1. Fuel Cost Components in the Fuel Adder
RCWG Meeting
July 26, 2016

2. Fuel Cost Components in the Fuel Adder
Section 3 of the VCM under Additional Rules for Submitting Fuel Costs
2. Any Filing Entity that submits an actual fuel adder must provide documentation that establishes the historical costs for fuel, including transportation, spot fuel, and any additional verifiable cost associated with fuel contracts that can be easily differentiated from the standard commodity cost of fuel and clearly attributable to the Resource for the period. The fuel adder for a rolling 12-month period is the difference between the Filing Entity’s average fuel price paid (including all fees) during the period and the fuel price utilized by ERCOT for the corresponding Resource. The Filing Entity shall provide rolling 12-month supporting data to verify total fuel price for all purchased volumes to support the actual Resource fuel consumption. Data to support these costs should include, but are not limited to, accounting ledger entries, invoices, and copies of fuel contracts. In addition, the actual costs used to calculate the fuel adder may include, but are not limited to, the following categories: transportation, deliveries, storage, injection, withdrawal, imbalance, and minimum requirements fees. Other costs not described herein may be included and approved by ERCOT.

3. Fuel Cost Components in the Fuel Adder Natural Gas Cost Components
Cost Type
Currently Allowable per VCM?
Natural gas commodity cost (Spot Gas)
Variable
Yes
Pipeline fuel losses
Pipeline commodity charges
Pipeline capacity reservation demand charges
Fixed ?
Pipeline balancing costs
Pipeline minimum requirement charges
Pipeline balancing penalties
Storage injection and withdrawal fuel losses
Storage injection and withdrawal commodity charges
Storage capacity reservation demand charges
Meter Charges
Hedging gains/losses

4. Natural Gas Cost Components in the Fuel Adder Definitions - Page 1 of 4
Natural gas commodity cost (or Spot Gas?)
The cost of gas per unit of volume or heat content (i.e. MCF or MMBtu) at the point of entry to the gas transmission pipeline (i.e. FOB [free on board] the gas transmission pipeline). The commodity cost does not include transmission pipeline charges, or any other charges relating to the movement of the fuel to the point of use. [i.e. The natural gas commodity cost as reported on EIA Form 923.]
Pipeline fuel retention (or fuel losses)
A quantity of gas retained by a transporter to cover gas usage or losses in the gas transmission system, such as gas consumed in compressor stations, and lost and unaccounted-for gas. Typically the pipeline will retain a percentage of the gas tendered for transportation for these operational purposes.
Pipeline commodity charges
A usage charge per unit of volume or heat content (i.e. MCF or MMBtu) to cover the variable cost of providing transportation services over a pipeline system.
Pipeline capacity reservation or demand charges
A charge for a unit of capacity reserved on a pipeline to cover the fixed costs of providing transportation services over the pipeline system. Section 284.8(d) of FERC regulations (applicable to FERC jurisdictional pipelines) state that the capacity reservation fee may not recover any variable costs. The capacity reservation charge is billed to the customer whether they use the service or not. Contract Demand refers to a firm shipper's contractual entitlement to service on any day. Contract Demand levels are expressed in MMBtu per day. For example, a firm shipper with a contractual entitlement of 50,000 MMBtu would be able to have up to 50,000 MMBtu of gas transported on any day of the year. A firm shipper pays a capacity reservation charge based on this contractual entitlement to "reserve" capacity to guarantee this level of service on any day.

