Exhibit BML-I
DOCKET NO. U-23356
During the course of this proceeding, the Staff determined that, in furtherance of
the Company’s obligation to provide reliable service at the lowest reasonable cost, the
Company must undertake certain analyses and increase the information it retains relating
to the purchase of off-system energy.
More specifically, the Company has agreed to make certain analyses and to
provide the results of them to the Staff. Set forth below is a brief description of each of
these analyses.
Risk Management Plan
The Company agrees to adhere to the terms of the Risk Management Plan
attached hereto.
This Plan will assist the System in ensuring that it has sufficient
resources to provide reliable service at the lowest reasonable cost.
The Company
commits to providing the Staff periodic reports, as described more fully below, in an
effort to keep the Staff informed of reliability and planning issues.
Documentation of Off-System Purchases
During its investigation in this proceeding, the Staff determined that the Company
did not retain for more than 90 days documentation of offers to sell off-system energy to
the System that were rejected. At the request of the Staff, the Company prepared a
detailed document retention plan that memorializes the facts and circumstances
surrounding energy purchases that were made as well as those that were rejected. This
Exhibit BML-I
will aid the LPSC in determining whether ESI properly uses the off-system market to
achieve reliable service at the least reasonable cost.
Margin Analysis
In deciding whether to purchase fixed price off-system economy energy, the
Company requires that the price be lower than its estimated avoided cost.
differential, or “margin” varies depending on how far in advance the purchase is being
made. The Staff questioned the size of the margin, and the Company agreed to prepare
an analysis supporting what it believes the size of the margin should be (for different time
periods) and provide that analysis to the Staff.
Transmission Constraints
The ability of the System to purchase economy energy from outside the System is
affected by operating conditions and constraints on the transmission system. Constraints
might also affect the ability of the System at times to economically dispatch its
generating units. At the request of the Staff, the Company will conduct a comprehensive
prospective cost/benefit analysis of relieving constraints on the transmission system.
A more detailed description of each of these commitments follows. This is a
summary of related Findings of Fact. To the extent that this summary deviates at all from
the Findings, it is the Findings that control and bind the Company.
Risk Management Plan
During the course of this proceeding the Staff requested that the System prepare a
documented description of how it will plan for the future resource needs of its customers.
Appendix 1 to this Exhibit contains the System’s Risk Management Plan and a
description of how that plan was utilized to determine what resources were needed to
Exhibit BML-I
meet the expected energy needs of its customers during the summer peak period of 2000.
The goal of the plan is to ensure reliable service and to mitigate the adverse impacts of
market price spikes, by (a) forecasting the peak load and analyzing the System’s
resources available to meet this peak, and (b) establishing procedures for meeting any
shortfalls. The plan, in part, addresses how the Entergy System will access the offsystem power market to achieve its obligation of providing reliable service at the lowest
reasonable cost.
The Risk Management Plan utilizes a stochastic simulation model that considers a
wide range of possible scenarios regarding both the System’s peak loads and available
supply resources in order to determine the resources necessary (a) to meet the planning
objective on an expected basis of an interruption of firm load no more than one day in ten
years, consistent with the directives of the Southwest Power Pool (“SPP”), and (b) to
meet the System’s planning objective concerning the number of interruptions imposed
each year on interruptible/curtailable customers.
In determining the expected needs of customers, the Risk Management Plan relies
on an average of the results of three alternative methodologies to forecast peak load
(sometimes referred to as a “consensus forecast”). Each of these three methodologies
employs a significantly different approach for forecasting System load. In determining
the estimated capability ratings of the System’s generating fleet, the Risk Management
Plan relies on actual operating experience of these generators under summer peak
operating conditions.
This will ensure that such capabilities are realistic and reflect
summer peak load conditions.
Exhibit BML-I
Any deficiency in System resources to meet the projected summer peak loads is
estimated in the Risk Management Plan. Once the size of any deficiency in available
resources is determined, subject to the SPP and System planning criteria (one day in ten
years loss of load for firm customers and a certain number of interruptions imposed each
year on interruptible/curtailable customers), the Risk Management Plan screens
alternative means of meeting any deficiency in resources through the use of a structured
technique for ranking alternatives known as “qualitative decision analysis”.
“qualitative decision analysis” considers each option in terms of applicable factors such
as cost, environmental impact, feasibility, and other factors.
The plan then selects the most cost-effective means to meet the forecasted
deficiency from the feasible alternatives. The goal of the Risk Management Plan is to
serve all customer classes with adequate levels of reliability at the lowest reasonable cost,
taking into account System constraints, market risks, and the Company’s service
obligations to all of its customers.
