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Buying Power In TheNorthwest:
A Buyer's Perspective
Robert McCulloughAnn Fisher
B. Martin HowardJune 22, 1999
IntroductionMarket OverviewLoad/Resource BalancePrice ForecastsMajor PlayersTransmissionNew AlternativesRisk and HedgingContract Issues
Buying Power In TheNorthwest
Introduction
How did we get here?What happens next?Who should we blame?
Roosevelt's Legacy
The PacificNorthwestreorganizes on a 20year cycleOur newesttransformation hitsOctober 1, 2001
The Robber Barons
JP Morgan
Samuel Insull
The Old System
J.D. Ross MasterPlan
Fundamental ProductsEnergy And Capacity
Capacity is the right to take energy atspecific rate any time within a definedperiod of timeEnergy is the amount of commodity takenover a period of timeElectric power is unique in the degree of itstight relationship with time - fractions ofseconds matter
Facts About Products
All products are effectively firmOne day prescheduled energy dominates themarket• This is roughly equivalent to a standard
commodity since its location and delivery canbe relied upon
Real time energy balances the system• Real time transactions offset weather
excursions and plant outagesNon-firm energy is not a marketable commodity,but poorly briefed market experts (usuallyHarvard professors) have continued to discuss itas if it were
Who sets the prices?
There is no formal market on the West Coastoutside CaliforniaTwo regions -- Alberta and California have formalcentralized markets mandated by regulatorsMarket prices are set up between schedulers,dispatchers and traders over the telephoneResults of trades are sampled daily by surveyfirmsThe market leader -- if there is one -- is BPA
Recent Developments AndCurrent Environment
National Initiatives - Legislation AndFERC ActionWestern EventsPrice Spikes In Summer, 1998Worries About Capacity
National Initiatives
Gas Restructuring In 1980s As PreludeEPAct Of 1992FERC's "Giga-NOPR" And Order 888/889FERC Hints At ISO Initiatives
Western Events
RTAsCalifornia RestructuringAlberta's PoolFailure Of INDEGO Formation
California Restructuring IsFollowing A Contorted Path
StructurePrice Artifacts
BPA's Eras
BPA goes through its own cycles of boomand bustLow cost hydro put's BPA in the driver'sseat between disastersBPA has just started a new acquisitioncycle
Future Focus
Basic GeographyNorthwest Delivery Points
MidC
COB
Today's Offer
New Resource Choices
All market participants plan on newgeneration in the early to middle users ofthe next decadeThe resource choice is natural gas firedcombined cycle generationEstimated "all in" prices are 25 mills
Market Overview
The WSCC is a regional market withincreasing barriers to entryTwo locations: California and Albertahave fallen victims to social engineeringwith higher costs and difficult tounderstand barriers
WSCC Areas
Load/ResourceBalanceWhy is the news always so good?
Traditional planning was highly conservativeThermal plant operations are still conservative and inefficientMany resources remain forgotten and undispatched -- evenduring high load periods
Have you considered cogen today?
