# Process for Addressing Northwest Power Act Section 5(b) and Section 9(c) Issues under Subscription

BPA will initiate a process to design a contract mechanism for making
contract offers consistent with the policy direction of the Power
Subscription Strategy and sections 5(b) and section 9(c) of the
Northwest Power Act. The process must provide interpretive guidance on
application of the Strategy and statutes and describe how the factual
determinations applying such guidance will be made.

#### Background

### Subscription Issues

BPA has developed a Power Subscription Strategy for selling power to its
public utility, investor-owned utility and direct service industrial
customers. This strategy addresses a number of policy questions
regarding the types of contracts that BPA intends to offer its
customers. The Subscription Strategy left open the question of the
contract mechanism that would be used in offering power to
investor-owned utilities in settlement of their rights to service under
the residential exchange program created under section 5(c) of the
Northwest Power Act.

The Subscription Strategy also identified policies for determining the
amount of power that would be offered to public utilities under section
5(b) of the Northwest Power Act. Identifying the contractual mechanism
for implementing these policy decisions addresses the same questions
necessary to develop the contract mechanism for offering power to the
investor-owned utilities under the Subscription Strategy.

A final question raised but not answered by the Subscription Strategy is
the impact of the sale of a customer's non-Federal resource on the
amount of power that BPA will offer the customer. Section 9(c) of the
Northwest Power Act requires BPA to make certain factual determinations
regarding the export of Northwest resources by its customers when
determining the amount of power BPA can offer a utility under section
5(b) of the Northwest Power Act.

The purpose of this paper is to frame the questions necessary to
determine the amounts of power that will be offered under Subscription
contracts, how those amounts could change over time, identify proposed
principles for resolving these questions, and suggest a process for
developing the interpretations of statute and factual determinations
necessary to resolve these issues. BPA believes this process must answer
questions producing the following results:

1.  What amount of power will BPA make an initial contract offer to sell
    under the Power Subscription Strategy

2.  How are changes to the amount of power initially offered under a
    Subscription contract made during the term of the contract?

3.  How will BPA determine if a customer has exported a resource from
    the Region requiring BPA under section 9(c) of the Northwest Power
    Act and section 3(d) of the Regional Preference act to limit the
    requirements power sold to such customer?

4.  What processes will be used to provide interpretive guidance and
    make factual determinations needed to answer the above questions?

# 

# [Statutory Guidance]{.underline}

The statutory basis for BPA addressing the above questions is found in
section 5(b)(1) of the Northwest Power Act, section 9(c) of the
Northwest Power Act, and section 3(d) of the Regional Preference Act.
Section 5(b)(1) provides the basis for BPA offering contracts under the
Subscription process to public utilities and investor-owned utilities.
It provides:

(b)(1). Whenever requested, the Administrator shall offer to sell 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---

> (b)(1)(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 power load in the region, and
>
> (b)(1)(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.
>
> 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 paragraphs 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.

Section 9(c), which requires the Administrator to consider certain facts
regarding customer export of resources in making determinations of a
customer's power requirements under section 5, provides:

(c)... The Administrator shall, in making any determination, under any
contract executed pursuant to section 5 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
the hydroelectric generated energy excluded from such requirements
pursuant to section 3(d) of the Regional Preference Act, 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 or 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 a
replacement for any amount of energy so excluded only energy that would
otherwise be surplus.

Section 3(d) of the Regional Preference Act of 1964, which had earlier
addressed the export of hydroelectric generated energy from the region,
provides:

(d) The Secretary, in making any determination of the electric power
    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.

These provisions and others in BPA's statutes provide the basis for the
contracts that BPA will offer under the Subscription Strategy.

**What Changes in the Marketplace Since Passage of the Northwest Power
Act in 1980 Must Be Addressed**

### Use of the Market As a Resource

When BPA first offered contracts in 1981 under the Northwest Power Act,
a relatively small group of customers owned non-Federal resources, which
were used to serve a portion of their retail consumer load. The
operation of most of these resources was managed on a single utility
basis through the Pacific Northwest Coordination Agreement. Most
utilities in the region planned on developing or requesting BPA to
develop enough resources to meet all their loads in the worst-case water
conditions on the hydroelectric system. The ownership of the output of
all resources and which loads those resources were dedicated to serve
was generally known by the utilities and BPA. Most transactions in the
wholesale marketplace either were made for short periods to displace the
output of generation with a higher variable cost or sold all or the
portion of the output of a resource for a period of years such that the
resource was dedicated to serve the loads of a regional utility other
than the owner's own loads.

Starting relatively soon after passage of the Northwest Power Act, some
customers begin to rely on purchasing power from the wholesale market
for relatively short periods to serve their firm loads. The
investor-owned utilities requested contracts with BPA, which gave a
right to purchase less BPA power than their net requirement that BPA had
calculated under section 5(b)(1) of the Northwest Power Act. This type
of purchasing basis under the 1981 contracts was called contracted
computed requirements service.

These customers had used the market as a resource under their BPA power
sales contract. Initially some customers made five-year purchases in
lieu of developing generating resources to serve their loads. Other
customers used new resources they had developed that they didn't wish to
explicitly specify under their power sales contract as a resource
serving their load under section 5(b)(1)(B). Over time customers used
purchases of shorter and shorter duration to serve their firm regional
loads as their confidence in the wholesale marketplace increased.

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. Some of
those contract amendments specified the resource used by the customer to
serve their regional loads but many did not. How to treat use of the
market as a resource by BPA's customers is an issue that must be
addressed in developing the Subscription contracts.