Depending on the circumstances, the System may or may not continue to rely on
the Request For Proposal (“RFP”) process to solicit bids for resources. However, if the
Entergy System continues to use the RFP process to solicit resources to meet its summer
requirements, the Entergy System will prepare contemporaneous documentation of the
results of the solicitation, including its analysis and evaluation of the bids received. This
will include reasons for rejecting or accepting bids. Alternatively, if the Entergy System
chooses to rely instead on bilateral negotiations to acquire the needed resources, ELI will
provide its analyses of purchase power offers, its market survey and other pertinent
information relating to its purchase power procurement. (This would include information
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on rejected offers.) Such information on the RFP process and/or the bilateral contracting
for purchased power will be provided to Staff subject, if necessary, to an appropriate
confidentiality agreement.
In connection with its planning process for meeting projected summer peak
demands, the Entergy System will evaluate all relevant “self supply” (owned or leased)
resource options, including unit up-rates, and new unit (or repowering) self-build options.
These analyses will be documented and provided to Staff. The Entergy System will
pursue cost-effective options regarding owned generation with the objective of providing
reliable service at reasonable cost, subject to its operating and other constraints.
The Company will provide the Staff a detailed description of the application of
the Risk Management Plan no later than January 15 of each year. In this connection, the
Company will provide the Staff studies of estimated needs for resources to meets its
reliability objectives, as well as studies of the resources the System has to meet those
needs and the analysis of the alternatives available to meet any deficiency. ELI agrees to
provide this information on a timely basis, and to receive comments and
recommendations from Staff regarding its planning and resource procurement practices.
ELI agrees to hold a technical conference with Staff to discuss this information and
answer questions.
After the conclusion of each summer season, the Entergy System will perform an
after-the-fact evaluation of: (a) the accuracy of its previous year load forecast, (b) the
dependable capacity ratings of units to determine what changes, if any, are needed for the
next planning cycle, and (c) the effectiveness of alternatives used to meet the deficiency
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at the least reasonable cost, and will provide this evaluation to the Staff by November 30
each year for the summer season just ended.
Documentation Plan
The Company believes that the records that ESI has maintained to document its
purchased power practices are adequate to demonstrate the reasonableness and necessity
of the purchased power costs that ELI’s customers have incurred. Further, it is ELI’s
position that these records also are adequate to comply with the provisions of the
Commission’s November 1997 General Order regarding fuel adjustment charges. ELI
does not believe that additional documentation is required either by the Commission’s
General Order, or for any legitimate or prudent business practice.
However, as a result of discussions with the Staff, ESI has implemented a set of
processes, which were put into effect in June 2000, that will contemporaneously capture
additional information about the wholesale power purchases that the System makes and
the offers for wholesale power that the System declines.
To do this, ESI has modified its TRADES system, which is the ESI-developed
computer-based system that the System’s wholesale power buyers use to record
wholesale power transactions.
The modified TRADES system now requires System
power purchasers to include additional information documenting the reasons particular
purchases are made, such as whether the purchase was made to ensure the reliability of
the System or was an economy purchase. ESI has further required its power purchasers
to enter into TRADES all offers of power that specify price, quantity and duration but
that are not accepted, and the reason that the offer was declined, such as, for example,
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that the price was not economical or that the purchase was not made because of operating
constraints (including minimum load issues or transmission constraints).
The EMO is a department of Entergy Services, Inc. that, among other
responsibilities, buys and sells electricity in the wholesale market on behalf of the
Entergy Operating Companies. The System buys and sells substantial amounts of energy
in the next-day and current day markets.1 These transactions are bilateral transactions
between the System and others, and, consistent with industry practice, are made over the
telephone without any documents changing hands. Parties call the EMO offering energy
for sale, or the EMO calls potential vendors to solicit an offer. Typically, offers must be
accepted or rejected within a very short time, often during the phone conversation.
In the past, the EMO has retained a substantial amount of information regarding
the planning processes that led to those purchases or sales, including copies of the
Seasonal Energy Plans, Monthly Energy Plans, and Next-Day Energy Plans. The EMO
has also retained the databases that were used to generate the short-term production
costing forecasts, and thus the avoided cost forecasts, that are prepared on a daily basis
using the Scheduler model. Not all of the Scheduler databases are routinely retained, as
numerous Scheduler model runs are performed on any given day, but the final Scheduler
run of the day has been stored for the past several years. The EMO also retains the
System Lambda from its Energy Management System (“EMS”) from the beginning of
each hour.
The EMO also retains information regarding system operations that is useful
when evaluating purchase decisions.
