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March 10, 1998 | document CR98-2 Related links:
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Detailed Recommendations Descriptions Recommendation #1: Further reduce staffing and support costs of power marketing and other Power Business Line functions not directly related to operation of the Federal power system Recommendation #2: Fund regional conservation market transformation at a level proportional to the percent of the regional firm load served by Bonneville. Carry out a review of the need for, and the appropriateness of, continued Bonneville support beyond the 10-year life establish in Comprehensive Review. Recommendation #3: Reduce projection of legacy conservation contract and staffing expenses. Allow Bonneville to extend low-income weatherization contracts with the states to be consistent with the end of the legacy contract commitments to the utilities. Recommendation #4: Further reduce staffing/funding for Northwest Power Planning Council Recommendation #5: Renewable resource projects: new projects beyond those currently committed must be supported by incremental revenues that cover the additional costs. Recommendation #6: Develop/implement a consolidated/integrated capital/asset management strategy for the FCRPS, including transmission Recommendation #7: WNP-2: Aggressive cost management, flexible response to market conditions Recommendation #8: Reduce Administrative and Other Internal Support Service Costs Recommendation #9: Obtain legislation to improve administrative effectiveness and efficiency Recommendations #10/11: Federal Power Act (FPA) conformance (cost functionalization) and reduced transmission overhead costs Recommendation #12: Further reduce federal and non-federal debt service Recommendations #13: Account for previously identified "undistributed reductions." IntroductionIn 1997, the four Northwest Governors asked the Northwest Power Planning Council (Council) to establish a cost control forum to assist the Bonneville Power Administration (Bonneville) in controlling the costs it recovers through rates in preparation for a subscription process for the post-2001 period. This Cost Review has covered planned costs of the Federal Columbia River Power System (FCRPS), including transmission, with a focus on projected costs for the 2002-2006 period. The objective has been to ensure that Bonneville's near and long-term power and transmission costs are as low as possible consistent with sound business practices, thereby enabling full cost recovery with power rates at or below market prices. Following are the recommendations of the Cost Review Management Committee (Management Committee). They reflect the Committee's consideration of extensive public comment on its draft recommendations. In particular, the Committee has heeded the admonitions of many commentors to ensure that its recommendations for conservation and renewable resource development are consistent with the recommendations of the Comprehensive Review of the Northwest Energy System . In addition, the recommendations regarding Washington Public Power Supply System (Supply System) Plant 2 have been modified to respond to legal and operational issues that have been identified. These recommendations have been forwarded to the Bonneville Administrator and to the region's Governors, the Northwest Congressional delegation, and the House and Senate Committees on Appropriations in Congress. Responsibility for decision and action lies with the Administrator. The recommendations identify $146 million in reductions to planned power expenses for Bonneville's next rate period, Fiscal Years (FY) 2002-2006. These reductions are in addition to substantial cost cutting already undertaken. Fully implemented, the cost reductions identified herein and those identified in earlier Bonneville budget planning would reduce annual power expenses in the FY 2002-2006 period are more than $200 million lower than Bonneville planned when rates were set for the current rate period, FYs 1997-2001. The Management Committee consisted of 11 members, including five
"outside" experts in corporate management and finance, and representatives
from both the Council and Bonneville. The outside members brought fresh
business perspectives and the benefit of private-sector experience in
leading large organizations through restructuring, cost cutting, and
downsizing. Mr. Curtis Bostick, Marco Island, Florida Ms. Joyce Cohen, Portland, Oregon Mr. Charles Collins, Seattle, Washington Mr. Jim Curtis, Portland, Oregon Mr. John Etchart, Helena, Montana Mr. Steve Hickok, Portland, Oregon Mr. Mike Kreidler, Olympia, Washington Kreidler is a former member of the United States House of Representatives, and he currently represents western Washington on the Council. Mr. Robert J. Lane, Portland, Oregon Mr. Todd Maddock, Lewiston, Idaho Ms. Rosemary Mattick, Seattle, Washington Mr. William Vititoe, Seattle, Washington Also available is a summary of public comment received on the Committee's
draft recommendations.
