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The management committee spent its first meeting getting acquainted with BPA's business objectives and cost structure, as well as discussing the scope and work plan for the review. All committee members were present except Robert Lane; the audience was about 15. ? Preliminaries. Committee chair Todd Maddock of the Northwest Power Planning Council (NWPPC) outlined the challenges BPA faces as restructuring and competition transform the electric utility industry. The Federal Columbia River Power System (FCRPS) has been "the economic engine" of the Northwest, and it is a resource the region's governors want to preserve, he stated. The year-long Comprehensive Energy Review came up with a number of recommendations, and the Transition Board is seeing that they are implemented, Maddock said. What has emerged during the transition process is that customers need to be assured that BPA's costs can be controlled and that the agency can meet the market in the future, he said. ? BPA Cost Management Background. Sue Hickey of BPA provided an extensive briefing on the agency's "strategic direction and cost management challenges." She listed several objectives BPA has for the review, including: develop agreed-upon financial parameters and principles; tighten cooperation with power suppliers, including the Corps of Engineers and the Bureau of Reclamation; and maintain clear administrative flexibility to implement the recommendations. BPA is grateful for the cost review opportunity, Hickey indicated. "We weren't dragged here--we want your advice," she added. BPA's purpose is "to meet public responsibilities through commercially successful businesses," Hickey said. To achieve this, the agency has identified seven strategic business objectives. The first is to "transform BPA into a high-performance organization," she stated. If we meet this objective, the others -- satisfy customers, increase value/share benefits, be the lowest-cost producer, achieve financial integrity, keep the power system safe and reliable, and invest in environmental results -- will fall into place, Hickey added. Hickey explained "the gap" between BPA's projected revenues and operating costs. Projections show a gap of over $200 million in the years 1998 to 2002. We've taken steps to keep costs "flat" and implemented cuts that reduce average expenses for the fiscal year (FY) 1997-2001 period by $610 million from planned levels and made capital cuts of $290 million, she said. But these will not be adequate to close the gap, Hickey stated. She described where BPA has already made cuts. "The bottom line is, we've stopped the cost increases, now how do we make the costs go down?" she stated. As a result of a "re-engineering" that began in 1994, BPA split its organization into three business lines, Hickey continued. BPA has since reduced its work force from 3,750 to under 2,900, she said. The agency pared its 1,900 contract employees to 500, and plans to be at 250 in FY 1999, Hickey said. She indicated that BPA is having to become "very strategic" about staffing because reductions have left holes in some skill areas. Hickey also pointed out that BPA is facing "a steep retirement curve," with many of its employees eligible for retirement within five years. Committee members asked how the reductions have been achieved, and Hickey explained that all have been voluntary, primarily as early retirements. The agency can offer up to $25,000 as a voluntary separation incentive, she said. There were several questions about how BPA uses contract employees and about staffing levels in various functions. Show Me The Money Hickey walked the committee through a bar chart of FCRPS expenses and revenues for FY 1993 through 2001. Of the $2.3 billion in expenses, she pointed out that about $700 million "are budgets we manage." Hickey also displayed BPA's third quarter revenues, which show the agency ahead of projections. The "good news" is we're meeting the projections, she said. The figures are, however, disappointing for several reasons, including a "record water year" on the federal system, which did not increase revenues as much as the agency would have anticipated, Hickey acknowledged. Committee members asked numerous questions about a list of "upward pressures" on BPA's expenses. The list includes additional fish recovery funding, arbitration related to a canceled plant (Tenaska), higher contributions to the federal retirement fund, investments in aging hydro and transmission facilities, wheeling costs associated with an independent grid operator, and upgrades to business systems. This is an area where "we think we're very weak," Hickey said of the agency's capability to process additional billing and scheduling transactions in a competitive marketplace. Joyce Cohen of the NWPPC suggested that "serious benchmarking is needed" to compare the region's federal hydro operating costs with those of other utilities. We need to evaluate at what point you shut down an aging plant, she said. Rosemary Mattick of Weyerhaeuser Co. said she wanted to know more about the Corps of Engineers and Bureau of Reclamation costs associated with the hydro system. Bill Vititoe, former CEO of Washington Energy Co., observed that the amount BPA is spending on its information systems, up to $70 million annually, is "awfully high." Hickey said BPA is developing a five-year plan, with performance and revenue targets for its business lines. The targets are specified at the corporate level, and it is up to the business lines to meet them, she said. When BPA reorganized into business lines, it was "a breakthrough" in being able to assign accountability for meeting targets, Hickey added. One of BPA's strategic business objectives is to be "the lowest-cost producer of power and transmission services," and Hickey laid out how the agency is planning to get there. The power business line is aiming for 2 cents per kilowatt-hour in the year 2000 and has identified several