The LPSC is currently conducting a review of this RFP and is accepting
comments on the RFP from interested parties due October 22.
The LPSC Staff is scheduled to file its comments on October 29.
These comments will be posted on the LPSC web site
shortly after these due dates.
QUESTIONS AND ANSWERS PROVIDED IN CONNECTION WITH THE LPSC TECHNICAL CONFERENCE OF OCTOBER 15, 2002
I.SUMMARY RESPONSES ON KEY ISSUES.
A: Will all resources acquired by the Entergy Louisiana, Inc. and Entergy Gulf States, Inc. utilize the procedures contained in the LPSC Market Based Mechanism Order?
Response:
LPSC Order No. R-26172, dated April 10, 2001, specifies several exemptions from the market-based mechanisms process, and provides further that a utility may apply for an exemption to the competitive bidding requirement outside of the quantitative thresholds for the exemptions set forth in that Order, upon the appropriate public interest demonstration. The RFP does not prevent Entergy Louisiana, Inc. or Entergy Gulf States, Inc. from requesting an exemption from the market-based mechanisms process. Regardless of whether the market-based mechanism process has been employed with respect to a particular capacity acquisition by ELI or EGS, such an acquisition would have to be approved by the Commission pursuant to the Commission’s General Order dated September 20, 1983.
B:The RFP indicates that the Entergy System may obtain some of its additional requirements through consideration of proposals outside the RFP process. Please explain.
Response:
ESI seeks to utilize the RFP process to acquire purchased resources to meet its supply requirements and encourages all bidders to use this process to make proposals. Further, ESI has received input from regulators that they seek to have potential suppliers utilize the RFP process to offer resources, and will question proposed transactions that have not been offered under the RFP process. However, ESI anticipates that in special situations there could be opportunities to acquire a long-term resource on favorable terms, which could require action on a schedule inconsistent with a planned RFP schedule. ESI believes that it is not in the best interests of Operating Companies’ customers to preclude consideration of such opportunities. In circumstances involving the time critical sale of an entire asset (or an equivalent under life-of-unit purchase), the Companies may (but are not obligated to) consider offers with definitive pricing and terms which, would provide to its customers benefits that may not otherwise be achievable. Such offers would be subject to the same standards and evaluation criteria as other supply alternatives, and would be considered in comparison to other resource supply alternatives. During the period of an active RFP, such offers should be made in writing to the person responsible for receiving questions from bidders relating to the Fall 2002 RFP (Julie Ell) who will record the request and route the request for appropriate consideration.
C: The RFP indicates that the Entergy System may obtain some of its additional requirements through commitments made pursuant to negotiations that began prior to the development of this RFP process. Please explain.
Response:
Prior to the implementation of the LPSC Market Based Mechanism Order, ESI had been in detailed negotiations that included a possible supply of a relatively small portion of its supply requirements. These negotiations do not involve an Entergy Affiliate, and are confidential and are expected to be finalized in the near future. Should these negotiations be concluded successfully, the results will be presented to the appropriate regulators for approval. The outcome of these negotiations will not alter ESI’s current expectation to acquire roughly 50% of its 2003 needs through this Fall 2002 RFP. We do not intend to discuss with market participants specific information regarding any particular potential transactions, whether within the context of the RFP or otherwise.
D: Will self-supply or self-build options be included in the Entergy System’s resource supply plan?
Response:
ESI plans to identify self-build options or self-supply options (resource ownership options possibly constructed by others) sufficient to allow it to replace, if necessary, purchases of power from short-term resources. This strategy helps to mitigate our customers’ exposure to market price volatility. ESI also plans to consider additional resources provided though upgrades to existing generating facilities, including (but not limited to) nuclear plant uprates. However, decisions to undertake a specific project would not go forward without appropriate regulatory approvals.
Currently, ESI has identified repowering options at several of its existing fossil generation sites. Significant evaluation studies have been conducted at two sites, the Michoud station and the Little Gypsy station. ESI plans to preserve the option to utilize these sites if needed. Responses to the Fall 2002 RFP will indicate whether these projects should proceed at this time.
Both the Michoud and Little Gypsy projects involve repowering an existing steam unit to result in a “combined cycle equivalent” unit of approximately 500 MW through the addition of two new CTs and a heat recovery steam generator (HRSG) that would supply steam to the existing steam turbine. The projects may involve phased construction that leads to a CT peaking /reliability resource in the initial phase, with the HRSG added later. ESI seeks to preserve the option to bring these projects into service when needed. ESI has applied for appropriate environmental permits and has completed preliminary engineering studies for the Michoud project.
