Southwestern Power Resources Association

Memo
To: SPRA Members From: Ted Coombes, Executive Director CC: Barbara Del Grosso Date: March 16, 2012 Re: New DOE Initiatives for PMAs

Today Department of Energy (DOE) Secretary Steven Chu issued a memorandum to the Departments Power Marketing Administrations (PMAs) (attached to email) outlining new responsibilities DOE will be assigning to them and new authority DOE will be seeking for the PMAs. These new tasks and potential new authority could herald major changes in which Southwestern Power Administration (SWPA) operates in the future. Taking greater advantage of energy efficiency, demand resources and clean energy while at the same time reducing costs to consumers requires a transition to a more flexible and resilient electric grid and much greater coordination among system operators, Chu wrote in the memo. This can only be accomplished by upgrading our infrastructure to take advantage of modern communications and control technologies and bringing the benefits of increased connectivity to more Americans. As [DOEs] own [PMAs] have historically played a valuable role in the electric sector, they can and should help lead this evolution *** to the extent allowable under their enabling statutes. In summarizing the memo, I will outline the new initiatives proposed and then provide my initial analysis of the potential impacts on SWPA and its wholesale power customers. Upgrading and Replacing PMA Transmission and Infrastructure: Chus memo notes that the PMAs infrastructure is aging and some of it needs to be replaced. He will be directing that each PMA strategic plan and capital improvement plan recognize the changing nature of the electric sector, including complying with NERC reliability standards, integrating variable resources [e.g. wind and solar energy], scheduling on an intra-hour basis, centralizing dispatch, responding to solar flares, and minimizing cyber-security vulnerabilities. To address the latter, he would charge the PMAs to serve as test beds for innovative cyber-security technologies. Analysis: Taking on these additional functions is going to require more personnel perhaps many more personnel plus increased capital investment and expenses.
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Benefits would accrue to SWPA customers, but many non-preference customers would benefit as much or more without bearing the costs. Chu acknowledges that the current economic environment is creating pressure on many of the PMAs customers. Capital improvements, therefore, must be staged to ensure the costs are appropriately managed. This statement is an acknowledgement by the Secretary of Energy that his new edicts are going to cost us more money. His solution is not to share the costs with all the beneficiaries, including non-preference electric consumers, but simply to spread out the costs and implementation over a longer period of time. Bottom line: your federal power costs are going to go up so that we can demonstrate at our expense certain benefits and efficiencies to investorowned utilities. I would call that being generous to the general public with our rate dollars. Paying for Upgrading PMA Transmission and Infrastructure: Capital expenses for SWPA are currently financed with annual appropriations and customer funding though net billing. Because appropriation limitations can sometimes inadvertently limit the PMAs ability to maintain the reliability of the transmission grid, Chu plans to seek Congressional authorization for SWPA to finance these expenses from a revolving fund similar to BPA [Bonneville Power Administration]. BPAs capital costs are funding by borrowing from the U.S. Treasury. Analysis: We are well aware of limitations that are often imposed on funding SWPA and Corps capital improvements due to limited appropriations in times of budget deficits. While a revolving fund for SWPAs capital expenses would address that portion of the problem, it would reduce the role of Congress and the PMA customers in deciding which SWPA capital improvements should go forward and at what costs. It is likely that these decisions would not rest with the PMA Administrators, but rather be made by officials at DOE Headquarters and the Office of Management and Budget. Since appropriations earmarks are no longer allowed, Congressional input could be reduced to limiting the amount of borrowing authority granted to the revolving funds in annual appropriations bills, but not specifying which capital improvement projects should be dropped or trimmed. Implementing New PMA Transmission Authorities: While there are several new or increased authorities that would be imposed on Western Area Power Administration (WAPA) and BPA, only one of these would apply to SWPA. Section 1222 of the Energy Policy Act of 2005 authorized SWPA and WAPA to assist third parties to develop needed transmission, regardless of whether the transmission project would improve the delivery of federal power. Chus memo says the department will continue to work with WAPA and SWPA to evaluate applications from third parties seeking assistance under Section 1222 authority with a critical eye toward achieving the transmission development goals that Congress intended. Analysis: Get ready for a bunch more proposals like the Clean Line projects for SWPA to use its eminent domain authority to acquire rights-of-way for transmission lines that likely will provide little or no benefit to federal power delivery and could provide little or no benefit to interconnectivity of the grid another goal identified earlier in the Chu memo. There is no provision in the memo to seek changes in Section 1222 to shield PMA hydro customers from any of the costs or other liabilities associated with SWPAs participation in transmission construction for third parties.

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Improving PMA Rate Designs: Quoting from the Chu memo: While continuing to market and deliver federal hydropower at cost-based rates, to the extent allowed by their enabling statutes and existing contractual arrangements, I am directing the PMAs to create rate structures that incentivize the following: energy efficiency programs, demand response programs, integrations of variable resources [wind and solar], and preparation for electric vehicle deployment.

Analysis: Note that the Secretarys memo did not state that SWPA will first have to determine that these rate incentives are economically efficient and that their costs exceed their benefits. I expect that DOE Headquarters would insist that the green nature of these proposals is sufficient justification for their implementation, regardless of cost and without quantifying the financial benefits. Improving Collaboration with Other Owners and Operators of the Grid: Again quoting from the memo: The reliability of the grid depends on cooperation and collaboration among all owners of the grid. I direct the PMAs to continue to look for ways to strengthen relations with other owners and operators of the grid and grid components, which should include, but not be limited to, the following: coordinating operations with neighboring balancing authorities; increasing cooperation between public and private power; and participating more effectively in regional planning.

I am also directing the PMAs to capture economies through partnering with others in planning, building, and operating the grid. Analysis: It is difficult to argue with the assumed objectives of the bullet points. It can certainly be argued that SWPA has already implemented this portion of the memo. However, we will have to be vigilant that the last statement, about partnering with others for grid planning and improvements, is not carried forward without careful evaluation and limiting SWPAs cost of participation to the benefits received for delivery of federal hydropower. Conclusion: The proposals in this memo, if implemented as planned, will constitute a major new way of doing business for SWPA. It would also add major new missions for the PMAs beyond the marketing and delivery of federal hydropower. SWPA will discuss the potential implications of these new initiatives during the committee meetings at our Annual Meeting April 9 11. Feel free to email or call if you have questions.

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