Insight No.17 : Jul 2010 : Power Project : Building a Better Business CaseBusiness Case for Bonneville Powerby Dian Schaffhauser

The energy business worldwide is in flux as it expands operations to encompass the power generated through relatively new sources such as wind and solar and to address the growing demands of new uses of electricity such as electric cars. Those needs present a giant learning curve for the organizations in charge of managing and delivering power, such as the Bonneville Power Administration.

After all, explains Gordon Matthews, BPA general engineer, "We have lots of experience in operating the river." The river happens to be the Columbia, the largest in the Pacific Northwest of North America, which starts in the snows of the Canadian Rocky Mountains, then rolls westward to form the border between Washington state and Oregon before it drains into the Pacific Ocean. Among other power sources, BPA manages the energy output of 31 federal dams on the Columbia through its 16,000 miles of circuit transmission.

"We're good at forecasting what the stream flows are going to be based on snowfall, and we know what our loads are going to be based on history," Matthews says. "But wind is sort of odd. If we knew accurately 12 hours ahead of time what the wind would be, we'd be happy. But with wind, in the next hour, what you're forecasting isn't necessarily what you get."

Sorting out what the future might look like for BPA - and specifically its research and development labs - is a project that Matthews and a handful of his colleagues at the federal agency have been involved with for about a year. As this article explores, nailing down the broad parameters for future state operations through a business case development is a methodical process that requires a combination of data collection, internal survey work, industry feedback, management discussion, and outside consulting expertise.

A BPA Background

BPA has a long history of dealing with hydropower. The nonprofit federal agency was created by an act of Congress in 1937 with two missions: One is to provide a transmission system to deliver power generated at federal hydro projects along the Columbia River in the Pacific Northwest, where the agency operates. The other mission is to market that power. By law, BPA is prohibited from owning the generation of power itself. But BPA takes every watt of the power generated by federal dams along the river - belonging either to the Army Corps of Engineers or the Bureau of Reclamation - and markets it. When surplus power is generated, BPA sells that power at a sufficiently high price, so it can reduce its rates to its "preference customers," the regional public utilities in Idaho, Oregon, Washington, Montana, and small parts of California, Nevada, Utah, and Wyoming.

The river is one thing; wind is another. In spite of its variability, BPA is still required to take the power generated by wind turbines when it's available - even if that happens in the middle of the night when loads are light and there's no market for that power. (The exception: BPA does have a dispatch procedure to limit wind when it adversely impacts the system.)

Energy generation is one of those things where "you use it or you lose it," Matthews points out. "You make it just in time and on demand. The prime driver in designing and developing a robust utility system is meeting the peaks. You need to have all the wires and all the transformers and all the stuff to deal with peak load situations, but those only happen rarely - daily or annually. But you still have to have the infrastructure, which looks like excess capacity when you're not in a peaking situation."

Therein lies the need for continual research. "How can you store it? That's really the Holy Grail," Matthews explains. "We're very interested in looking at different types of storage technology and helping assess how well those would work in a real operating transmission system."

That research in turn requires laboratories. BPA has operated its own set of laboratories - one dedicated to high voltage testing and the other to other forms of testing. The labs are housed in two massive buildings at BPA's campus in Vancouver, WA.

The research performed at the labs includes activities such as "impulse testing," where the labs simulate a lightning strike to see what impact a million volts will have on its equipment; or checking new components - insulators, tower designs, conductors, power shaping equipment such as capacitors and inductors, and cabling --- to characterize their risk of failure under varying conditions. In the 1990s the labs were involved in specifying the fiber optics system that BPA ran through its system to enable communications from its substations, which aren't staffed, to its control center. More recently the labs have worked with academic partners - local universities - to build up a "wind inventory," to document where the most wind is generated and how reliable it is.

