2018 Business Plan and Budget Supplemental Information May 1, 2017

Transcription

1 2018 Business Plan and Budget Supplemental Information May 1, 2017 Today we posted our 2018 Business Plan and Budget (BP&B) for stakeholder comment. WECC staff had productive dialogue with the members of the Member Advisory Committee (MAC) Budget Work Group during the preparation of this year s budget. Several issues were raised that we, WECC staff and the MAC Budget Work Group, felt warranted more context and explanation. This document summarizes the 2018 budget and then discusses issues identified by the MAC Budget Work Group. Summary The 2018 statutory budget is $27.10 million, a 1.1 percent increase ($300,000) over the 2017 WECC Budget. WECC budgeted staffing levels will increase to 143 full-time equivalents (FTE), an increase of three FTEs. Assessments will be $25.28 million, and remain unchanged from the 2017 assessment. This BP&B is consistent with the commitments made by WECC in 2016 following the Section 4.9 Review direction to develop an approach to stabilize and increase LSE certainty in annual assessment amounts over at least a three-year period. Most importantly, the budget will allow WECC to: fully meet its critical reliability mission by funding its delegation and delegation-related responsibilities; address one of the Board-identified strategic focuses for the Western Interconnection (the adequacy of natural gas infrastructure to meet evolving electric reliability needs); and make more efficient use of its engineering staff considering increased workload in the areas of short-circuit analysis, frequency-response analytics, and geomagnetic-disturbance analytics. Changes to Budget Since the March Finance and Audit Committee Meeting After the presentation of the draft budget at the March 2017 FAC meeting, WECC staff continued to review and refine the estimates in the 2018 BP&B. The following delineates some of the major changes relative to the March 2017 FAC version: Assessments decrease $253,000 and remain at the same level as 2017 assessments due to budget reductions and increases in Penalties; Penalties increase $167,000 due to timing of confirmed violations approved by FERC and collections thereof to date; Meeting Expenses decrease $11,000 to conservatively estimate meetings required under the RAC structure based on the information currently available; Consulting expenses decrease $335,000 due to 1) a $100,000 reduction in Board Director search fees based on conversations with the Chair of the Nominating Committee and 2) a

2 2018 BP&B Supplemental Materials 2 $235,000 reduction in consulting fees based on fine-tuning the scope of some reliability assessment work and the development of some modeling tools and more conservative estimates of State Representative and Non-Governmental Organization travel reimbursements and stipends; and Professional Services decrease $4,000 due to updates to Board Director compensation. Summary of Major Budget Changes Between 2017 and 2018 The following table shows the budget changes between 2017 and 2018 by major BP&B category. The drivers of the large changes in each category are outlined below the table to 2018 Budget Comparison Funding 2017 Budget 2018 Budget 2017/2018 Incr $ / (Decr $) 2017/2018 Incr % / (Decr %) Assessments 25,282,000 25,282, % Penalty Sanctions 1,059,500 1,663, , % Other Funding 662, ,050 (47,826) (7.2%) Total Funding 27,004,376 27,560, , % Expenses Personnel Expenses 19,229,726 19,871, , % Meeting & Travel Expenses 2,082,329 2,231, , % Operating Expenses 5,977,025 5,470,080 (506,945) (8.5%) Indirect Allocation (604,152) (538,000) 66,152 (10.9%) Total Expenses 26,684,928 27,035, , % Fixed Assets 112,000 62,000 (50,000) (44.6%) Total Expenditures 26,796,928 27,097, , % Funding Less Expenditures 207, , , % Penalties increase 57.0 percent ($604,000) due to penalties issued and approved for confirmed violations and collection thereof from July 1, 2016 through the current date WECC does not include penalty estimates in its budget. Instead, the budgeted penalties amount reflects only funds received to date for confirmed violations for which FERC has approved a penalty; Personnel Expenses increase 3.3 percent ($642,000) due to the addition of three FTEs, continued refinement of labor float rates, budgeted merit pool, and medical premium rate increases; Meeting and Travel Expenses increase 7.2 percent ($150,000) primarily due to increased audit requirements and on-site visits required by physical security standards; Operating Expenses decrease 8.5 percent ($507,000) primarily due to a $475,000 reduction in consulting expenses, as well as reductions in Board Director compensation, and business