The Cost Review is an outgrowth of the Comprehensive Review of the Northwest Energy System. The Comprehensive Review was a yearlong process initiated by the governors of the Northwest states, culminating in December 1996. The Comprehensive Review involved representatives of major interest groups from around the region. It focused much of its effort on Bonneville's role, obligations, and risks in a deregulated, competitive marketplace, and on aligning the risks and benefits of the Federal Columbia River Power System among customers, environmental imperatives, and taxpayers. The primary goal of the Comprehensive Review was to ensure that Bonneville could continue to meet its obligations to the U.S. Treasury and third-party debt holders, fulfill its responsibilities for fish and wildlife recovery, and retain the long-term benefits of the FCRPS for the Northwest. The Comprehensive Review also sought to define a role for Bonneville in the new competitive environment that was sustainable politically and competitively. Key direction of the Comprehensive Review that has guided the Cost Review can be summarized as follows: ? Market the power products of the federal system for relatively long terms (five years or more) to Northwest customers at cost based rates through a subscription system. This recommendation is central to achieving the primary goal of the Comprehensive Review. ? Return Bonneville to its historic role of marketing and transmitting power produced by the FCRPS, rather than becoming an aggressive marketer of power products and services in the competitive marketplace; ? End Bonneville's responsibility to acquire resources to meet the load growth of customers, except on a bilateral basis where the customer accepts the risk and financial obligations associated with such acquisitions; ? Limit Bonneville's financial support of conservation acquisition to current contractual obligations and certain market development activities, provided they are self-sustaining by 1999. Also limit support for conservation market transformation in proportion to the share of regional firm loads served by Bonneville; ? Define Bonneville's responsibility for renewable resource development (beyond current wind and geothermal pilot projects) to limited research and development support, and to renewable resource purchases on the behalf of, and funded by, customer utilities; and ? Require Bonneville's transmission rates, terms and conditions to be designed and implemented in a manner that is comparable to those developed by investor-owned utilities (IOU) subject to Federal Energy Regulatory Commission (FERC) regulation. In addition, the Comprehensive Review recommended that the responsibilities and funding of the Council be brought into line with the more limited role recommended for Bonneville. In July 1998, the subscription process recommended by the Comprehensive Review for selling Bonneville's power products will begin. The objective is to get new long-term power sales contracts in place for FY 2002-2006 and beyond. Achieving a very high level of subscription by Northwest wholesale power customers is a high priority. It is the most certain way to achieve the primary goal of the Comprehensive Review: satisfying obligations to the U.S. Treasury and third-party bondholders; fulfilling responsibilities for funding fish and wildlife recovery; and retaining the substantial long-term benefits of the FCRPS for the Northwest. The work of the Cost Review Management Committee has been driven by the objective of achieving a high level of long-term Northwest subscription. However, Bonneville's wholesale customers are facing a period of unprecedented uncertainty and risk. There are new suppliers and increased price competition in the marketplace. With the onset of retail competition, utilities are uncertain of their future loads. It is the Management Committee's view that these utilities are unlikely to buy power from Bonneville on a long-term basis unless they perceive Bonneville's price to be very low relative to these risks. Thus, the Management Committee believes that the key to a high level of long-term subscription is to reduce the costs as much as possible, consistent with the Comprehensive Review and sound business practices. This should enable Bonneville to price its subscription products well below current market price expectations. Bonneville has been working toward a cost structure that would allow it to compete successfully in a 2-cent-per kilowatt-hour market. The Management Committee has challenged Bonneville and other agencies of the power system (U.S. Army Corps of Engineers (Corps), the Bureau of Reclamation (Bureau), and the Supply System) to beat that goal by a substantial margin. The Management Committee believes that the goal of pricing power well below market expectations will enable Bonneville to return to its roots as envisioned by the Comprehensive Review. Those roots are a focus on Bonneville's core missions of marketing and transmitting the firm power output of the FCRPS for relatively long terms to regional customers, and of meeting its environmental responsibilities. This is a role that is sustainable, both competitively and politically. While Bonneville will continue short-term marketing of nonfirm power, the emphasis on long-term firm contracts will allow Bonneville to reduce staff and expenses associated with many marketing and related support activities. In this environment, Bonneville will not be engaged in acquiring additional power resources to meet the load growth of customers. Nor will it have a large responsibility for the development of conservation and renewable resources. Staffing and other expenses related to these activities can be reduced. These directions all are consistent with the recommendations of the Comprehensive Review of the Northwest Energy System. The Committee's Starting Point: FCRPS "Cost Baselines" (October 1997) Since late 1993, Bonneville has made substantial strides in reengineering its operations and reducing its planned costs. Indeed, FCRPS financial results for FY 1997 and reductions to date in Bonneville staffing demonstrate new, aggressive cost management practices. Bonneville staffing today is the lowest it has been