under a current post-2001 contract committed to

serving a BPA customer's regional load; or

3. The resource is subject to a prior BPA written section 9(c)

determination that the resource could not be conserved or otherwise

retained to serve regional load.

4. The Administrator determines a thermal resource could not be

conserved or otherwise retained to serve regional load by reasonable

means under principle III.B.

(B) The policy BPA proposes for determining when a thermal resource

could not be conserved or otherwise retained to serve regional load is

met when:

(i) There were no purchasers after the resource was offered for

sale in the region to BPA and all of its regional customers for a

period of at least one year through a public process at cost plus a

reasonable rate of return. In the case of a resource offered for a

fixed term, the output of such thermal resource shall not be deducted

from the owner's or purchaser's maximum firm requirements for the term

of the offer or the term of the export, whichever is less.

(ii) The resource is permanently auctioned through a public process

and was not purchased by a regional purchaser. In the case of a

resource permanently auctioned, the output of such thermal resource

shall not be deducted from the owner's net requirements.

(iii) The Administrator determines that the market price for power

makes it unreasonable to retain that resource to serve regional load.

Principle III.A. addresses the difficulty in a deregulated

wholesale market of determining whether power from a customer's

resource has been exported in a manner that increases the

Administrator's firm energy requirements. The proposed principle states

a rebuttable presumption that all power from a customer resource which

has been used to serve regional loads and which is sold on the market

shall be treated as power exported by the seller. Such a sale shall be

deemed to increase the Administrator's firm power requirements under

the customer's or another customer's BPA power sales contracts. Power

sold from the resource will not be treated as an export if the customer

can demonstrate the resource was: Not used for load and developed

solely for sale in the market, or that the power from the resource is

being used by a Direct Service Industry (DSI) or another BPA utility

customer to serve retail load in the region;, or that a prior BPA

determination under Section 9(c) allowed the resources to be exported.

If a customer demonstrates that the resource has been sold to a DSI

or another utility in the region, the purchasing utility must

demonstrate that power from the resource is dedicated by contract with

BPA and is being used to serve its retail load in the region.

To implement this principle, the customer must provide that

commercial information it wishes to share with BPA on its power sales,

so BPA can make the required factual determinations. BPA considered

whether it should continue the practice stated in the 1994 Non-Federal

Participation Section 9(c) Policy of examining a customer's

transmission schedules to points outside the Pacific Northwest. This

alternative was rejected due to limitations on the flow of information

from transmission functions to power sales functions arising from

functional separation under FERC orders 888 and 889.

Principle III.B.4 addresses a customer's sale of resources, which

are determined to increase the Administrator's power requirements

obligations to serve load in the region. Such a sale must meet one of

three tests in order for BPA to determine that the resource could not

be conserved or otherwise retained to serve regional load. Unless at

least one test is met, the amount of power, capacity and energy sold

and deemed exported would be treated as a resource that could be used

or retained to serve firm load in the region and whose sale will result

in BPA's obligations increasing. Thus, BPA would reduce its section 5

electric power requirements contract obligations to that customer by

the amount of the power sold from the resource.

The first test provides that a customer may offer power from a

resource for sale in the region to BPA and its eligible customers for a

period of at least one-year at cost and a reasonable rate of return. If

BPA or a BPA customer in the region does not offer to purchase the

resource, then the Administrator would determine that the output of the

resource could not be conserved or otherwise retained to serve regional

load for a period equal to the duration of the offer of the resource or

the term of the export whichever is less.

The second test provides an alternate mechanism in which a customer

may auction the resource to the highest bidder as long as BPA and all

BPA

[[Page 24382]]

regional customers are reasonably notified of the auction and have a

reasonable opportunity to bid on the sale. If the resource is auctioned

and the customer can demonstrate that BPA and its regional customers

had a reasonable opportunity to participate, the Administrator would

determine that the resource could not be conserved or otherwise

retained to serve regional load.

BPA considered a possible alternative to the second test that would

limit the use of auctions based on an economic standard of paying the

stranded costs of a utility. Under that test, BPA would reduce its net

requirements obligation to the utility if the proceeds of the auction

and export of a resource resulted in net positive benefits above the

cost and reasonable rate of return for the resource, and if such

benefits were not paid to the consumers of a utility. The purpose of

such a limitation is to preserve the benefits of low cost resources for

regional loads.

The third test allows the Administrator to determine that a

resource could not be conserved or retained to serve regional load

based on current market conditions and prices in the region for a

specified period. If the Administrator makes that determination, then a

customer would be allowed to sell a resource during the period without

a reduction in BPA's obligation to provide power under its Subscription

contract.

