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The Management Committee received briefings from BPA, the Washington Public Power Supply System, the U.S. Army Corps of Engineers, and the Bureau of Reclamation. All committee members were present, except Joyce Cohen, who participated by telephone. ? BPA Overview. Sue Hickey of BPA said the purpose of the cost review is to "ensure that BPA's near and long-term power and transmission costs are as low as possible, consistent with sound business practices, leading to full cost recovery with power rates at or below market." Accomplishing this, she said, will give confidence to BPA customers, tribes, and other constituents that future Federal Columbia River Power System (FCRPS) costs are being effectively managed. It will ensure that the subscription process results in a very high level of customer load commitment to BPA; minimize or eliminate transition costs; and ensure that obligations to Treasury, third-party bondholders, and fish and wildlife recovery are at least as secure as they are currently, Hickey stated. XXXHickey reviewed BPA's business objectives and presented a "matrix of strategic choices," ranging from a larger, more aggressive role for the agency in power marketing and transmission to a more passive role, selling at the bus bar and being a transmission maintenance company. She said BPA has chosen "the middle path" for its power and transmission business lines, involving power sales that "complement the market" and "being the best transmission owner-operator it can be." Rosemary Mattick commented that forces for defederalization more likely would push BPA to become more competitive over the long term, not "just sort of competitive." Hickey said the choices are "a compromise" and that the right niche for BPA in the market is to fully embrace its public responsibilities. BPA's role is to deliver power to small and rural customers that might be left behind in the competitive market and to "leverage our role in the river" to enhance environmental quality, she said. XXXOn the transmission side, we have to be "ahead of the pack" in open, nondiscriminatory access and in reliability, Hickey stated. That's our niche -- social responsibility, environmental stewardship, and energy efficiency, and we have to succeed on the business side to deliver on these responsibilities, she said. XXXGiven your size and dominance, how can you be successful with a niche strategy? asked Chuck Collins. We think there will be a huge consolidation of companies nationwide, Hickey replied. We won't grow or go national, so we need to define what we are going to be and be excellent at what we do, stated Hickey. You are becoming much more than an electricity supply company with this approach, commented Curtis Bostick. We've always been more -- BPA always has been around to serve public purposes, responded Hickey. With deregulation, rates across the country as a whole may go down, while in this region they could go up, she said. By charging at cost, BPA still might be able to assure some benefits of deregulation in the Northwest, Hickey stated. We're here because your costs are an issue, said Bostick. The question is, who decides what other things, beyond the cost of power, are going to influence your costs? he said. XXXHickey described the objectives of BPA's cost management strategy. The first is "a high probability of recovering power costs in a 2-cent market when current power sales contracts expire (in 2001)." The panel asked questions about the residential exchange, the costs of WNP-2, meeting the standards of the Clean Water Act, and renewable resources. "As you get more customer-focused in your outlook, I suggest you canvas your customers that are the recipients of renewables to see if they are really willing to pay more", said Mattick. "The Electric Power Research Institute would be a more appropriate organization for this kind of activity," Mattick added. "The question is, should BPA or someone else be marketing these resources?" said Mike Kreidler. "We're dead convinced there's a green market," commented Steve Hickok of BPA. XXXWhy isn't hydro in the green power niche? asked Todd Maddock. There are "degrees of greenness," Hickok replied. "From the surveys we've seen, outside the Northwest, hydro is considered real green, but in the Northwest, it is less green due to anadromous fish issues," he added. "We need numbers on the "hydro outage issue," said Collins. "With the fish flush, you lose opportunities -- there's an availability issue that is not accounted for in this data," he stated. "We've lost 10 percent of the Federal Base System -- we need to understand the revenue implications of this issue," Collins said. ? BPA Power Business Line. Hickey said "2 cents in 2000" started out as an internal slogan, but BPA has defined it publicly as "a 100 