since 1965. Recent efforts of the Bureau and the Supply System to reduce costs and improve financial margins likewise reflect responsiveness to the marketplace for wholesale power. In August and September of 1997, Bonneville completed its annual planning and budget process. This process covered the remaining four years of the current rate period (FY 1998-2001) and the initial five-year subscription period (FY 2002-2006). Bonneville already planned a number of cost-cutting actions beyond those reflected in the 1996 Rate Filing. These actions would result in average annual power expenses in the FY 2002-2006 period that are $89 million lower than the expenses planned to be recovered through Bonneville's rates for FYs 1997-2001. The results constitute the "Cost Baselines" that Bonneville proposed to the Management Committee for review and recommendation last October. Included were these cost management objectives in support of the Cost Baselines: ? Hold operations and maintenance (O&M) in the Power Business Line (PBL), including other entities' O&M, flat over the nine-year (FY 1998-2006) horizon ? Manage WNP-2 operational costs to 19 mills/kWh by 2000 and continue operation of project only if economic ? Limit renewable resource losses to no more than $15 million annually ? Pursue direct funding for future Corps/Bureau O&M and revenue-producing investments to enhance FCRPS market responsiveness ? Rigorously evaluate, prioritize, and manage revenue-producing Federal investments in hydro ? Constrain Bonneville-funded Federal investments to levels commensurate with the availability of low-cost sources of capital ? Reduce short- and long-term debt service costs through: ? Manage relationships and fish costs to achieve measurable results in preserving and restoring Pacific Northwest salmon ? Redesign information technology and accounting/financial reporting systems and services, to reduce overhead costs substantially while ensuring responsiveness to business needs ? Redesign other corporate services to reduce costs and increase value substantially ? Reduce Federal and contractor staffing per reengineering plans and corporate redesign targets ? Reduce funding for the Council by 27 percent ? Reduce Energy Efficiency cost and staffing in order to achieve financial self-sufficiency by the end of 1999 ? Continue implementation of a reliability-centered maintenance strategy for transmission ? Continue to shift from a long-run system expansion strategy to a customer request-based strategy for transmission investments ? Achieve superior performance compared to Western States Coordinating Council (WSCC) transmission providers (top one third), through operational efficiencies, and tighter control on timing, and prioritization of capital investments. This will result in a reduction to the fully allocated cost per hour of transmission maintenance service of 30 percent by 2001. Included in the baselines for FYs 2002-2006 are assumptions that the costs of the Residential Exchange program are either eliminated statutorily or minimized through the "in lieu" provisions of the current statute, and that fish and wildlife costs remain stable. The Management Committee adopted these Cost Baselines as it's starting point. FCRPS Cost Management Challenges and Opportunities The Management Committee recognizes that Bonneville faces significant challenges and opportunities in achieving further savings; for example: ? System capability has suffered in recent years, in large part due to aging hydroelectric facilities and inadequate levels of appropriations funding. Improving productivity will require significant new investments that must be designed and managed to yield higher production and lower O&M costs. ? Unlike in a typical business enterprise, control over power production in the FCRPS resides largely with entities (i.e., Corps, Bureau, and Supply System) other than the entity responsible for marketing the products and recovering the costs (Bonneville). Almost half of power O&M costs and virtually all projected capital investments are managed by entities other than Bonneville. A consolidated, integrated strategy directed at maximizing FCRPS asset returns (financial results and public benefits) for the region is lacking. ? The Supply System has done an exemplary job in reducing its costs and increasing its production. It now projects that WNP-2 operating costs will be at or even slightly below expected market prices in the year 2000. However, beginning in 2002, the plant's costs may begin to increase, primarily due to a need to purchase fuel as the current inventory is depleted. These cost increases, as well as any unplanned expenditures, will need to be managed aggressively to minimize their impact. ? Most FCRPS expenditures for fish and wildlife, and other public responsibilities like the residential exchange, conservation, and renewable resource development, are borne by Bonneville's PBL, representing about 20 percent of this business line's (BL) expenses. ? Most of Bonneville's financial risks also fall to the PBL. At the same time, about 57 percent of this BL's expenses are attributable to relatively fixed debt service and depreciation expenses, due in large part to 100 percent debt financing of past capital investments. ? Bonneville's corporate functions and overheads generally are less efficient than "best practices" in other enterprises would indicate is possible. The Management Committee's Recommendations Bonneville should undertake extraordinary efforts in its power, corporate and transmission organizations to reduce the costs of its commercial operations and constrain the costs of its public benefit programs. Similarly, other agencies of the FCRPS -- Corps, Bureau, and Supply System -- should act in concert with Bonneville by taking aggressive action to maximize the value of the FCRPS (financial returns and public benefits) by reducing O&M costs and improving asset productivity. The Management Committee's recommendations are summarized in the following table and described in detail at the end of this document. If achieved by the FCRPS agencies, these cost reductions should permit Bonneville to price its subscription products significantly below currently expected market prices.