### Functional Separation of BPA into a Power Business and a Transmission Business 

In 1992, Congress passed the Energy Policy Act providing, among other
things, the obligation for investor-owned utilities to offer wholesale
transmission services and requiring "transmitting utilities" including
BPA to provide wholesale transmission upon an order of the Federal
Energy Regulatory Commission (FERC). Passage of this act ultimately led
FERC to issue orders 888 and 889. Order 888 requires investor-owned
utilities to develop and offer proforma tariffs for the provision of
wholesale transmission. Order 889 requires such utilities to
functionally separate such that the merchant functions of the utilities
have access to no more information about a utility's transmission system
than any other participant in the market. Such orders allowed
investor-owned utilities to deny transmission access to utilities that
did not provide "reciprocal" transmission access to that provided by
investor-owned utilities under orders 888 and 889. BPA has chosen to
voluntarily comply with orders 888 and 889. BPA has functionally
separated its power and transmission businesses.

Functional separation presents a particular challenge to the
implementation of section 9(c) of the Northwest Power Act and section
3(d) of the Regional Preference Act. BPA has historically administered
these statutes by examining the transmission schedules of non-Federal
utilities to utilities outside the Pacific Northwest. BPA's power
business, which needs this information to determine the amounts of power
it can sell to its customers, is not allowed access to transmission
schedules under Order 889. How the BPA power business determines whether
a non-Federal resource has been exported is an issue that must be
addressed.

[Impacts of Deregulation on BPA's Customers]{.underline}

Historically, utility service has been provided by utilities that either
generated their own electricity or purchased it on the wholesale market
and delivered that electricity to their consumers. While each state has
different laws on the retail sale of electricity, the practical effect
in most states led to each utility having a service area where it was
the exclusive provider of the distribution service moving the
electricity to consumers and the electric supply service of selling the
actual electricity to consumers. BPA sold its power to these customers
on a wholesale basis and these customers used the electricity to supply
their consumers in the Pacific Northwest.

Deregulation of the wholesale electric utility industry has led states
to consider different models for the retail provision of distribution
and electric supply service to consumers. Most models proposed for
deregulation of the retail supply of electricity leave the utility as
the exclusive supplier of distribution service but propose different
mechanisms for allowing other entities to compete in the supply of
electric supply service to consumers.

These models for electric supply raise an issue under section 5(b)(1) of
the Northwest Power Act regarding the amount of electricity needed by
BPA's customer to supply its needs. BPA's Subscription Strategy proposed
a number of policy mechanisms for addressing retail load loss by BPA's
customers and its impact on the amount of power sold to those customers.
These issues primarily focused on allocating the risk of financial loss
between our customer and the risk to the U.S. Treasury.

Another impact that must be addressed is the loss of retail load on our
ability to sell electricity to investor-owned utilities. BPA's
authorization to sell power under section 5(b)(1) directs BPA to look at
the difference between a utility's retail loads in the Pacific Northwest
and the resources it has historically used and those it dedicates to
serve its consumer loads. The statute doesn't distinguish between
residential, commercial, and industrial loads. BPA has proposed under
the Subscription Strategy to provide sales of power under the RL rate
schedule as a means to provide service to residential and small farm
loads of investor-owned utilities. If State retail access statutes
result in a loss of service to residential, commercial, or industrial
loads of an investor-owned utility, such retail load loss could
eliminate BPA's ability to sell power under section 5(b)(1) to that
investor-owned utility. How BPA treats the loss by a utility of the
electric supply obligation to industrial and commercial loads on its
ability to purchase BPA power is an issue that must addressed.

Impact of the Sale of Resources and Other Assets by BPA's Customers on
BPA's Sales under the Subscription Strategy

Another change brought about by deregulation of the utility industry are
decisions by individual utilities to change the aspects of the utility
business in which they wish to participate. These strategic decisions by
BPA customers have led to sales and proposals to sell the existing
generation resources that have historically been used to serve their
retail load in the region. These resources will most likely be purchased
by participants in the wholesale marketplace seeking to sell the
resource either inside or outside the Pacific Northwest for the highest
price they can receive. BPA has a concern that its sales of Federal
power to investor-owned utilities not be used as a vehicle for the
region to lose the benefits of low cost non-Federal resources currently
used to serve retail load in the region. BPA's statutes direct BPA to
make factual determinations regarding the sale of those resources and
their impact on the cost-based rates offered by BPA to loads in the
Pacific Northwest. How BPA accounts for those resources sold by its
customers in determining the amount of power sold is an issue that must
be addressed

In addition to sales of resources, some of BPA's customers have made
decisions to sell both their distribution and electric supply business
in different parts of the region.

These sales reduce the amount of regional load served by these utilities
impacting the amount of power BPA can sell. In some instances, new
public power entities are forming and proposing to take over either or
both the distribution and electric supply service formerly provided by
investor-owned utilities. How BPA accounts for changes in the amount of
load served by its customers is an issue that must be addressed.

## Key Principles for Section 5(b) Offers and Section 9(c) Determinations

Developing a contract construct implementing the Subscription Strategy,
meeting BPA's statutory directives and addressing the issues raised by
deregulation of the utility industry seems confusing and complicated.
The potential for unintended and unforeseen consequences is high. The
paper identifies proposed principles for answering the 4 questions
necessary to make contract offers. BPA will also propose a process for
obtaining input from the region on these principles and identifying
where decisions will ultimately be made answering these questions. While
straight forward answers to results oriented questions and a simpler
process may be desired, addressing these issues is one of the
requirements for the Pacific Northwest to maintain BPA's cost-based
rates and regional preference to the benefits provided by BPA.