Responses to the RFP will influence the timing of these projects. Any decision to proceed will be accompanied by the appropriate requests for regulatory approvals.
E. Will an Entergy Affiliate (separately or jointly) submit a bid in response to this RFP? If so, what measures has Entergy taken to ensure that its affiliate has no preferential access to information or has any unfair advantage over other potential bidders?
Response:
We expect, but do not know with certainty, that one or more of the Entergy Affiliates will respond to the RFP. The individuals involved in evaluating bids in the RFP process have no involvement with decisions of the Entergy Affiliates regarding whether to respond or what response to make. The RFP process has been designed to be objective and impartial to every bidder. The draft RFP provides significant detail regarding the efforts to assure that no bidders have preferential access to information or any other unfair advantage. Any decision to proceed will be accompanied by the appropriate requests for regulatory approvals.
F: The RFP indicates that “the development and implementation of the RFP process does not preclude in any way ESI or the Operating Companies from considering, evaluating, and/or seeking regulatory approvals for acquiring resources that are owned by one or more Entergy Operating Companies, which resources are not reflected in rates of retail customers of any Operating Company”. Please explain.
Response:
Some of the Entergy Operating Companies own resources that are not currently included in retail rates. These resources currently include EGS’s 30% share of River Bend formerly owned by Cajun Electric Cooperative, EAI’s shareholder retained share of Grand Gulf, and a share of EAI’s capacity associated with wholesale load that is not reflected in retail rates. The Entergy Operating Companies do not intend to submit bids in the Fall 2002 RFP from the resources that are not currently included in retail rates. However, the Operating Companies do reserve their right to devote at any time their own generating assets to meet the supply needs of their retail customers, subject to required reviews and approvals by their regulators. Any decision to devote these resources to an Operating Company’s supply resources would reflect market alternatives and would be based upon approvals from the appropriate regulators.
G: Will demand side alternatives be considered in Entergy System supply planning?
Response:
While ESI intends to consider offers of demand side alternatives in considering alternatives for meeting the requirements of the Operating Companies’ customers, the Fall 2002 RFP has not specifically sought responses for demand side proposals. ESI welcomes proposals outside the Fall RFP process for demand side reductions and plans to continue to offer demand side supply options, such as curtailable and/or interruptible load alternatives.
H:Why did the RFP not identify specific load centers to be served by the resources to be acquired to meet 2003 supply requirements?
Response:
ESI has indicated in the draft RFP that the resources provided by current generation, purchased power, and transmission import capability are adequate to meet the near term reliability requirements in each of its major planning regions. ESI does not acquire resources solely to serve specific load centers, but rather seeks a portfolio of resources that can provide reliable supply to each load center at the lowest reasonable cost consistent with existing constraints.
I. What evaluation criteria will ESI use in evaluating bids?
Response:
In the RFP, ESI has provided a description of the evaluation criteria and methods that will be utilized to evaluate bids. As detailed in the RFP, the primary evaluation criterion is an economic comparison of bids. Bidders are encouraged to focus on price and operational terms that have the greatest impact on total production costs for the product offered. Factor evaluation will only be utilized to distinguish between bids within a product category that have comparable economic evaluation results. Factor evaluation attributes (e.g. supplier credit rating, available pipelines, etc.) may also be used to assess a resource portfolio for overall risks, such as overdependence on a single fuel or transport supplier or exposure to suppliers with weak credit. Although ESI has identified certain important criteria and preferences with respect to such criteria, it would be inappropriate for ESI to make public the specific criteria and modeling that will be used in the evaluation of the proposals. To create a competitive process and encourage maximum creativity by bidders, ESI has decided to provide information about the needs of the Entergy Operating Companies and the overall evaluation criteria without disclosing so much detail about criteria that every bid in a product category will look essentially the same. ESI believes that such a competitive process is critical in order to produce creative bids that will yield maximum benefits for the Operating Companies’ customers. Additionally, detailed evaluation criteria may include highly sensitive commercial information that is proprietary to ESI and the Entergy Operating Companies.
J: Please explain how supplier credit will be considered in the evaluation of bids?
Response:
The primary objective of ESI’s credit evaluation is to assure that a supplier who is awarded a bid has sufficient financial viability to perform under a purchase power contract. For most transactions, ESI’s primary risk is that the supplier fails, for whatever reason, to deliver the power expected under the contract, which would require that ESI would have to replace the power, possibly at higher market prices. ESI expects that credit should not be an issue for “bricks and mortar” asset sales.