WSCC Load/Resource Balance
Load Growth
Jan-
06
Feb-
06
Feb-
06
Apr
-06
May
-06
Jun-
06
Jul-0
6
Aug
-06
Sep
-06
Oct
-06
Nov
-06
Dec
-06
0.00
50,000.00
100,000.00
150,000.00
200,000.00
RESOURCES - HYDRO - CONVENTIONAL HYDRO - PUMPED STORAGE STEAM - COALSTEAM - OIL STEAM - GAS NUCLEARCOMBUSTION TURBINE COMBINED CYCLE GEOTHERMALINTERNAL COMBUSTION COGENERATION OTHER
WSCC Loads and Resources(2006)
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99
Feb-
99
Feb-
99
Apr
-99
May
-99
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99
Jul-9
9
Aug
-99
Sep
-99
Oct
-99
Nov
-99
Dec
-99
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50,000.00
100,000.00
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WSCC Loads and Resources(1999)
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99
Feb-
99
Feb-
99
Apr
-99
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-99
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99
Jul-9
9
Aug
-99
Sep
-99
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-99
Nov
-99
Dec
-99
0.00
20,000.00
40,000.00
60,000.00
80,000.00
NWPP Loads and Resources1999
NWPP Loads and Resources2006
Jan-
06
Feb-
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Feb-
06
Apr
-06
May
-06
Jun-
06
Jul-0
6
Aug
-06
Sep
-06
Oct
-06
Nov
-06
Dec
-06
0.00
20,000.00
40,000.00
60,000.00
80,000.00
Interregional Markets
Packaging
While load/resource balance figures arereassuring -- they obscure how difficulttrue optimization actually isThe single largest resource is regionaldiversityInterregional packaging is likely to be thesource of major new supplies
Price Forecasts
Observed MarketBehavior• The "disasters" have not happened
• ... But prices have spent time far above"marginal" cost anyway
• Volatility and price "quantumtunneling"
Past as Prelude• Significant Landmarks
• Markets "open" mid-1995• NYMEX begins trading futures Summer 1996• PX begins end of March, 1998• Midwest price excursions of June, 1998• High volatility periods since Summer, 1998
• Load Evolution• Supply Evolution (or "devolution")
• The simple fact is that there were no majorproblems in the last year• 1998 hydro was a little worse than normal, thisspring has been a little better
• There were no major plant outages• There were no significant transmission outages• Loads were higher, but not markedly so
• California's PX has had an enormous impact intwo ways:• Terms of trade have turned towards the PacificNorthwest as the theorists in California haveattempted to offset market power by California'sbig three utilities
Why Were 1998 SummerPrices So High?
ISO Risk
Northwest PriceHistory• Slow start in mid-1995
• Increased activity coincident with NYMEX futures trading• PX onset coincident with high and volatile prices• Confounding effects
• weather (1998 hot Summer)• resource (less-than-normal hydro)
• NW Prices still apparently higher and more volatile post PX
Jun-
95
Jul-9
5
Aug
-95
Sep
-95
Oct
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Nov
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Dec
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Apr
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May
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Jul-9
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Sep
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Oct
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Nov
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Dec
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Apr
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May
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Sep
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Oct
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Apr
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May
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Nov
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Feb-
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Mar
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Apr
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May
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A Short History ofNorthwest Spot Prices
PX
7/1/
95
8/1/
95
9/1/
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10/1
/95
11/1
/95
12/1
/95
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2/29
/97
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/97
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/97
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/97
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2/1/
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2/29
/98
4/1/
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2/29
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Mid-C Volatility
PX
Mid-C VolatilityAnother View
Jul
Sep
Nov
Jan
Mar
May
1995 1996 1997 1998
0
5
10
15
20
25
Daily Volatility$/MWh
Month
Year
Seasonal Volatility Changes
1995199619971998