5. Natural Gas Cost Components in the Fuel Adder Definitions – Page 2 of 4
Pipeline minimum requirement charges
Provisions in a contract requiring customers to purchase or transport minimum annual volumes of gas or pay a charge for any volumes which fall below the minimum volume level. Contracts with minimum volume requirement provisions protect the pipeline against the risk of not recovering its fixed costs.
Pipeline balancing costs
A daily or monthly charge for volume balancing services. Balancing charges are assessed on the difference between gas volumes tendered and gas volumes received by the shipper on a transmission pipeline on an hourly, daily and/or monthly basis.
Pipeline penalties (balancing or over-run)
Penalties charged by a pipeline to provide an incentive for shippers to stay within contractual limits, such as maintaining actual gas receipts and deliveries at nominated and confirmed levels. Balancing penalties may be assessed on an hourly, daily or monthly basis based on the difference between volumes tendered and volumes received by the shipper on a transmission pipeline. Balancing penalties are intended to prevent a shipper from unauthorized use of storage and line pack with excess deliveries of transportation gas, or from depleting storage and line pack by taking more gas off the pipeline system than it delivers, both of which disrupt other sales and transportation services to others.

6. Fuel Cost Components in the Fuel Adder Definitions – Page 3 of 4
Natural Gas Cost Components
Definition
Storage injection and withdrawal fuel retention
A quantity of gas retained by the storage operator to cover gas usage or losses in the gas storage facility, such as gas consumed in compressor stations, and lost and unaccounted-for gas. Typically the storage operator will retain a percentage of the gas injected or withdrawn for these operational purposes.
Storage injection and withdrawal commodity charges
A usage charge per unit of volume or heat content (i.e. MCF or MMBtu) to cover the variable costs of injections and withdrawals of gas to/from storage
Storage capacity reservation demand charges
A charge for a unit of capacity reserved in a storage facility for storage of customer-owned gas. The capacity reservation charge covers the fixed costs of the storage facility and excludes variable costs. The capacity reservation charge is billed to the customer whether they use the service or not.
Meter Charges
A fixed monthly charge to cover the cost of providing metering services
Hedging gains/losses
Gains or losses on financial or physical instruments used to lock in profits, reduce volatility or reduce the risk of loss
3rd Party Margin (?)
Margins from 3rd party transactions that were realized under fuels contracts included in the fuel adder will be included as a credited to the fuel adder (?)

7. Fuel Cost Components in the Fuel Adder Related Definitions – Page 4 of 4
Related Terms
Definition
Fixed Costs
Costs that will be incurred regardless of usage or the volume of throughput and are predominately associated with capital investment in the pipeline system or storage facility. Fixed costs include investment related costs such as depreciation, return and taxes, as well as certain O&M expenses, including labor, A&G expenses and as-billed third party reservation costs
Variable Costs
Costs which vary with usage or throughput, and exclude fixed costs
Spot Gas
(from Section 7 of VCM)
Spot natural gas includes the following gas purchases only:
Natural gas purchased during normal daily gas trading for next-day flow up to and including the next trading day (“day-ahead” gas). Day-ahead gas transactions are typically included in the determination of daily gas price indices, such as Platt’s Gas Daily indices.
Natural gas purchased after normal daily trading for flow on the current gas day up to and including the next gas trading day (“intra-day” or “same-day” gas).
Natural gas purchased under contracts for longer periods where the price for daily gas deliveries are based on a daily gas price index (or daily  gas price indices) effective for gas flows on such day.

8. Fuel Cost Components in the Fuel Adder
Prior RCWG discussion points:
Should the fuel adder include only “incremental” and “variable” costs, to be consistent with the other components of verifiable cost and market power mitigation?
Does the existing VCM language allow inclusion of fixed cost components?
Should Resources be able to recover their costs for providing the fuel supply, transportation and related services required to make the Resource available to the market?
Does including fixed-cost components result in the market bearing the risk and/or cost for Resource fuel contracts?
Should margins from any 3rd party volumes be included in the fuel adder?
Should market participants have visibility to the range of approved actual fuel adders?

9. Fuel Cost Components in the Fuel Adder
Guidance from Nodal Protocols
5.6.1 (3) These unit-specific verifiable costs may include and are limited to the following average incremental costs:…
5.6.1 (5) These unit-specific verifiable costs may not include: (a) Fixed costs, which are any cost that is incurred regardless of whether the unit is deployed or not; and (b) Costs for which the QSE or Resource Entity cannot provide sufficient documentation for ERCOT to verify the costs.