percent load-factor product" delivered in the Northwest. The price of the product is now about 2.13 cents, which would mean cost reductions of about $125 million to get to 2 cents if everything else remained the same, she said. The bottom line, according to Hickey, is that we think we'll end up in 2000 with revenues going up and costs remaining flat. We're thinking 2 cents is about the right place, she added. XXXHickey discussed BPA's view of current market conditions, noting that on January 1, 1998, "the California experiment begins." What that will do to the market is unpredictable, she said. Hickey described three power markets: bilateral-complex, commodity, and real time/daily/spot. While BPA is active in all three, BPA's strategy is to try to move as many sales as possible to the bilateral-complex market, the market for customers who want to lock into low, stable, long-term rates, she said. XXXWith new information technology systems and a "hypercompetitive" market, we are being driven into the spot market to sell the power we cogenerate at our facilities, said Mattick. We are making deals with marketers to have them market the power for us, she said, andthat's where the market is going,. Keeping the benefits of the hydro system in the Northwest, putting no more risk on Treasury and stakeholders, and moving forward with a consensus package on issues like subscription -- that influences how aggressive we can be in one market versus another, said Jim Curtis. You should think about what information technology is doing for the business today -- the terrain is changing, said Mattick. There is more information in real time, and people are using these tools, she added. Maybe you don't have the luxury to say you will participate "in this market in this way," Mattick said. BPA is set up to market power, and "you ought to be uniquely excellent at that," she continued. XXXHickey explained Power Business Line revenue projections for 1998-2006, saying that the base (20 mills/kwh) assumes 100 percent BPA subscription for the entire period after current contracts expire in September 2001. A pessimistic case, also at 20 mills, assumes a lag in subscription sales for the period after the contracts expire, causing revenues to be significantly lower beginning in 2002, but eventually all the power is sold long-term, and revenues return to virtually the same level as in the base case by 2006. We are projecting revenues in 2002-2006 substantially higher than currentlevels, assuming that we will be converting short-term sales into long-term bilateral sales, she said. To me, it's inconceivable that subscription won't work, said Collins. The question is, who will own the system's output? For the first time, it's possible that people outside the region might own it, he said. You espouse the philosophy of "how good can we be," said Collins. But the question is, "how good does BPA have to be to survive?" Meeting the market credibility test means answering the question: "can you reduce your costs?" I don't want to forfeit the idea that you could be really good, but this cost review will only influence the first question, he continued. The data says that you're not safe at 2 cents until after 2005 -- "you've got a damn good future, but a tough adolescence," Collins said. I hear that we have to get our cost structure below 2 cents, responded Hickey. You're saying 2 cents isn't a target that will let us survive our adolescence, she stated. ? Transmission Business Line. Hickey described the Transmission Business Line's strategy and "key drivers," noting that it is a $500 million business and that BPA wheeling rates are among the lowest in the Western Systems Coordinating Council region. BPA has been the backbone of the reliable system in the Northwest, she said. The Transmission Business Line differs from the Power Business Line in that the assets are ours, and all the staff is ours, noted Hickey. Nevertheless, we know there are alternatives to our system so "we need to look sharp," she said. What are the impediments to increasing your transmission rates by 10 percent? asked Bostick. Customers complain about the costs of new facilities and who will pay -- we need to focus on O&M, not these rates, although we could raise them, said Hickey. There's "a huge disconnect" between your wheeling rates and costs, said Collins. Our costs to construct new transmission are more than what others can construct for, and our O&M costs are higher than what others are incurring, Hickey acknowledged. XXXBPA has been doing a lot of benchmarking and looking at unit costs, she noted. Our problem is with our indirect costs and overhead, and we are going to try to reduce both by 50 percent, Hickey stated. Our rates look great in terms of the network, but when you look at the network and the Intertie, we don't look as good, she said. We've