Parker-Davis Project FES Contract Amendment

1. Parker-Davis ProjectFES Contract Amendment November 4, 2003

2. Purpose: To discuss customer comments received since October 1, 2003 customer meeting. Expectation: To clarify intentions and increase understanding among the Parties. Purpose & Expectations

3. Post Comments & Responses • Check the Power Marketing Website at www.wapa.gov/dsw/pwrmkt for: • Customer comment letters • Responses to comments • For those who do not have internet access, Western will fax comments and responses upon request.

4. Western will ensure that a minimum of 60 days is available to the contractors for execution of the amendment. Contract Execution

5. Latest possible date to sign the P-DP FES Contract Extension Amendments • All contract extension amendments must be signed by mid-year FY 2005. • Must be known prior to decisions about new applicants under the resource pool.

6. When will the FES Contract advance funding be implemented? • Western plans to implement advance funding under the FES Contract at the beginning of the fiscal year following execution of the FES amendment.

7. Why make advance funding effective before 2008? • An earlier effective date for the FES advance funding provisions will give Western and the existing P-DP FES Contractors the opportunity to gain experience and refine the process before the new post-2008 contractors begin taking Parker-Davis FES.

8. Intent of Subsection 6.1 language • Intent is to bring about a shift from the present payment for electric service in the month following the month it is furnished to payment in the month prior to the month of service (i.e., a “Payment Shift”) • APA Contract for Advancement of Funds for Transmission Services is an example of such a payment shift

9. How does the Payment Shift work under the APA AOF for Transmission Service? • Arizona Power Authority Contract has been posted to Website • The amount of the transmission bill is paid as an advance prior to the month of service. • The transmission bill issued after the month of service shows a credit for the funds that have been advanced.

10. Western’s thoughts on section 6.1 recommendation • Use of the term “Advanced” • Customers are sensitive because of Generation AOF Contract connotations • Western needs to have reference to “Advance” to establish a tie with our legislative authorities • Can Western revise our advance funding process under FES to send only one monthly bill to the customers before the service month, rather than an invoice for an advance followed two months later by a power bill with a credit? • Western will work with internal process stakeholders to evaluate and streamline the advance funding process.

11. Recommended rewrite of Section 6.1BILLINGS, PAYMENT, AND SCHEDULE OF RATES: • “6.1 Except as provided in this subsection, each month, Western shall issue to the Contractor bills based on the capacity and energy shown in Exhibit A or Exhibit A-1, as the case may be, in the month prior to the month the electric service is to be received (i.e. in advance), and the Contractor shall pay for electric service in accordance with Article 13 of the GPCPs attached hereto, provided, however, sub article 13.1 shall not apply. The rates, calculated charges, and conditions shall be as set forth in the current P-DP Rate Schedule, attached hereto and made a part hereof, or any superseding rate schedule(s) promulgated pursuant to Article 11 of the GPCPs.”

12. Recommended rewrite of Section 6.2BILLINGS, PAYMENT, AND SCHEDULE OF RATES: • “6.2 Billing and payment terms and conditions to pay for excess energy, excess energy banking and firming excess energy as provided in Section 16 shall be set forth in a separate agreement.” • Actual excess energy is not known until after the fact. Most efficient to have separate agreements that provide for billing after-the-fact. • Western concurs

13. Explanatory Recitals • Change subsection 2.4 from “advance funding to pay for Western and BOR’s costs associated with PDP firm electric service” to • “prepayment for PDP firm electric service as provided in section 6.” • Western needs reference to “advance”: • Substitute “payment in advance” or “advance payment” for “prepayment” in subsections 2.4 and 2.5.

14. Billing, Metering & Scheduling Instructions • Received opposing comments for use, purpose and intent. • What is Western’s intent for an MSI? • The MSI is an implementing instruction • Does not amend or modify the terms and conditions of the contract • Not the place to negotiate terms and conditions • The MSI is a unilateral document

15. How will advance funding under FES work with the AOF Contract? • The FES Contract and the AOF Contract are complementary, but mutually exclusive, sources of funding. • The Net Funding Requirement under the AOF Contract excludes the amount of advance funding the FES Contractors provide outside the AOF Contract. • The sum of all funding sources will be equal to 100% of the revenue requirement as determined through the rates process.

16. What about Cash Flow Requirements? • The AOF Contract provides for cash flow requirements and expensing of capitalized items. • Line items that need cash flow accommodation will be funded through the AOF Contract. • Line items advance funded through the FES Contract will be those that do not need cash flow accommodation.