To manage this risk, ESI will apply uniform and consistent procedures to evaluate the credit quality all bidders, utilizing the expertise of its corporate risk management group. A maximum “Supplier Exposure” will be determined for each potential supplier offering bids in response to the Fall 2002 RFP. This maximum Supplier Exposure represents the total aggregate exposure from a supplier that will be accepted without additional collateral. This maximum Supplier Exposure includes exposure from all transactions with Entergy and any of its affiliates, including pre-existing transactions and transactions with Entergy subsidiaries other than the Operating Companies. For potential transactions anticipated under this Fall 2002 RFP, the Supplier Exposure will be calculated by comparing the cost of power under a potential contract associated with a bid with a potential replacement cost for that power if the supplier failed to perform. The potential replacement cost will be based upon potential market prices for the power product in future years, based upon forward market price information for power and fuel and expected potential price volatility. The replacement costs assumptions will be determined in advance of the credit evaluation, and will be applied uniformly and consistently to all bids and potential suppliers.
Credit issues will be considered in two ways in the evaluation. First, credit can be a “threshold factor” for consideration of a bid. Second, credit risk will be considered as an attribute of a bid that will be presented to decision makers in their review of a proposed supply plan portfolio. The decision makers are also expected to consider the overall credit risk profile of the entire supply portfolio.
In the “threshold factor” evaluation, each supplier’s credit situation will be assessed to establish a maximum supplier exposure without additional collateral. As described in the RFP, each supplier is required to provide basic financial information with its bid that will be used to determine the maximum Supplier Exposure. Bids from suppliers who do not provide the required financial information or who do not meet minimum net worth requirements will not be considered. For companies who have a credit rating established by credit rating agencies, the credit evaluator will utilize these ratings in conjunction with the provided financial information to determine the maximum Supplier Exposure. This maximum Supplier Exposure represents the total aggregate exposure from a supplier that will be accepted without additional collateral associated with the potential contract. This determination will be based upon pre-determined criteria that are uniformly applied considering the credit rating and the term of the proposed contract. For example, suppliers with AAA credit may be assigned a $100 million exposure limit, regardless of duration of contract. However, a supplier with non-investment grade credit may be assigned a maximum Supplier Exposure of $20 million for contracts of one year or less, $10 million for contracts of up to two years, and $5 million for three year contracts, and bids of longer duration would require additional collateral. If a supplier offers a bid that will require additional collateral, the supplier will be informed and asked to confirm his willingness to supply the collateral if the bid is selected. If a supplier indicates he is unwilling to offer additional collateral if selected, the bid will be eliminated from further consideration.
During the economic evaluation of bids, the supplier’s credit situation will only be considered as a factor in distinguishing between bids that have approximately the same economic value. Since a supplier could offer multiple bids that could in aggregate exceed the maximum Supplier Exposure established by the credit evaluator, in the development of supply portfolios the cumulative supplier exposure from all bids may be considered, and illuminated to decision makers to assess overall risk and to flag the need for additional collateral if the bids are selected.
In the selection of the overall supply portfolio, the company may establish limits for the aggregate amount of exposure that the Operating Companies have from supply contracts from suppliers with weak credit ratings (e.g. total exposure from all suppliers with non-investment grade credit ratings may be limited to an overall dollar limit.).
II.OTHER RESPONSES TO QUESTIONS SUBMITTED PRIOR TO, OR AT, THE LPSC TECHNICAL CONFERENCE
LPSC1-1Q. Should Entergy be required to provide the specific criteria to be used in the evaluation of proposals in advance of the bidding?
A. See response to I, above.
LPSC1-2Q. Please specify the role and expected scope of involvement of each entity in the Entergy RFP, negotiation, and awards process:
Entergy
Lexecon
PSC (Louisiana, Arkansas, Mississippi, Texas)
PSC Consultants (e.g. Stone Pigman; Exeter Associates; others)
A.
Entergy – Responsible for the overall process and thus involved in all activities except those assigned exclusively to LEXECON.
Lexecon – Monitors the process through unrestricted access to activities within the process. See RFP Sections 2.10, 3.0, 3.1, 3.2, and 3.4, Table G-1, Appendix B and Appendix F.
PSC (Louisiana, Arkansas, Mississippi, Texas) - Informal consultation will occur between the Operating Companies and their retail regulators and/or members of their Staffs with respect to the RFP process, including the negotiation and awards process. Subject to appropriate protections for confidential information, the Operating Companies’ retail regulators also will be provided with such information and documentation relating to the RFP process as is necessary to determine appropriate regulatory treatment for the transactions that are selected through the RFP process.