3 2018 BP&B Supplemental Materials 3 insurance premiums. One-time 2017 projects, including RAS Modeling and Base Case Coordination System alternatives, came out of the budget and new 2018 projects, including the $750,000 gas/electric interdependence work, replaced them; and Fixed Assets decrease by 44.6 percent ($50,000) primarily due to the reduction in one-time data storage costs and data analysis software. AREAS OF INTEREST As we worked to develop this budget, the MAC Budget Work Group raised questions in the following areas of interest. Reliability Assessment Committee Implementation Efficiencies In early 2018, the Reliability Assessment Committee (RAC) should be fully operational and we expect efficiencies will be achieved. However, the efficiencies do not directly translate to a lower WECC budget for Some of the benefits that were envisioned when the RAC was designed include: reducing duplication in data collection; facilitating accurate, complete, and consistent data; increasing coordination between near- and long term reliability assessments; and increasing stakeholder engagement. We believe these will translate into efficiencies within WECC staff time as well as within the stakeholder community such as travel less necessary to attend the RAC meeting instead of attending both the Planning Coordination Committee (PCC) and Transmission Expansion Planning Policy Committee (TEPPC) meetings. However, these efficiencies do not directly translate into lower WECC budget or staff requirements due to other changes occurring in staff workload. Using conservative estimates, the 2018 budget for meetings and travel to support the committees, including the RAC, is slightly lower than However, it is not clear exactly what subcommittee structure will be needed to support the RAC. Based on internal analysis, we have estimated the time spent performing tactical work to support all WECC committees (liaison activities) totals approximately two FTEs, spread across many employees. Even if the RAC formation eliminated percent of the former PCC and TEPPC committees, subcommittees and work groups, it would not result in a reduction to total headcount. The primary driver of the staffing need is assuring adequate resources to support current WECC products. During 2016, the PCC Review Task Force and TEPPC Review Task Force individually reviewed their existing products and found that they were all beneficial for assessing the reliability of the Western Interconnection. The Joint PCC-TEPPC Review Task Force (JPTRTF) recommended consolidating all the products under the RAC. A draft RAC transition plan was recently posted for

4 2018 BP&B Supplemental Materials 4 stakeholder comment. It includes an appendix that provides a detailed list of the work products to be transitioned (click here to display the plan document). As described in the next section, we are adding two FTEs that will free up some of the engineering time currently spent performing liaison activities. The two new FTEs, plus process efficiencies gained with the RAC and ADS, are necessary to meet growing demands placed on staff by NERC, stakeholders and the strategic plan. If these efficiencies are not realized, it is likely that we would budget for additional engineering FTEs to meet the growing expectations. Three Additional FTEs The 2018 BP&B adds three FTEs one Compliance Risk Analyst in our Entity Oversight Group, plus a Project Manager and a Project Coordinator in our Reliability Planning and Performance Analysis group. The Compliance Risk Analyst we seek will be a subject matter expert in internal controls and will further our capabilities in delivering the Risk-Based Compliance and Enforcement Program. Internal controls are a core compliance activity, along with completing an Inherent Risk Assessment (IRA), in developing an entity-specific compliance oversight plan. This is an area where our skills need to be enhanced. The Project Manager and Project Coordinator are intended to help plan, execute and close out WECC s many projects as well as provide staff liaison support to the remaining committees. This will free up our technical and engineering staff so they can focus on work that they are uniquely qualified to do. It also will allow WECC to improve the support to committee meetings and further the development of the three-year operating plan and the three-year work plan. Adding this capability will allow WECC to meet its expanded technical workload in 2018 (geomagnetic disturbance, frequency response, and short circuit analyses/analytics) without adding engineering capacity. We do not see any areas where using consultants in lieu of staff would be a viable alternative to adding headcount in 2018 as this work will become baseload work, nor do we see work that could be pushed off to a future year to avoid adding headcount in Budgeted Merit Pool WECC s 2018 merit pool is budgeted at 3 percent. This is in line with industry practices and is in the same range as NERC and other Regional Entities merit pools for Two critical aspects of WECC s compensation process/philosophy are 1) WECC follows standard business practices; and 2) checks and balances are embedded in our compensation structure to ensure that WECC pays fairly and that compensation is in line with the market. WECC s Human Resources and Compensation Committee oversees its compensation program, which is designed to ensure that WECC can attract and retain talent with the necessary skills and capabilities to execute its mission. Our compensation is market-based and is informed using expert compensation consultants and data