found we have difficulty recovering costs on the Intertie, Hickey noted. How long would it take you to revise your rates to let you make more money on the Intertie? asked Cohen. The process takes a couple of months, but since the Transmission Business Line established five-year rates to sell to the Power Business Line, and sales have been made to customers on that basis, we can't change those rates, Hickey said. XXXWhile we have challenges and uncertainties to face, we are in good shape with the Transmission Business Line, she stated. It's not as high risk as the power business, Hickey stated. We have a marvelous heritage. We built the system, we are acknowledged experts worldwide, and I think we should be world-class as a transmission provider, she concluded. ? Key Strategies. Curtis reviewed BPA's strategic planning targets in the public responsibilities, high-performing organization, customer satisfaction, and financial areas. He said BPA will "renovate its financial strategy" in 1998 and that the targets would change as a result. Curtis discussed personnel costs and staffing strategy. What is the relief for your inability to reduce personnel? asked John Etchart. It's statutory, Curtis replied. XXXMattick asked for an explanation of "energy efficiency." Hickey explained the conservation priorities in the Northwest Power Act and noted that there has been a "huge role change" for BPA in this area due to deregulation. We have to honor the conservation contracts we have in place, she added. Could you buy the contracts back? asked Bostick. We've tried, but haven't been able to do it with all of them, Hickey replied. With shared services, you should look outside for competitive bids whenever you can, suggested Vititoe. Collins said customers want to see current expenses, not projections for 2001. I'm concerned about the scale and pace of the reductions that are occurring, Collins stated. ? WNP-2 Cost Trends and Targets. Vic Parrish of the Washington Public Power Supply System described how costs for WNP-2 have been reduced. The plant's regional cost of power has gone from 3.7 cents/kwh in FY 1993 to 2.12 cents in FY 1998. WNP-2 staffing decreased from 1,733 in FY 1993 to 1,130 in FY 1998. Net generation went up from 6,130 to 7,764 GWh over the same time period. We have made changes so the plant can be more flexible to meet BPA's power needs, he said. Parrish noted that while costs have decreased, reliability and safety have increased. The availability factor has gone up from 68.8 percent to 83.7 percent, with a national average of 78.1, he said. XXXParrish discussed cost-saving measures and compared WNP-2 costs to other nuclear plants in the country. Our goal is to be the lowest-cost plant, he said, describing plans for future cost reductions. Our strategic target for FY 2002 is a regional cost of power of 1.92 cents/kwh, Parrish said. Our obligation is to ensure safety and that the resource is run as economically as possible, and then it's up to the region to decide if it wants the plant, he stated. I think you need a thermal resource to be there in the middle of winter to generate electricity, Parrish added. When asked about increasing O & M costs after 2002, Parrish explained that the Supply System must begin buying more expensive fuel for operation during those years. Bostick inquired how the relationship between BPA and the Supply System came about. Collins replied, "there's more history there than you care to know." XXXYou're producing power that costs more than BPA's average cost now, plus, you have decommissioning costs -- so BPA is buying the right to get power in 2012 from a completely written off plant, said Bostick. "That's a long bet," he added. A Supply System staffer noted that WNP-2 is not a baseload plant and that its power can be generated when it has more value. We can operate when the hydro system can't, he said. Hickey noted WNP-2 has been getting national recognition as a high-performance plant. That's good, but it's still higher than BPA's cost, said Bostick. We look at it as an integral part of how we operate the whole system, responded Hickey. It's the only resource we have except hydro, she said, adding that maybe BPA should analyze it as a separate resource. Maybe you should consider retiring some of the older hydro plants and keep WNP-2 working in the way you need it, suggested Mattick. ? Corps of Engineers and Bureau of Reclamation Cost Management. Hickey explained the evolution of the BPA/Corps/Reclamation institutional relationship, starting with the Bonneville Project Act of 1937. She noted that BPA became self-financing as a result of the 1974 Transmission System Act, but that the Corps and Reclamation continue to get Congressional appropriations. Hickey pointed out that the Corps and Reclamation have an individual project focus, while BPA's public and business