How Has the PXBehaved?
• Day ahead prices most indicative for NW• Short term ISO artifacts most influential in California• Volatility seems to have settled down some• Relation to Mid-C and COB PODs
PX Average PricesCalifornia PX Day-Ahead Prices - Various Moving Averages
(Volume Weighted)
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$/M
Wh
daily average
last 35 day average
PX On Peak PricesPX Day Ahead On Peak Daily Averages
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Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99
$/M
Wh
Flows Across COB• COB is a "balance point" between mid-C and California• Generally prices "flow" north or south consistently through COB• Overall, PX seems to "drive" COB and mid-C• But mid-C prices seem to be "working" the PX• This is consistent with "terms of trade" change
Mid-C/COB RelativeTo PX
On-Peak Relative to COB
-30
-20
-10
0
10
20
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Apr-98 Jun-98 Aug-98 Oct-98 Dec-98 Feb-99 Apr-99 Jun-99$/M
Wh
Mid-CPX
PX/Mid-C/COB -Temporal RelationsCross Correlations
0
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1
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-20 -15 -10 -5 0 5 10 15 20
Lag
Corr
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COB/PXMid-C/COB
S to COB/N to COB -Temporal Relations
Cross Correlations: N-to-COB vs S-to-COB
-0.3000
-0.2500
-0.2000
-0.1500
-0.1000
-0.0500
0.0000
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-25 -20 -15 -10 -5 0 5 10 15 20 25
Lag
Corr
elat
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• Our current results indicate that the California PX has addedabout 2.5 mills to on-peak prices and about 2 mills to off-peakprices
• Close examination indicates that the impacts are verydependent on problems within the PX itself
• As a working hypothesis, we expect that PX excursions will onlyoccur during high load months in California
• November through January were not affected by PX problems
Updating forecasts forthe California PX
• Generally more volatile behavior after April 1, 1998• Summer disproportionally affected• Summer 1999 will be interesting
Futures Behavior Changesfrom PX Initiation
Futures (NYMEXCOB) Behavior Post
PX
0.0
10.0
20.0
30.0
40.0
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60.0
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11/1/97 1/30/98 4/30/98 7/29/98 10/27/98 1/25/99
What's new?• Basically the only change from previous years is the arrival of
California's "deregulated" power market• California has deregulated by implementing a $300 million dollar
computer program to schedule power for the customers of investorowned utilities in the state
• The program is a triumph of complexity and sophistication -- likeloans to Russia the problem is so large that everyone in California isforced to take it seriously
• Few, if any, understand the program and its relationship to regionalpower markets
• A Prediction Company opportunity? (Packard & Farmer)
NorthwestProjections
• Average water in 1999-2000• Continued high prices and volatility in Summer-Fall• Winter events less likely - California influence
NorthwestProjections
Projected Dow Jones Mid-Columbia Index
0
10
20
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Sep-98 Dec-98 Mar-99 Jun-99 Aug-99 Nov-99 Feb-00 May-00 Aug-00 Nov-00 Feb-01 May-01
$/M
Wh on-peak
off-peak
Major PlayersSuppliersCustomers
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BPA
Industry
IOUs
Canada
GeneratingPublics
Brokers
Bonneville PowerAdministration
Established in 1937, now has a "service territory" over300,000 square milesMore than 80% of the power sold in the Northwest comesfrom BPA.Controls over 75% of the high voltage transmission grid.The 800 lb. gorilla -- or not.
BPA is facingsignificant risks as it
moves into a lessregulated world.
Power salesEscalating fish and wildlife costsTransmission issues including FERC's desirefor a RTO/Transco.SubscriptionShould there be a transmission rate case?Transmission terms and conditions.
Subscription (Who gets What and Why an Ever-changingSituation.)Eligibility RequirementsDSI "entitlement."
Power Sales
Rates to be "below market."TimingFish recovery and CRACSlice of the SystemProducts available
Power Rate Case
Slice of the SystemFirst discussions took place in 1993 and were driven bygenerating utilities.Initially seen by some as a way to better coordinateindividual hydro operations with BPA's hydro system
Advantages of theSlice ApproachAbility to maximize hydro benefits
Potential to game the system.Not for the unwary.Effect of the DSI claim on out of region sales.
Fish IssuesHow much should be spent Who pays -
Gorton amendmentDivergence in the region
Publicly OwnedUtilitiesInvest in BPA or diversify?
IOU attacks on traditional Public serviceSplit in Public Ranks on eligibility issues
Effect of Relicensing RulingWhat does access mean anyway?When will we know?
