Conditional Resales NAESB Assignment Update

Conditional ResalesNAESB Assignment Update April 16th, 2014 Bob Zerfing, Rebecca Berdahl

Response to the NAESB OS Request The NAESB OS requested information to clarify the following issues: • For Option 1 – what are the complexities associated with implementing C&P for Resales(e.g. make WEQ 013 consistent with WEQ 001) and describe if/why this option might be‘unworkable’ • For Option 2 – what is FERC’s general policy with regard to Resales and does their guidance provide NAESB an opportunity to modify the current C&P standards to align with this overall guidance • Is there merit in completing the Reservation Merge Project R09015 as part of the STCP project

Option 1 Components • Option 1- treat Resales as Scheduling Rights only • ROFR remains on the conditional parent • Resales lose scheduling rights if the parent loses capacity • Implementation Guide (WEQ-013) mirrors the Business Practices (WEQ-001) • Current WEQ-013 is not aligned with WEQ-001 • Realigning WEQ-013 requires significant redesign and industry-wide implementation changes. • This realignment effort must be taken on by the NAESB OS. • The timeframe for this has not yet been identified.

Option 1 Complexities • Current Implementation Guides and Templates (WEQ-013) do not support C&P of Conditional Resales (WEQ-001). • Resales are Scheduling Rights Only • ROFR (and thus encumbering capacity) remains with the parent of the Resale • Resales are permissible from conditional parents • The Resale inherits the conditionality of the parent • Resales can be resold or redirected • Resales are a temporary tool for consolidation of reservations for ease of scheduling • If the conditional parent loses capacity to a P&C, then the TP has the right to annul any Resales associated with that lost capacity to guard against over scheduling.

Option 1 Complexities (cont’d) • Industry-wide commercial systems are built upon the WEQ-013 implementation guide where the capacity moves from the original reservation to the resale. These systems are foundational for the commercial viability of the market. The impact of changing these foundational systems to accommodate the Preemption and Competition of conditional reservation is significant. • OASIS • ATC/AFC Calculation and Evaluation • Transmission Scheduling • Data Warehouses • Ancillary Services • TP and Customer Custom Applications

Option 1 Complexities (cont’d) • Industry-wide Business Models and Practices supporting a robust secondary market are built upon these Industry-wide Systems. • To modify the current implementation to match the WEQ-001 Preemption and Competition Standards for Resales would be a major impact to the industry and a major disruption to the NW Regional Secondary Market. • These foundational commercial systems need to separate ‘scheduling capacity’ from ‘encumbering capacity’ which requires a change to WEQ-013. • The ability to track ‘encumbering capacity’ with ‘scheduling capacity’ both upstream and downstream through the daisy-chain of possibilities with the secondary market is critical and challenging.

Option 1 Complexities (cont’d) • Tracking aggregations to determine which scheduling capacity is tied to which original reservation if: • The aggregated reservation is partially redirected, or if • one of the parents loses capacity due to STCP. • A massive data conversion effort is needed to take the existing capacity residing on the resale reservations and creating the encumbering capacity on the original parent. • The financial middleman aspect of tracing who paid what to whom would be complex given the daisy chain of potential resales and redirects of resalesallowed by the current standards. • The complexity of the above items require that NAESB OS determine the time needed to address the implementation modifications and additions to OASIS and impacts to other commercial systems

Major Challenge for the OS for Option 1 NAESB OS must provide an assessment of the changes needed to WEQ-013 to make it consistent with WEQ-001.11 ‘Resales’ • Ability to Comply concern • Once FERC adopts the BPs, TPs need to comply • If the NAESB Implementation Guide is inconsistent with the BPs or does not address the BPs, then TPs cannot fully comply with the BPs • The NAESB OS STCP should include the development of the implementation to enable compliance with the BPs • The NAESB OS STCP project should include modification to the Implementation Guide to ensure consistency with WEQ-001 • Because of the compliance exposure, NAESB OS STCP project completion must consider the implementation templates and systems • TP must be able to ‘unwind’ and ‘track’ secondary transactions including multiple downstream transactions resulting in a ‘daisy-chain’ affect.

Option 1 Questions????

Option 2 – Treat Resale as a capacity reassignment • Change WEQ 001-11 to align with WEQ-013 • FERC Guidance history analysis supports that a Resale is both scheduling and capacity reassignments • C&P Rules for Resales • Inherits the conditionality of the parent • Transaction is ‘delinked’ from the parent reservation • Cannot be a Challenger • Can be a defender if the parent is conditional and can ‘extend’ if challenged • Parent Reservation continues to be billed under it’s original agreement with the TP • Assignee is billed separately for the matching extension (same billing issue as Motion 11)

Option 2 - FERC Description of Resales FERC history (as far back as Order 888) refers to Resale as ‘capacity reassignment’ • Order 888, Page 178: ‘…a public utilities tariff must explicitly permit the voluntary reassignment of all or part of a holder’s transmission capacity right to any eligible customer. • Order 888 Page 179: ‘In effecting reassignment, the assignor does not have to return it’s capacity entitlement to the TP but may deal directly with the assignee without involvement of the TP. • Order 890 P 808: ‘In Order No. 888, the Commission found that allowing holders of firm transmission capacity rights to reassign capacity would help parties manage the financial risks associated with their long-term commitments, reduce the market power of transmission providers by enabling customers to compete, and foster efficient capacity allocation.’ • FERC Order 676C ¶ 46 “The assumption of a customer's scheduling rights by an assignee for one or more hours does not mean the transmission provider is offering hourly service to the assignee. As the Commission explained in Order No. 890-A, the reassignment of transmission capacity simply results in the reseller obtaining the right to schedule the reserved capacity during the period of the reassignment, consistent with the original customer's reservation. Indeed, permitting such resales is consistent with the Commission's determination in Order No. 888 that “a public utility's tariff must explicitly permit voluntary reassignment of all or a part of a holder's firm transmission capacityrights to any eligible customer.