purposes are met through the operation of the coordinated system. The relationship among the three agencies worked fine until the competitive market came along and imposed constraints, she said. Increasing costs in a deregulated marketplace have given rise to the need for a new relationship, Hickey stated. BPA is concerned about managing its costs, including those associated with Corps and Reclamation projects, she said. The appropriations process is not responsive to market conditions since forces other than the marketplace, according to Hickey set priorities, and as a result, appropriations may fail to provide adequate resources for the system's generating assets. XXXIn 1992, Congress passed the Energy Policy Act, which authorized BPA and the Corps and Reclamation to jointly fund O&M and capital investments, Hickey said. BPA wants to invest in facilities to increase their output and is working with the Corps and Reclamation to develop this new institutional relationship, she said. XXXCorps Hydropower Cost Review. Colonel Eric Mogren of the Corps said BPA and the Corps are natural partners in the hydropower system and that a positive and constructive relationship has evolved over the years. He emphasized that the multiple-purpose nature of the system affects how it is operated, especially with respect to navigation, flood control, and hydropower production. The Corps, Mogren said, operates 21 projects in the region, with nearly 13,000 MW capacity. Steve Brockshink of the Corps discussed the availability factor for units at Corps projects, noting that availability has been lower for larger units (30 MW and over) and that the worst performers are the units with fish passage systems. Collins said he would like to see pre-1991 data on unit availability. XXXBrockshink presented charts on forced outages, which show that the percentage of such outages for Corps units is higher than the industry norm of 2.85 percent. He said smaller units have fewer forced outages and that units on the Columbia/Snake river system have a higher rate than the overall system. The Corps is "just floating above" the industry norm of 6.46 percent for scheduled outages, Brockshink said. Brockshink presented O&M and production cost figures for Corps projects. Cohen asked that comparative data for hydro projects elsewhere in the country be provided to the committee. Brockshink described initiatives the Corps has undertaken in the last 10 years to improve effectiveness and efficiency. He said a contractor had inventoried the hydropower maintenance backlog and told the Corps that by 2006, there could be over a billion dollars in deferred maintenance. A Corps staffer noted that maintenance and operation are both tied to the funding stream from Congress. Does that explain your performance versus the industry standard? asked Etchart. Clearly, that's a contributing factor, said Mogren. XXXEtchart asked what the effect would be on revenues if the projects were at the industry norm for availability. Roy Fox of BPA replied that BPA might be able to collect $50 million more in annual revenues if there were a 90 percent availability factor. That's a rough number, he acknowledged, but he added that if the system can be operated to match load better, it would bring in more revenue. It sounds like it would be worth investing $10-15 million a year to get that, commented Bostick. Fox said BPA has done a project-by-project analysis to see what effect there would be on revenues if a unit's availability were raised and what it would cost to do it. XXXBrockshink discussed the Corps' capital investments. Mattick asked whether BPA's strategy to hold O&M costs flat was realistic, in light of the declining availability and the billion-dollar backlog of maintenance. It's not realistic due to the aging power system and the fact that fish facilities are being steadily added, replied Mogren. The screens at the projects are very labor intensive, he noted. You have to look at the interplay between the capital investment strategy and the O&M cost strategy, Fox said. It's reasonable to assume O&M costs stay level if you've made the necessary capital investments, he added. Curtis promised more information on this at the next meeting. XXXCollins noted that 66 percent of budget costs are personnel. Unless these employees can fix these units, I'm not sure what we're buying, he said, adding, we've got to make sure we are buying what we need. Mogren said more budget information would be provided. XXXBureau of Reclamation Report. Ken Pedde of Reclamation described operations at Grand Coulee and Hungry Horse dams and said that availability factor above is not a good measure. You have to factor in how the system operates in talking about availability, he noted. Pedde said that 90 percent of the power Reclamation produces goes to BPA. He presented charts