#### I. Amount of Power under the Initial Contract Offer

What amount of power will BPA make an initial contract offer to sell
under the Power Subscription Strategy? This question addresses how BPA
will contractually limit its initial offer of power under the Power
Subscription Strategy. The Power Subscription Strategy specified that
customers must continue to serve their load with non-Federal generation
and long-term power purchase contracts that extend beyond 2001 that are
currently serving load. Determining the amount of power included in the
initial contract offer focuses on four primary questions: (1) How is the
amount of retail load in the region served by the customer determined;
(2) What are the customer resources that must be dedicated to serve load
under the initial Subscription offer; (3) How is the peak and energy
capability of those resources determined; and (4) How does BPA account
for any reductions in requirements sales resulting from determinations
under section 9(c) and section 3(d)?

### Discussion of the Principle, Statutory Language, and the Issues and Alternatives Considered 

### Determination of Regional Retail Loads

I.A. BPA will base its initial offers on actual loads or reasonable and
verifiable estimates of the customer's retail load in the Region based
on the utility's projected business plan at the time of the offer.

This principle on serving regional retail loads was derived from the
following statutory language in section 5(b)(1) of the Northwest Power
Act:

...**electric power to meet the firm power load of such public body,
cooperative or investor-owned utility in the Region** ....

The proposed principle recognizes the statutory language that BPA must
offer power to serve a customer's regional load under the Northwest
Power Act. BPA has proposed a fixed block product and a SLICE product
where the amount of power offered must be based on reasonable and
verifiable estimates of the customer's load. The Power Products Catalog
of the Subscription Strategy had proposed a principle where fixed block
products and SLICE offers had to be based on the customer's existing
load without consideration of load growth. These products were based on
an annual estimate of loads done once at the start of the contract and
had assumed there would be no increase in the amount of the purchase
over the term of the agreement. The customer agreed under these products
to provide non-Federal resources to serve their load growth.

That proposed principle did not explicitly address institutional changes
in a deregulated market causing large reductions of in the customer's
load. The longer the term of the contract based upon a forecast, the
more likely such changes would occur. Changes in load would have been
reasonably certain to occur for investor-owned utilities allowing retail
access to their industrial loads. A lesser but similar concern would be
raised for public utilities purchasing a SLICE product.

The proposed principle addresses the concern by limiting the initial
forecast used to establish the original purchase. In this paper BPA
proposes a principle on changes to amounts of power during the term of
the agreement that would allow BPA to annually review the changes in
load as part of the basis for purchasing requirements power. That
principle will allow BPA to address the potential for both retail load
loss by the utility or the sale of utility resources that result in a
reduction of net requirements purchases.

[Determination of Customer Resources Currently Serving Their
Load]{.underline}

I.B. BPA will require all current generation and long-term power
purchase contracts included in the Firm Resource Exhibit for the
1998-1999 Operating Year or included in the Resource Exhibit or its
equivalent for 1998-1999 Contract Year in 1996 BPA requirements power
contracts to be continued to be applied to serve that load under a
Subscription contract. BPA will also require all current long-term
surplus power purchase contracts or Excess Federal Power purchase
contracts that extend beyond 2001 to be applied to serve load under a
Subscription contract.

**I.C. In determining whether a contract purchase by a customer was a
"long term power purchase contract that extends beyond 2001", BPA will
consider any purchase contract that terminates after September 30, 2001
to be a long term power purchase contract required to be used to serve
load.**

**I.D. BPA will offer customers service without a PF Surcharge for loads
served by "generation resources and long term power purchase contracts
that extend beyond 2001" that are lost due to statutory reasons
described in section 5(b)(1) on the dates such resources are lost and
BPA forecasts such loss at the start of the rate period.**

These three principles address how BPA will identify generation and long
term power purchase contracts that extend beyond 2001. These principles
on continuing use of customer resources is based on the language in
section 5(b)(1):

> (b)(1)(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 power load in the region, and
>
> (b)(1)(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.
>
> 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 paragraphs 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.

These proposed principles define which resources are included in the
phrase "currently being served either by customers' generating resources
or long-term power purchase contracts that continue beyond 2001." BPA's
current 1981 contracts have used the Firm Resource Exhibit as a
mechanism for customer's to identify whether a resource was serving the
customer's load. The 1996 contracts offered as replacements of the 1981
contracts identified customer resources used to serve load in a Resource
Exhibit.

BPA considered whether the customer's use of the market as a resource
should also be considered. While many customer's using the market as a
resource would likely have faced a loss of contract right for short-term
contract purchases, a number of customers have been serving load in the
region with resources that they have not included in the Firm Resource
Exhibits of their current power sales contract. They have actually been
using their own non-Federal generation to serve their load instead of
the market. BPA's proposal is to address the use of those resources in
serving regional load in its application of section 9(c) of the
Northwest Power Act.

The proposed principles clarify which contracts are meant to be included
in the term "long-term power purchase contracts that continue beyond
2001". These principles clarify that all contracts that extend beyond
2001 are included in the resources that must be used to serve regional
loads under the Subscription contract. These contracts include
prescubscription contracts and other long-term surplus power contracts
to purchase surplus Federal power from BPA. It also acknowledges there
are a number of these contracts customers know will expire prior to the
end of the rate period. The proposed principle allows the customer to
purchase requirements service from BPA without the PF Surcharge as long
as the cost of such service has been identified and included in BPA's
rate case. Resources or contracts that are lost after the rate case has
ended will face a PF Surcharge covering any additional costs BPA faces
to serve the load.