In addition, the TBL should meet the cost management objectives in its baseline, in particular: ? Obtain operational efficiencies, tighter control on timing and prioritization of capital investments to achieve superior performance compared to the WSCC transmission providers (top one-third); ? Reduce fully allocated hourly costs of transmission maintenance service by 20 to 30 percent by 2001; and ? Increase flexibility of cost structure.
The Management Committee has not addressed fish and wildlife costs. The Management Committee believes there are opportunities for improved efficiencies in the planning and implementation of fish and wildlife measures on the part of Bonneville, the Council, the Corps, the Bureau, the National Marine Fisheries Service, the Fish and Wildlife Service, state agencies, and the tribes. A management review of the contracting processes for implementing the fish and wildlife program was recently completed at the request of the Council. This review identified recommendations for planning, procurement, contract administration, and monitoring that should result in a more cost-effective planning and implementation process. The same sort of scrutiny should be applied to the rest of the fish and wildlife activities. Efficiencies in fish and wildlife programs should be obtained with the same aggressiveness as the Committee is recommending in other functions of the FCRPS. Greater efficiency can only benefit fish and wildlife. Several commentors expressed concern about follow-through on the Management Committee's recommendations. Bonneville's rate setting process will be the vehicle for implementation of many of the recommendations. That process provides opportunity for interested parties to see that the recommendations are being implemented. Other facets of the Management Committee's recommendations will require continuing attention over the long term. Bonneville and the Council should devise an approach for expert review and advice on long-term FCRPS cost management. Bonneville and the region face many risks in achieving the cost reductions discussed above. Implementing many of the recommendations will be difficult and success is not assured. There is no antidote for that, other than the skill and dedication of the managers and employees of Bonneville and the other FCRPS agencies. It is essential that these people be given the statutory authority and other tools necessary to be able to implement the cost reductions while maintaining the effectiveness of the agencies in carrying out their core functions. Bonneville's financial risks are substantial. For the remainder of the current FY 1997-2001 rate period, hydro and thermal resource costs are the greatest risks to FCRPS net revenues. Market price risk during this period is limited due to sales contracts that are largely fixed. Financial risks are substantially greater post 2001, with added hydro risk, fish recovery and enhancement cost risk, and market price risk. The magnitude of the risks can be as much as $200 million or more in a given year. Bonneville can reduce its risk profile significantly by reducing its power costs and by creating greater flexibility in its cost structure over time. The Cost Baselines and the Management Committee's recommendations do not include two key elements of a Bonneville revenue requirement for power. They are: (1) a planned margin (planned net revenues) for risk; and (2) acceleration of repayment, as recommended by the Comprehensive Review when certain pricing conditions occur; i.e., when option fees are paid and when Bonneville's power costs are below market. There is a risk that the sense of urgency in the need to reduce costs and improve productivity is not shared fully throughout the FCRPS agencies. Bonneville has been forced to confront this need by the realities of the market. Others have been insulated from those realities to varying degrees. In particular, the Management Committee concludes that the Corps must be more aggressive in reducing expenses and improving productivity. Implementation of an integrated capital/asset management strategy is essential if the FCRPS is to maximize asset value for the region. The Supply System has made great strides in reducing costs and increasing availability. The Committee can anticipate a viable market for the power from WNP-2. However, the Supply System must reduce costs further to meet and sustain its year 2000 cost target, and the Management Committee has challenged it to produce even more savings. Toward this end, the Management Committee recommends the Supply System continue its examination of additional cost reduction measures and initiatives, including the potential adoption of a twenty-four-month fuel cycle, improved outage planning, industry benchmarking of "best practices", and the use of other fuel options. Unforeseen costs lower than expected market prices or performance problems could alter the situation. Increasing flexibility to deal with such circumstances should be a priority. If the plant is operated and marketed in a way that results in the generation of net operating revenues, the decommissioning fund should be built up to improve flexibility in the event the plant cannot recover its operating costs in the future. Under the Northwest Power Act, Northwest utilities have the right to sell to Bonneville an amount of power equal to that required to serve their residential and small farm customers at their average system costs, and to receive an equal amount of power at Bonneville's average system cost (ASC). In reality, this has been an accounting transaction. The exchange was intended as a means of allowing wider access to the benefits of the federal hydro system. In the past, the exchange has been a major cost to Bonneville, but it cannot be allowed to be so in the future. The Comprehensive Review suggested an alternative way of providing access to the benefits of the federal system. It recommended that the residential