BPA rate case - Seasonal Rates

---------------------- Forwarded by Mary Hain/HOU/ECT on 03/14/2000 08:48 AM
---------------------------

Enron Capital & Trade Resources Corp.

From: "Andrea Settanni" <asettanni@bracepatt.com<
03/14/2000 08:25 AM

To: Mary Hain/HOU/ECT@ECT
cc:
Subject: Seasonal Rates

Mary-

Pursuant to your request, I reviewed FERC orders discussing seasonal rates.
Based on what I found, Dan was right, it does not seem that seasonal rates
are prohibited. If proposed, however, seasonal rates must be cost
justified. I did not come across any particular discussion of what kinds of
proof are necessary (you had asked about the time period for actual sales and
elasticity of demand). I have included a few paragraphs below from FERC
orders that discuss seasonal rates, which may be useful to you. Please let
us know if you would like us to look into this any further. Andrea

Related to 205/206

ALJ-DEC, 35 FERC ?63,076, Union Electric Company, Docket No. ER84-560-000,
(June 04, 1986)
[65,264]

It might be noted that UE could have established a seasonal/time-of-day rate
with cost justification or by explaining its departure from cost-based rates.
In Commonwealth Edison, the Presiding Judge rejected a higher seasonal demand
charge for the summer because it was not cost justified. He also held,
however, that where the rate design is not intended to reflect costs, the
applicant "must justify the departure from cost-based rates. 18 C.F.R. o35.
13(b)(4)(iii)." 15 FERC ?63,048, at p. 65,229 (1981).

UE made a valiant effort to comply. It attempted to relate the off-peak costs
to on-peak by its 50 percent discount argument and reference to its Exhibits
UE-28 and UE-19. These exhibits amply justify the on-peak costs but offer no
cost support for the off-peak discount. This discount is chosen as a matter
of judgment. A similar proposal was rejected by the Presiding Judge in
Commonwealth Edison. Id.

Although the argument of a "free ride" deserves consideration, based on the
record we have here and in the absence of a detailed cost justification, UE's
off-peak demand charge is rejected.

REVERSED - see next paragraph

COMM-OPINION-ORDER, 40 FERC ?61,046, Union Electric Company, Docket No.
ER84-560-000, (July 20, 1987)

Union's proposal to assess a capacity charge for off-peak service under
specified circumstances (when a customer's off-peak demand exceeds twice its
highest measured peak demand) not only reflects the fact that customers use
the company's production and transmission plant off-peak and capacity-related
costs are incurred during those times, but also recognizes the equity
consideration created by the existence of the peak shaving option to certain
customers. Upon consideration of the evidence presented and the merits of the
arguments raised by the parties, we reverse the judge's ruling and allow the
off-peak billing demand provision. Although we are approving Union's use of
an off-peak billing demand provision, the Commission nevertheless believes
that a strong incentive continues to exist for customers to peak shave and,
thus, realize cost savings. Furthermore, although we adopt Union's approach
as reasonable within the context of this case, this is not to say that only
such an approach is appropriate or that this approach is preferred.

COMM-OPINION-ORDER, 11 FERC ?61,083, Florida Power Corporation, Docket No.
ER80-206, (Apr. 25, 1980)
urging rejection of FPC's proposed rate increase.

On February 12, 1980, the Public Service Commission of the State of Florida
filed a letter noting the absence of proposals relating to peak load pricing
(time-of-day and seasonal rate differentials) in FPC's submittal. 5 The
Public Service Commission urged our review of the issues of time-of-day and
seasonal pricing in this proceeding.

We note that the questions of time-of-day and seasonal pricing are proper
subjects for the hearing ordered below if any party chooses to pursue them,
including the Florida Commission should it petition to intervene late in this
proceeding.

COMM-OPINION-ORDER, 6 FERC ?61,292, Commonwealth Edison Company, Docket No.
ER79-182, (Mar. 30, 1979)
[61,695]

Our review of Commonwealth's filing indicates that the proposed rates have
not been shown to be just and reasonable and may be unjust, unreasonable,
unduly discriminatory or otherwise unlawful. Therefore, we shall accept the
proposed rates for filing and suspend those rates for five months, to become
effective, subject to refund, on September 1, 1979.

We note with interest that the proposed rates are designed on a time-of-day
and seasonal basis. The Commission has encouraged the use of innovative rate
design as a way of more closely matching rates to costs and thereby
minimizing misallocation of resources as well as reducing waste, inequity and
discrimination. 4 We therefore direct the Presiding Administrative Law Judge
to insure that the parties fully address the issues raised related to the
cost support for the time-of-day and seasonal rate design.

FED-REGS, FERCSR ?13,963, FPA, Regulations 18 CFR Sec. 35.13 Filing of
changes in rate schedules.

[11,299]

shall fully support all such data and shall explain the rationale and the
specific application proposed.