Mid-Columbia Utilities
Mid Columbia Supply
• Background• Public Power Ownership• Most Significant Regional Capacity/Reserve
Source• Massively Surplus Relative to Owners' Needs
• FERC Relicensing• Opportunity Seen By Outside Interests• Historical Claims to Capacity• FERC Decisions
• Entitlement
Background
• Initial License in 1955• Due for renewal in 2005• FERC's initial decision mostly preserved "status
quo"• Complaints by various NW interests who wanted a
share (bigger)• ALJ overturned decision because of legislative
history, et al• FERC issued final modified Order
FERC Decision
• Whatever entity gets the new license must make "... available in afair, equitable and non-discriminatory manner pursuant tomarket-based principles and procedures, 30 percent of the firmpower and 30 percent of the non-firm power from the project... "
• Applies to a defined but fairly large group consisting of threesubgroups• Idaho Cooperatives• Snake River Association• "The Purchasers"
Implications
• Same principles should apply to all mid-Columbia PUD projects• From Priest Rapids/Wanapum, 243 aMW firm power will be sold to
the "three groups"• An additional 66 aMW of nonfirm power, on average, will also be
sold• Some of this power will be resold in bulk at retail• First delivery likely in 2005 (Priest Rapids), all by 2009
(Wanapum)
Looking For Love in All the Wrong Places?Scottish Power/PPL MergerCity of Portland/Enron arrangementEnron/Western Oregon Coop arrangement.Stranded Costs
Investor Owned Utilities
CanadiansB.C. Hydro and the Canadian EntitlementTransAltaEdmonton PowerCominco Metals
Canadian Entitlement
• Power generated by U.S. projects on the Columbia River• Some power deemed by Treaty to be a result of construction and
operation of large Canadian projects and storage reservoirs• Power belongs to Canada• Marketed by Powerex (BC Hydro)• Future amounts and quality are ongoing topics of international
conversation• Prospective purchasers should talk to Powerex
Cominco
Cominco seeks a purchaser for its surplus power• Primary metals producer in Trail, BC• Owns 230 kV transmission line that crosses the border to BPA's
Boundary substation• Holds export license• Owns Waneta hydro plant• By separate agreement Cominco owns a contractually defined part
of the output from a set of coordinated Canadian hydro projects, ofwhich Waneta is a member
• Rights are surplus to Cominco's needs• Some significant and valuable flexibility
Powerex/BC Hydro
• Large very reliable entity with experienced and expert marketingaffiliate
• Massive hydro resources• Significant transmission ownership and control
• To BPA's Northern Intertie• To Alberta
• Canadian Entitlement• Transmission constraints
Power MarketersFERC mandates for ReportingHow Profitable is it?The Shifting Scene
Industrials
The Pacific Northwest has hundreds (somesay thousands of megawatts) of idled fossilfuel generationMost primary industry sites have massivecogeneration projects high centered at 3mills less than a new Frame 7
Pacific Northwest Markets
Non-generatorsPublic GeneratorsDSIsBPAIndustrialsIOUs
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Generating
BPA
Industry
IOUsDSIs
Non-Ge
Non-Generators
BPA (and others) serve over one hundredpublics ranging from medium size (50 to100 megawatts) to minisculeSophistication varies from none to mediumThere is little correlation between size andsophistication
Stampede?
Mostnon-generatorshave naively takenBPA's wordconcerning theshortage
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Actually . . .
Actualsubscriptionmeetings are farless exciting
Public Generators
"The Slice"BPA's public generators are trying topurchase a cut of the pie in partial defenseof future BPA policy changesThe product is elusive and difficult tounderstand
DSIs
Twelve primary metals smelters using3000 megawatts annuallyEleven of the twelve are elderly and duefor replacementAlthough some smelters are wedded to themarket, most appear to believe that themarket will not be able to serve them
DSIs Are Currently Active In APonderous Political Ambush of BPAThe aluminums sponsored a "surprise"meeting with Secretary RichardsonThe fallout included a reorganization at theDepartment of Energy and a complexnegotiation that seems to be trading apromise to stop visiting DC for energy
Current Score
Energy at 23 millsApproximately 50% serviceAluminum variable rateBPA will offer "spot insurance" of somesort
BPA
VastRichProfoundly confused without a clearmissionSurprisingly successful with its currentinitiative
Resource Acquisitions
BPA has one of the worst histories ofresource acquisition in the industryBPA's history includes contract defaults,massive unfinished projects, ineffectiveproject management, and political agendasBPA initiates a new cycle approximately everdecade -- starting now
Is BPA Really A Customer?
Yes, but . . .BPA is currently entering the market as abuyerBPA's decisions are profoundly tactical --policies are often changed without noticeor forethought
On the other hand . . .
