**ISSUES, CONCERNS AND PROPOSALS FOR THE PROPOSED SLICE PRODUCT**

Bruce Mizer

January 20, 1999

PROCESS AND GOALS

The goals of the process to develop the Slice product have been stated
as:

1\. Avoid shifting costs among customers,

2\. Avoid shifting risks among customers, and

3\. Comply with applicable statutes.

These are appropriate goals. In addition, we suggest that whether a
specific Slice implementation fully meets these goals is a matter of
judgement and interpretation. Predictably, most of the customer
participation in the process to develop the Slice proposal is by persons
actively desirous of an attractive Slice product -- or at least eligible
for the product. It is not reasonable to conclude that the interests of
all customer groups have been fully represented in the process.
Accordingly, the participants in the process should expect that BPA
would present the Slice proposal broadly, and with explanations of how
it is consistent with the above goals, to the full spectrum of potential
BPA customers for additional comments.

Unlike many BPA products, the Slice product is not self-leveling. For
many products, a customer that feels a product is too good can buy the
product, or, conversely, if the customer feels the product is too
disadvantageous it can purchase an alternative. However, BPA has defined
that only a subset of present customers is eligible to purchase the
Slice product. When only a subset of customers my purchase a product,
the result of the product being too favorable is to shift costs from the
eligible customers to other customers. Having limited the eligible
customers, BPA has a greater duty to ensure that the product meets the
above goals.

In the process, it has been suggested that comments should propose a
solution to any issues or concerns articulated. The duty is on the
parties seeking the product to evaluate comments and propose a product
that meets the above goals. In an attempt to be constructive, we also
propose solutions to the concerns set forth below.

SLICE PERCENTAGE

The current Slice product contemplates a one-time computation of the
"Net Requirements" of an eligible utility using a single base year. Once
the maximum percentage Slice is determined for a utility, the proposal
contemplates no further review of the utilities "Net Requirements."

This concept is flawed. BPA only is required to serve the Net
Requirements of a utility. BPA is authorized to serve utility loads in
excess of Net Requirements under prescribed conditions that, in this
case, BPA may or may not meet. The determination of Net Requirements for
these statutory purposes is not a static determination and, as currently
contemplated, BPA would not comply with its obligations to other
regional loads.

There are two reasons that a utility's Net Requirements might decline. A
utility that has sold a regional resource may have an increase in its
resource capability when sales contracts expire and the utility can use
more of the regional resource to meet its loads. A utility may
experience declining loads either due to loads that cease to exist or
due to loads that shift between utilities.

Possible solutions:

> 1\. BPA could recalculate the Slice percentage annually.
>
> 2\. BPA could limit the Slice percentage to the minimum that
> corresponds to the minimum Net Requirement of the utility.
>
> 3\. BPA could offer to sell other products to meet Net Requirements in
> excess of the minimum Slice for which a utility may be eligible. Such
> other products should be limited to block sales or other product terms
> that do not disadvantage other customers.
>
> 4\. See the possible solution to 2 in the next section.

USE OF CRITICAL WATER CAPABILITY

In the most recent incarnation, but not yet written, BPA has stated that
once a utility has contracted for a Slice percentage, BPA will not
review the utility's sales of other resources dedicated to serve load.
The agreement to use critical water capability (average FELCC) is
inconsistent with BPA's approach on this issue. BPA is offering to sell
to each Slice participant a percentage of the total system sufficient to
assure that the Slice participant has approximately a 98% probability of
surplus energy on an annual basis and virtually 100% probability of
surplus in some periods.

It would be more consistent with industry trends and BPA's proposed
*laissez faire* approach to the Slice participants' sales of their
surpluses for the maximum Slice percentage to be based on average water
capability of the Slice System. Within the year, BPA and the
participants already propose to use average annual firm capability
without regard to monthly relationships between requirements and the
Slice capability. The active wholesale market could be used to fill any
deficits and sell surpluses based on the average capability of the
System. This would justify the BPA position that they have no obligation
to look at the disposition of the participants' regional resource
output.