This information includes the Generation
The next-day market involves purchases made, usually by 10:00 a.m., for delivery the following
day; the current-day market involves purchases made for delivery within the next several hours.
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Availability Data Base (“GADS”), which records information about generating unit
performance, the OMENS database, which records the contemporaneous notes of the
System dispatchers, and the contemporaneous notices that are issued internally during
times of duress.
The EMO also has retained a substantial amount of information regarding each
wholesale transaction that the System consummated.
The EMO has developed the
TRADES system, which is an electronic database with a graphical user interface
(“GUI”). The TRADES system has been used by the EMO’s wholesale energy traders to
record information in real time on the purchases or sales that they have made. The
information that was historically recorded in TRADES includes the name of the buyer or
seller, the price and quantity of the transaction, the transmission path over which the
energy will be delivered and the point of delivery, the times at which the energy will be
delivered, the names of the traders on both ends of the transaction, and other information,
such as whether the energy is dispatchable, that needed to be retained for operational
reasons. A snapshot of the screen that the traders use to enter information about their
transactions is included as Appendix 2 to this Exhibit.
However, during the course of this proceeding, the Staff indicated that additional
information regarding the transactions which were accepted would be useful to evaluate
the reasonableness of the System’s purchases. This information includes the reason why
the purchase was made (e.g., whether the purchase was made for economics or
reliability). Further, if a purchase was made for economics, it would be useful to know
the avoided cost (for the appropriate time horizon) that was used to determine that the
purchase was economic, and if a purchase was made for reliability reasons, the
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circumstance that lead to the need (e.g., the unexpected loss or derating of a generating
unit or of a prescheduled purchase, a transmission constraint, or an unanticipated increase
in the load that must be served).
The Staff also requested that the EMO retain the information regarding offers that
the EMO received that were not accepted.
Basically, the Staff primarily sought
information, which had not previously been retained, on the price and quantity of offers
to sell energy that were declined and the reason that those purchases were not made.
Those reasons could include price or operational constraints, such as minimum loading
issues or the unavailability of transmission.
Following discussions with the Staff, the Company agreed to develop and
implement a system to collect additional information regarding wholesale power
transactions that were accepted, and to collect and retain information regarding offers that
were not accepted.
In order to collect additional information on wholesale power transactions, the
EMO has modified the TRADES database to require that the traders identify the reason
for the purchase (e.g., either economy or reliability) at the time that the purchase was
If the purchase is made for economic reasons, the Contemporaneous
Documentation System is designed to identify the appropriate avoided cost that was used
to determine that the purchase was economic, and associate that avoided cost with the
purchase. If a purchase was made for reliability reasons, the traders can indicate whether
the purchase is a non-standard purchase,2 a peaking purchase,3 or a post market
A non-standard purchase is defined as a purchase of a 16 hour block that enables a cheaper
average MW price than could be obtained for a peaking purchase. Pricing of the peaking hours will be at a
higher cost than non-peaking hours. (i.e. Hrs 7-12 @ $40/MW, Hrs 13-20 @ $90/MW, Hrs 21-22 @
$40/MW ? Average price = $65/MW)
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purchase.4 Additional information about why there was a need for a reliability purchase
is also collected.
The reasons that may be selected are plant trip/failure/derate, an
unexpected increase in the load forecast, a transmission constraint, or some other reason.
The Contemporaneous Documentation System also requires the traders to record
information on the valid offers that are received, but that are not accepted. An offer is
defined as valid only if it is received from an Entergy-approved counter-party5 and
includes the following information: price ($/MWh), quantity (MWh), start time, and
duration (day or hours).
Offers may be rejected because they are not economically
attractive (i.e., the price is greater than the avoided cost for the relevant time period), or
because of operational reasons.
If an offer is rejected because of economics, the
information that is collected includes the name of the vendor, the amount and price of the
power, the schedule proposed for sale, and the relevant avoided cost estimate that led to
the rejection. If an offer is rejected because of operational constraints, information on the
avoided cost is not retained, but the reason for the rejection is. The trader must choose
one of the following reasons for rejecting an offer for any reason other than price:
Transmission constraint – no available transfer capability;
Transmission constraint – transmission loading relief;
Inappropriate type of product (e.g., an offer for around the clock energy
when the System needs peaking power);
A peaking purchase is defined as a purchase to cover the peak hours (typically hrs. 13-20, but may
vary slightly).
A post market purchase is defined as a purchase outside the “normal” power purchase hours of
7am – 12pm (i.e., purchase of power at 3pm because of unit trip).
A vendor can become an approved counter-party by meeting certain credit standards and the
execution of a standard contract.
