8/2/2019 Southwestern Power Resources Assoc. (SPRA) Summary of Chu PMA Initiatives - 3/16/12

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Southwestern Power Resources Association

MemoTo: 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 memorandumto the Departments Power Marketing Administrations (PMAs) (attached to email)outlining new responsibilities DOE will be assigning to them and new authority DOEwill be seeking for the PMAs. These new tasks and potential new authority couldherald major changes in which Southwestern Power Administration (SWPA)operates in the future.

Taking greater advantage of energy efficiency, demand resources and cleanenergy while at the same time reducing costs to consumers requires a transitionto a more flexible and resilient electric grid and much greater coordination amongsystem operators, Chu wrote in the memo. This can only be accomplished byupgrading our infrastructure to take advantage of modern communications andcontrol technologies and bringing the benefits of increased connectivity to moreAmericans. As [DOEs] own [PMAs] have historically played a valuable role in theelectric sector, they can and should help lead this evolution *** to the extentallowable under their enabling statutes.

In summarizing the memo, I will outline the new initiatives proposed and thenprovide my initial analysis of the potential impacts on SWPA and its wholesalepower customers.

Upgrading and Replacing PMA Transmission and Infrastructure: Chus memonotes 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 planrecognize the changing nature of the electric sector, including complying withNERC reliability standards, integrating variable resources [e.g. wind and solarenergy], scheduling on an intra-hour basis, centralizing dispatch, responding to solarflares, and minimizing cyber-security vulnerabilities. To address the latter, he wouldcharge the PMAs to serve as test beds for innovative cyber-security technologies.

Analysis: Taking on these additional functions is going to require more personnelperhaps many more personnel plus increased capital investment and expenses.

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Benefits would accrue to SWPA customers, but many non-preference customerswould benefit as much or more without bearing the costs. Chu acknowledges thatthe current economic environment is creating pressure on many of the PMAscustomers. Capital improvements, therefore, must be staged to ensure the costsare appropriately managed. This statement is an acknowledgement by theSecretary of Energy that his new edicts are going to cost us more money. Hissolution is not to share the costs with all the beneficiaries, including non-preferenceelectric consumers, but simply to spread out the costs and implementation over alonger period of time. Bottom line: your federal power costs are going to go up sothat we can demonstrate at our expense certain benefits and efficiencies to investor-owned utilities. I would call that being generous to the general public with our ratedollars.

Paying for Upgrading PMA Transmission and Infrastructure: Capital expensesfor SWPA are currently financed with annual appropriations and customer fundingthough net billing. Because appropriation limitations can sometimes inadvertentlylimit the PMAs ability to maintain the reliability of the transmission grid, Chu plansto seek Congressional authorization for SWPA to finance these expenses from arevolving fund similar to BPA [Bonneville Power Administration]. BPAs capitalcosts are funding by borrowing from the U.S. Treasury.

Analysis: We are well aware of limitations that are often imposed on fundingSWPA and Corps capital improvements due to limited appropriations in times ofbudget deficits. While a revolving fund for SWPAs capital expenses would addressthat portion of the problem, it would reduce the role of Congress and the PMAcustomers in deciding which SWPA capital improvements should go forward and atwhat costs. It is likely that these decisions would not rest with the PMAAdministrators, but rather be made by officials at DOE Headquarters and the Officeof Management and Budget. Since appropriations earmarks are no longer allowed,Congressional input could be reduced to limiting the amount of borrowing authoritygranted to the revolving funds in annual appropriations bills, but not specifying whichcapital improvement projects should be dropped or trimmed.

Implementing New PMA Transmission Authorities: While there are several newor increased authorities that would be imposed on Western Area PowerAdministration (WAPA) and BPA, only one of these would apply to SWPA. Section1222 of the Energy Policy Act of 2005 authorized SWPA and WAPA to assist thirdparties to develop needed transmission, regardless of whether the transmissionproject would improve the delivery of federal power. Chus memo says thedepartment will continue to work with WAPA and SWPA to evaluate applicationsfrom third parties seeking assistance under Section 1222 authority with a criticaleye 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 transmissionlines that likely will provide little or no benefit to federal power delivery and couldprovide little or no benefit to interconnectivity of the grid another goal identifiedearlier in the Chu memo. There is no provision in the memo to seek changes inSection 1222 to shield PMA hydro customers from any of the costs or other liabilitiesassociated with SWPAs participation in transmission construction for third parties.

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Improving PMA Rate Designs: Quoting from the Chu memo: While continuing tomarket and deliver federal hydropower at cost-based rates, to the extent allowed bytheir enabling statutes and existing contractual arrangements, I am directing thePMAs 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 notstate that SWPA will first have todetermine that these rate incentives are economically efficient and that their costsexceed their benefits. I expect that DOE Headquarters would insist that the greennature 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: Againquoting from the memo: The reliability of the grid depends on cooperation andcollaboration among all owners of the grid. I direct the PMAs to continue to look forways 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 othersin planning, building, and operating the grid.

Analysis: It is difficult to argue with the assumed objectives of the bullet points. Itcan certainly be argued that SWPA has already implemented this portion of thememo. 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 carefulevaluation and limiting SWPAs cost of participation to the benefits received fordelivery of federal hydropower.

Conclusion: The proposals in this memo, if implemented as planned, will constitutea major new way of doing business for SWPA. It would also add major newmissions for the PMAs beyond the marketing and delivery of federal hydropower.SWPA will discuss the potential implications of these new initiatives during thecommittee meetings at our Annual Meeting April 9 11.

Feel free to email or call if you have questions.