REGIONAL PREFERENCE AND SECTION 9(c) OF THE REGIONAL ACT

As noted above, during the meetings last week BPA stated that once a
utility has contracted for a Slice percentage, BPA will not review the
utility's sales of other resources dedicated to serve load. This concept
has multiple flaws:

1\. Taken in conjunction with the present proposal for determining Slice
percentage, above, this would allow a utility whose available resources
grow in the future (e.g. a mid-Columbia PUD) to sell hydroelectric power
outside the Region that could have been conserved within the Region.

Solution: See above.

2\. For any utility, BPA is allowing or encouraging increased power
sales outside the region. This is an undisguised method for BPA to allow
its power to be arbitraged outside the region without any attempt to
meet the requirement that it be surplus, not be conservable for service
in the Region, or be offered in the Region at the rates established for
such sales.

> Solution: a. As noted above, BPA could base the determination of the
> Slice percentage to which a utility can subscribe on the ratio of the
> utility's Net Requirement to the average capability of the Federal
> resources rather than the firm capability. In this manner BPA should
> be able to make a reasonable determination that surplus will exist
> when utilities sell power outside the region.
>
> b\. BPA must establish policies on the use of Intertie capability that
> insure that all statutory restrictions have been met before any
> federal power is arbitraged outside the region. The Slice proposal
> could acknowledge that such policies will be developed and that
> purchasers will comply.
>
> c\. If BPA is successful in meeting all subscription requests
> (preference utilities, IOUs and DSIs) then the issues of regional
> preference and section 9(c) may be moot.

INVENTORY SOLUTION

The Slice product properly acknowledges that the costs to be paid by
Slice purchasers include their percentage of the cost of augmenting the
system to meet additional loads. However, there have been proposals that
such costs that might occur after the first five years of the contract
could be limited to less than all the costs BPA might then incur to
augment the system. At best, this concept is based on the notion that
BPA could make a policy decision that utilities that contract for more
than five years have a grandfathered right to the embedded cost of the
federal inventory. This policy, if adopted by BPA, would require that
BPA now agree to future rate tiers based on the term of contracts.

BPA has not articulated such a policy decision. If such a decision is
required for the Slice product, it must be subjected to full disclosure
and discussion with all customers.

In the absence of a policy decision to tier future rates, the Slice
product must acknowledge the same risks as faced by other customers,
that future costs may include future augmentation of the system. Perhaps
the most that can be said is that the costs attributable to the Slice
product will be consistent with the costs that are recovered through
power rates for those customers that sign contacts with a term exceeding
five years for other products.

The foregoing is not meant to disagree with section VI. E. of version
5.1 that contemplates a distinction between the replacement of lost
capability and the inventory solution.

ELIGIBILITY

BPA has asserted that the Slice product only is available to public
bodies and cooperatives as a "requirements" product. As discussed above,
limiting eligibility to a subset of customers requires much greater care
in defining the product. Another solution would be not to limit the
eligible class of customers. BPA can allow broader purchase of the
product if it agrees to augment the system to meet all requests.

"BUY BACK" OR "SYSTEM USE"

The participants in the Slice process spent much time defining a "buy
back" provision with complex provisions and storage accounts that did
not work. This now has been replaced by a correct recognition that BPA
can use its system. The Slice product cannot be a sale of Federal
resource capability. BPA carefully has maintained that the Slice product
is the sale of power indexed to the operation of the Federal resources.
The most recent restatement of the "System Use" provisions acknowledges
that BPA can use the capacity and energy in the Federal system so long
as it meets the contractual obligation that it incurs to each Slice
participant (and all other customers).

Moreover, any further restriction on the ability of BPA to use the
capacity and energy in the Federal system is a cost shift that would be
inconsistent with the articulated goals. For all other products, BPA
receives and distributes through its rates to all customers the benefits
of diversity among customers. If the Slice product were to prohibit or
restrict BPA's use of its system to the non-coincident excess of its
contract commitments, that would be a material reduction in BPA's
benefit from diversity among customers. The inability to use such
diversity likely would increase costs to non-Slice products.