Exhibit BML-I
Time constraint (e.g., an offer is received without sufficient time to
arrange for transmission service);
The System’s generating units are at their minimum loads and cannot be
shut down to allow additional purchases;
The System’s generating units cannot be turned down because of fuel
contract constraints;
The offer was withdrawn by the vendor;
The offer was unit-contingent on a unit that the System did not consider
Some other reason.
These explanations will be captured and stored in the TRADES database. To the
extent that the purchaser is informed of the specific transmission constraint, i.e., what
interface is constrained, that information will be retained. It is not expected that the
“other” category will be used very often. However, this is a work in progress and
experience may suggest changes to the options in order to minimize the use of “other.”
The information collected in the Contemporaneous Documentation Process will
be retained in an electronic database. A wide variety of reports can be generated from the
database. Reports detailing each accepted or rejected transaction are available, as are
reports summarizing and analyzing the transactions. Samples of the kinds of reports that
can be generated are included as Appendix 3 to this Exhibit.
Margin Analysis
In making the decision whether to purchase energy off-system, the System
requires that the price of such a purchase be lower than the estimated avoided cost. This
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differential or “margin” (the size of which depends on the time horizon for the purchase)
is necessary to ensure that the purchase produces a benefit to the System and its
customers. Conceptually, the System’s approach of requiring a margin for purposes of
determining whether it will purchase off-system supplies is prudent. The use of a margin
for purchased power is supported by the following: a) it protects against making a
purchase commitment too early in the process and thereby missing the opportunity for
subsequent lower-cost offers, b) it encourages the System’s traders to negotiate better
deals, c) the Monte Carlo simulation study submitted by ELI demonstrates that, so long
as there are multiple offers, not all of which are taken, the appropriate margin is a
positive number, and d) the margin should be larger as the period between the time of the
estimate and time for delivery of the energy grows longer. Just as the cost of an option
for one year is greater than the cost of an option for month or a week, so should the
margin be larger for the longer purchase horizons. The System’s margins reflect that
However, the record does not demonstrate that the specific numerical values of
the margins used by the Entergy System for making purchase power decisions are the
most appropriate margins for that purpose. It may be appropriate to adjust those margins
as market conditions change. Consequently, the Staff does not opine as to the specific
quantification of the margins that should be used for making future hourly, daily, weekly,
monthly, or annual off-system purchase decisions, and recommends that the Entergy
System reevaluate those margins to determine whether they should be adjusted in order to
more appropriately access the off-system economy energy market in order to achieve
reliable service at the lowest reasonable cost for the System. ELI agrees to provide such
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an analysis to the Staff within nine months of the acceptance of the Settlement by the
Commission. The Company also commits to providing the Staff an outline of how the
study will be conducted within four months of the acceptance of the Settlement.
Transmission Constraints
The Entergy System, like every other transmission-owning utility, faces
transmission import limits and constraints within its control area. The Staff did not
perform an engineering analysis of these limitations.
These limits and constraints,
including Amite-South, can affect the Entergy System’s use of the off-system economy
energy market, System dispatch, and fuel costs. Therefore, Staff has concluded that the
Entergy System should conduct a prospective study to determine what transmission
constraints exist, the feasibility of options to mitigate such transmission constraints,
including analysis of the costs and potential net benefits for ELI’s customers of each
reasonable alternative for improving the transmission transfer capability of the
transmission system of the Entergy Operating Companies. ELI and Entergy have agreed
to prepare and submit such a study to the Commission within six (6) months of the
Commission’s Order approving the settlement. ELI shall consult with Staff on the scope
and methodology of the study prior to commencement. At a minimum, the transmission
study shall include analyses of the extent to which Entergy transmission system
limitations adversely affect Entergy’s ability to fully and optimally dispatch its
generating units, including the need to dispatch units out of merit order and any resulting
need to acquire more off-system purchased power for the period under study, if any, and
if so, how much additional purchased power is needed. Also, the analysis in the study
shall evaluate how the transmission constraints limit the System’s ability to make use of
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off-system economy energy to cost-effectively displace Entergy’s internal generation and
what can be done to minimize that limitation. The study shall identify each transmission
line that experienced line loadings during contingencies at the time of annual peak which
meet or exceed 100% of the normal line rating including the percent amount in excess of
100% and shall describe the contingencies which cause the exceedence of 100%.
Detailed data inputs, analytic assumptions and results shall be included as part of the
study or available to Staff as supporting workpapers, as appropriate.
Entergy may
request that data which it deems confidential be provided to Staff subject to a
Confidentiality Agreement.