### Determination of Resource Capability

**I.E. BPA will follow the Declaration Parameters included in the Power
Products Catalog under Actual Partial Service in establishing the
resource capabilities of the identified customer resources under the
Subscription contract. Once determined, those capabilities are fixed in
accordance with the terms of such parameters for the term of the
contract.**

The proposed principle relies on the statutory language of section
5(b)(1):

> (b)(1)(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 power load in the region, and
>
> **(b)(1)(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.

The proposed principle endorses the approach suggested in the Power
Products Catalog for Actual Partial Product for determining the resource
capabilities of the customer's resources. BPA considered whether their
might be a simpler method for determining resource capability, but
decided that there were enough unique customer perspectives on
estimating resource capability that the proposed standards would best
meet the needs of a deregulating power environment.

### Application of Section 9(c) and Section 3(d) Determinations to Initial Contract Offers

**I.F. In determining the amount of a customer's net requirements, the
customer's energy requirements must be reduced by the amount of any
electric peaking capacity and electric energy that BPA determines was
exported from the region, that increased BPA's obligation to provide
power to other regional loads, and that could have been conserved or
otherwise retained for service to regional loads.**

The proposed principle is based on the following statutory language from
section 9(c) of the Northwest Power Act:

(c)... The Administrator shall, in making any determination, under any
contract executed pursuant to section 5 of this tittle, of the electric
power requirements of any Pacific Northwest customer, which is a
non-Federal entity having its own generation, exclude, in addition to
the hydroelectric generated energy excluded from such requirements
pursuant to section 3(d) of the Regional Preference Act, 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 or 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 a
replacement for any amount of energy so excluded only energy that would
otherwise be surplus.

The proposed principle states that BPA will implement the language in
section 9(c) where BPA makes a determination that a customer has
exported power from a resource, BPA's net load requirements have
increased as a result of such disposition, and the power could be
conserved or otherwise retained for service to regional loads by
reasonable means. BPA has existing determinations resulting in
reductions of requirements purchases that would be implemented under
this principle. BPA would also make additional determinations, which may
reduce a customer's power requirements under its Subscription contract.

# Changes to the Amount of Power during the Term of the Contract

How are changes to the amount of power initially offered under a
Subscription contract made during the term of the contract? This
question addresses reductions in net requirements that must be made due
to institutional changes on a customer's system changing the amount of
load served by that customer or reductions in net requirements due to a
section 9(c) determination or a section 3(d) determination being made
during the term of the contract. It also addresses the mechanism for
making additional sales to public utilities and applying the PF
Surcharge or Targeted Adjustment Surcharge or IOUs making additional
power purchases at the NR rate.

The questions regarding changes to the amount of power sold during the
term of a contract revolve around the transition from the 1981 contract
model to the Regional Review model. Under the 1981 contract BPA
obligated itself to serve the entire regional load after some notice
period. Under the Regional Review a BPA goal was to only acquire new
resources to serve load increases beyond Subscription amounts under a
bilateral contract where the requesting customer takes all the financial
risk.

### 

### Discussion of the Principle, Statutory Language, and the Issues and Alternatives Considered 

### Changes in Initial Purchase Amounts Due to Changes in Retail Loads

II.A. BPA will require on at least an annual basis that the customer
report specified events causing a reduction of its load. If such
reductions for fixed block and SLICE purchasers reduce a customer's
maximum requirements purchase below its current purchase from BPA, BPA
will implement a mitigation measure for retail load loss of the Power
Subscription Strategy specified in the contracts of public utility
customers. BPA will provide the remarketing product option to
investor-owned utilities.

The proposed principle is based on the same statutory language as the
principle for estimating retail loads for the initial offer. This
principle requires an annual look at the loads and resources upon which
the original estimate was based. If changes on the customer's system
have resulted in reductions of retail load served by that customer, BPA
will reduce its requirements power sale to no more than a customer's
maximum requirements purchase and implement the mitigation measure
established by contract with the customer.

The proposed principle addresses the issue of the loss of retail load by
an investor-owned utility through the use of the remarketing product
mitigation measure specified in section IV.H.2. of the Subscription
Strategy. This provision provides a financial benefit to the residential
loads of investor-owned utilities that can no longer purchase
requirements power due to retail load losses. BPA considered other
alternatives such as a conditioned consent to the removal of customer
resources from dedication to serving regional load under their
Subscription contract. Under such an alternative BPA would allow a
customer to remove a resource from serving its load equal to the
reduction in requirements service caused by the retail load loss. BPA is
interested in comments and other alternatives to address this issue.

### Application of Section 9(c) and Section 3(d) Determinations during the Term of a Contract

II.B. BPA will reduce a customer's net power requirements by the amount
of any exports of hydroelectric or thermal resources where BPA
determines such resources could have been conserved to meet firm energy
requirements of customers of BPA.

The proposed principle is based on the same statutory language as the
reductions applied to the initial contract offers for these exports.
These reductions are based on the timing of an export made by a customer
and can come at any time. For example, a customer could end a
contractual sale to another customer where such customer had dedicated
the purchase to serve its firm loads. The customer losing the resource
could request additional service from BPA on six months notice at the PF
Surcharge rate. If the customer owning the resource had then exported
the resource after it was withdrawn, then it would face a section 9(c)
determination and would potentially see its net requirement for
purchasing from BPA reduced. BPA's policy on hydroelectric resources
under section 3(d) is that such resources can always be operated or
applied against regional load.

### Renewable Resource Principle

II.C. BPA will reduce a customer's net power requirements by any
dedication of a renewable resource owned by the customer or purchased
under contract where the customer specifies the dedication of such
resource for a contract period. Only the first 200 aMW of resources that
meet the standards for renewable resources under BPA's conservation and
renewable resources discount may be dedicated under this principle.

