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The Management Committee discussed a variety of cost management options for BPA and asked the agency to provide additional information. All committee members were present. Legislative Update. Steve Crow of the Northwest Power Planning Council told the committee that Senator Dale Bumpers of Arkansas has joined Senator Slade Gorton of Washington on a restructuring bill that calls for retail competition by January 1, 2002. there's a "Northwest chapter" in the bill, he said, which focuses on BPA and issues such as stranded costs. On the House side, according to Crow, there's a proposal by Rep. Peter DeFazio of Oregon, joined by Rep. Bob Smith of Oregon, which deals with the same topics as the Senate bill. The House bill includes a section on cost control, he noted, which requires the BPA Administrator to report to Congress annually on estimates of the market for firm power sales in the Northwest and to provide options to meet or beat that market level. John Etchart said he heard at a conference last week that the first legislation likely to move in Congress would deal with regional reliability councils. Some people are challenging the idea that these entities are being asked to take on regulatory responsibilities, and Congress will have to sort the matter out, he said. BPA's Cost Management Options. Jim Curtis of BPA reviewed "cost management objectives and potential changes to cost baselines." He said the objective 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. Curtis reported that FY 1997 financial results were better than BPA expected. Our revenues were not that much above estimates, but our expenses were significantly below estimates, he stated. Financial reserves are at $430 million, instead of the $360 million assumed in the rate case, so we're ahead, Curtis said. The question facing the agency is, what level of post-2001 revenues and expenses should BPA plan on? he stated. Surviving in the competitive market has provided a discipline for BPA -- our activities are driven now by what we think we can earn in a way they never were before, observed Steve Hickok of BPA. Hickok reviewed power business line (PBL) revenues, indicating that 90 percent of BPA's long-term revenues terminate when most power sales contracts expire in 2001. Joyce Cohen suggested BPA should look at outsourcing its power sales force. Rosemary Mattick noted the need to "go back to the 35,000-foot level" and ask "what business is BPA really in?" Then you should go through the functions and see if all of them add value to that business and whether you have the staff you need to "do your core competency," she said. Noting that BPA operates in different markets, Hickok said if BPA wants to sell as much as it can into the highest value market, the questions are, when will the market develop for post-2001 deliveries, and does BPA need to be selling now? The answer to the latter, he said, is yes, noting that "in an arrangement with the Transition Board," BPA has sold "a couple of hundred megawatts" into the post-2001 market. In 1998 and 1999, most of the people who want to buy post-2001 power for a multiyear period "will have made their move," and what will be left are the spot and commodity markets, Hickok predicted. The question, he continued, is how much will utilities buy post-2001? Some utilities say that they don't know the retail access rules yet, and they don't know who their customers will be, Hickok said. The way "would-be aggregators" are positioning themselves could mean that traditional BPA customers could lose many of their traditional customers, he stated. Price is important, but that's not the only thing in this region, Hickok pointed out. BPA represents a number of things besides low cost -- we're trying to convince aggregators that having BPA in their power supply is important to their end-users, he said. It has to do with BPA's "relative greenness," its "Northwestness," and its tie to the Columbia River, Hickok stated. How much of your efforts are going to traditional customers and how much to other types of aggregators and marketers? asked Cohen. The Comprehensive Review asked if the Federal power system should be marketed at cost, rather than market, and if so, under what conditions, Hickok replied. Subscription is "a fancy way" to sell an option to have a cost-based relation with BPA over time, he continued. All marketers want to know BPA's costs to see if they will be attractive in the long term, and different aggregators may want a large or small amount of subscription product in their portfolios, said Hickok. Most of our public customers don't know what role they will have yet, he added. Attracting the Risk-Averse. I think the BPA system will subscribe, said Chuck Collins. The "more interesting question is, to whom will it subscribe?" he said. If not to the publics, it will subscribe to someone else, Collins predicted. If I were Southern California Edison, and I had a chance to have 5-10 percent of my portfolio in Columbia River hydro, I'd take it, he stated. The "outsiders" are good at understanding risk, while public agencies are "scared to death of risk," Collins continued. If we are going to preserve the benefits in the Northwest, we have to have a cost story that is so compelling these risk-averse agencies will subscribe, he said. The Regional Act doesn't express a concept of BPA that has broad support in the region, Collins stated. It mandates BPA to do things many people don't want it to do anymore, he added. Most entities don't want 20-year contracts anymore -- they want five to seven-year contracts, commented Curtis Bostick. "Would you subscribe for 20 years at 16 mills?" Collins asked Bostick. Yes, he replied. "Sold," said Collins. Curtis discussed BPA's power cost baseline under various revenue scenarios and compared BPA's risk management tools with those of a "generic investor-owned utility." Mike Kreidler asked about contracting out the power sales function. BPA and its federal partners know how to get high value out of the system over time, and contracting out to a more aggressive entity raises questions about such things as water releases for fish, Curtis replied. In