Pre-decisional page 1(for discussion only)

Roy Fox, BPA Enterprise Risk Manager January 28, 2005

Fish Cost Components WorkshopPBL Rate Case Risks

and Risk Mitigation

Background and discussion

Pre-decisional page 2(for discussion only)

Federal Generation by WaterYear

6,0007,0008,0009,00010,00011,00012,00013,000

1929

1931

1933

1935

1937

1939

1941

1943

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1961

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1967

1969

1971

1973

1975

1977Fe

dera

l Hyd

ro G

en. +

CG

S G

en.

(am

w)

Pre-decisional page 3(for discussion only)

MID-C MONTHLY AVERAGE PRICES FOR HLHMID-C MONTHLY AVERAGE PRICES FOR HLHMAY 1996 – MAY 2004MAY 1996 – MAY 2004

$1.00

$10.00

$100.00

$1,000.00

May-96

Aug-96

Nov-96

Feb-97

May-97

Aug-97

Nov-97

Feb-98

May-98

Aug-98

Nov-98

Feb-99

May-99

Aug-99

Nov-99

Feb-00

May-00

Aug-00

Nov-00

Feb-01

May-01

Aug-01

Nov-01

Feb-02

May-02

Aug-02

Nov-02

Feb-03

May-03

Aug-03

Nov-03

Feb-04

May-04

Pric

e ($

/Mw

h)Pr

ice

($/M

wh)

Pre-decisional page 4(for discussion only)

Net Secondary Energy Sales Revenue Variability

• Hydro and market price variability combine to create huge net secondary sales revenue uncertainty:

– 2005 and 2006 PBL net sec. sales rev. ~ $500m with a std. dev. of ~$300m (August 18th Workshop)

– Average market prices used (Aug. ’04 SNCRAC assumptions):$39 - $44 per MWh 2005-6 Std. Dev. $14

– Risk level varies with market price assumptions

Pre-decisional page 5(for discussion only)

Drivers of Power Rate RisksDrivers of Power Rate Risks• Hydro supply variability (both annual volume and

seasonal shape of run-off)• Market price variability (level and volatility)• Fish and Wildlife costs from generation changes

resulting from non-power requirements for operations• CGS performance• Other resource availability (wind, conservation, hydro

plant performance and availability)• Loads• Unexpected expenses, expense overruns (“non-

operating” risks)• IOU Settlement cost variability

Pre-decisional page 6(for discussion only)

TPP: Treasury Payment Probability

• As a not-for-profit, Federal enterprise, BPA does not seek to maximize net revenue; BPA must use other financial performance measures.

• Key performance – making all scheduled payments to Treasury on time.

• High probability of making payments to Treasury has become a key financial metric.

• BPA must pay other vendors before paying Treasury; TPP measures overall financial health.

Pre-decisional page 7(for discussion only)

TPP Graph (For illustration purposes only– from June 10th workshop)

$100 M

Year End0 1 2 3 4 5

$400 M

$600 M

$800 M

$1000 M

Length of RatePeriod (4)

LiquidityReserve Level

(WorkingCapital)

StartingReserves =$350M (1)

Expected Value of EndingReserves

Max Ending Reserves

Min EndingReserves

Exp. Val. Annual Changein Reserves = $50M (2)

Variability ofAnnual Change in

Reserves = +/-$200M (3)

4 MajorInfluences on

TPP

Reserves are below liquidityreserve (working capital) level:

DEFERRAL

$1200 M

$1400 M

$1600 M

Pre-decisional page 8(for discussion only)

Factors Affecting TPP

Currently reserves are the main protection against net revenue variability. The 4 main factors affecting TPP in a rate case are:1) The starting reserve level;2) The expected value of the change in reserves from one year to the next (i.e., the E.V. of BPA’s cash flow); 3) The annual variability (risk) in BPA’s cash flow;4) The length of the rate period.

Pre-decisional page 9(for discussion only)

Tools to Mitigate Risks• Cash Reserves • Planned Net Revenues for Risk (increases cash

reserves via increase in rates)• Rate Design

– Flat rates & reserves – Shaped rates (eg. front-load revenues or back-load costs)– Rebates (send rebates to customers if certain conditions

occur)– Surcharges (raise rates if certain conditions occur)– Indexed rates (index the level of rate to a measurable variable)

• Potential to engage others to explore risk mitigation alternatives – cost and feasibility issues

• Length of rate period (generally less risk with shorter rate periods)