NW Energy Coalition

**Brief Analysis of the Henwood Energy Services Study**

*Steve Weiss - November 10, 2004*

Please note that the NW Energy Coalition as an organization has not
taken a formal position in support of or against Grid West.
None-the-less, the Coalition clearly sees the need for and benefits of
more coordinated transmission planning, improved pricing structures and
system management to increase efficiency in the 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's participation
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 to support Northwest institutions while
providing long-range planning, low-cost transmission service and
opportunities for new renewable energy generators to get better access
to the gird. That said, 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.

Steve Weiss's review of the Henwood Study, conducted by Henwood Energy
Services and commissioned by Snohomish County PUD, with participation
from 12 other Washington public utilities, follows.

**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]{.underline}.

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[^1]. 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]{.underline}.

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 Henwood 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
4^th^[^2], 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 #1Grid 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.[^3]
However, we are far from that decision, so the utilities\' concerns are
premature.

What follows is a more detailed critique.

**1. 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.

**2. 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.)

**3. 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
decisions, 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.

**4. 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:

> a\) The much more limited role Grid West would take compared to other
> RTOs;

b\) Grid West\'s intention to use existing facilities;

> c\) Grid West\'s ability as a late-adopter to avoid many computer and
> soft-ware development costs other RTOs have experienced; and,
>
> d\) the many cost-control mechanisms incorporated into Grid West's
> bylaws.

**5. 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.

**6. 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.

**7. 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[^4] 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 (which includes representatives of public power, IOU's, state
and tribal governments, consumers, independent power providers, BPA and
environmental and renewable energy advocates) is at work now developing
the parameters of the study, 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.

[^1]: It should be noted that a prime roadblock to the Coalition\'s and
    many others\' support of the previous failed RTO West effort was
    that the filing utilities essentially negotiated with themselves to
    write the TOA. This was completely unacceptable to most of the
    non-filing RRG members, and ultimately led to the rejection of RTO
    West. Therefore it was seen as a critical element to establish a
    counterparty\--the Developmental Board\--to represent the region\'s
    interests in negotiating the TOA. Thus grew the need to approve the
    bylaws, seat the Developmental Board and allow it to negotiate at
    least a first draft of the TOA before a meaningful cost-benefit
    study could be done.

[^2]: The date for this decision has now been moved to mid-January.

[^3]: It must be noted that before that decision can be made, each of
    the filing IOUs must also receive its state\'s regulatory
    approval\--another important safeguard.

[^4]: Calculating cost of solving congestion with redispatch rather than
    new construction; determining the cost of redispatch compared to
    curtailing transactions; analyzing the costs and benefits of
    allowing transmission rights holders to sell rights; and,
    determining the value of allowing new generators to purchase rights
    from existing holders rather than building new lines.