The proposed principle on renewable resources is based on the following
statutory language allowing the Administrator to consent to resources
changes under a requirements contract:

> (b)(1)(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.

This proposed principle allows customers to dedicate a new renewable
resource to serve their load. BPA has consistently interpreted the
language of section 5(b)(1) as allowing the Administrator to determine
by contract the customer's right to dedicate additional resources to
serve their load. BPA's Subscription Strategy requires customers to take
risks on non-Federal resource placement commensurate with the risk they
take for BPA on covering future costs of Federal resources. BPA is
requiring customers to specify the amount of resources they dedicate to
their loads for the term of the contract they sign. BPA is willing to
sign a Subscription contract for terms ranging from 1 to 20 years. This
principle provides an exception to the requirement that resources be
known and dedicated at the start of the contract for the entire term of
a contract by providing the Administrator's consent to adding renewable
resources during the term of a contract and removing such resources at a
point prior to the end of the contract. BPA has placed two conditions on
its consent: (1) Qualified renewable resource dedications are limited to
the first 200 aMW of renewable resources that customers request to
dedicate during any year; and (2) Only resources that would qualify for
BPA's conservation and renewable resource discount are eligible.

Increases in Requirements Purchases Due to Permanent Discontinuance of
Non-Federal Resources for Statutory Reasons

### **II.D. BPA will provide service under the PF Surcharge rate or the NR rate for loads served by "generation resources and long term power purchase contracts that extend beyond 2001" where such resources or contracts are lost due to retirement, obsolescence, loss of the resource, or loss of contract right (for contract resources only).**

II.E. "Generation resources and long term power purchase contracts that
extend beyond 2001" are considered lost due to permanent discontinuance
for loss of resource or loss of contract right resulting from factors
beyond the reasonable control of the customer and which the best efforts
of the customer are unable to remedy. "Generation resources and long
term power purchase contracts that extend beyond 2001" are considered
lost due to permanent discontinuance for obsolescence or retirement
where the customer has consulted with Bonneville and Bonneville has
agreed in writing to such discontinuance.

The proposed principles on increases in requirements service due to lost
resources or lost contracts are based on the following statutory
language:

> 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 paragraphs 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.

The proposed principles provide no consent by the Administrator for
additional purchases of requirements power. Only if the customer has
lost a resource or contract for the reasons specified by statute will
BPA provide replacement power for their resource as requirements power.
If a customer wished to purchase additional power from BPA for other
reasons, BPA would be able to broker purchases of replacement power from
the market under its surplus power rates.

The proposed alternative principles maintain BPA's existing contract
standards regarding lost resources. These principles have worked for 20
years and allow BPA to consider all the facts in determining when it is
required to replace a customer's lost resource with Federal resources.

BPA considered developing a "market test" to determine whether a
customer had lost a resource meeting the statutory standard in all
situations where a resource stopped operating. The market test assumed a
customer would sell a resource in the deregulated market before shutting
it down for loss of resource, retirement, or obsolescence.

Notice Required to Receive Additional Requirements Service for Lost
Resources or Annexed Loads

### **II.F. BPA will assume the market will provide resources to serve increased loads. Service for new "annexed loads" will be provided under the Targeted Adjustment Charge or NR Rate. Service for lost "generation resources and long term power purchase contracts that extend beyond 2001" will be provided at the PF Surcharge or NR Rate upon the customer's notification that such an event has occurred. Service to replace "qualified renewable resources" at the end of the declared contract period will be provided at the PF rate. BPA shall provide service for annexed loads, lost resources, and replacements of "qualified renewable resources" six months following the determination that such event has occurred or as mutually agreed.**

The proposed principle regarding additional service for annexed loads is
based on this language of section 5(b)(1):

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---

The proposed principle regarding additional service for lost resources
is based on this language in section 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 paragraphs 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.

The proposed principles provide that BPA will provide service to annexed
loads or lost resources for all customers. BPA considered making changes
in service only at the annual review of load changes for determining any
reductions in requirements purchase, but decided that a rolling notice
period better served the sporadic nature of these events. BPA assumed
six months would give BPA and the customer sufficient time to determine
the facts surrounding the annexed load or lost resource and allow BPA to
get prepared to provide service. It would also give BPA time to purchase
any additional resources necessary to serve the load even if it was
difficult to purchase in the market.

III\. How Will BPA Determine if a Customer Has Exported a Resource From
the Region Requiring BPA to Limit the Requirements Power Sold to Such
Customer?

Section 9(c) requires BPA to make several factual determinations when
customers export non-Federal resources outside the region. Section 3(d)
requires BPA to limit its sale of requirements power to any customer by
the amount of hydroelectric power it exports from the region. These
determinations are particularly difficult in a deregulated environment
where sales are often made to marketers at the generator busbar,
schedules of transmission are not available to the BPA power business
making the determination, and merchant activity by all customers is
confidential, commercial information not readily available for factual
determinations.

Discussion of the Principle, Statutory Language, and the Issues and
Alternatives Considered

Identification of Exported Resources that Increase the Firm Energy
Requirements of the Administrator

III.A. BPA will treat any resource existing on the date the Subscription
Strategy was published that has been used to serve regional firm load at
some time during its life as exported from the region in a manner that
increases the firm energy requirements of the Administrator unless the
customer can demonstrate that 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, that the resource is currently serving
regional load under the customer's or another customer's Subscription
contract, or that the resource is subject to a prior section 9(c)
determination that its export did not increase the firm energy
requirements of the Administrator.

