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Presentation. A LOOK AT TIER 2 OPTIONS AND SOME WAYS TO EVALUATE THEM. Presented by: Terry Mundorf, Partner Marsh Mundorf Pratt Sullivan & McKenzie May 7 2011. Presentation Overview. Some considerations for Tier 2 Options Criteria for evaluating Tier 2 Options

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  1. Presentation A LOOK AT TIER 2 OPTIONS AND SOME WAYS TO EVALUATE THEM Presented by: Terry Mundorf, PartnerMarsh Mundorf Pratt Sullivan & McKenzie May 7 2011

  2. Presentation Overview • Some considerations for Tier 2 Options • Criteria for evaluating Tier 2 Options • Sorting Tier 2 Options • How do the Tier 2 Options stack up • Concluding thoughts

  3. Considerations for Tier 2 Options • Before we talk details, want to put Tier 2 options in larger context • What is happening at BPA and in Region that should be considered when making Tier 2 decisions • Changes can make Tier 2 decision look really smart or really dumb • At BPA things will change • Tiered Rates and the CHWM contract are new, and will likely change over time • There will be a new Administrator who may not like tiered rates and the TRM • Over time, TRM and CHWM contract strictures will loosen, implementation will become more flexible, TRM may disappear entirely

  4. Considerations for Tier 2 Options (cont’d) • Tier 1 entitlement to amount of lowest cost power will change • Federal base system capability will likely decrease over time • Under Tiered Rates, loss of capability will not be replaced • Means amount of Tier 1 power available to City will likely decrease over time • Some of the load being served with low cost Tier 1 power today will likely become Tier 2 load at some point in the future • BPA power system is changing at the Regional level • Federal system used to be capacity rich and energy constrained • Advent of wind generation and fish constraints have reversed this relationship • Federal system is now capacity constrained and energy rich during some portions of the year leading to negative energy prices during some periods • Relative scarcity of capacity and abundance of energy reflected in BPA pricing • Peak load will cost a lot, energy likely to be relatively cheap from time to time

  5. Considerations for Tier 2 Options (cont’d) • Non-BPA resources • Can offer advantages such as keeping money in community • The inexpensive resource opportunities are gone, and those that remain have a very long pay-back period • Non-BPA resource acquisition is labor intensive even if done in a group setting • Non-BPA resource operation is also labor intensive and has high risk profile • Cannot control all variable, such as fuel costs, regulatory changes • Market can be less expensive – sometimes • Market can be less expensive than alternative resources episodically • Market can also be far more expensive than alternative resources • Trick is to be in the market when it is timely to do so, like right now • To rely on market for low cost power requires expertise and is labor intensive • Market is not a panacea replacement to BPA Tier 2 supply

  6. Considerations for Tier 2 Options (cont’d) (cont’d) • How Tier 2 load comes to the City is also a key factor • One type of Tier 2 exposure is a steady increase in indigenous load • A second type of Tier 2 exposure is when a new large load appears (Wal Mart, industrial concern) • Steady load growth can be accommodated within BPA planning windows, while large load increments do not always correspond to BPA planning windows • What have we learned in the last 10 years • Crystal balls don’t work, regardless of who operates them • Many things have happened, many have been unexpected and unforecast (advent of wind, energy market meltdown, recession, load loss, departure of manufacturing base) • Helps to plan, but plans do not control the future

  7. Criteria for Evaluating Tier 2 Options • Four major criteria for judging the Tier 2 options available to the City • Does it provide a secure and relatively low cost supply of power • Does it allow the City to spend money in the community • Does in allow the City to stay within its core competencies (operating a distribution system and providing customer service) • Does it provide a reasonable degree of flexibility in order to respond to changing and unforeseen developments, and to take advantage of new opportunities • These criteria are of essentially equal importance and provide a good basis for judging Tier 2 options

  8. Sorting Tier 2 Options • Tier 2 Options available include • BPA Tier 2 Product • Short Term Rate • Load Growth Rate • Vintage Rate • Non-BPA resources • Local biomass generation • Group resource efforts such as ENW • Non-BPA market purchases • Conservation and demand side resources • BPA funded • Self funded • Let’s see how they stack up to the criteria

  9. Concluding Thoughts • City load forecast shows no Tier 2 until 2023 • Things can change in a hurry, including loss of CHWM due to loss of Federal system resources • Based on the foregoing analysis, looks like • Conservation and demand management rate highest for Tier 2 service • Of the power supply options, BPA Short Term product offers best combination of low cost, using core competencies and retaining flexibility • If take this course, crucial that retail rates and conservation programs provide proper price signals and incentives • Key to success depends on action by customers • City has been very pro-active regarding power supply and changing electric utility environment • Your decisions should continue that approach

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