When deregulation struck the US energy sector in the 1990s, the emphasis in the electrical utility business switched from driving the technology forward to who could operate their system most efficiently and cost effectively. "There was a mindset that everything that needed to be invented had been invented," says Matthews. From 60-plus people, staffing in the labs shrank to about 20 chemists, craftsmen, and researchers.

Matthews, who was part of the labs, moved to other parts of the organization, eventually landing in the BPA's Asset Performance and Compliance Group. About 18 months ago, as mandates out of Washington shifted under the Obama administration, BPA's Technology Innovation Office, responsible for administering all of the agency's research and development investments, began looking into the possibility of the labs contributing to the growing need for new technology to meet the changing needs of the country.

A Core Team and a Business Case

Matthews and four other people with experience in the labs and business development were brought together as a core team to research what should be the fate of the labs. As Matthews explains, the Innovation Office was aware of the labs and the significant contributions toward R&D they'd made over the years and was also aware that the labs were operating in a diminished capacity with a skeleton crew. "So the question was, what do we do with the labs? Do we make the investment in staffing and facilities to revitalize them? Do we contract out the facility to be operated by somebody else? Or do we shutter them?" Those were the three business cases to be developed by the core team, along with an eventual business plan to envision how any eventual transition would unfold.

The business case project had several components - development of situational analysis, a strengths-weaknesses-opportunities-threats (SWOT) analysis, customer roundtables, and survey work.

Starting in December 2008, the team began contacting Pacific Northwest academic institutions with power engineering programs. The goal was to determine any interest in partnering and collaboration on research projects. The team also made visits to the Department of Energy (DOE) and other power marketing agencies across the nation, to understand how the labs at the BPA could pursue research initiatives that would have value for those other entities.

Although the DOE has a constellation of national labs - Lawrence Livermore and Sandia National Labs among them - BPA saw its unique selling proposition as being a functional lab where applied research could take place. "We thought there was a natural partnership there, where the proof of concept could come from those national laboratories, but where they could actually do qualification testing before commercializing new technologies," Matthews says.

At the same time these interviews were taking place, the team began a situational analysis of the current state of the labs. That involved pulling work reports to build an inventory of what work had been and was being performed at the labs and putting values on it as if it were being performed by an outside entity.

With the help of consultants, the team also conducted focus group sessions with internal people who had been customers of the labs as well as those who had not been. The goal for that phase was to understand the strengths of those relationships where the work was done internally and also to understand why other people weren't using the labs or were contracting externally for work that "arguably could have been performed internally," Matthews explains.

The focus groups, which numbered about a dozen, were kept fairly small - to about 10 people - and were separated out by areas of expertise. "We wanted to make sure once we had an audience, that anyone who was going to contribute would be heard." He adds that by keeping participants separated by specific functional areas, their conversation could feed on itself.

The team sat in on the focus groups, documented the conversations, and then went back and analyzed what was said to look for patterns in the discussions.

Two themes surfaced, Matthews says. "One was that those people who used the labs considered the continued availability of those services vital to the performance of their jobs in planning and design and maintenance. Those people not using the labs were doing it because - either rightly or wrongly - they perceived that it took too long to get a project in. When you have a minimal staff, you queue up. If you need the answer tomorrow, and someone says it's going to be six months, then you look outside. That became almost a complete feedback loop. People started to believe it was going to take too long or be too much .trouble to use the labs. So they don't. And they built up those relationships outside to do their business."

Two of the consultants who worked on the initiative came from NEETRAC - the National Electric Energy Testing Research and Applications Center, which is part of Georgia Tech. "They brought a perspective that was unique," says Matthews. "The labs historically have been focused only on work internal to BPA. NEETRAC is in the business of performing work for their member utilities or anyone in the industry that needs it. So they helped us to examine whether there was a market out there that wasn't being addressed by the commercial sector."

In that area, he adds, "We walk a fine line. It's not our place to compete with the commercial sector, but if there is a need not being met commercially that provides value to our efforts and also to the Pacific northwest region, then that's something we're willing to consider pursuing."