This proposed principle is based on the following statutory language
from section 9(c):

(c)... The Administrator shall, in making any determination, under any
contract executed pursuant to section 5 of this tittle, of the electric
power requirements of any Pacific Northwest customer, which is a
non-Federal entity having its own generation, exclude, in addition to
the hydroelectric generated energy excluded from such requirements
pursuant to section 3(d) of the Regional Preference Act, 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 or other customers of the
Administrator are increased.

The proposed principle III.A. addresses the difficulty of determining
whether any resource has actually been exported in a deregulated
environment. The proposed principle states a rebuttable presumption that
all power from resources that have served regional load and is sold on
the market shall be treated as exported by the seller and shall be
deemed to increase the Administrator's firm energy requirements under
Subscription contracts. If the customer can demonstrate their resource
was developed solely for sale in the market, that they are being used by
a DSI or a utility to serve retail load in the region, or that a prior
determination determined they could be exported at that time, then the
resource will not be treated as increasing the Administrator's firm
energy requirements.

This principle treats all sales of power in the wholesale market as an
export. To implement this principle, the customer will determine how
much of its commercial information it wishes to share with BPA in making
the factual determinations required by BPA's statutes. BPA considered
whether it should continue the practice of 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 functional separation limitations on the flow of
information from transmission functions to power sales functions.

### Treatment of Previously Exported Resources

**III.B. Existing resources that have been used to serve regional load,
exported prior to the publishing of the Subscription Strategy, and that
are subject to a prior section 9(c) determination shall not be
considered to meet the section 9(c) test of increasing the
Administrator's electric power load requirements for the term of the
export.**

**III.C. Existing resources that have been used to serve regional load
and exported prior to the publishing of the Subscription Strategy, and
that are not subject to a prior section 9(c) determination shall be
considered as meeting the section 9(c) test of increasing the
Administrator's electric power load requirements under the Subscription
contracts.**

III.D. Existing resources that have been used to serve regional load,
exported prior to the publishing of the Subscription Strategy, and that
are subject to a section 9(c) determination shall be considered to meet
the section 9(c) test of increasing the Administrator's electric power
load requirements under the Subscription contracts upon expiration of
the export contract unless they meet the "market resource test".

The proposed principles on treatment of previously exported resources is
based on the following language from section 9(c):

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.

Proposed principle III.B., III.C., and III.D. address the treatment of
existing resources that have been exported. Proposed principle III.B.
provides that regional resources that have had section 9(c)
determinations shall not be considered as increasing the Administrator's
obligation under Subscription contracts. Proposed principle III.C.
provides that resource that were previously exported but did not have a
section 9(c) determination made must now meet the factual determinations
required by the statute. BPA specifically noted in its 1994 Section 9(c)
policy that it had not made any determinations for the exports of
investor-owned utilities because these utilities were not placing any
load upon BPA under their section 5 contracts. Proposed principle III.D
would consider existing resources as returning to serve the loads of the
Region upon the expiration of the export contract. The principle
includes an exception if the customer can demonstrate the resource was
never used to serve regional loads and was never intended for that
purpose.

### Presumption Regarding the Use of New Resources in a Deregulated Environment

III.E. All new generating resources developed by utilities after the
date of Subscription will be treated as meeting the "market resource
test" unless they are dedicated to serve load under a Subscription
contract. In such event they will be treated in the same manner as
non-Federal resources dedicated to regional load under Subscription
contracts.

Proposed principle III.E. assumes that new generating resources will
developed in the future to serve the deregulated market unless a
customer specifically chooses to dedicate the resource to serve its own
loads. This prinicple 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 retail load of a particular utility.

### Customer Export of Generation Resources and Long Term Power Purchase Currently Serving Regional Load

III.F. Any export of "generation resources and long term power purchase
contracts that extend beyond 2001" that are included in any customer's
Firm Resource Exhibit for the 1998-1999 Operating Year other than the
owners own Subscription contract shall be considered to meet the section
9(c) test of increasing the Administrator's electric power load
requirements under the Subscription contracts.

**III.G. Any export of "generation resources and long term power
purchase contracts that extend beyond 2001" that are currently being
used to serve regional load but are not included in the customer's Firm
Resource Exhibit for the 1998-1999 Operating Year shall be considered to
meet the section 9(c) test of increasing the Administrator's electric
power load requirements under the Subscription contracts.**

These principles are based on the following statutory language from
section 9(c):

(c)... The Administrator shall, in making any determination, under any
contract executed pursuant to section 5 of this tittle, of the electric
power requirements of any Pacific Northwest customer, which is a
non-Federal entity having its own generation, exclude, in addition to
the hydroelectric generated energy excluded from such requirements
pursuant to section 3(d) of the Regional Preference Act, 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 or other customers of the
Administrator are increased.

Proposed principles III.F. and III.G. divide all resources currently
used to serve load into two classes: (1) those resources that are
currently in Firm Resource Exhibits; and (2) those resources that are
currently used to serve load, but are not included in Firm Resource
Exhibits. BPA has proposed that it will only require resources currently
specified in the Firm Resource Exhibits to be dedicated to serve
regional load under its Subscription contracts. Resources that are
currently used to serve regional load but are not included in Firm
Resource Exhibits will result in increases in the firm energy
requirements of the Administrator. The customer will be required to
demonstrate that the resource has either been sold to a regional utility
to serve consumer load in the Region or could not have been conserved or
otherwise retained to serve regional loads under proposed principle
III.H. Proposed principle III.G. also recognizes that the Administrator
would face an increase in its energy requirements if the owner of a
resource terminated a contract purchase used by another utility to serve
their retail load. The customer would also be required to demonstrate
that the resource has either been sold to a regional utility to serve
consumer load in the Region or could not have been conserved or
otherwise retained to serve regional loads under proposed principle
III.H.

