SPP Strawman for RSC Motions 1-41

SPP Strawman for RSC Motions 1-41

Southwest Power Pool, Inc.

SPP Strawman for RSC Motions 1-41

Table of Contents

Introduction

RSC Motion 1

Problem Summary

PCTF Recommendation

RSC Motion 4

Problem Summary

PCTF Recommendation

[CF1]

Introduction

This document has been developed by SPP staff and the SPP stakeholder groups to address the SPP Regional State Committee’s Motions 1- and 4 from their meeting on October 25, 2010. This document replaces the whitepapers for Motions 1,3and 4 that had been previously presented as separate documents.

RSC Motion 1

RSC recommends that SPP review what is the best manner to address significant cost increases and/or overruns of transmission projects that are regionally funded.

Problem Summary

The issue of increases in transmission project cost estimates is a result of the projected cost estimate increases provided by Designated Transmission Owners (DTO) after receipt of their respective Notification To Construct (NTC) for some of the Priority Projects approved by the Board of Directors in April 2010. This issue is a product of the increased openness and transparency of the SPP planning processes and concern due to the regionalization of cost allocation. In the past, transmission cost estimates would have tended to remain internal to each member utility, subject only to the utility’s internal review and any applicable obligations to its regulatory authorities. Adjustments in cost estimates “prior to a spade of earth being turned” would have been handled completely within the utility’s own processes. With the implementation of SPP’s Highway/Byway cost allocation methodology, additional scrutiny is warranted in reviewing changes to regionally funded project cost estimates for projects that were a result of an SPP process, including Aggregate Study, Generation Interconnection, STEP reliability and economic project development processes (Applicable Projects).[k2]

PCTF Recommendation

Project Cost Task Force (PCTF) recommends multiple process improvements in order to increase the transparency related to modifications of cost estimates for projects after approval. PCTF also recommends implementing a mechanism to review whether a project that has experienced a significant increase should be reevaluated for construction and/or regional cost allocation.

The PCTF proposes that SPP stage the implementation of the processes developed to initially apply to approved Applicable Projects 300 kV and greater, and after the process is refined and working well or after a date certain to then include approved Applicable Projects 100 kV and above.

Project Tracking Enhancements

Currently, when SPP issues a Notification To Construct (NTC) for an approved project it is entered into the Project Tracking process. The Designated Transmission Owner (DTO) is required to submit quarterly updates of cost estimates and the expected in-service date. These updates are incorporated into a quarterly report that is submitted to the Board of Directors/Members Committee (BOD/MC), the Markets and Operations Policy Committee (MOPC), and the Regional State Committee (RSC). In accordance with the guidelines provided in the SPPNTC Whitepaper approved in early 2010, cost estimates that have increased by more than 20% since the previous estimate require the project developers to submit justification for the variance[k3]. [CF4]

To make the Project Tracking process more rigorous, several enhancements should be considered for implementation after an NTC is issued

1. For Applicable Projects that SPP issues an NTC, DTOs have 90 days to respond to the NTC committing to a project(s) as specified in the NTC or proposing a different project schedule or project specifications. If the DTO accepts the NTC, it shall respond as prescribed in the NTC letter and additionally provide SPP with a refined study cost estimate as described in Stage 43 of the proposed fourfive-tiered process as denoted in recommendations for RSC Motion 4. For Applicable Projects that are required due to an executed Generation Interconnection Agreement, the DTO will provide [CF5]
2. The[k6] refined study cost estimate received from the DTO will be used as a baseline for reporting all cost estimate changes during the Project Tracking process and will be the basis for determining project variance. The refined study cost estimate will be referred to as the NTC Project Estimate (NPE).
3. SPP’s Project Tracking process should be enhanced to require all Applicable Projects with an approved NPE which exceeds $20 Million and that are regionally funded will be required to submit Project Tracking updates on a monthly basis for that project; all other projects will be required to submit Project Tracking updates on a quarterly basis. SPP will continue to issue notices to DTOs requesting the monthly and quarterly updates.
4. PCTF recommends the development, or selection, and implementation of a Standardized Cost Estimate Reporting Template (SCERT) to[k7] be utilized for all approved project cost estimates and monthly/quarterly updates. Staff recommends the PCTF be assigned the responsibility to develop the SCERT by assessing the appropriate information to be provided in response to the SPP Project Tracking inquiries.
5. Each month, SPP will submit a Project Tracking report to the Project Cost Working Group (PCWG) detailing all project cost estimate changes outside the established project variance bandwidth, as set forth below in the PCWG Review.