(vii) Based upon information reported in Statements BB and BC, the utility
shall list selected months that are normally the months of greatest
significance in determining the need of the utility for power supply
capability throughout the year. All twelve months may be selected, if
appropriate. In its selection, the utility shall take into account any
effects of local weather seasons and, particularly, the extent to which peak
demands may tend to be similar in magnitude in two or more months of a
weather season. The utility shall explain the reasons for the selections and
describe the significance for the selections of seasonal variations in the
weather.

REG-PREAMBLE, FERCSR ?31,044, Inquiry Concerning the Commission's Merger
Policy Under the Federal Power Act: Policy Statement, Order No. 592, December
18, 1996, Docket No. RM96-6-000, 18 CFR 2, 61 FR 68595 PART 01 OF 02.
1. Identify the relevant products

The first step is to identify one or more products sold by the merging
entities. Products may be grouped together when they are good substitutes for
each other from the buyer's perspective. If two products are not good
substitutes, an entity with market power can raise the price of one product
and buyers would have a limited ability to shift their purchases to other
products. In the past, the Commission has analyzed three products: non-firm
energy, short-term capacity (firm energy), and long-term capacity. 75 These
remain reasonable products under the prevailing institutional arrangements,
and applicants should recognize such products in their analysis. Other
product definitions may also be acceptable. For example, the lack of on-site
buyer storage creates products differentiated by time. Thus, peak and
off-peak energy (seasonal and daily) may be distinct products.

ALJ-DEC, 15 FERC ?63,048, Commonwealth Edison Company, Docket Nos. ER79-182
and ER80-106, (June 03, 1981) PART 02 OF 02.

It is Commission policy that rate design reflect cost incurrence, Idaho
Power Co., Opinion No. 13, issued May 4, 1978, mimeo at 26; Minnesota Power
and Light Co., Opinion No. 12, issued April 14, 1978, mimeo at 24-5.

[65,229]

In both cases, the Commission rejected rate design features where there was
no evidence in the record showing that the rate design features reflected
cost incurrence, id. In its order setting this proceeding for hearing, the
Commission took note of Edison's proposed seasonal differential and
specifically directed that the parties fully address the issues related to
the cost support for the seasonal rate design, Commission Order issued March
30, 1979, mimeo at 4-5. On October 9, 1980, the parties were directed by the
Presiding Judge to identify in their initial briefs the portions of the
record that relate to cost support for the seasonal differential.

The requirement that Edison provide cost support for its seasonal
differential, as discussed supra, is also set forth in the Commission's
filing requirements for rate schedules: if the rate design is intended to
reflect costs, the applicant must show how it reflects costs; if the rate
design is not intended to reflect costs, the applicant must justify the
departure from costbased rates, 18 CFR o35.13(b)(4)(iii) Statement P.
Edison's seasonal differential is intended to lessen the costs imposed upon
it by its prominent summer peak. Edison reasons that, since it must build
capacity to meet its prominent summer peak, charging more in the summer would
give customers an incentive to control their summer demands and, therefore,
Edison's cost of adding capacity would be reduced (Tr. 169). Accordingly,
Edison must show how its seasonal differential reflects the costs imposed on
it by summer demand, under the Commission's filing requirements in 18 CFR o35.
13(b)(4)(iii) Statement P. Further, even PURPA Section 111(d)(4) relied upon
by Edison states that rates "shall be on a seasonal basis which reflects the
costs of providing service to such class of consumers at different seasons of
the year to the extent that such costs vary seasonally for such utility."
(Emphasis added.)

Further, support for relying on marginal rather than average costs comes from
the Commission itself. In its order of March 30, 1979 setting this cause for
hearing, mimeo at 4, 5, the Commission, in commenting on time of day and
seasonal rates, mentioned that it encourage innovative rate design to match
more closely rates to costs. In this regard, the Commission cited its Order
No. 537, supra at 4, which specifically suggests use of pricing mechanisms
based on marginal cost principles

[65,236]

for jurisdictional wholesale sales. Under the circumstances in this case,
where the sale of economy energy is related to Edison's costs in adding or
eliminating additional excess capacity, it is appropriate to establish the
price for economy transactions on marginal costs. This provides a more close
matching of the rate to the cost than would a rate design based on average
costs. Accordingly, Winnetka's position on pricing of economy energy will not
be adopted.

AFFIRMED and REVERSED - see next paragraph

COMM-OPINION-ORDER, 23 FERC ?61,219, Commonwealth Edison Company, Docket Nos.
ER79-182-000 and ER80-106-000, (May 12, 1983)
Turning to Commonwealth's exceptions, we find that the judge correctly
rejected the seasonal differential. Even if we accept the company's
interpretation of PURPA, it still has not cited any record evidence
whatsoever of a difference in costs between summer and nonsummer months.
Without at least some showing of a cost difference, it is impossible to make
a judgment on the reasonableness of the company's 15.25% proposal. We
therefore uphold the judge on this point.