BPA has always paid higher than marketpricesBPA decisions are fortuitous -- sometimespolitical, sometimes tactical -- but alwayssurprising
Industrials
A vast body of Pacific Northwestindustrials enjoy varying levels of openaccessMcCullough Research has 500 megawattsto buy over the next few years, for example
IOUs
Investor Owned Utilities are in a state ofextreme indecisionPGE announced divestiture and is nowreconsideringPuget, BPA's worst enemy, has launched amassive PR campaign to be allowed intothe fold
Canada
Canadian entitlement puts BritishColumbia Hydro in a power positionThere is some (as yet untested) belief thatthey may have a superior transmissionposition to other partiesAlberta is forecasted to go positive in 2001
Mid-Columbias
FERC has adopted an equitable usestandard in hydro relicensingThis means that the non-Federal dams are"for sale"What does this mean? FERC isn't clearand much confusion is evident
Customers
An unusual breadth of customers arecreated by BPA's contract cycles
Transmission
Perils of FERC leadershipBPA's ratemaking methodologyBad examples from North and South
Perils of FERC leadership
FERC's Rulemakings and NOPRs stronglyindicate the necessity of a regionaltransmission entityOn the factual side, "pancaking" is a rarePacific Northwest problem
BPA's ratemakingmethodology
BPA has a built in inflationary mechanismin its ratemakingThe Cost Control Committee hasrecommended that costs get redirected totransmission customers
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BPA Transmission Costs
Bad examples from North andSouth
Transmission has become both expensiveand unreliable in both the Alberta andCalifornia experimentsA case study: 17% losses in off-peakexports from central Alberta to the BritishColumbia border
Northwest Transmission
• General system• System constraints• System problems• Tariffs• Future changes
General System
• 80% owned and operated by BPA• Several entities own rights to share of BPA system• Basic components
• West side U.S.• East side U.S.• B.C.
• Northern Intertie West• Northern Intertie East
• Alberta• Eastern connections• Southern Intertie
• AC• DC
System Constraints
• System is usually amazingly unconstrained• Constraints generally stability, not thermal• "Core" constraints
• Northern Intertie East vs West and capacity constriants• "West of Hatway" constraints• General "cross Cascades" problems• Southern interties/loop flow
System Problems
• Loopflow• Northern Intertie• Southern Intertie
• Voltage Stability• Cross Cascades• Oregon Coast
• Operation Questions• "INDEGO" and descendents
Tariffs
• 888• Bottlenecks• Capacity release• Oases - can they really work?• RTAs
• WRTA• NRTA
• FERC initiatives and ISOs - what's next?
Future Changes
• Operation, ownership, control• Fish - John Day drawdown effects• New generation - siting could relieve many existing constraints
• Fish• West side voltage stability• Distributed generation?
• New transmission• Really necessary?• SWIP
Alberta
• New Tariff administered by ESBI• Designed to "hold" power in Alberta• Export rates $3.82/MWh plus 15% to 17% losses• Fortress Alberta
• For now, and several years, all imports and exports must be sold to orpurchased from the non-profit Alberta Power Pool
• Some minor provision for utilities in Alberta to "earmark" imported powerfor their customers - but all transactions must be at the Pool price
• Within some number of years bilateral transactions may be allowed betweenAlberta IPPs and external entities - but no such provision seen for utilities
AnnexationMunicipalizationSpecial ContractsBPACogenerationDistributed GenerationDeregulation
New Alternatives
Identify GoalsGet away from current supplierCheaper ratesFuture opportunitiesTiming
Staying with theCurrent SupplierMay make sense depending upon
characteristics of load, ability to changesuppliers in the future.Downside risk of changing may includesignificant cost including litigation costsTo large measure depends upon the relationshipwith the current supplier
"Why I wouldn't stay with that SOBoutfit even if they gave me the power for free!"