A Focus on Risk

The SWOT allowed the team to drill down on particulars. "We've really done a lot in the last decade to change our corporate thinking to one that's really risk based," Matthews says. "And to be able to quantify and characterize risk and do risk analysis. The SWOT gave us the analysis we needed to turn that risk into informed thinking."

By looking at alternatives such as abandoning the lab or outsourcing the operation in terms of what risks those options posed to BPA's primary mission, that SWOT analysis allowed the team to come up with a fairly objective analysis to substantiate the decisions it made, Matthews says. "It wasn't based on an emotional or intuitive reaction, but one that would stand the scrutiny of people who would audit that thinking." As an example, if a problem arose with some type of component in the field, Matthews asks, "How much of a threat is it if you have to go outside commercially and contract? There's a built-in lag time that contracting always involves, as opposed to being able to run up the hill to the labs and say, 'We have a problem...'"

The team used surveys to go out to the organization at large and get people's impressions about the value of the lab to their work on a numeric scale.

The team also performed focus groups with senior management to take a reading on how aware they were of the labs and its operations. "Our executives knew that the labs were there and provided a lot of value over the years. It became apparent early on that the labs' going away was not a good option, that we could demonstrate we were getting a positive return on investment in the labs. The growing consensus was that labs could do more and were cost effective as compared to having to outsource some of the work that arguably could be done internally. The question was, are they still relevant?" observed Matthews. "It became apparent very quickly that they were relevant. It [turned] a yes-no decision into a how-much? How big should the labs be? What's the right size?"

Phased Implementation

Now that the analysis is done and a plan for the future of the labs laid out, next comes the hard part: implementing the phased approach developed by the team and approved by management. The first stage is to "stabilize the labs," Matthews says. "What do we need to do to make sure the situation doesn't deteriorate?"

Because the agency is staff-constrained - it's not adding any full-time employees - it must develop new processes for the huge build-out the industry is currently undergoing. Explains Matthews, "We've integrated over 3,000 megawatts of wind in the past three years. Projections are that that's going to double within the next five years. That adds hundreds of miles of new transmission that has to be constructed." Those demands put a real stress on BPA. When staff is added, where should it go - to the labs or to planning, design, or construction? "It's a tough and challenging environment."

Even if the decision is to add staffing to the labs, should it be in the areas of R&D - "the sexy part of the labs," as Matthews calls it - or should it be in other operational areas, such as electrical, chemical, or geotechnical testing? For example, a chemistry lab does routine analysis on oil samples taken from transformers and devices and substations all over the system. That testing provides a snapshot of the health of the transformers. Why is that important? "We need to know if there's a problem before one actually blows up, especially since they're not produced domestically anymore," he explains. "If we were to order a transformer today, we're looking at more than 18 months before we take delivery."

Once the critical needs are met of keeping those internal services up and operating, the next stage calls for investments to achieve "operational excellence, characterized as an entrepreneurial growth strategy for BPA," Matthews says. He explains that these are resources to serve the agency's internal needs for non-research lab services. Since this stage is presumed to require more FTE, it's currently on hold.

The third stage involves investing in a creative center of excellence - the more outward facing phase that engages BPA's labs in working with other national labs and with universities to provide services that aren't commercially available elsewhere to the industry at large.

At this point, Matthews, says, the labs are doing all of stage one and "little pieces of stage three." If stage three looks promising, he adds, "it provides more impetus to pursue stage two." Current areas of interest include advancing the grid, the network for delivering electricity, and integrating renewable energy into its operations.

"If you consider the whole energy pie 10, 20, 30 years out and take petrochemicals out of that, does the pie get smaller - that we'll use less energy, which probably translates into a lower standard of living - or do we make up that difference?" Matthews asks. "Electricity is a technology where the infrastructure is already in place. So how do we build out that infrastructure while also being cognizant that we need to control costs? If we do our jobs really well, you'll totally take us for granted."