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Intertie Project

Intertie Project. Public Information Forum February 8, 2007. Agenda. Overview of the Rate Adjustment Process Review Rate Drivers and Proposed Rates Discuss Approaches to Rate Adjustment Western’s Recommendation Next Steps Questions and Comments. Rate Adjustment Process.

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Intertie Project

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  1. Intertie Project Public Information Forum February 8, 2007

  2. Agenda • Overview of the Rate Adjustment Process • Review Rate Drivers and Proposed Rates • Discuss Approaches to Rate Adjustment • Western’s Recommendation • Next Steps • Questions and Comments

  3. Rate Adjustment Process • Informal Rate Meeting – June 15, 2006 • Formal Process for Rate Adjustment – July 12, 2006 • Publication of Federal Register Notice of Proposed Rates • Beginning of Consultation and Comment Period • Public Information Forum – August 17, 2006 • Public Comment Forum – August 24, 2006 • End of Consultation and Comment Period – October 10, 2006 • Extension of Rates & Public Process – December 28, 2006 • Publication of Federal Register Notice of Order Extending Rates and Extension of Public Process for Rate Adjustment

  4. Rate Drivers FY 2008-2012[FY99 Ratebase PRS]

  5. Rate Drivers FY 2008-2012[FY07 Ratebase PRS]

  6. Summary of Rate Drivers • Significant increase in Repayment category as a percentage of the average total annual costs • Moderate increase in O&M and minor increase in Other categories • Overall, substantial increase in total annual costs to recover over short period of time

  7. Average Annual Expenses

  8. Annual Expense Projections • FY 2008 O&M expenses derived from budget estimates submitted to DOE and OMB. • FY 2009-2012 O&M expenses indexed off FY 2008 budget estimates @ 3.65%, consistent with budget submission • Repayment applied towards an estimated FY 2006 unpaid capitalized deficit balance of $54.4M, of which $41.7M are required payments

  9. Annual Expense Summary • Largest contributor to proposed rates is the short-term repayment obligation associated with capitalized deficits • Why the increase in repayment obligation? • Lower than projected sales of 500-kV transmission service • Revenue shortfall resulted in capitalized deficits with short-term repayment periods

  10. Which Leads Us to Where We Are Today… • Rate Adjustment necessary to ensure recovery of annual costs and repayment of project • Rates must be “lowest possible consistent with sound business principles” • Several approaches to Rate Adjustment

  11. Alternatives to Consider • Standard Approach • Alternative Approach • Restructure 500-kV Sales Assumptions • 230/345/500-kV System Rate • Combination of the above

  12. Standard Approach • Update proposed rates presented during the Public Information Forum held August 17, 2006 • Pros: • No additional deficits planned after FY 2007 • Most conservative approach—minimizes overall interest costs over project repayment • Cons: • Highest immediate rate increase • Prices 500-kV transmission service significantly higher than other providers • Higher risk of not achieving 500-kV sales assumptions

  13. Pinch Points

  14. Alternative Approach • Use certain repayment flexibilities when determining proposed rates • Incur additional deficits to cover annual expenses and required payments • Direct payments to reduce a future year pinch point repayment obligation after deficit repayment completed • Pros: • Lessens the impact of the immediate rate increase • Still makes required payments each year in accordance with DOE Order RA 6120.2 • Ensures project repayment within maximum allowable time frame

  15. Alternative Approach, Cont’d • Cons: • Increases interest costs during project repayment • Potential future rate increases if sales assumptions do not materialize • Directing payments is allowed under DOE Order RA 6120.2 only when no unpaid capitalized deficits exist • All current and future capitalized deficits must be paid off by FY 2017 to begin directing payments

  16. Restructure 500-kV Sales Projections • Existing rates were based on phasing-in sales of 500-kV transmission service • Phase-in period began in FY 1999 with projected sales of 62.5 MW, incremental sales of 100 MW each fiscal year and ends in FY 2008 with total sales of 962.5 MW • Current long-term sales are 612 MW • Proposed rates from July 2006 proposal assume sales of 962.5 MW in FY 2008 and beyond, i.e. sales projections were not restructured

  17. Restructure 500-kV Sales Projections • Extending the phase-in period by five years will allow Western additional time to market long-term 500-kV transmission service • Restructuring the sales projections over the next five years will give Western flexibility to achieve the phase-in total sales of 962.5 MW • Aligns sales projections based on performance to date and future outlook

  18. 230/345/500-kV System Rate • Legislatively, and from a financial accounting and repayment standpoint, the Intertie is one project • Indirect costs are allocated to the Intertie Project, not to the 230/345-kV and 500-kV transmission systems • Slower than projected sales of 500-kV transmission service does not relieve Western from Intertie Project repayment responsibility. • A 230/345/500-kV rate is consistent with “sound business principles”

  19. Western’s Recommendation • Combination of the above • Alternative Approach • 230/345/500-kV System Rate • Restructure the 500-kV Sales Assumptions • Alternative Approach • Makes required payments in all years in accordance with DOE Order RA6120.2 • Incurs additional deficits in FY 2007-2010 • Pays deficits first, then begins directing payments in FY 2017

  20. Recommendation, Cont’d • 230/345/500-kV System Rate • The same rate for entire transmission system regardless of voltage level • Potential for additional sales by moving reservations from the 230/345-kV to the 500-kV or vice versa • Beneficial for all customers by keeping the 500-kV transmission system competitively priced • Restructure 500-kV Sales Assumptions • Extend phase-in period by five years to achieve sales • Attain 962.5 MW sales level by FY2013

  21. 230/345/500 System Rate • $15.24 kW-Yr, regardless of voltage • Assumes additional deficits incurred FY 2007-2010 and all deficits paid by FY 2017 • Begins directing payments in FY 2017 • Extends phase-in period of 500-kV sales projections to FY 2013

  22. Transmission Service Rates

  23. Credit Risk Mitigation for Transmission Service Sales • Current business practice requires customers to pay for transmission service after the fact, usually one month in arrears • Western can be at risk for up to 4 months’ revenue in event of default • All customers will be required to pay in advance for long-term transmission service • New business practice of pre-payment will reduce the revenue risk exposure to one month

  24. Credit Risk MitigationExample • Calpine—filed for Bankruptcy protection late in 2005 • Monthly transmission service bills approx. $500k • When bankruptcy filing done, Western was owed approx. $1M (two months’ service) • Loss of revenue impacts all rate payers • Payment in advance could have reduced exposure

  25. Credit Risk Mitigation • Current environment - companies financial and credit status can change quickly • Many of Western’s customers have no credit rating • Payment in advance mitigates risks • Many customers already pay for long-term transmission service in advance • Firm Electric Service customers pay in advance

  26. Schedule • Revised rate brochure will be available on Western’s website by 2/12/07 at: http://www.wapa.gov/dsw/pwrmkt/Intertie/RateAdjust • Public Comment Forum scheduled for February 27, 2007 at 10:00 a.m. MST • Consultation and comment period ends March 28, 2007 • Questions not answered today will be answered in writing no later than 15 days prior to the end of the comment period.

  27. Comments & Questions • Send written comments to J. Tyler Carlson, Regional Manager • Comments may also be faxed to 602-605-2490, Attn: Jack Murray, Rates Team Lead • E-mail to Tyler Carlson, carlson@wapa.gov or Jack Murray, jmurray@wapa.gov • All written comments must be received by the end of the comment period

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