Reports & papers Bonneville Cost Review (CR98-2)

Bonneville Cost Review Objective, Scope and Work Plan Related link: Final cost review (document CR98-2)

• Summary of initial comments (separate document)
• Introduction
• Objective
• Scope
• Work Plan
  • Approach
  • Work Plan Stages
    • Stage 1
    • Stage 2
    • Stage 3
    • Stage 4
  • Consultations and Communications
    • Consultations
    • Management Committee Meetings
    • Formal Public Comment
    • Other Communication Opportunities
    • Briefings
  • Time Line

Introduction

The purpose of this document is to establish the objective, scope, and work plan for the Bonneville Cost Review. An earlier version was used in consultations with Bonneville customers, tribes and constituents. Comments received in the consultations were considered by the Review's Management Committee in deciding the objective, scope, and work plan described herein.

Objective

The objective of the Cost Review is to ensure that Bonneville's near and long-term power and transmission rates are as low as possible, consistent with sound business practices, leading to full cost recovery with power rates at or below market. Accomplishing this will:

? Give confidence to Bonneville customers, tribes and other constituents that future Federal Columbia River Power System (FCRPS) costs are being effectively managed.
? Ensure that the subscription process results in a very high level of customer load commitment to Bonneville;
? Minimize or eliminate transition (stranded) costs; and
? Ensure that obligations to Treasury, third-party bondholders, and fish and wildlife recovery are at least as secure as they are currently.

Scope

The Review will cover FCRPS planned costs for the period FY 1998 through 2006. Focus will be placed on planned costs in FY 2002 through 2006, the initial rate period under new power sales contracts. The work of the Review is expected to conclude in January of 1998.

The scope of the Review will include the operation and maintenance and capital investment costs of the FCRPS. The Review will identify and assess strategic, programmatic, and organizational options to minimize the costs of Bonneville, other Federal agencies of the FCRPS, and non-Federal entities funded by Bonneville. Included will be a review of the major functions performed by Bonneville and other FCRPS agencies. The purpose is to identify activities that can be made more efficient, reduced, accomplished at less cost through other means or eliminated without compromising the ability to meet statutory, contractual, and other obligations. Tradeoffs and risks involved with cost reduction options will be also assessed.

In order to focus this effort, it is necessary to define generally the limits of what the Review will and will not address. The Review will address:

? Power Business Line:
? Direct Bonneville O&M expenses,
? O&M expense and capital investments of the Corps and Bureau, [ The Review will address FCRPS management of fish and wildlife costs. It will not address the level of fish and wildlife obligations or the particular measures the FCRPS is called upon to implement.]
? Long-term non-Federal resource acquisition costs, including O&M and capital investment costs of the Supply System.
? Transmission Business Line:
? Direct Bonneville O&M expense and capital investments.
? Efficiency Business Line.
? Bonneville Corporate:
? Corporate overhead costs (distributed),
? Costs charged directly to the business lines (e.g., legal services), and
? Environmental and fish and wildlife costs. [ Bonneville management of fish and wildlife costs will be addressed on the same basis as other FCRPS agencies.]

The Review is not intended to address:

? Changes to Bonneville's existing statutes or contractual requirements. The Review will, however, note areas where cost savings may be achievable with changes to federal statutes or regulations.
? Issues that are now or will be undergoing review in other forums, including:
? The subscription process, power cost allocation and rate design;
? Separation of Bonneville into separate transmission and power entities;
? The level and nature of Bonneville's fish and wildlife obligations, including Bonneville funding requirements;
? Mechanisms for transition (stranded) cost recovery;
? Application of Federal Power Act standards and requirements to Bonneville transmission.
? Sale or lease of transmission delivery facilities.
? Bonneville marketing strategies and opportunities for increasing revenues.
? Actions that would reduce Bonneville revenue requirements by reducing Treasury repayment or the probability of repayment.

Work Plan

Approach

Bonneville already has underway an internal planning and budget process aimed at fiscal years 1998 to 2003, a time frame dictated by the federal budget process. The horizon of the internal budget process is being extended to FY 2006 given that the FY 2002 to 2006 time frame is the initial period under new power sales contracts being developed through the power subscription process. The results of Bonneville's planning and budget process will be "baselines" of future spending plans for the power and transmission business lines and for corporate functions. These baselines reflect Bonneville's strategic goals, including market ?driven cost management goals. The Review will critically examine the cost baselines with particular focus given to the FY 2002-2006 period. The Review's final product will include assessments and recommendations to the Administrator for changes to the baselines for the FY 1998 to 2006 period.

A key Bonneville goal is to be able to meet or beat market prices for power when its current contracts expire in the year 2001. The success of the subscription process will depend in large part on customer confidence that Bonneville can meet market prices through the initial 5-year subscription period and beyond.