Demonstration That a Resource Could Not Be Conserved or Otherwise
Retained to Serve Regional Load

**III.H. BPA shall determine that any thermal generating resources
considered to meet the section 9(c) test of increasing the
Administrator's electric power load requirements under the Subscription
contracts could not be conserved or otherwise retained for service to
load in the region through reasonable measures if the resource was
either (1) 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 and there were no purchasers; (2)
permanently auctioned through a public process providing notice to BPA
and all BPA's regional customers; or (3) the Administrator determines
that the market price for power makes it unreasonable to conserve the
resource for use in the Region.**

The proposed principle is base on the following language from section
9(c):

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.

Proposed principle III.H. requires resources that are determined to
increase the Administrator's obligation to serve load in the region to
meet one of three different tests in determining whether the resource
could be conserved or otherwise retained to serve regional load. Unless
one of such tests is met, the amount of capacity and energy exported
would be treated as a resource serving that customer's firm load in the
region and reduce their net requirements purchase.

The first test provides that a customer may offer a resource for sale in
the Region for a period of at least one-year at cost and a reasonable
rate of return. If they make such offer and BPA or a party in the region
does not offer to purchase the resource, the Administrator would
determine that the resource could not be conserved or otherwise retained
to serve regional load.

The second test provides an alternate mechanism where a customer may
auction the resource to the highest bidder as long as BPA and all its
regional customers are notified of the sale. If the resource is
auctioned and the customer can demonstrate that all regional parties had
an opportunity to participate, the Administrator would determine that
the resource could not be conserved or otherwise retained to serve
regional load.

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 prices in the region. If the Administrator makes that
determination, the customer would be allowed to sell the resource
without a reduction in BPA's obligation to provide power under its
Subscription contract.

BPA considered a possible alternative to the second test that would
limit the use of auctions to paying the stranded costs of a utility.
Under that test BPA would have reduced a utility's net requirements if
the proceeds of the auction and export of a resource resulted in
benefits above the cost and reasonable rate of return for the resource
that were not paid to the consumers of a utility. The purpose of such a
limitation would be preservation of the benefits of low cost resources
for regional loads.

### Identification of Hydroelectric Energy Exported From the Region

**III.I. Any regional hydroelectric resources that are exported by a
customer shall reduce the amount of power sold under a customer's
requirements contract unless such resource was already considered as
serving that customer's load in calculating the customer's net
requirements under such contract.**

The proposed principle is based on the following language from section
3(d) of the Regional Preference Act:

(d) The Secretary, in making any determination of the electric power
    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.

Proposed principle III.I. requires the reduction of a customer's net
requirements under Subscription contracts under section 3(d) of the
Regional Preference Act if the customer exports any hydroelectric power
from the region. If the resource was already considered dedicated to
serve a customer's firm load in calculating its net requirements, BPA
will not further reduce a customer's net requirements if the resource is
exported and replaced by the customer through a purchase from the
wholesale market.

# IV. Process for Developing a Contract Construct for Subscription Contracts

What processes will be used to provide interpretive guidance and make
factual determinations needed to answer the above questions? BPA can
provide interpretive guidance and make factual determinations needed to
address the above questions either through development of formal
policies, issuance of interpretative rules, or contract offers. The
process used to decide any statutory question must be cognizant of
starting the 90-day statute of limitations under the Northwest Power Act
and the need to preserve and document factual decisions for future
purchases of requirements power in an administratively efficient manner.

BPA has drafted this paper to present a set of principles for developing
a contract construct for Subscription contracts. BPA plans to issue a
Federal Resister Notice shortly proposing the development of a power
marketing policy on the offer of section 5(b) power sales contracts
under the Subscription Strategy. This Federal Register Notice would
start an official 30-day comment period leading to the development of a
policy on contract offers. BPA's plans to use the principles under III.
as a proposal to revise its 1994 Section 9(c) Policy to apply to all BPA
customers under the current deregulated environment. BPA's contract
offers would need to incorporate the results of that revised policy in
its contract offers.

# Proposed Principles

#### 

#### I. Amount of Power under the Initial Contract Offer

I.A. BPA will base its initial offers on actual loads or reasonable and
verifiable estimates of the customer's retail load in the Region based
on the utility's projected business plan at the time of the offer.

I.B. BPA will require all current generation and long-term power
purchase contracts included in the Firm Resource Exhibit for the
1998-1999 Operating Year or included in the Resource Exhibit or its
equivalent for 1998-1999 Contract Year in 1996 BPA requirements power
contracts to be continued to be applied to serve that load under a
Subscription contract. BPA will also require all current long-term
surplus power purchase contracts or Excess Federal Power purchase
contracts that extend beyond 2001 to be applied to serve load under a
Subscription contract.

**I.C. In determining whether a contract purchase by a customer was a
"long term power purchase contract that extends beyond 2001", BPA will
consider any purchase contract that terminates after September 30, 2001
to be a long term power purchase contract required to be used to serve
load.**

**I.D. BPA will offer customers service without a PF Surcharge for loads
served by "generation resources and long term power purchase contracts
that extend beyond 2001" that are lost due to statutory reasons
described in section 5(b)(1) on the dates such resources are lost and
BPA forecasts such loss at the start of the rate period.**

**I.E. BPA will follow the Declaration Parameters included in the Power
Products Catalog under Actual Partial Service in establishing the
resource capabilities of the identified customer resources under the
Subscription contract. Once determined, those capabilities are fixed in
accordance with the terms of such parameters for the term of the
contract.**

**I.F. In determining the amount of a customer's net requirements, the
customer's energy requirements must be reduced by the amount of any
electric peaking capacity and electric energy that BPA determines was
exported from the region, that increased BPA's obligation to provide
power to other regional loads, and that could have been conserved or
otherwise retained for service to regional loads.**

# [Changes to the Amount of Power during the Term of the Contract]{.underline}

### 

II.A. BPA will require on at least an annual basis that the customer
report specified events causing a reduction of its load. If such
reductions for fixed block and SLICE purchasers reduce a customer's
maximum requirements purchase below its current purchase from BPA, BPA
will implement a mitigation measure for retail load loss of the Power
Subscription Strategy specified in the contracts of public utility
customers. BPA will provide the remarketing product option to
investor-owned utilities.