TRANSMISSION SURCHARGE

Some participants have suggested that BPA credit the Slice purchaser for
any surcharge that may be applied to transmission rates to meet
obligations of the power system. This proposal should not be adopted.
This is a proposal that makes a bad idea worse.

The proposal for the PBL to credit some customers to offset a surcharge
further compromises the separation between the PBL and the TBL.
Application of transmission rates should be blind to the contractual
relationship between the transmission user and the Power Business Line.
Moreover, if Slice participants were to receive such a credit, they then
would need to carry a liability to repay the credit when the power rates
subsequently are increased to repay the TBL. The liability would not
expire with the Slice contract.

This credit proposal effectively is a proposal that the PBL loan to a
Slice participant an amount to offset the Slice participant's share of a
loan from the TBL to the PBL. First, if the TBL to PBL loan is allowed,
this proposal would be either a reduction in the net proceeds to the PBL
or an increase in the amount that must be collected from other TBL
customers. Second, the PBL should not be loaning money to its customers.

RESOURCE REPLACEMENTS AND ACQUISITIONS

The recent draft language is flawed. Section 6(m) of the Region Act (i)
deals only with major resources and (ii) allows BPA in the alternative
to offer a reasonable share of the particular resource or a reasonable
equivalent. The language drafted for the proposal would require BPA to
offer a reasonable share of any resource. This appears to be an attempt
to contract away the limitation of major resources and the alternative
of a reasonable equivalent. It is not clear that an offer by BPA to the
Slice participant to include the new resource into the group to which
the Slice percentage applies is not a reasonable equivalent.

Solution: replace the language circulated on 1/14 with:

\(3\) [Resource Acquisitions by BPA]{.underline}

> BPA will not be obligated to acquire resources for any reason,
> including the replacement of resources that are part of the Slice
> System. Nothing in the Slice product shall relieve BPA of any
> obligation that it may have to a Slice participant under section 6(m)
> of the RPA.
>
> \(4\) Federal Base System Replacement Resources
>
> Should BPA acquire a resource that it designates as a FBS replacement
> resource, and BPA and the Slice participant agree that the Slice
> participant may elect to participate in such resource, the Slice
> participation contract shall set forth the conditions under which the
> Slice participant's share of such resource may be included in its
> Slice share.

Further comment: The concepts above could create the result that each
Slice participant has a different set of resources in its Slice system
than any other participant. Moreover, further complexity may be created
by resources that are in Slice systems for some Slice participants and
not in the Slice system of other Slice participants that have a share of
the same resource. It should be clear that Slice participants pay all
the costs of administering and accounting for such uniqueness.

DETAILS OF EXPENSE AND REVENUE "TRUE UP"

The true-up should be open and transparent to all customers. All
customers have an interest in this issue because the true-up affects the
costs and risks to other customers. The general principles for the
true-up should be vetted in the rate proceeding. In accordance with the
principles established in the rate proceeding, at least annually, BPA
should publish and circulate among all customers the proposed true-up
and hold an information/comment forum for all customers before making a
final decision to close out a year.

Other customers have a similar interest in the determination of
administrative costs to be charged to Slice participants.

CAPITAL EXPENDITURES

The handout for this topic on 1/13 is complex and has several rate
implications for other customers -- especially during the second rate
period. The arrangements for true-up of capital expenditures are a rate
matter. This matter should not be decided in this forum; it should be
part of a 7(i) rate proceeding. Perhaps the work of this group could
become the initial proposal on this topic in the rate proceeding. The
rate proceeding could establish principles that would apply to the
entire term of the Slice contract.

PAYMENT FOR IMPLEMENTATION COSTS

The proposed language appears to lack flexibility to accommodate future
new costs of administration of the Slice contracts. See, for example,
the note above in the discussion of resource replacements. See also the
discussion of "Stay Flexible" in Version 5.1. The development of
implementation costs must be able to recover new costs not anticipated
in advance. The details of these costs should be distributed to other
customers in the same manner as discussed above under true-up.

ECONOMIC DISPLACEMENT OF WNP2

The provisions of the proposal distributed on 1/13 and discussed on 1/14
seem unduly complex and require administrative burden.