and small farm customers of exchanging investor owned utilities be given the opportunity of being served with Bonneville power. Access to that power would be on a priority basis second only to public agencies. The Management Committee believes this can meet the objective of providing wide access to the benefits of federal power. Bonneville now faces competition. Competitive markets mean price volatility, product innovation and aggressive marketing. Bonneville can limit its risks most appropriately in this environment by constraining its costs to levels that permit it to offer prices below market. The recommendations of the Cost Review will translate into low power prices only if subsidies and cost transfers inherent in the 1980 Northwest Power Act and in past Bonneville practices are held in check. At the time the Act passed, the argument was that these subsidies and cost transfers were affordable and necessary because Bonneville's costs were so far below market. The Management Committee's recommendations, seriously pursued, are designed to recreate those circumstances, but in a substantially changed market environment. Today's more competitive markets make discounts and subsidies less effective and less appropriate forms of public policy. Finally, the Management Committee would like to conclude with a note of caution. The Management Committee realizes there are many calls on Bonneville's funds. But there is a need for restraint. To the extent the Management Committee's cost reductions are absorbed by increased expenditures for other purposes, the value of this Cost Review will have been diminished significantly. Driving Bonneville's costs back up to or above market levels will discourage subscription and jeopardize the fundamental goal of securing the long-term economic benefits of the federal system for the region. It will confirm to potential subscribers that Bonneville's costs are not manageable. Relying on stranded cost recovery mechanisms as an alternative to cost management is a high-risk path. If a high level of long-term subscription is achieved, long-term funding for fish recovery and other public benefits will be more stable; the U.S. Treasury and other creditors will be more secure; stranded cost recovery mechanisms likely will be avoided; and, most importantly, the benefits of the FCRPS will be retained in the Northwest. Recommendation #1: Baseline: Recommendation: Rationale: Implementation: Cost to Implement: Implications: Risks: ? Deregulation and Restructuring: ? FERC compliance/functional separation: ? Statutory obligation: Northwest customers cannot exercise their statutory right to obligate Bonneville to provide new resources and expanded service if this recommendation is to hold. ? Implementation: There is plenty of time to accomplish the initial subscription, note the changed operating environment that results from it, and re-focus the PBL marketing effort accordingly. ? Technology: If the technology does not lead to anticipated efficiency improvements, there is a risk that some of the anticipated staff reductions will not be achieved. ? Operation Analysis Some market analysis, particularly for purposes of managing river operations in relation to both fish and excess power, may need to increase, not decrease, depending on how overall industry restructuring affects operations of the FCRPS. It is anticipated that fewer analysts will be required in the future for this function, but this is very tentative. Recommendation #2 Market Transformation: Recommendation: Rationale: The Management Committee intends that Bonneville honor the provisions of the Comprehensive Review. The Comprehensive Review included provisions for the long term funding of market transformation by Bonneville in proportion to the amount of regional firm load served by Bonneville. The Comprehensive Review recommended funding through Bonneville (as well as the regional IOUs) because it thought funding of such a regional effort directly by states and utilities would be administratively difficult. Bonneville's share of this regional effort would be approximately $10 million. The recommended reductions are corrections to Bonneville's Cost Baseline based on the regional firm load served by Bonneville. The availability of other funding for market transformation and the appropriateness of continued Bonneville funding should be reviewed by 2004. The Committee believes that market transformation, along with other conservation, is most appropriately supported through the state public purpose funds called for by the Comprehensive Review. Consequently, Bonneville should work with other interests to secure such funding for the period beyond the 10-year minimum life of the activity established in the Comprehensive Review, unless there is regional consensus that Bonneville funding should continue Risks: Recommendation #3: Legacy Recommendation: The four states have an active request to extend their low-income residential weatherization contracts. The Management Committee believes that this extended funding horizon will help to create a bridge for the states to fund these programs. Bonneville estimates show that the cost of extending these contracts will be no more than $500 thousand per year in additional debt service in the post 2001 period. The Comprehensive Review recommended that the region's retail distribution utilities allocate funds from a system benefit charge to fund low-income weatherization. The Management Committee strongly recommends that no additional funding for this program come from Bonneville, and that the states develop funding through retail utilities' collection of public purposes money or other tax sources. This recommendation assumes only that existing funding commitments occur over a longer period of time. Rationale: Normally, Bonneville's budget estimates include the maximum amount available to be spent under the contracts. Nevertheless, utilities generally under-spend the