17. Replacement Advances Reconciliation Surcharge • Determined as provided for in the Generation AOF Contract • Commenter was concerned that Western would calculate the surcharge in a manner other than the formula set forth in the Generation AOF Contract. • In the FES Contract, the surcharge is implemented by Western only, not the new or existing FES Contractor • Thus the language “As determined by Western” • The FES Contract does not amend or modify the Generation AOF Contract and visa versa

18. New Contract Section 13 • The FES Contract does not amend or modify the Generation AOF Contract and visa versa • Important to FES Contractors that the FES Contract Extension Amendment not be construed as modifying the Generation AOF • Important to Western that the Generation AOF Contract not be construed as superseding or modifying the FES Contract

19. New Contract Section 13 • 13. Nothing in this Amendment No. 1 to Contract No. 87-BCA-XXXXX shall be construed as modifying any of the provisions of Western’s and Reclamation’s Advancement of Funds Contract. • Nothing in Western’s and Reclamation’s Advancement of Funds Contract shall be construed as superseding or modifying any of the provisions in this FES Contract.

20. Term of Contract; Effective Dates • Divide into 3 subsections to provide for: • Term of Amendment: Effective upon execution and terminates concurrent with Original Contract • Section 6: Effective on the first day of the Federal fiscal year following the effective date of the Contract Amendment. • Billing transition language to be determined based on outcome of process review • Exhibit A-1 shall become effective October 1, 2008.

21. FERC Policy Concerns: • Will Western be forced to include future capital transmission projects in rates? • Western has the same concerns and uncertainty. • We support the concern, but the issue must be fought at FERC. • Make your position known to FERC. • Western can’t sign a contract exempting ourselves from FERC policy direction anymore than the FES Contractors can sign contracts opposing your Boards and Commissioners.

22. Summary of Additional Customer Comments As of November 4, 2003

23. Schedule Meetings • Perform cash-flow analysis on a routine basis. • Conduct meetings so customers have time to plan in advance for their fiscal requirements. • Adjustments to advance: Not more than annually and give customers time to react. • See attached calendar for customer involvement in planning and rates processes

24. Funding Western Core Activities versus Other Activities: • Fund present Western and Reclamation core activities and staffing with this advance, including normal escalation. • For other activities that are not Core to providing firm electric service • Present annually or more frequently to customer for consideration • Present the work program and data • Give customers a choice to fund other activities not core to FES. • APA advance-funding contract is a partial model.

25. Customer Objections: • If customers object, Western can either: • Agree and not perform activity, or • Disagree and opt to seek appropriations • Customers can support or oppose the appropriations request, or • Disagree and fund activity with advances and Follow the normal rate setting process • Customers can appeal during the rates process if they desire.

26. Rate Setting Process • Don’t change rate setting process. • Customers can appeal Western decisions during the rate process.

27. Appropriations Requests: • Western must agree that by using the 1-month advance as forward funding, it will be reducing future appropriations requests accordingly.

28. Transmission Construction (Capitalized) Funding • Projects are defined as those presently identified to Congress in appropriations requests. • Determine through JPA and 10-year planning process which projects will be Customer Funded Projects (CFP) • Customers must commit to fund each specific project well in advance so that Western can seek appropriations if necessary. • If a project is not funded by customers, but determined critical by Western, Western must seek appropriations. • Customers can support or oppose appropriations request. • Appropriation-funded project must be rate-based as is done today. • For CFP, include as a revenue stream requirement in rate structure to make payments or give credits to make funding members whole.

29. Transmission Construction (Capitalized) Funding • Western will provide design, construction, construction supervision and commissioning. • Option: Customers can also perform these activities under Western supervision • Work must be performed to Western’s standards • At a cost savings • Within the same delivery parameters • Significant cost savings is defined as a firm bid that is at least 10% below Western’s costs. • In all cases Western must provide the construction supervision and commissioning work.

30. Customers Can Help Western and Western Can Help the Customers • Put customers in a better position to help Western control costs, direct investment and manage investment costs. • Western must help customers achieve a better position to meet local needs by arranging for needed investments. • Customers must be able to leverage the transmission capability of Western to meet their future load needs. • New communication and working relationship processes should be implemented.

31. Next Steps • Comments due by December 8, 2003 • Western will send out another version of the Contract Extension Amendment that incorporates comments • Western will hold another meeting with the customers if necessary and/or if requested • Contractors sign and return the Contract Amendment during January and February 2004

32. Comments & Responses • Posted on the Power Marketing Website at www.wapa.gov/dsw/pwrmkt for: • Customer comment letters • Responses to comments • For those who do not have internet access, Western will fax comments and responses upon request.