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New Roles for the PMAs?

Not So Fast, There, Secretary Chu!On March 16, 2012, Energy Secretary Steven Chu issued a memorandum outlining sweeping new roles

for the Power Marketing Administrations (PMAs) that market hydropower generated at federal

multipurpose reservoirs. In our six-state region, Southwestern Power Administration (SWPA) provideswholesale hydropower from 24 Corps of Engineers dams to rural electric cooperatives, municipally

owned electric utilities and state power agencies. This energy ultimately reaches about 8 million people.

Like the other PMAs, SWPA charges the lowest possible rates, consistent with sound businessprinciples (Section 5 of the Flood Control Act of 1944). This means that SWPA sets its wholesale powerrates at levels that are sufficient to recover the investment costs of the hydropower and transmission

systemplus interestas well as the annual operating and maintenance costs of the Corps hydro plantsand SWPA. The PMAs are one of the few federal programs that recover all associated federal costs.

But Secretary Chu wants the PMAs to take on new responsibilities well beyond simply marketing federal

hydropower. What does this mean?Mission creep for DOE and higher costs for electric consumers!

The New Energy Order

Among other things, Secretary Chu would assign the following new obligations, authorities and

responsibilities to SWPA:

Upgrading and Replacing PMA Transmission and Infrastructure: Chus memo notes that the PMAsinfrastructure 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 serveas test beds for innovative cyber-security technologies.

Analysis:Taking on these additional functions is going to require more personnelperhaps many

more personnelplus increased capital investment and expenses. Benefits would accrue to SWPAcustomers, but many others would benefit as much or more without bearing the costs. Chu

acknowledges that the current economic environment is creating pressure on many of the PMAscustomers. 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 aregoing to cost consumers more money. His solution is not to share the costs with all the beneficiaries,

but simply to spread out the costs and implementation over a longer period of time. Bottom line: your

constituents electicity costs are going to go up so that we can demonstrate at our expense certainbenefits and efficiencies to investor-owned utilities. Thats 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 tofinance these expenses from a revolving fund similar to BPA [Bonneville Power Administration].

BPAs capital costs are funding by borrowing from the U.S. Treasury.

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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 might address that portion of the problem, it would reduce the role ofCongress 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 theamount 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: Section 1222 of the Energy Policy Act of 2005

authorized SWPA 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 SWPA to evaluate applications from third parties seeking assistanceunder Section 1222 authority with a critical eye toward achieving the transmission developmentgoals that Congress intended.

Analysis: Get ready for a bunch more proposals for SWPA to use its federal 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 gridanother goalidentified 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.

Improving PMA Rate Designs:Quoting from the Chu memo: While continuing to market anddeliver 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 energy efficiency programs, demand response programs, integration of variable resources [wind and

solar], andpreparation for electric vehicle deployment.

Analysis:Note that the Secretarys memo did notstate that SWPA will first have to determine that

these rate incentives are economically efficient and that their costs exceed their benefits. Expect DOEHeadquarters to insist that the green nature of these proposals is sufficient justification for theirimplementation, 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 thegrid. 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 Chus assumed objectives. It can certainly be argued that SWPAhas already implemented this portion of the memo. However, without careful evaluation and limiting

SWPAs cost of participation to the benefits received for delivery of federal hydropower, partneringwith others for grid planning and improvements could very well mean improving the grid for others

at our expense.