We reverse the judge's adoption of a price set at 110% of the utility's
incremental costs, however, and approve the type-B split-savings method
proposed by Commonwealth. Under this method, economy transactions are
arranged for a 12-hour or similar period at a fixed price based on cost
estimates at the time of the agreement. If the utility's incremental costs
rise to the point that continued supply would become burdensome, the utility
may terminate supply. We find this method superior to that proposed by staff
in that implementation is greatly simplified. Cost determinations need not be
made as frequently.

Related to PMAs

REG-PREAMBLE, FERCSR ?36,710, Procedures for Public Participation in Power
and Transmission Rate Adjustments and Extensions, December 31, 1980, 10 CFR
903, 45 FR 86976
[36,741]

Historically, many PURPA-type standards have been used in designing wholesale
rates for the sale of Federal hydroelectric power. PMAs analyze costs to
establish revenue requirements and consider this information in designing
rates. Declining block rates for energy were once used by the PMAs but
subsequently were found inappropriate and eliminated from rate schedules.
Many of the PMAs for years have been effectively using various forms of load
management measures in their rate schedules, such as scheduling limitations,
loadshaping, capacity and energy overrun charges, etc. BPA has had a history
of using seasonal rates for wholesale firm capacity and energy and also
offered its direct service industrial customers interruptible rates some time
ago. Southwestern has had interruptible capacity rates in effect since 1957.
These examples demonstrate the willingness of the PMAs to implement
PURPA-type standards where applicable.

Many of these PURPA-type standards, when applied appropriately in the design
of PMA rates, can serve to implement the purposes of PURPA by encouraging
conservation of energy, efficient use of resources and facilities, and
equitable rates. The public participation process will provide an opportunity
to examine these and other appropriate concepts.

The PMAs will continue to review and revise their power marketing practices
on a system-by-system basis to serve the PURPA objectives. The Assistant
Secretary for Resource Applications, working with the Administrators of the
power administrations, and after receiving public comment, will consider the
adoption of rate design guidelines, similar in form to the guidelines in RA
6120.2 on financial accounting and ratemaking, which will reflect the
experience gained by the PMAs in their system-by-system approach to rate
design.

Related to PURPA

FED-LAW, FERCSR ?5021, PURPA, SEC. 111. CONSIDERATION AND DETERMINATION
RESPECTING CERTAIN RATEMAKING STANDARDS.

(4) Seasonal rates.--The rates charged by an electric utility for providing
electric service to each class of electric consumers shall be on a seasonal
basis which reflects the costs of providing service to such class of
consumers at different seasons of the year to the extent that such costs vary
seasonally for such utility.

FED-REG-NOTICE, FERCSR ?37,503, DOE Responsibilities Under Title I of PURPA

(4) Seasonal rates shall be established where costs vary by season;

PROP-REG-PREAMBLE, FERCSR 1988-1998 ?32,457, Administrative Determination of
Full Avoided Costs, Sales of Power to Qualifying Facilities, and
Inter-connection Facilities, March 16, 1988, Docket No. RM88-6-000, 53 FR
9331, 55 FR 31882

Pricing flexibility may take several different forms. For instance, a
contract could provide QFs with a price floor applicable to all the power
supplied to the utility, but still provide for higher variable unit prices
reflecting daily or seasonal periods. The price floor would provide the
revenue stream necessary for the QF to secure financial support while

[32,174]

the price variability would induce the QF to maximize deliveries in peak-load
periods when the utility values additional supplies most. Of course, the
price floor should not exceed the minimum value of the utility's avoided
cost. Similarly, a contract could provide for a two part price--a fixed
payment for capacity and an energy price for power delivered. The QF would be
assured a minimum revenue stream based on the value of its capacity. The
variable energy component would allow the utility to dispatch the QF capacity
only when it was economic. Whatever the pattern of contract payments, rates
for purchases from QFs should always reflect how well the characteristics of
the suppliers' power match the purchasing utility's need. This will ensure
that the QF will make most production decisions on the basis of rates
reflecting avoided costs (rather than the guaranteed average rate) and, at
the same time, will receive revenues sufficient to attract investors.

To avoid problems such as those associated with take-or-pay contracts in the
natural gas industry, the Commission wishes to stress the danger of including
forecasted fuel costs in the fixed rate structure of long-term contracts,
especially in combination with the specification of minimum purchase
quantities. The Commission also encourages the use of time-of-day and
seasonal rates in flexible pricing structures for long-term contracts.

REG-PREAMBLE, FERCSR 1977-1981 ?30,128, Small Power Production and
Cogeneration Facilities; Regulations Implementing Section 210 of the Public
Utility Regulatory Policies Act of 1978, Order No. 69, February 25, 1980,
Docket No. RM79-55, 18 CFR 292, 45 FR 12214, 45 FR ...

Rather than specifying that exact time-of-day or seasonal rates for purchases
are required, however, the Commission believes that the selection of a
methodology is best left to the State regulatory authorities and nonregulated
electric utilities charged with the implementation of these provisions.