contracts. Estimates of under-spending are based on Bonneville's past experience. Bonneville's funding of the low income weatherization program is meant to act as a bridge to allow states to fund programs from either a system benefit charge or from other tax sources. The Management Committee agrees that it is appropriate to extend the funding of this program to be consistent with the end of the legacy contract commitments to the utilities. Based on Bonneville's estimates, the Management Committee expects that approximately $ 3 million in annual savings will accrue from under-spending of these legacy conservation contracts due to reduced debt service and from further reduced staffing. The Management Committee recommends that Bonneville extend funding to the low-income residential weatherization, which will cost Bonneville approximately $500,000 per year in additional debt service in the years 2001 to 2006. Thus, the net cost savings to Bonneville will be $2.5 million per year. Risks: Recommendation #4: Baseline: Recommendation: Cuts of this magnitude bear the risk of impairing the effectiveness of the Council. A public process should be convened to determine the future role and funding sources of the Council. The possibility of additional funding from other sources to support Council activities of regional scope should be investigated. Rationale: Looking forward, the continued high importance of fish and wildlife issues argues for maintaining the necessary capability. For example, annually the Council plays a key role in assuring accountability by providing congressionally mandated scientific and policy reviews of proposals for more than $125 million in Bonneville fish and wildlife funding. Congress has also asked the Council to carry out reviews to assist Congress in making decisions on major appropriations decisions. The Council anticipates further assignments of this nature. The Council is also spearheading efforts to establish a strong scientific foundation for fish and wildlife policy in the basin. All three tasks involve significant assistance from the Council's public affairs, power and legal divisions in addition to fish and wildlife staff. Reductions in staffing in these areas must not impair the Council's ability to complete work in these three areas. On the power side, the onset of a competitive generation market and the restricted resource acquisition role for Bonneville means the Council's planning function should be reduced and reoriented. However, the importance of Bonneville to the economies of the Northwest states means that maintaining a capability for continued oversight of Bonneville is required. In addition, the Comprehensive Review recommended that at least for a transition period, analytic capability be maintained to monitor and evaluate the transition to competitive electricity markets and facilitate the development of conservation and renewables in those markets. Council members can rely to a greater extent on central staff for staff support. Having two Council members per state reflects Congress and the states' desire to have broad representation on the Council. In some states, requirements for geographical representation have been included. This level of representation would have to be sacrificed in order to achieve the greater efficiency required by these budget levels. Cost to Implement: Implications: Risks: Recommendation #5: Baseline: Note: these savings are based on current projections of the costs and revenues of the three current projects. Bonneville is committed to funding up to $15 million per year in costs above the revenues obtainable from the projects (including the costs of the data collection and research and development [R&D]). Recommendation: Rationale: Implications/Risks: Recommendation #6: Corps of Engineers Note: The Management Committee recommends that the Corps increase its operating margins by $40 million, of which $30 million is assumed to be obtained from operation and maintenance expense reductions and the remainder from improved revenues as a result of increased project availability. The $30 million reduction from O&M projections in the baseline would require that the Corps hold average annual O&M in FYs 2002-2006 to FY 1996 actual levels. These savings approximate the efficiencies already accomplished or planned by the Bureau, the Supply System, and Bonneville. Actual efficiencies should be obtained through benchmarking and adoption of industry "best practices", and through the FCRPS asset management strategy outlined below. Bureau of Reclamation Note: The Management Committee recommends that the Bureau increase its operating margins by $8 million, of which $2 to $3 million is assumed to be obtained from operation and maintenance expense reductions and the remainder from improved revenues as a result of increased project availability. Recommendation: ? Establish a joint committee composed of the Corps, Bureau, and
Bonneville to facilitate the development and implementation of this
strategy. Rationale: It is essential that the FCRPS adapt the business model to its particular purposes if it is to maximize the value of its assets both for the Pacific Northwest and for the taxpayers of the United States. Survival (long-term cost recovery) in a competitive marketplace requires it. This calls for a capital/asset management strategy that is both integrated - that is, directed toward value maximization; and consolidated - that is, involving all entities in the FCRPS working together toward that end. Simply adapting the business model to meet the needs of the FCRPS is not sufficient to ensure success. A crucial factor for success is to connect the management of the capital and asset base directly to business strategy. Once this alignment has been made, creating appropriate incentives along with key accountabilities is relatively straightforward. The participating agencies of the FCRPS must work together to improve margins. To that end the