the Comprehensive Review, Brett Wilcox advanced the notion that fish and wildlife interests have the biggest stake in the operation of the system for secondary energy, said Collins. Wilcox suggested that they should take on the risks and make decisions at the margin -- "they can have the water or the cash," he stated. That was too radical an idea, Collins added. Etchart noted he has heard it still being discussed. In light of the facts we've presented, Curtis asked, are we on the right track emphasizing long-term sales? I think so, if we want to keep the benefits in the Northwest, Bill Vititoe replied. Curtis said BPA's analysis indicates that if the agency constrained its 2002-2006 expenses to FY 1997 levels, BPA could meet an 18-mill market. The "largest and least controllable" of BPA's power expenses is non-federal debt service, he said. One question we need to look at, said Collins, is "how big is the federal base?" The "most interesting question there is, what's the status of WNP-2?" he continued. We need to ask, Collins said, is it worth 19-20 mills to keep the federal base bigger? Should we keep WNP-2 going? he inquired. Curtis reviewed cost reduction options for the PBL. Committee members asked how purchased power costs compare to personnel costs. If you increase the system's efficiency, you wouldn't need as much purchased power and could get a far better return, suggested Vititoe. You could change your relationship with customers, said Bostick. You could sell what you have and let the customers do the balancing and play the margins, he stated. Building Windmills? Over the past decade, BPA has invested in revenue-producing assets, said Mattick. When you look at the return on the capital invested, how is it working out? she asked. You need a line item on how you are employing capital -- maybe you should not use capital to buy resources, Mattick suggested. It gets back to the question of "what business you?re in," she continued. Are you building windmills, are you in the nuclear business, or are you a marketer of a given set of resources? it's a whole different way of looking at capital investments, Mattick said. Don't you have a windmill generator about to come on line -- why are you in that business? Mattick inquired. We made some promises to constituents and customers interested in these resources, responded Curtis. In renewables, we made a commitment that through 2001, we would be willing to lose $15 million a year on renewables, he added. I don't know how you can plan to lose $15 million a year, said Mattick. It is within the bounds of the Comprehensive Review for us to say that the conservation/renewables phase out is too slow, stated Collins. So it's fair game to revisit that? asked Mattick. We could say zero out the renewable contracts by 2003 or 2005, responded Collins. there's great political support for some of these programs, noted Todd Maddock. If we zero them out, we're violating the consensus we got in the Comprehensive Review, he added. What about an earlier phase down? asked Collins. We could consider that, but we need to be sensitive to what the Comprehensive Review told us, Maddock replied.
Curtis explained a series of "administrative efficiencies," such as procurement changes, that could save from $10 million to $20 million annually. He noted that several "shared services redesign" studies are under way or planned to identify savings in such areas as financial planning, information management, and human resources. Curtis noted that BPA is looking into the use of Enterprise Resource Planning (ERP) software. You need to define your enterprise, otherwise ERP will just make old systems go faster, said Mattick. Cohen told the committee she sent a letter to CH2M Hill asking if BPA's $8 million fish and wildlife contracting duties were put out for bid, whether they would be interested in competing for such a contract. She said their response was positive and that they would like to talk further about the idea. Cohen suggested this is an example of the possibilities for outsourcing BPA activities that could be investigated.
If we were to recommend that BPA reduce PBL and TBL personnel costs by 20 percent, I'd like you to tell us what risks you would face as a result -- what won't get done, said Vititoe. I'd like a list of what you think are not your core activities, such as fish and wildlife contracting, that could be out-sourced, said Cohen. We need to have the three different markets BPA could respond to arrayed with what BPA would look like at different market levels, maybe 20 mills, 18 mills, and 16 mills, said Maddock. We need to see what 16 mills might imply, he added. Collins asked whether BPA's analysis is "capturing WNP-2 as a 19-mill resource." We need to know the overhead of the PBL and TBL and get more into the details, he added. If you describe a 16-mill scenario, that will tease out all of these things, said Collins. I'm not saying we would do 16 mills, but we want to see the analysis, he stated. Hickok summarized BPA's federal hydropower investment strategy, pointing out that the idea is to institute a business-type approach to Federal Columbia River Power System (FCRPS) investments. Given BPA's marketing strategy, and the value of amounts and shapes of energy and capacity as these contribute to product inventory that supports this strategy, you approach the system investment question unit-by-unit. You ask how investment in each generating unit will contribute to inventory and therefore to revenue production in this marketing strategy. You line up the investment opportunities by revenue return and then create project-by-project (powerhouse-by-powerhouse) multi-year development plans. that's the right way to look at it, commented Vititoe. I'd like to see the excess dollars available for redeployment between now and 2001, he added. How can they be re-deployed to specific, revenue-producing, efficiency-enhancing projects on the system, and what would you get -- could you, for example, improve availability up to 92 percent? asked Vititoe. I'm struggling with "all these extraneous things BPA does that are far away from what you were set up to do," said Mattick. What is your "ultimate strategy" -- is it