To reach its recommendations, the Cost Review will:

? Develop and assess cost reduction and management options that will allow Bonneville to meet a range of market conditions. Revenue forecasts reflecting a range of potential market prices will be developed and used as cost control targets.

? Assess the non-cost implications of cost reduction and management options. While some cost reductions can be achieved without affecting Bonneville's performance, some cost reductions may have near- and long-term implications for revenues, service levels, system reliability, ability to carry out public purpose responsibilities, statutory or contractual requirements, or other non-cost factors. Assessing these effects will help the Management Committee in making difficult and contentious tradeoffs that will be required in arriving at recommendations.

The assessment of cost reduction options will be supported by quantitative analyses. Costs for each business line will be identified by the extent to which they are fixed, controllable or discretionary. In addition, each business line will be further broken into organizational functions for which key activities, costs, cost structure and staffing will be identified. Cost management practices, discretionary functions, FCRPS staff and contractor levels and deployment, and overall controllability of costs will be evaluated.

The Management Committee will have the ability to call upon Bonneville and Council staff or independent consultants to undertake analyses in support of their work.

Work Plan Stages

The work plan is divided into four stages, each culminating in a meeting of the Management Committee. Each of the four stages will include a process of consultation with customers, tribes and constituents. The consultations will be held in advance of the Management Committee meetings and are intended to provide an opportunity for the consulting parties to review and comment on the materials that will be considered by the Management Committee. The consulting parties? comments will be presented to the Management Committee so that the views and advice can be taken into consideration in the decisions of the Committee. Each the four stages are described below. The time line for the work plan is in Attachment 1.

Stage 1

The first stage, which has been completed, entailed developing the objective, scope, and work plan of the Review. A draft version of this document was discussed at the first meeting and in the consultations leading to it. The first meeting was also used to provide some of the background information the Management Committee needs to understand the FCRPS cost structure and cost drivers so they can begin to make judgments regarding cost management options. This information includes a description of Bonneville's competitive environment and current response; and historical costs and actions affecting future costs.

In addition to deciding the objective, scope and work plan for the Review, the Management Committee also requested additional detailed information elaborating on some of the background materials. This information will be considered at subsequent meetings.

Stage 2

The second stage will be focused on initial review of Bonneville's cost baselines and supporting analyses for the FY 1998 through 2006 period. Bonneville and Council staff will also begin work to respond to information requests of the committee. Discussions will also be held with the Corps, the Bureau and the Supply System regarding opportunities for reducing their O&M and capital costs.

The primary products of the second stage will be an initial Management Committee assessment of the planned power and transmission baselines and cost management strategies for the FY 1998 through 2006 period and directions for further information and analysis of other options.

Stage 3

The third stage will focus on refining Bonneville's planned cost baselines and supporting analyses for the FY 1998-2006 period and identifying options for recommending changes to the baselines.

The primary product of the third stage will be Management Committee preliminary recommendations, and direction for additional analyses and refinements.

Stage 4

The fourth stage will focus on concluding the analyses and finalizing recommendations for changes to the baselines. The Management Committee recommendations may also include a call for analysis of further cost reduction opportunities, bench marking or other cost management actions leading to potential cost reductions that could not be accomplished in the initial time frame of the review. The primary product will be Management Committee recommendations to the Administrator. The Management Committee will hold a public meeting to present draft recommendations and to take public comment on those recommendations. After this meeting, the recommendations will be finalized and submitted to the Administrator. After this stage, the Administrator will decide on the recommendations, and the Council and BPA will submit a report on the outcomes to Congressional Committees.

Consultations and Communications

During the Review, customers, Tribes, other constituents and the public will be consulted on a regular basis to review progress to date and discuss future activities. Information relevant to future Management Committee meetings will be made available as early before meetings as possible and comment will be taken before final materials are produced.

Consultations

Bonneville and Council staff will meet regularly with Bonneville customer, constituents and tribal representatives to inform them of Management Committee progress and discuss materials to be presented at upcoming Management Committee meetings. Comments collected during these consultations will be shared with the Management Committee.

Management Committee Meetings

It is the consensus of the Management Committee that if the Review is to be successful, it will be necessary to have rigorous discussions of Bonneville and FCRPS management strategies and business operations, including staff reduction objectives. To enable frank, efficient give and take on internally sensitive issues, most Management Committee meetings will be closed. However, meeting summaries will be made available to the public shortly after each meeting.

Formal Public Comment

Formal comment will be taken on the Management Committee's draft recommendations. The Management Committee will conduct one public meeting to present draft recommendations and take comment prior to finalizing the recommendations and presenting them to the Administrator.

Other Communication Opportunities

In addition to the consultations, Bonneville and Council staff will be communicating with the public on a regular basis. The following communication opportunities are available to the public.

Briefings

Bonneville and Council staffs are available to meet with interested groups. Please contact Mike DeWolf (Bonneville) at (503) 230-3530 or Dick Watson (NWPPC) at (503) 222-5161.

Time Line

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