on FY 1997 discharge at Grand Coulee, noting "we don't control the river -- it provides fuel when it wants to." In the last five years, we've never spilled because units were not available to generate, Pedde said. XXXReclamation is looking at a "new philosophy" with BPA in which scheduling would relate to available megawatts rather than units, Pedde explained. Each month, BPA would expect to get so many megawatts from us, he said. This approach makes more sense to us -- we think it's a more businesslike concept, Pedde said. The real issue from a private industry standpoint, said Mattick, is, what is the total lowest delivered cost? We have so much infrastructure here, she continued. It seems we have way too much capacity and a marketing program that is a little bit disconnected from capacity, Mattick stated. Maybe some units should be laid up indefinitely, she suggested. Sometimes we have every machine running, noted Steve Clark of Reclamation. XXXPedde reviewed availability, forced outage, and cost charts for Grand Coulee. Collins questioned the earlier statement about "never spilling." Clark noted that the forced outage rate at Grand Coulee is less than the industry average. XXXPedde said as a result of the Endangered Species Act, Reclamation "has shifted production" from the high-dollar months of winter to spring and summer when a lot of energy is generated, but at a low price. He indicated base program costs from FY 1992 through 1996 had gone down. What about costs after 1996? asked Collins. We may have hit a plateau and be going to see some increases, was the reply. You've reduced employment at Grand Coulee and Hungry Horse by a one-third in five years? asked Collins. Yes, Pedde replied. I hear from BPA they can't do that, said Bostick. A Reclamation staffer representing the local trades council described a "painful" process of negotiations with employees and unions. XXXFox explained BPA's generation investment strategy, in which the agency is defining levels of investment, primarily capital, needed to achieve certain availability and efficiency performance targets for hydropower projects. He noted that the average age of a unit in the hydropower system is 35 years, about the time when major component replacements are needed. Fox said BPA, the Corps, and Reclamation are participating in a hydro industry benchmarking group which is standardizing data and providing information on how other hydro project owners in the country are performing. After the Energy Policy Act of 1992 passed, BPA started thinking how to make investments in its asset base, he said. Fox explained that $150 million in reliability improvements are being funded directly by BPA, with most of the money going to systems in the Grand Coulee main powerhouse and to Corps projects identified after the August 1996 West Coast outage. One hundred million dollars in direct-funded additions and efficiency improvements have been completed or are under way, returning over $15 million a year, he said. In FY 1997, BPA and Reclamation entered into a direct funding agreement for Reclamation projects in the Northwest, Fox noted. We can talk with Reclamation about performance objectives that make sense to us in a market setting, and it's the first time that payments are being tied to performance, he said. XXXBPA and the Corps have prioritized maintenance requests and investment opportunities in Corps projects, and a direct funding agreement to implement those items is to be proposed, Fox stated. We are working with the Corps to get an O&M agreement in place and to talk about the performance we need to get from projects, he said. XXXDirect funding has put us on a more businesslike basis -- the money is available when we need it, noted Clark. Why has Reclamation moved further and faster on this than the Corps? asked Bob Lane. The Corps has national appropriations issues, while BPA and Reclamation are more regional and "their footprints match up," replied Mogren. The mood is shifting to cautious support of direct funding, he added. We have meetings scheduled to discuss the issues and develop some principles, and if there is support, we may go faster with it, Mogren said. ? Next Meeting. Maddock appointed a subcommittee of Vititoe, Collins, and Curtis to develop the agenda for the next meeting, scheduled for November 17. We are getting to the point where it's time to talk about what we should do with all the information we've received, Maddock said, adjourning the meeting. Members of the BPA Cost Review Management Committee, created by the Northwest Power Planning Council and the Bonneville Power Administration, are: Todd Maddock, chair; Curtis Bostick, Joyce Cohen, Chuck Collins, Jim Curtis, John Etchart, Sue Hickey, Mike Kreidler, Robert Lane, Rosemary Mattick, and William Vititoe. |
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