Key Points Concerning FERC Language • FERC does not divorce scheduling and capacity rights in their discussion of Resale and therefore lends credence to the argument that NAESB OS should reconsider it’s current treatment of Resales as scheduling rights apart from capacity. • To have separate scheduling rights apart from the corresponding capacity right is meaningless. • Current WEQ-001 standards treat them as separate, WEQ-013 implementation (and current systems) treat them as the same, as two sides of the same coin. Encumbering Capacity Scheduling Capacity

Key Points Concerning FERC Language • FERC implies that the Assignee has the same right to resell excess scheduling capacity that the reseller has • 890A ¶’s • 427 ‘…Just as the original transmission customer may find that it has excess capacity it can reassign, so may an assignee. Denying the assignee's right to further assign its scheduling rights would inhibit customers who value the capacity most from accessing it and thereby contradict the Commission goal of creating a competitive secondary market for transmission capacity. …’

Key Points Concerning FERC Language • FERC implies that transmission should go to the customer who values it the most • This is the whole justification of Preemption and Competition • The Assignee values the reassigned capacity more than the Reseller • The Assignee should therefore be allowed to make the decision on defending that scheduling capacity • It would seem that the Resale, not the original reservation, should have ROFR rights since they value it most.

Key Points Concerning FERC Language • There appears to be a FERC Priority Conflict • FERC would like a robust secondary market, including resalesfrom conditional reservation • FERC would like a robust Preemption and Competition market. • The two don’t mix. Preemption and Competition actions for a conditional reservation with secondary transactions associated with it is in conflict with a robust secondary market. In fact, it suppresses or discourages a robust secondary market due to inherent uncertainties.

Implementation Advantages of Option 2 • The majority of Option 1 complexities listed above are greatly reduced for Option 2 • Much of the implementation processes used today are unaffected • It requires minimal changes to existing WEQ-001 BPs • Auditing and Tracking of Resale activity is easier

For Further Consideration (Next Steps) • NAESB OS discussion with FERC • Straw Poll of support at the OS • Request FERC Staff attendance at the OS May 2013 meeting to further evaluate an Option 2 approach • Parking Lot Re-evaluation: • Option 2: Rescind Resale Motion 14 • Do we need a mitigation plan • Suspend conditional resales • Annul all associated downstream transactions • Neither are popular with the NW Region

Option 2 Questions????

OS Project R09015 Does tackling the Reservation Merge Project make sense to be worked on as part of the STCP?

Reference Material for R09015 • R09015 Restated • BPA 2012 Service Increment Transaction Volumes • Transaction Reservation Merge Project value considered for conditional Resale C&P

Transmission Reservation Merge (R09015) ‘Transmission Customers may from time-to-time have a portfolio of transmission service reservations from a single provider on a single path. For ease of tracking and efficiency, the customers desire to combine or merge like reservations (i.e., firm, non-firm, etc) into a single reservation. Under existing OASIS business practices and protocols, customers must use the Resale mechanisms to merge two or more like reservations under a single assignment reference number. In other words, customers sell their reservations back to themselves.’

Revised Volumes for BPA’s Secondary Transaction • A recent BPAT review of 2012 secondary transaction volume lends support to a third Option for C&P issues associated with Resales.

Why Tackle the ‘Tx Reservation Merge’ Project? Daily Resale Activity - Summary • 38% of Daily Resales were done on the same day as the start day of the parent. (Parent Reservation is Unconditional, e.g. Resale cannot lose scheduling rights.) • 18% were done after the start date of the parent. (Parent Reservation is Unconditional, e.g., the Resale cannot lose scheduling rights.) • 28% were done within 1 calendar day before the start date of the parent. (Really close to having the Parent Reservation Unconditional, lowers the probability that the Resale would lose scheduling rights.) • This means that 84% of Daily Resale activity is done within 1calendar day of the start day of the parent • Another 11% of Daily Resales are done more than 1 calendar day ahead of the start day of the parent (but these 11% are also safe because they are within 1 pre-schedule day of the parent start time). So, more than 95% of Resales are done within 1 pre-Schedule day or later. • Of the 5% of Daily Resales that are done in the conditional window, 45% are Resale to self. Mitigate the 2.7% of the total Daily Resales addressing the ‘Transmission Reservation Merge’ NAESB request e.g., for Resales that could be recalled due to a Conditional Parent, the ‘Transmission Reservation Merge’ project would mitigate 45% of this exposure.

R09015 value in the C&P project • Utilities with a high volume of secondary transactions may reduce C&P exposure to conditional Resales that are used for the consolidating of transmission inventory. For BPAT, • Addressing the R09015 project now apart from option 1 and limiting conditional reservations only solves half of the problem. To fully address the issues with Option 1, you would need both the reservation merge and limiting resales to unconditional reservations. • It might simplify the ‘fix’ to the inconsistencies between 001 and 013 if Option 1 is chosen. • The volumes are low enough in the pro forma markets that though it is a good idea, doing R09015 now does not provide a lot of value to the STCP project. • BPA recommends that R09015 stand on its own merit and not be taken on as part of the STCP.

Conditional Resales NAESB Assignment Update