Other alternatives perceived as freedom from an unbearableoppression.Rates may be similar but contract allows more freedomAccess to alternatives possible
Annexations andMunicipalizations
Not for the faint heartedRequires council or Board approval and electionFacilities are obtained through condemnation or by contractGeographical Location of loadIssues of Public Good
PPL/HermistonPPL/Emerald PUDEnron/Western Oregon Coop/Columbia River PUD
Large CustomerIssues
Can be lengthy processArrangements with serving utility criticalSavings can be Significant
Bonneville PowerAdministration
Service through an BPA customerCurrent limitations on who it can serve.
Too much trouble and cost to fight - try buildingSiting and permitting issuesNew generation may have fewer problems than the past due tolower costs, need for west side resources, and utility refusal tobuild.PURPA arrangements with steam host.BPA sponsoring $3.5 million investment in home size generation
Cogeneration andDistributedGeneration
Special ContractsSeveral Watch "fors" -Based upon bypass potential or economic developmentMay require special metering or new facilities
"What fors" Allocation of Distribution charges, transmission, and
ancillary services costs.Services actually providedAbility to get Commission approval, especially if supplieris not a willing seller.PUDs may have new incentive to work with customersIOUs hanging on until Deregulation happens or is killed.
State Commissions will need help understanding the benefits
Deregulation Will it happen?
Will it benefit you?Will it prevent new arrangements from occurring?What about these stranded costs and social benefit charges?
Bottom Line There are deals to be made
Requires persistence and a willingness to go to the matMeasuring benefits can be trickyDon't assume anything.Benefits can be significant especially if deregulation doesn'toccur soon or if BPA changes.
Risk and Hedging
Hedging Options
Numerous hedging options exist• The most formal is the NYMEX futures contract• NYMEX only hedges on-peak sales • a simple hedge can easily be constructed by buying power flat
over the next year and reselling into the spot market• Most utilities will provide hedges without much trouble• All brokers and financial houses will provide hedges -- but
require a long sales talk first
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On-Peak Off-Peak
Spot Prices
PX/ISO
Updated Forecasts
Jan-
87
Jan-
8 8
Jan-
89
Jan-
90
Jan-
9 1
Jan-
92
Jan-
93
Jan-
94
Jan-
9 5
Jan-
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Jan-
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Jan-
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Jan-
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Jan-
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Jan-
01
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PX/ISO Operations
NYMEX tends To Be Naive
NYMEX has yet to include water yearsSurprises tend to show up across the entireNYMEX futures series without reference to thecauseNYMEX futures are likely to be lower afterprice decreases in the spring
Updating forecasts for theCalifornia PX
Our current results indicate that theCalifornia PX has added 9.26 mills toon-peak prices and 4.82 mills to off-peakpricesClose examination indicates that the impactsare very dependent on problems within thePX itselfAs a working hypothesis, we expect that PXexcursions will only occur during high loadmonths in CaliforniaThis should mean that November through
OutlookClimate/Water Conditions Suggest Crisis WillNot Occur - At Least Not SoonHistory Of Prices Near Level On AverageFuture Most Likely Same Or Better• Something Always Seems To Move Prices
Toward Levels Of The Last Fifteen YearsVolatility And Uncertainty Will Increase
Nov
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Dec
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Janu
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Febr
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Mar
ch
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July
Aug
ust
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NYMEX Hedging Strategy
Hedge
Hedge
PX
Risk and Hedging
• Risk• Price volatility• Midwest experience and the "Fear of God"• Consequences• Realistic evaluation
• Infrequent purchasers• Coincident peakers• Random peakers• Flat loads
• Hedging• Long and short positions• Classic financial instruments
• Futures• Options
• 31 Flavors• Swaps• Caps/floors• Collars
Midwest Examples
Truncated Graph - Cinergy NYMEX-Style Peak - Summer Estimated Density Functions
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Midwest Examples 2
Cinergy NYMEX-Style Peak - Summer Estimated Density Functions
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Long and Short Positions
