henwood.html

The NW Energy Coalition's Brief Analysis of the

Henwood Energy Services Study of the
Grid West Proposal

Steve Weiss
November 10, 2004

Our Position
The NW Energy Coalition has not taken a formal position in support of or against Grid West. However, the Energy Coalition does not advocate cutting short the dialogue over Grid West's potential implementation. The study analyzed here, conducted by Henwood Energy Services and commissioned by Snohomish PUD and 12 other public utilities, could be read by some as a reason to dismiss Grid West. The Energy Coalition believes this would be a premature reaction, as the Henwood study has significant flaws that don't fully report the potential benefits of Grid West nor account for improvements that ongoing discussions will create.

Meanwhile the need clearly exists for more coordinated transmission planning, improved pricing structures, and system management to increase efficient use of the grid. The Coalition doubts that a voluntary incremental step will significantly improve the system. The Coalition also doubts that a FERC-directed traditional RTO will serve the best interests of the Northwest. For these reasons the Coalition has contributed Steve Weiss as a member of the Regional Representatives Group and a developer of the current Grid West platform proposal. The Coalition hopes that Grid West can be structured in a way that supports Northwest institutions while providing long-range planning, low-cost transmission service, and better grid access for new renewable energy projects.

But the Grid West developmental process is far from complete, and its own comprehensive cost-risk-benefit study is only now in its design phase. The Coalition thus believes it is premature at this time to take a formal position either for or against Grid West.

Overriding Concerns

The Coalition has two fundamental problems with the Henwood study and its interpretation that go beyond the study's particular conclusions:

• The Henwood study is based on a hypothetical proposal that may have little in common with the actual Grid West proposal.

The current Grid West proposal is incomplete. The technical workgroup and consultant have not yet finished the task of describing the functions Grid West would perform, markets it might run, the relationship it would have with transmission owners and grid users, or the tasks it would take on. In addition, the Transmission Operating Agreement (TOA), the key contract between the transmission owners and Grid West that will ultimately determine the scope of Grid West, has not been negotiated because it requires an independent co-party to the utilities to negotiate with and therefore the need to seat a developmental board.

Thus the Henwood study's conclusions regarding the future costs and benefits of Grid West are, by necessity, based on what Henwood speculates might be Grid West's scope.

In addition, as the RRG conducts this development work it will adjust Grid West's scope and design based on estimated costs and benefits. Grid West's development is not being done in a vacuum there is an ongoing feedback process to make sure that only functions which produce real net benefit will be incorporated into the final design.

• The utilities co-sponsoring the Henwood study have wrongly concluded that the RRG would not be doing a thorough, in-depth cost/benefit study before irrevocably moving forward.

This is not the case. All the members of the RRG, including the Coalition, have insisted that their support for moving forward is strictly contingent upon the results of such a study once Grid West's scope and design is known. The RRG explicitly decided, after much deliberation, that a meaningful cost-benefit study could not be done until more design work had been completed and a draft TOA was negotiated.

In the cover letter accompanying the study, its sponsoring utilities state:

The only prudent course is for BPA and the Grid West Regional Representative Group (RRG) to step back and take time to comprehensively define the proposed Grid West design, and then study in detail the costs and benefits of Grid West compared to the costs and benefits of alternatives to an RTO.

This is exactly what the RRG is insisting on.

The utilities' letter goes on to say, "If bylaws are approved November 4th , it will be too late to consider the costs and alternatives in an objective way." This is also not true. Instead, the RRG decided that it could not make an informed decision without knowing what Grid West would be doing and how it would do it. Once the actual details of Grid West's functions and its relationship to the transmission owners (the TOA) is fleshed out, a meaningful cost-benefit study can be done. After that, if the parties believe Grid West would be too costly or risky decision points #2, 3 and 4 the region can easily walk away from Grid West with little loss. In fact, the Grid West Developmental Board bylaws require it to dissolve itself after 12 months if it has not been able to successfully negotiate TOAs with the transmission owners, particularly Bonneville.

