VI. Utility Options for Procurement Transactions

In their procurement plans, the utilities shall provide detailed descriptions of the various transaction processes they will use to meet their residual net short needs and hedge price risk. In this decision we authorize the utilities to procure products using any of the following transactional methods: a competitive bid process, purchases through transparent markets, inter-utility exchanges, ISO markets and utility ownership. Additionally, we authorize the respondent utilities to contract directly with counterparties for short-term products to the extent the utilities make a showing that such transactions represent a reasonable approximation of what a transparent competitive market would produce.

A. Competitive Solicitations

· Requests for Offers/Requests for Proposals. Procurement plans shall specify the steps of the solicitation process to be used. The process shall be consistent with the competitive solicitations in use now under transitional procurement authority.

· Competitive solicitations may be all-source or may be segmented to allow similar sources to compete with each other, but must cover all of the sources described in section V above.

· Solicitations should be widely distributed (starting with bidders list used under transitional procurement authority). Required items shall include among other things:

¬ Description of product requirements

¬ Term

¬ Minimum and maximum bid quantities

¬ Scheduling and delivery attributes

¬ Credit requirements

¬ Pricing attributes

· Each utility shall update its procurement plans to specify and describe the evaluation tools and methodology it will use to rank and select bids, such as:

¬ Minimum requirements for counter-party creditworthiness

¬ Minimum number of bids that must be received

¬ An evaluation of cost-to-risk tradeoff (consumer risk tolerance level) of the various bids

B. Transparent Exchanges

· Approved utility plans will identify and describe the various electronic energy trading exchanges that each utility proposes the use (e.g., Bloomberg, Trade Spark, Intercontinental Exchange).

· The procurement plans shall demonstrate that the identified electronic trading exchanges the utility intends to use provide transparent prices.

C. ISO Markets: Hour-Ahead, Day-Ahead (when available), and Imbalance Energy and Ancillary Services

· ISO spot market transactions are authorized to balance system and meet short-term needs.

· Procurement plans shall describe procurement strategies for hedging the utility's overall portfolio risk with ISO spot purchases.

· While we wish to provide utilities with timing flexibility in meeting their residual net short needs, it is not our intention to have the entire RNS met in the spot market. Though we do not set an explicit limit on spot market purchases, utilities should plan to minimize their spot market exposure and should justify their planned spot market purchases if they exceed 5% of monthly needs.

· We authorize the use of a Day-Ahead Market should it become operational.

D. Inter-Utility Exchanges

· Traditionally, regulated utilities entered into seasonal and long-term inter-utility exchange agreements (IUE) with other regulated utilities and other load-serving entities such as the Bonneville Power Authority (BPA). Through private negotiation the specific terms were crafted to best fit the resources and needs of both parties. The commission reviewed the reasonableness of these transactions in the annual ECAC reasonableness review proceedings. There were even

some prudence disallowances adopted by the Commission. Payment was typically non-cash with capacity and energy balanced to reflect the seasonal and locational value of the power. Opposite peaks in the northwest and southwest lead to large-scale transactions.

· Unless we adopt specific guidelines for negotiated IUEs these deals would only occur through an RFO process, which is unlikely to be as successful in price or in meeting specific needs of both parties. By adopting the benchmark and other guidance discussed below we allow negotiated IUEs to be included for approval in the monthly advice letter filings.

· The important elements to justify an IUE as reasonable would include:

¬ Cost-effective reductions to seasonal or specific RNS,

¬ Cost effective reductions to seasonal or specific Residual net-long positions.

To justify as cost-effective an IUE to reduce RNS (acting as a buyer), the utility will have to demonstrate that at the time of executing the IUE agreement the expected costs for the repayment was less than the avoided incremental costs at the time of delivery. This determination would be based upon the incremental costs of the existing delivery time and repayment time portfolios available when the IUE is negotiated. For example, if the delivery's existing portfolio incremental transaction cost or the most recent RFO bids for the delivery period are more than $100 and if the repayment portfolio's incremental transaction cost was $100 or less then the IUE could be deemed reasonable when filed by advice letter. This total transaction cost would account for the differing values of capacity, energy, ancillary services, and volume of energy in the two sides of the transaction.

To justify as cost effective an IUE to reduce residual net long positions (as a seller being repaid in capacity, energy, or ancillary services) the utility would have to demonstrate that the average portfolio value of the time of repayment is higher than the forecast of spot prices when firm energy would otherwise be dumped as surplus into the spot market.

In their comments ORA and PG&E suggest this guideline is too narrow and could be a disincentive to enter into an IUE transaction. Neither suggested an alternative so we will adopt this guideline with the provision that parties may propose more detailed criteria for our consideration in any of the up-dated procurement plans. TURN criticized the guideline as relying upon forecast prices. This is not accurate, because the comparison is to the existing portfolio and other available options, i.e., RFO bids, and so the price would be no higher than would otherwise be paid under the adopted RFO process.

E. Utilities may Provide Showing for Direct Bilateral Contracting for Short-Term Products As an Additional Alternative Procurement Method

· We are receptive to the potential use of bilateral contracts beyond the transactional methods described above for short-term products (i.e., less than 90 days). For the Commission to approve the use of such proposed transactional methods, the utilities updated procurement plans must demonstrate that the transactions for short-term products represent a reasonable approximation of what a transparent competitive market would produce.

F. Utility Ownership

· Utilities may propose to buy or construct generation.