### 

II.B. BPA will reduce a customer's net power requirements by the amount
of any exports of hydroelectric or thermal resources where BPA
determines such resources could have been conserved to meet firm energy
requirements of customers of BPA.

II.C. BPA will reduce a customer's net power requirements by any
dedication of a renewable resource owned by the customer or purchased
under contract where the customer specifies the dedication of such
resource for a contract period. Only the first 200 aMW of resources that
meet the standards for renewable resources under BPA's conservation and
renewable resources discount may be dedicated under this principle.

### **II.D. BPA will provide service under the PF Surcharge rate for loads served by "generation resources and long term power purchase contracts that extend beyond 2001" where such resources or contracts are lost due to retirement, obsolescence, loss of the resource, or loss of contract right (for contract resources only).**

II.E. "Generation resources and long term power purchase contracts that
extend beyond 2001" are considered lost due to permanent discontinuance
for loss of resource or loss of contract right resulting from factors
beyond the reasonable control of the customer and which the best efforts
of the customer are unable to remedy. "Generation resources and long
term power purchase contracts that extend beyond 2001" are considered
lost due to permanent discontinuance for obsolescence or retirement
where the customer has consulted with Bonneville and Bonneville has
agreed in writing to such discontinuance.

### **II.F. BPA will assume the market will provide resources to serve increased loads. Service for new "annexed loads" will be provided under the Targeted Adjustment Charge or NR Rate. Service for lost "generation resources and long term power purchase contracts that extend beyond 2001" will be provided at the PF Surcharge or NR Rate upon the customer's notification that such an event has occurred. Service to replace "qualified renewable resources" at the end of the declared contract period will be provided at the PF rate. BPA shall provide service for annexed loads, lost resources, and replacements of "qualified renewable resources" six months following the determination that such event has occurred or as mutually agreed.**

[III. How Will BPA Determine if a Customer Has Exported a Resource From
the Region Requiring BPA to Limit the Requirements Power Sold to Such
Customer?]{.underline}

III.A. BPA will treat any resource existing on the date the Subscription
Strategy was published that has been used to serve regional firm load at
some time during its life as exported from the region in a manner that
increases the firm energy requirements of the Administrator unless the
customer can demonstrate that 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, that the resource is currently serving
regional load under the customer's or another customer's Subscription
contract, or that the resource is subject to a prior section 9(c)
determination that its export did not increase the firm energy
requirements of the Administrator.

**III.B. Existing resources that have been used to serve regional load,
exported prior to the publishing of the Subscription Strategy, and that
are subject to a prior section 9(c) determination shall not be
considered to meet the section 9(c) test of increasing the
Administrator's electric power load requirements for the term of the
export.**

**III.C. Existing resources that have been used to serve regional load
and exported prior to the publishing of the Subscription Strategy, and
that are not subject to a prior section 9(c) determination shall be
considered as meeting the section 9(c) test of increasing the
Administrator's electric power load requirements under the Subscription
contracts.**

III.D. Existing resources that have been used to serve regional load,
exported prior to the publishing of the Subscription Strategy, and that
are subject to a section 9(c) determination shall be considered to meet
the section 9(c) test of increasing the Administrator's electric power
load requirements under the Subscription contracts upon expiration of
the export contract unless they meet the "market resource test".

III.E. All new generating resources developed by utilities after the
date of Subscription will be treated as meeting the "market resource
test" unless they are dedicated to serve load under a Subscription
contract. In such event they will be treated in the same manner as
non-Federal resources dedicated to regional load under Subscription
contracts.

III.F. Any export of "generation resources and long term power purchase
contracts that extend beyond 2001" that are included in any customer's
Firm Resource Exhibit for the 1998-1999 Operating Year other than the
owner's Subscription contracts shall be considered to meet the section
9(c) test of increasing the Administrator's electric power load
requirements under the Subscription contracts.

**III.G. Any export of "generation resources and long term power
purchase contracts that extend beyond 2001" that are currently being
used to serve regional load but are not included in the customer's Firm
Resource Exhibit for the 1998-1999 Operating Year shall be considered to
meet the section 9(c) test of increasing the Administrator's electric
power load requirements under the Subscription contracts.**

**III.H. BPA shall determine that any thermal generating resources
considered to meet the section 9(c) test of increasing the
Administrator's electric power load requirements under the Subscription
contracts could not be conserved or otherwise retained for service to
load in the region through reasonable measures if the resource was
either (1) 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 and there were no purchasers; (2)
permanently auctioned through a public process providing notice to BPA
and all its regional customers; or (3) the Administrator determines that
the market price for power makes it unreasonable to conserve the
resource for use in the Region.**

**III.I. Any regional hydroelectric resources that are exported by a
customer shall reduce the amount of power sold under a customer's
requirements contract unless such resource was already considered as
serving that customer's load in calculating the customer's net
requirements under such contract.**