The decision point (#1) at issue here does not entail an irretrievable decision in any sense of the word. After decision point #1, Grid West will not be operational. In fact it will be three major decision points away from operational. It is true that withdrawal after Grid West is fully operational will be costly for BPA. Thus it is important at decision point #4 for the region to be very sure that it wants to move forward to seat the Operational Board (as opposed to the Developmental Board) of Grid West. We fully expect that decision to be made carefully. However, we are far from that decision, so the utilities' concerns are premature.

What follows is a more detailed critique:

• The Henwood study quantifies only a fraction of the benefits Grid West might provide. Many of the major benefits are only discussed qualitatively or fairly casually dismissed as benefits that could be easily accomplished without Grid West. But many of those benefits (the use of generation redispatch to free up more long-term ATC, for example) cannot be, in our opinion, readily realized without an independent third party. Coordinated activities that by nature have the potential to create winners and losers among self-interested transmission owners will not take place on a bilateral, voluntary basis.
• The study fails to assess adequately the future effects Grid West might have on new resource and transmission development. The study mostly analyzes the current use of the system with or without Grid West. The transmission system was very generously overbuilt originally, so there was a lot more flexibility available until recently. Of course overbuilding costs money, but once done it results in a system where inefficiencies in scheduling and use (using contract paths rather than flow-paths), no real redispatch market, etc., cause little economic pain.

Thus Henwood found that there is not too much curtailment going on now and that the system is dispatched pretty efficiently. But as the system gets more and more use, that will no longer be the case unless the region makes some very large new infrastructure investments to once again become overbuilt. On the other hand, if we run the system more efficiently, we don't have to build as much new infrastructure. Not accounting for the future problems, at which Grid West is mainly aimed, makes the benefit side of Grid West appear weak in the Henwood study.

An example of this discounting of future problems appears on p. 2-3, where Henwood states that wheeling costs are not considered when parties are making dispatch decisions, since wheeling costs are charged, for the most part, as a fixed charge and are used to pay for embedded costs. That is true, at present. However, going forward it is important that parties begin to account for transmission costs (or avoiding those costs) when they make generation siting and dispatch decisions. That is exactly what Grid West would provide looking forward, and it's a benefit that Henwood doesn't attempt to weigh. Grid West has the potential to optimize the system; giving users price signals to act economically (i.e., redispatching their generation and selling unused rights if that has economic value, siting new generation to minimize new costs and investing in lower cost non-wires alternatives.)

• Losses. Another factor Grid West could consider in the future, though not contemplated in its initial functions, is location- and time-based loss calculations. Right now losses are assigned as rough averages. But in real time, losses change drastically depending on line loadings. Taking real losses into account by giving users price signals based on those losses would probably affect dispatch quite a lot. For example, power sent from British Columbia to California now is charged losses based on averages: about 20%. However, in reality, when lines are loaded, the incremental losses may be as much as twice that. And when lines aren't loaded (or counter-scheduled), losses may be as low as zero. Giving users those price signals would change generation patterns, resulting in much more efficient generation patterns. Only a flow-based west-wide system can do that. Henwood did not even discuss this important issue. It should be noted that losses are as significant a cost of the system as congestion is.

On p. 3-10 Henwood estimates only a 1% improvement in dispatch decisions with Grid West. That's a very low figure looking forward. For example, consider the McNary Open Season effort by BPA to get that line constructed. First of all, the line may not really be needed. It is only congested a few hours per year (maybe less than 100). Many of those hours are during the spring runoff when parties are trying to export a lot of power. But the power isn't worth much in those months, so it might be that if those parties were offered some money, they'd release their transmission rights and enable a lot of new generation to get it (mostly wind) without forcing anyone to build new lines. Grid West would be the neutral market-maker which could arrange those transactions. Henwood fails to account for the savings that could be realized from avoiding unneeded construction.