Corps and Bureau must continue their efforts to find additional expense reductions and increase availability. The Bureau is recognized for having undertaken productive efforts to reduce expenses to date. Therefore, only incremental expense reductions are requested. The Management Committee concludes that the Corps must be more aggressive in reducing expenses and improving productivity. Therefore, larger expense reductions are expected from the Corps. In addition to these expense reductions, the Corps and Bureau are expected to provide greater project availability (weighted by generation capacity). Implementation: A key opportunity for achieving a consolidated integrated capital/asset management strategy for the FCRPS would be the establishment of a Joint Operating Committee. This Committee would develop common objectives for guiding power-related planning, budgeting, operational, and investment decisions of the FCRPS. These common objectives, criteria, and controls should take into account constraints imposed by the non-power purposes of the Federal projects. In addition, the Committee would establish common controls (i.e., financial and operational reporting mechanisms) and means of measuring accountability. The FCRPS should investigate areas where savings could be gained by consolidating services that currently are provided in triplicate. Given Bonneville's experience with reductions in the cost of providing shared services, it appears that the greatest areas for consolidation might be accounting and financial systems, human resources, and information technology systems. Such steps should be directed toward eliminating redundancies and reducing overhead costs, while ensuring that planning, control and accountability systems support the objective of maximizing asset value. Costs to Implement: Risks: Recommendation #7: Baseline: Recommended Improvement in Annual Net Operating Revenues: Recommendation: 1. Subject WNP-2 to a market test biennially: annual revenues at market price recover annual operating costs, accounting for hydro firming value provided by the plant. 2. Implement a strategy that combines aggressive cost management with a flexible response to market conditions and unforeseen costs. 3. In Bonneville's subscription process and 1998 Rate Case, determine how to allocate the plant's costs in rates and market a portion of the FBS equivalent to the plant's expected output priced in a manner that ensures the recovery of the plant's operating costs and allows a lower price for the rest of the FBS, unless legal or other issues prevent doing so. 4. To the extent that plant revenues exceed operating expenses, use a portion of the resulting net operating revenues first to build up the decommissioning fund to improve future financial flexibility. 5. Re-evaluate plant termination in the event that operating costs are projected to exceed revenues achievable at market prices by more than the termination costs (i.e., terminate if termination is more economical than continued operation, taking into consideration hydro-firming value of the plant and termination costs). Rationale: Separating a portion of the FBS equivalent to the planned output of WNP-2 from the rest of the subscription pool and selling it at rates which would cover the plant's operating costs would allow a lower subscription price for the rest of the federal system power. (Legislation would be necessary to actually separate WNP-2 from other Federal resources and sell its output at market, and such legislation would be risky and take longer than Bonneville's schedule for its 1998 Rate Case. This would mean that Bonneville would be unable to adopt the recommendation as written in the Management Committee's Draft Report when Bonneville sets rates for the FY 2002-2006 period.) Implementation: As part of an evaluation of termination, if the plant fails to meet the market test, termination costs and effects on reliability of the federal system must be considered, particularly if there are significant additional reductions in capability of the federal hydro system as a result of fish enhancement and mitigation. Implications/Risks: There is some risk that WNP-2 will face significant unplanned costs, either from failure of major pieces of equipment or from increased regulatory requirements. There also is some risk that market prices will be significantly lower than currently assumed. In the event of major unplanned costs, reductions in output or reliability, or a significant reduction in expected market prices, Bonneville and the Supply System should consider terminating WNP-2. A termination analysis should take into account the potential impact on revenues and Bonneville costs during the period, including termination costs not covered by the decommissioning fund and costs of any major equipment failure. While the analysis should focus on implications for federal system reliability, it also must consider effects on the region as a whole due to load/resource or reserve deficits, particularly if John Day or Lower Snake Dams (or both) have been or are expected to be breached or significantly reduced in output for purposes of fish enhancement and mitigation. Recommendation #8 Baseline Note: These figures combine both the direct and indirect reductions to PBL expenses due to administrative and other internal support services savings. The entire reduction goal is $31.7 million. $9.0 million of these reductions are estimated to benefit power directly through reduced corporate and PBL administrative costs. The remaining $22.7 million are estimated reduce transmission expense and capital costs. These transmission savings result in an indirect PBL reduction of $5.5 million through lower transmission rates. Recommendation: This goal will be accomplished through several efforts. The first is a shared services review Bonneville currently has underway. Upon the completion in 1998 of this effort, reductions will be identified as a result of