Partial shutdown \-- It is not clear that BPA would track the costs of
partial operation of WNP2 to the Slice participants that elected to
continue to receive energy during a partial shutdown. This cost tracking
should be specified.

In general -- the entire proposal requires administration. The
accounting and tracking costs must be administrative costs allocated to
Slice. Perhaps a simplification is to allow return of energy to BPA
whenever agreed by BPA or whenever the market price of energy equals or
exceeds the price at the time of delivery.

COMBINATION OF SLICE WITH OTHER PRODUCTS

BPA has evaluated the combination of Slice and other products and
indicated no interest in such combination. This is appropriate and
should be within BPA's discretion. Should BPA reverse this decision, it
is incumbent on BPA to establish principles or restrictions on non-Slice
products used in combination that avoid any opportunity to game BPA with
its own power. For example, a product purchased in combination with
Slice could be required to be either (a) flat for all hours of the year
or (b) shaped to the utility load monthly and within the month. BPA
would have a duty to explain to other customers how any flexibility in a
Slice participant's purchase of other products could not be used to
disadvantage BPA and, therefore, other customers.

ASSIGNMENT/POOLING/AGENTS

Currently BPA sells power to its customers' loads and receives the
benefit of any diversity in load shapes. The fundamental concept behind
pooling is to combine purchases to benefit the purchasers by capturing
their own diversity. This would be a shift of cost or risk to other
customers.

CONVERSION IF INVALID

The language proposed by BPA on 1/13 may create one or more "off-ramps"
for Slice participants. This is contrary to the intent of the Slice
concept.

Solutions:

1\. At a minimum, the language should be clarified to limit such an
off-ramp to exclude a court acting following a billing dispute or future
dispute over implementation. That is, the off-ramp should be related to
litigation commenced during the 90 day window.

2\. Any such off-ramp that occurs after a full year under the contract
should not allow the Slice participant a unilateral option to walk. The
participant should be able to elect the proposed off-ramp if there is an
initial adverse decision during the first year. If the litigation is not
final prior to the end of the first year, the participant should be
required to choose:

\(i\) To convert at that time to another product,

\(ii\) Take the off-ramp, or

\(iii\) Thereafter, only be able to elect to purchase other power
products for the same Net Requirement and for the full term of the Slice
contract unless it is mutually agreed between BPA and the participant
that the participant may take an off-ramp.

FUTURE INTERPRETATIONS AND IMPLEMENTATION

The Slice proposal contemplates a "Contract Implementation Group" or
"CIG" that would "be responsible for formulating and establishing
implementation details not defined by the Slice Contracts." No other BPA
power product would have such a delegation of responsibility. As
contemplated in section XII.B.(2), BPA must have a veto right \-- just
as it may or may not agree with customers on issues under other
contracts. Moving future decisions into a forum in which participants
outnumber BPA inherently would shift risks.

TECHNICAL ASPECTS OF ENERGY AND POND ACCOUNTING

It is difficult or impossible for other customers to achieve sufficient
confidence to accept for ten years the technical aspects of energy
accounting, scheduling, pond accounting and similar matters. BPA should
retain the authority to make adjustments in conformity with the goals
stated above. The proposed CIG is not sufficient for this purpose as it
allows the other Slice participants to jointly veto a change needed by
BPA to protect other customers.

DISPUTE RESOLUTION

The unique dispute resolution mechanism is inherently flawed. All
disputes contemplated in section XIII.C will involve BPA as a party to
the dispute and many disputes may involve all "Participants". Thus, BPA
cannot be on the review panel -- it must be a panel of other customers
(from the limited subset of customers eligible for Slice.) In some cases
there will be no-one eligible for the panel; in all other cases the
panel likely includes parties that would benefit in the future by
deciding against BPA at present.

The case has not been made that there is a need for a special review
panel beyond the "CIG" or any other special dispute mechanism unique to
the Slice contract. Even if there is such a need, the mechanism must not
be biased against the interests of BPA and non-Slice customers of BPA.
The review panel mechanism is not reasonable and likely is not
practical.