• Grid West costs exaggerated. Henwood has estimated new costs but did not subtract out costs that each individual transmission owner would no longer have. Many of the functions of Grid West (scheduling, running transmission studies, OASIS, balancing, planning, etc.) are not new--Grid West would simply be taking them over from the utilities. Moving costs to Grid West is different than adding new costs. In addition, Henwood estimates Grid West's costs to be the average of other RTOs. This approach fails to take account of:

• Grid West's incentive to cut costs. Henwood speculates (Section 6-2) that Grid West, as a non-profit entity, would have little incentive to reduce costs. Similar logic would find that public utility commissioners don't try to reduce costs. Grid West's Board, like those commissions, is elected by stakeholders and users. They won't get re-elected if they let things get out of control. Under the current draft of the Grid West bylaws, it takes only 11 of the 30 votes of the membership committee to deny re-election to a Board member. Unlike some other RTOs whose members are much more insulated from their boards, Grid West will have ample incentive to keep costs down and resist scope creep.

• Planning benefit. Section 10-8 fails to connect the benefit of having Grid West in charge of planning. One of the major barriers now to getting affected parties who need transmission actually to pony up the money to build new facilities is that they don't get many of the benefits of their investment. When a new line is built, the investors only get the right to get their money back in the form of transmission credits for their scheduled use. They don't get the rights to the money generated by other free riders that also are able to use the line--once the line is built, it often creates new capacity far beyond the use requested by the investor. Grid West would assign ALL the rights created by the expansion to those who paid for it and use new revenues from free riders to reimburse the investors more quickly than is the case today. This would be a huge benefit and incent construction when needed without harming existing customers.

• Alternatives to Grid West. In Section 10 and 11, Henwood discusses other ways to do things that would not require a new, independent and FERC-jurisdictional entity such as Grid West. First of all, Henwood recommends doing four studies to provide information about needed changes to the operation of the system, their costs and benefits. This recommendation raises the question of how Henwood could have come to its own conclusions before conducting those same types of studies. In addition, studies can be biased if done by entities that may be winners or losers depending on their outcome. That's another reason for having an independent entity like Grid West do them once the independent developmental Board is in place.

Second, Henwood suggests that Grid West was not going to study costs and benefits. As mentioned earlier, there are four decision points that the RRG must approve before Grid West actually starts to operate. Only the last actually activates Grid West, and the cost-benefit analysis will precede the last decision. The RRG decided that studies should not be done before a determination of which functions Grid West would take on, what the bylaws looked like, and other similar questions. Without those basics, a cost : benefit analysis would be meaningless. The RRG committee (includes representatives of public power, IOU's, state and tribal governments, consumers, independent power providers, BPA and environmental and renewable energy advocates) developing the parameters of the study is at work now, and the study will be completed in ample time before the final vote.

Third, for each of the four items it recommends studying, Henwood suggests that negotiations or voluntary coordination agreements (non FERC-jurisdictional and not requiring an RTO) could solve the problem at much less cost. However, many on the RRG feel that Grid West is best suited to capture these benefits, because it would be neutral and independent. Reconfiguring existing rights and redispatching generation to free up ATC are extremely difficult for parties with a stake in the outcome to accomplish fairly or at all.

Furthermore a neutral and independent party in charge will be much better able to make planning decisions, because it can acquire sensitive information from competitors who would not share it with each other. These are the functions that Grid West is being designed to do. It is difficult to imagine leaving this kind of thing to non-neutral parties who have a stake in the outcome. This is not to say that there are not proactive steps that can and should be taken to improve current coordination and planning functions before more comprehensive solutions are in place.

Conclusion

The Coalition sees many flaws, both in the Henwood study itself, and in the conclusions that its sponsoring utilities are taking from it. First, the study tries to evaluate a proposal that does not yet exist. Second, the study seems to discount benefits Grid West could bring to the region in the future, by comparing it to the status quo, rather than a future with or without Grid West. Third, Henwood claims, without much justification, that the efficiencies Grid West is supposed to bring could be accomplished through bilateral agreements and without an independent entity. Many on the RRG are skeptical of this conclusion. Finally, the studies' sponsoring utilities seem to feel that allowing Grid West to continue to develop its proposal and conduct its own cost-benefit study would be a slippery slope that irrevocably commits the region to putting Grid West into business. The Coalition does not agree with these points and believes, without taking a position on Grid West at this time, that the developmental process is open and responsive to change, and holds out enough promise of significant benefits that it is important to not cut short the process prematurely.