(C) All new thermal generating resources developed by BPA customer

utilities after the December 21, 1998, publication date of the Federal

Power Subscription Strategy will be treated as meeting the ``market

resource test,'' unless power from the resource is dedicated by a BPA

customer under its BPA contracts to serve consumer load. In such event,

the thermal generating resource will be treated in the same manner as

existing non-Federal resources dedicated by customers to regional load

under Subscription contracts.

Principle III.C. proposes to change the definition of ``market

resources'' under the Section 9(c) Policy to create a presumption that

new resources are developed for sale in the deregulated market and not

for service to a customer's retail load. The exception would be where a

customer specifically chooses to dedicate part or all of the output of

the resource to serve its own load or regional load of another customer

as stated below. Otherwise, all such resources sold on the market would

not increase the Administrator's power requirements obligation to any

customer under its BPA section 5 contracts.

(D) Any customer's sale on the market or export of the output of

thermal resources that is included in any other BPA customer's Firm

Resource Exhibit for the 1998-1999 Operating Year (under a 1981

contract or a resource exhibit under a 1996 contract) shall be

considered to meet the section 9(c) tests of increasing the

Administrator's electric power load requirements under the Subscription

contracts. The output of such resources shall be deducted from the

selling customer's net requirements unless BPA determines the resource

could not be conserved for service to load in the region under III.B.

above.

(E) Any customer's sale on the market or export of the output of

thermal resources that are currently being used to serve that

customer's or another customer's regional load but are not included in

either customer's Firm Resource Exhibit for the 1998-1999 Operating

Year (under a 1981 contract or a resource exhibit under a 1996

contract) shall be considered to meet the section 9(c) test of

increasing the Administrator's electric power load requirements under

the Subscription contracts. The power output of such resources shall be

deducted from the customer's net requirements unless BPA determines the

resource could not be conserved for service to load in the region under

III.B. above.

Proposed principles III.D. and III.E. divide all customer firm

resources currently used to serve load into two classes: (1) those

resources that are currently in any BPA customer's Firm Resource

Exhibits; and (2) those resources that are not included in Firm

Resource Exhibits. BPA has proposed that it will require only resources

currently specified in any of its customer's Firm Resource Exhibits to

be dedicated by the customer to serve its regional load under its BPA

contracts. Customer's resources that are currently used to serve

regional load but which are not included in Firm Resource Exhibits, if

sold on the market, will result in increases in BPA's firm power

requirements obligations under section 5 contracts. The customer

selling the output of the resource will be required to demonstrate that

the resource has either been sold to a regional utility to serve that

utility's consumer load in the region, or demonstrate how the resource

could not have been conserved or otherwise retained to serve any BPA

customer's regional loads.

Principle III.D. also recognizes that BPA would face an increase in

its power requirements obligations if the owner of a resource

terminated a contract purchase used by another utility to serve its

regional retail load. The owner of the resource would be required to

demonstrate that the resource has either been sold to another regional

utility to serve its consumer load in the region or could not have been

conserved or otherwise retained to serve any BPA customer's regional

loads.

(F) Any regional hydroelectric resources exported by a customer

shall reduce the customer's BPA power requirements under its BPA

contracts, unless the resource is contractually committed to serving

another customer's regional load or such resource was previously

determined to be serving that customer's load and the customer replaces

the resource by a market purchase or new generation.

Principle III.F. requires the reduction of a customer's BPA power

requirements obligation under its BPA contracts, if the customer

exports any hydroelectric power from the region. If a customer

demonstrates that the resource has been sold to a DSI or another BPA

customer utility in the region, then the purchaser must demonstrate

that its purchase is dedicated to and is being used to serve retail

load in the region. If in calculating the customer's net requirements,

BPA determines the resource was already dedicated to serving the

customer's firm load, BPA will treat the hydro resource as remaining

dedicated and will not further reduce its net requirements obligation

to the customer, nor will BPA replace the resource.

Responsible Official: Mr. Steve Oliver, Manager, Bulk Power

Marketing, is the official responsible for the development of the draft

policy proposal for addressing issues under sections 5(b) and 9(c) of

the Northwest Power Act regarding the amount of Federal power a

customer may purchase under BPA subscription power sales contracts.

Issued in Portland, Oregon, on April 26, 1999.

Judith A. Johansen,

Administrator and Chief Executive Officer.

[FR Doc. 99-11407 Filed 5-5-99; 8:45 am]

BILLING CODE 6450-01-P