corporate overhead or business line efficiencies gained through the redesign of financial, information, procurement, and human resource management, and other processes, adoption of formalized benchmarking techniques, and implementation of private sector-based "best practices". Implementation of "shared services" review recommendations also will identify activities that may be provided more efficiently through outsourcing. In addition to the shared services review, Bonneville also is currently investigating "enterprise software." While implementation of such software agency wide will require substantial investments in the near term, it has the promise of yielding great long-term savings, which are integral to the goal of reducing shared services costs by 50 percent. The Management Committee's recommendation calls for reductions of 50 percent, in aggregate, of administrative and other internal support service costs from FY 1996 levels. Excluded are administrative and support service costs for fish and wildlife recovery and enhancement. The cost reductions outlined here are shown as reductions to the overheads charged to the BLs by corporate. The allocation of these reductions to the BLs is assumed to be proportional to current distribution of corporate internal services. Rationale: Implementation Scheme: Cost to Implement: Risks: Recommendation #9 Note: Cost reductions due to these legislative changes apply to both BLs within Bonneville. As shown, the direct impact on the PBL cost baseline is estimated to be $3.0 million. The direct impact on transmission is estimated to be $7.0 million, of which an estimated $4.0 million will be "passed through" indirectly to PBL through lower transmission rates. Recommendation: ? Exempt Bonneville -- and potentially the other federal agencies of the
FCRPS -- from certain federal administrative laws in areas such as
appropriation law, procurement and property management, information
resources, and real estate, particularly those laws and procedures that
currently have been lifted by administrative waivers and other actions.
Establish new procedures based on sound business practices, directed toward
minimizing costs. Rationale: In addition, federal requirements such as appropriations laws, procurement laws and property laws add limitations which are more conducive to truly governmental entities than to a self-financed agency charged with operating on a business-like basis in a competitive environment. Examples of burdensome procurement or property procedures that Bonneville must follow include: the current prohibition on the joint ownership of federal and non-federal transmission facilities, restrictions on self-representation in litigation, and requirements for the resolution of contractual disputes before governmental boards of contract appeals. Bonneville should be able to resolve bid protests and contract appeals under its own statutory authorities, including the use of alternative dispute resolution, without jurisdictional challenges. Bonneville also should determine the character and necessity of its expenditures and the manner in which they are incurred and paid. Such restrictions on the use of appropriations should not apply to a ratepayer-funded entity. In addition, the current separation of power production and marketing functions between Bonneville, the Corps, and the Bureau result in duplicative and inefficient procurement processes. Efficiencies in the procurement of major equipment and maintenance services for federal generation facilities may be obtained if common, flexible and business-oriented procurement procedures are used by all three FCRPS federal agencies. Implications: Risks: Recommendations #10/11: Baseline: Recommendation: Although the $30 million estimate is based on early analysis only, types of costs currently in the power business baseline that may more properly be functionalized to transmission include, for example, Corps and Bureau generation integration and other transmission costs. In addition, the Management Committee at this point recommends that the TBL seek additional internal expense reductions of $2.5 million per year by reviewing activities such as aircraft, equipment maintenance, and transmission sales staff. $1.5 million of this reduction would benefit power through reduced transmission rates. The other $1.0 million would benefit other transmission service purchasers. Rationale: Implementation: Cost to Implement: Implications: Recommendation #12: Baseline: Recommendations: Implementation: Cost to Implement: Implications and Risks: Inasmuch as Bonneville's financial reserves are a key means of mitigating financial risks, any use of cash reserves to accelerate debt or to revenue finance a portion of new capital additions could reduce the probability of making annual Treasury payments on time and in full (the same is true of variable rate interest rate exposure). These recommendations could affect Bonneville's ratemaking assumptions; e.g., planned net revenue for risk, in order to ensure revenues are adequate to meet scheduled Treasury payments. Note: Interest expense projections in this Cost Review do not assume that repayment will be accelerated from current repayment policy and schedules. The Comprehensive Review recommended that Bonneville accelerate repayment when certain pricing conditions occur. Recommendations #13: Rationale: Since the cost baselines already assumed that a certain amount of unspecified cost reductions would be achieved, the total savings from the Management Committee's recommendations must be adjusted to avoid "double counting." Thus, while the Management Committee's specific recommendations total approximately $157 million for Bonneville as a whole and $166 million for the PBL in particular, the net change from the cost baselines is the $137.5 million total reductions and $146.3 million PBL reductions shown on the summary table. |
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