limitations or challenges to achieving that goal. These include the year-to-year risk that water conditions pose for a hydro system, high fixed costs, fish and wildlife costs, and the fact that a high proportion of BPA's costs are managed by other entities, she pointed out. BPA conducted a benchmarking study for its transmission operations, Hickey said. The study showed that the agency's transmission rates are low, but hourly labor rates are high when overhead is included. Overhead is 50 percent higher than other operators, she stated. High fixed and overhead costs are challenges for the transmission bunesiness line, Hickey said. The energy efficiency line needs to break even in 1999 and is seeking to radically reduce staff, Hickey stated. It faces limited start-up capital, marketing uncertainties, and fewer staff to accomplish its goals, she explained. BPA is undertaking a "shared service review," headed by Jim Curtis, to optimize the efficiency of internal services across business lines, and is also working on a staffing strategy that focuses on skills needed, Hickey said. To meet the goal of 2 cents in 2000, we've got to find about one-quarter of a billion dollars a year, Chuck Collins of Colsper West Corp. said. "The candidates narrow down very fast," he observed. ? What We're Up To Here. NWPPC staffer Dick Watson presented the proposed objective, scope, and work plan for the cost review. The objective is to help BPA get to "power and transmission rates that are as low as possible, consistent with sound business practice, leading to full cost recovery with rates at or below market," he said. The scope of the review covers O&M and capital investment costs of the FCRPS for FY 1998 through 2006; and a review of major activities, business lines, and corporate costs, such as overhead. "Do the Corps and the Bureau buy off on our looking at their expenses?" Mattick asked, indicating that examining those budgets is "very critical." Watson said staff needs to find a way to bring the agencies in to collaborate in the review. Watson went on to explain what is considered "outside the review," which elicited a number of comments from the committee. Curtis Bostick, who serves on two electric co-op boards in Florida, said that it may be worthwhile to discuss BPA's marketing strategies and opportunities for increasing revenues. I respect BPA's need for confidentiality in competitive matters, but we have to go into these things, Vititoe concurred. The sale or lease of transmission facilities was also listed as outside the draft scope. Bostick suggested that in a cost review, you try to isolate things that lose money and figure out what to do about it. FERC is putting transmission on "a cost basis," he observed, and perhaps BPA would want to consider selling off transmission and using the revenues to pay down debt. Transmission is an attractive asset, Vititoe agreed. That may be the most cost-effective thing we can recommend, he added. Hickey pointed out that the Comprehensive Review concluded that BPA should "be both power and transmission." The question remains, however, if we separate the two, do we need another separate infrastructure, she said. Staff laid out a work plan that would build on BPA's current planning and budget process and have the committee examine cost baselines and recommend changes. The timeline for the review extends to early January, at which time the committee is to make recommendations to the BPA Administrator. John Etchart of the NWPPC asked what is compelling BPA to purchase a 6 cent-per- kilowatt-hour wind project given its financial circumstances. Hickey responded that the Northwest Power Act gives BPA a responsibility for renewables. Subsidizing the wind project will "jump-start" the agency's green power market, she said. "what's more green than hydro? Wouldn't it be better to run the most efficient hydro system? Mattick asked. "Everyone is aware that utilities, not just government, have been regulated and have gotten fat--there's room for streamlining," Bostick said. Over the years, you've been selling at cost, and everyone saw room to add things in, he observed. You now have the costs and not the control, Bostick added. Or maybe you weren't selling at cost, Vititoe commented. You were overcapitalizing and pushing expenses into the future, he said. Collins pointed to Corps and Bureau expense charts. Costs went up while the availability of hydro resources went down, and there is a high cost component for personnel, he added. You may have a relationship issue here, Collins observed. ? Bring Us The Data. Committee members outlined the information they need for the review. Vititoe asked for several pieces of cost data, including detail on information services costs. He also inquired whether the agency is addressing "the millennium problem" in its computer systems and asked for information on that. Cohen said the committee needs data on how many people are carrying out "the core business," and Vititoe agreed, asking for numbers of employees and contractors separated by business units and functions. We also need information about your competitors to put things in context, Mattick said. If you don't understand "where your line and your competitors? lines cross," you don't know what you?re aiming at, she explained. what's missing is an overall business proposal, Mattick observed. "Once you?re crisp on that, it drives everything else," she said. Absent a clear framework, you get lost in the detail, Mattick added. For example, if you don't have a clear vision of what you want your information services to do, "it will eat your lunch," she said. Next time tell us why you think the market will be so low, Bostick requested. From a national point of view, that's a very low number, he commented. The public meeting adjourned, and the committee continued to meet in executive session. To Summary of Initial Comments 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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