• Long positions benefit from rising prices• Short positions benefit from falling prices• Consumers hold an innate short position• Generally, "hedging" is the artful combining of long and short
positions to decrease the variability in the net outcomeexperienced by the holder of the positions - just insurance
• Like any insurance, there is always a premium• If you want to buy insurance, comparison shopping is a good idea
NW Prices Have Been Incresingly Volatile
Mid-C Daily Volatility
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But Long Term Variability is Much Less6 Month Moving Average - Mid-Columbia
(100% Load Factor)
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NYMEX Futures Are Overpriced For InnateLong Term Short Consumers
• But the possibility remains that a utility or large powermarketer or trader may be able to offer an arrangement thatsatisfies some need to hedge
• Not all large consumers have flat or off peak loads
Background
• Initial License in 1955• Due for renewal in 2005• FERC's initial decision mostly preserved "status
quo"• Complaints by various NW interests who wanted a
share (bigger)• ALJ overturned decision because of legislative
history, et al• FERC issued final modified Order
FERC Decision
• Whatever entity gets the new license must make "... available in afair, equitable and non-discriminatory manner pursuant tomarket-based principles and procedures, 30 percent of the firmpower and 30 percent of the non-firm power from the project... "
• Applies to a defined but fairly large group consisting of threesubgroups• Idaho Cooperatives• Snake River Association• "The Purchasers"
Implications
• Same principles should apply to all mid-Columbia PUD projects• From Priest Rapids/Wanapum, 243 aMW firm power will be sold to
the "three groups"• An additional 66 aMW of nonfirm power, on average, will also be
sold• Some of this power will be resold in bulk at retail• First delivery likely in 2005 (Priest Rapids), all by 2009
(Wanapum)
Energy and CapacityRevisited
New entrants to the market assume thatcapacity will simply disappearThe market evidence doesn't support thisviewWe can expect "iron" to be a central portionof markets as we reach load/resourcebalance over the next decadeEvidence from Illinois already supports thisconclusion
FishFish are generally the best advertised risk inhistoryBPA announces yearly that it has spenthundreds of millions on fish programsIn reality, amazingly few real impacts haveoccurred. BPA's estimates are high, energyproduction is not strongly affected, but BPA'sflexibility has been
Contract IssuesTransmission RiskPricing ArrangementsTie-insMost Favored Nations' ClausesRestructuring RiskBTU DealsFinancing Offers
Transmission Risk
Don't take itIf in doubt, follow the first ruleBPA's rumored increase plus thecontinuing threat of cost averaging undersome regional transmission authoritymakes accepting transmission risk a verybad idea
Pricing Arrangements
Indexing has been a mixed blessingDow Jones indices have been mildly erraticUtilities (particularly Puget) have not administered the indicessmoothlyBPA has done better than the averagePGE has also done well
Unforeseen surprises (PX/ISO) have trulychanged the customer preferences
Tie-ins
An amazing amount of creativity has goneinto tie-ins of a variety of kinds
DSM/conservationProduct enhancementsPuget's "transportation"
As a general rule, true synergies have beenrare
Most Favored Nations'Clauses
Pacific Northwest history with mostfavored nation clauses has been verymixedPacific has interpreted these withconsiderable latitudeAs a general rule -- enumeration has faredbetter than bland assurances
Restructuring Risk
As in California the threat of restructuringregulation colors many decisionsDefensive contract language is a mustAs a general rule restructuring legislationis always a downside risk
BTU DealsA number of players are offeringgas/electric combinationsWhile picturesque, these arrangementsoften pose more problems than they solveCreative approaches do exist, but creativityrequires that either the buyer or the sellerhave the possibility of "tolling"
Financing Offers
Financing offers now aboundThese offers are surprisingly saleable --even though the customer often seeminglymakes a very bad choice in choosing to goaheadCredit risk is a real issue
Transmission
BPA's transmission rates are under attackby groups proposing to increase them tocover social policy agendasBPA's rates are forecasted to increase from125% to 200% at the next rate case
Transmission (Continued)
FERC relief is unlikelyBPA uses unique accounting methodsThese methods are poorly understood both inside and outside ofthe agency
BPA's monopoly position makes successvery likely
That's All, Folks!
After twenty years our electric market isseasoned and rationalNeighboring experiments are likely toprovide more uncertainty than marketfundamentalsLong term prospects continue to be good