5 2018 BP&B Supplemental Materials 5 compiled by two prominent compensation consulting firms Mercer and Towers Watson as well as Regional Entity salary survey data. WECC benchmarks the salaries of the entire staff every three-to-four years (officers are benchmarked annually) against market data, which is heavily weighted toward electric utilities. We establish a compensation range for each role that is based on market data. Individuals are paid within that range based on demonstrated proficiency in their roles. The annual merit budget establishes the merit pool and is not a guaranteed percentage increase. Alignment with Strategic Priorities In 2016, the Board developed and approved an outline for WECC s strategic direction and it included five main strategic themes for WECC to focus on. Those five themes include: 1. Monitor their progress as proposals are developed for structural changes in the West and be prepared to evaluate potential impacts on reliability. 2. Assess the reliability implications of the ongoing evolution of load composition and resource mix; and implications for fuel security, resource and transmission adequacy as well as BES stability. 3. Identify key vulnerability issues and work with stakeholders to address them. 4. Maximize sharing of operating and system data and insights from Event Analysis, including near-misses. 5. Focus reliability assessment efforts on identifying the impacts and possible mitigation efforts surrounding a handful of future industry evolution scenarios or high-impact/low-probability events. In 2016, the Board also endorsed a three-year operating plan in which we identified five priority initiatives. Of those five, four are explicitly addressed in the 2018 BP&B. The fifth, an assessment of state implementation plans related to the Clean Power Plan, has effectively been rendered moot by recent changes in policy direction from Washington DC. Those four initiatives are: 1. Comprehensive study of natural gas infrastructure the 2018 budget includes funds for a consulting study of natural gas-electric industry interface issues and adequacy of gas infrastructure to meet evolving electric sector needs. This is discussed further in a separate section below. 2. Enhance WECC s capability to assess Essential Reliability Services in future scenarios the 2018 budget includes resources to allow us to enhance our planning capability, tools and models to measure frequency response in our planning base cases.

6 2018 BP&B Supplemental Materials 6 3. Create a comprehensive risk assessment of the Western Interconnection the 2018 budget includes resources necessary to continue and improve on the risk assessment work initiated in Assess Interconnection performance regarding key operational practices and work with our committees to improve upon them the 2018 budget includes resources necessary to continue the Reliability Assurance project. In addition to providing the resources necessary to support the specific priority areas above, this budget also includes necessary resources to deliver the other activities outlined in the three-year operating plan. Natural Gas Study The adequacy of natural gas infrastructure to meet the evolving needs of the electric power sector is one of the top structural reliability issues the sector faces. The expansion of Variable Energy Resources, especially solar, has significantly changed the operating characteristics of the balance of the fleet. It has especially increased the need for highly responsive ramp rates of natural gas plants, which in some cases is faster than the natural gas system can support (this was the core summer 2016 issue in Southern California with Aliso Canyon). It is more than prudent that we get ahead of this issue as we expect renewable resource additions, especially solar, to continue pace. In addition, we expect continued decline of solid fuel resources where fuel can be adequately stored, placing even more pressure on the gas system s ability to serve electric generation. This assessment was highlighted in the strategic direction outline the Board approved in 2016 and was also featured as a core initiative in our three-year operating plan, which was endorsed by the Board in December. The budget for this study in 2018 ($750,000) represents an estimate based on similar assessments conducted in the Eastern Interconnection. We are in the process of soliciting bids from qualified firms to do the work and, depending on timing, the budget may be updated based on the bids received. We are very sensitive to building on the earlier work conducted for the Western Interstate Energy Board (WIEB), work NERC has conducted on characterizing natural gas storage facilities, and the work that the California Independent System Operator (CAISO) has performed on Aliso Canyon and will not duplicate any of these previous assessments. Click here for a link to the draft scope of work for the project for more information. Duplication between WECC, Peak, and NERC The question of duplication between WECC and Peak was explicitly considered by the Committee Organizational Review Task Force work conducted in Because of the reviews, there were a few adjustments made in the committee structure within the Operating Committee and those changes will

7 2018 BP&B Supplemental Materials 7 be made once the necessary transition work has been done. Beyond that, we are unaware of any duplication of effort between WECC, Peak and NERC. If any stakeholder is aware of efforts that are duplicated and the specifics surrounding those circumstances, WECC requests that this information is provided to WECC s CEO for consideration. Working Capital Reserves A Working Capital Reserves table is included in the BP&B each year, which rolls forward estimated reserves starting with the most recent fiscal year-end, through current year projections, up to and including 2018 budgeted funding and expenditures. It is Table B-1 and can be found in the Supplemental Financial Information section of the BP&B beginning around page 45. Cost Tracking WECC will track costs and time related to the implementation of the Reliability Assessment Committee and the Anchor Data Set. WECC s current accounting system has the capability of tracking vendor costs without any system modifications or incremental cost. However, based on preliminary conversations with our payroll provider, it does not appear as though we can use our current payroll system to track time for these activities. We will continue to investigate the options available to us with our current vendor and additional time-tracking software providers. If WECC does need to use a new provider, it is estimated that the annual cost will be $20,000 to $40,000. WECC may implement time tracking for all employees at some point in the future where it provides managerial value; however, WECC does not anticipate tracking time at a detailed activity level (e.g., by committee or work group). Summary We are confident that the draft BP&B represents good financial stewardship, adheres to commitments made to the membership regarding assessments, and funds the necessary work for WECC to fulfill its mission. The budget is also consistent with the strategic priorities approved by the Board of Directors as well as WECC s Operating Plan.