to repay investments faster or is to keep benefits in the Northwest in a deregulated environment? she asked. The latter, said Hickok. The idea is, can you keep the federal system here delivering for the people for whom arguably it was built, he added. What will you do with the recommendations we make? Mattick asked. The recommendations will go to the BPA Administrator, replied Etchart. Congress is looking to see what this group will produce, said staffer Dick Watson. The Northwest Power Planning Council feels the obligation to ensure that the Administrator accepts the recommendations, noted Maddock. If this group made some firm, explicit requests with regard to investments, perhaps you could bind in the other federal project operators through Congressional review of their budgets, suggested Cohen. Six Bullets from Collins. You should come back with a proposal with six components, according to Collins: 1) Recommendations for dealing with overhead and staffing. 2) A 16-mill scenario. BPA is a river generation manager; BPA is not the solver of the power supply problems of the Northwest, he said. 3) A structure or proposed relationship with the Corps of Engineers and Bureau of Reclamation that "incentivizes" them, so that they "have to behave like you behave," Collins stated. 4) "Getting to ground" on WNP-2. You are no longer the protector of the region's energy supply, he said. Don't pay a premium for WNP-2 if no one else wants to buy it, Collins added. 5) Recommendations about BPA's "ancillary programs." You need to look at them and make a political judgment on how quickly and how far down they can be pared, he said. 6) Timing. You are protected for the next few years, but you can't wait for things to happen, Collins advised. You should accelerate because you need the savings to make investments in the short term, he added. You also need to focus on opportunities involving financial considerations, such as debt management, said Maddock. It is important for BPA to provide an action plan for implementation for these decisions, recommended Kreidler. Your management needs to do these things, not outside consultants, said Bob Lane. You have to define your areas of activity, starting with a more strategic focus, and then break that down into tactics, he advised. Define the businesses you want to be in and out of, Lane said. Look at opportunities to reduce expenses that don't contribute to the bottom line, he continued. Everything you do needs to be looked at, Lane said. You should consider outsourcing activities, but with an eye to whether outsourcing can save you money, he stated. This isn't going to get done by January -- it's an "immense operation," Lane said. BPA has statutory requirements that private enterprise doesn't have, noted Maddock. At 16 mills, you can't do all the things you are mandated to do, and legislative changes may need to be recommended, he stated. Bostick said he liked the six items Collins listed. My three items were, he said: 1) Find all the efficiencies in running BPA that you can. 2) Make a judgment on WNP-2. BPA has got the numbers, but may not have the courage to make the decision, he stated. 3) Rate the ancillary programs "on a sensitivity basis." The 16-mill scenario is good because it will force you to look at these programs, Bostick said. Tell us the risks and costs of different scenarios, urged Vititoe. And don't give us the "we'll have to cut the nurses and the police" approach, he added. Be as hard as you can get, exhorted Lane. "Quantitative savings is the nut -- that's what you have to get to," he said. You need to do innovative things and you need to "syndicate the pain," stated Mattick. Call your human resources and information technology people together and tell them "we are going to get ready for 2001 and ask, what can you do?" she said. "Never outsource anything that is broken," Mattick advised. If you can't fix it, they won't be able to either, and it will cost you a lot of money, she stated. You need to get this done in the next three years, and if you try to bring in the Corps and Reclamation, you may not get it done, Vititoe said.
Shutting the plant down early has an impact on rates, Curtis noted. If you decommission early, you cut off a positive revenue stream and incur decommissioning costs earlier, he said. I'd double these cost numbers, stated Bostick. These don't include the costs of BPA overseeing the shutdown, and it is costing you to have WNP-2 in existence, he said. If you could sell the power at a price reflecting decommissioning and O&M costs, how much would you have to get for it? asked Kreidler. In a medium market scenario, 21 mills, Bartlett replied. Why are utilities in higher markets shutting down nuclear plants? asked Collins. A Supply System staffer replied that only one nuclear plant has been shut down recently, and it was 26 years old. If the plant were shut down now, will the net costs in 2003 be higher if it's shut down or if it's operating? asked Vititoe. Curtis said staff would look further at the various options. He pointed out that there would be different risks associated with WNP-2 in a 16-mill market and that the 16-mill analysis would need to show them.
You should come back to us with a series of savings and indicate when or where the savings "cut into the core," Collins said. Try to "take a big enough slice to change the character of the organization," he urged. We are not talking about a 50 percent reduction in linemen or power schedulers, but everything else is on the table, Collins stated. I'd like to see the numbers for things BPA finances that the Corps does, over and above producing power, said Vititoe. Those are ancillary activities like green power is, he added. Curtis proposed BPA send the committee members "the best we've got" in two weeks and talk by phone. Then, we'll have something better for you at the next meeting, he said. The committee discussed the timing of getting public comments and making final recommendations, and asked staff to lay out a schedule. 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, Steve Hickok, Mike Kreidler, Robert Lane, Rosemary Mattick, and William Vititoe. |
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