Standardized Cost Estimate Reporting Template

The PCTF recommends a Standardized Cost Estimate Reporting Template (SCERT) be developed for DTOs to submit additional cost tracking information to SPP for Applicable Projects which exceed $20M. [[THE FOLLOWING SHOULD GO IN THE D&C WHITEPAPER DISCUSSION, as well as use design best practices and performance criteria for managing the costs of approved transmission projects.]][CF8] The information submitted by the DTOs should include: (i) actual expenditures spent to date; (ii) estimate at completion; and (iii) projected in-service date,;[k9]

PCWG Review

Any Applicable Project that deviates or is expected to deviate +/- 20% from its NPE should be based on data and information from both the DTO and SPP staff, and acted on by the PCWG pursuant to the options set forth below. PCWG will prepare a report to be submitted to the MOPC, RSC, and BOD. The PCWG will be provided with the original SCERTA[k10], monthly project tracking data updates, and any comments from SPP staff or the DTO related to the cost estimate variances. Comments from the DTO should include relevant information regarding any sunk costs, an explanation for the cost estimate variances, and comments as to why the project should or should not continue forward. The[k11] recommendations made by the PCWG to the MOPC, RSC, and BOD that may include any of the following:

1. Accept the cost deviation as reasonable and acceptable and reset the baseline used to evaluate future cost deviations.
2. Identify all or a portion of costs related to the variances and recommend potential actions.

1. Recommend changes to the NTC that would reduce the cost or avoid issues that may be causing the increase.

2. Recommend assessing whether design best practices and performance criteria are being followed by one component of judging whether project cost variances are reasonable and appropriate.

3. Recommend consideration be given to excluding from regional funding project costs that are a result of not adhering to performance criteria[k12].

1. Suspend all future expenditures on the project while SPP restudies[1] the project to determine appropriate changes to the NTC or possible withdrawal of the NTC.
2. If PCWG recommends a restudy and/or changes or withdrawal of the NTC, the recommendation to the MOPC would follow SPP’s existing processes for approval to the BOD. The BOD will make the final determination on whether to restudy and/or change or withdraw the NTC.

There are instances when resetting the baseline cost estimate will be prudent as it would not be reasonable for a project to be flagged automatically for review every month following a cost estimate variance that had been previously reviewed and accepted. The PCWG will determine if and when to reset the baseline cost estimate. If a baseline cost estimate is reset, the NPE will still be retained in the monitoring tool.

Figure 1: PCWG Review Cycle

At this time, SPC task force does not recommend the development of specific criteria to determine whether a restudy should be recommended by the PCWG. Instead, recommends that the BOD assess whether a restudy is warranted on a case-by-case basis while considering the time and cost for SPP staff to perform the restudy. [k13]

Figure 2: Project Tracking Flowchart

RSC Motion 4

SPP evaluate how cost estimates are established for transmission projects before Cost Benefit Analyses are performed.

Problem Summary

SPP staff and stakeholders need to create a standardized and transparent method for creating and controlling transmission project cost estimates. Estimates should be refined as projects move from a conceptual estimate to construction completion. Continuous tracking and reporting throughout the planning process should reflect these updates at increasingly higher levels of accuracy. The Project Timeline illustration below depicts five stages of the project estimating process. Each of these stages must have progressively tighter requirements for the accuracy of cost estimates and detail of data. The bandwidth for estimate accuracy reduces as the scope definition detail increases.

Conceptual Estimate is defined as the estimate prepared by SPP Staff based on historical cost information in a database created by SPP as well as updated information provided by the DTO(s) and is to be used as a screening tool to determine if a project is cost effective and should or should not be pursued in meeting a determined system need. This estimate would be based on straight line estimated mileage and would not attempt to address environmental, geography, terrain or other details. The Conceptual Cost Estimate Template information would be utilized. Projects that are being considered by its proponent as a potential solution to meet a need identified by the RTOin a needs assessment or the STEP[k14], but for which there may be little or no analysis available to support the transmission project. A project charter is developed at this stage[k15].

Study Estimate is defined as an estimate prepared by the DTO(s) for projects that pass the Conceptual Estimate screening process and that SPP may consider further and that requires a more detailed estimate and that SPP has provided a conceptualscope. This estimate would include any known additional costs to the cost per MW/Mile and would be DTO specific costs but may or may not have DTO engineering scrutiny or input.

NTC Project Estimate is defined as a refined Study Estimate provided by the DTO after receipt of an NTC and that includes any additional cost information known at the time the DTO is required to provide its response to the SPP.

Design Estimate is defined as the Rrefined NTC Estimate provided by the DTO to SPP after the DTO engineering has been completed, including any environmental, routing or siting requirements required, and that has a known route. This would include but not be limited to any known material and labor costs.

Construction Estimate is defined as the refined Design Estimate provided by the DTO after all labor and material costs are known. This cost estimate will also include any known condemnation costs.

Figure 3: Cost Estimate Precision Bandwidths Throughout Project Lifecycle

PCTF Recommendation

Project Cost Task Force (PCTF) recommends that TOs develop consistent cost estimating principles relative to design best practices and performance criteria to be developed by the TOs. PCTF further recommends the development, or selection, and implementation of a Standardized Cost Estimate Reporting Template (SCERT) to be utilized for reporting cost estimates to SPP.

There are costs that will be associated with providing cost estimates on projects prior to the issuance of a NTC. The issue of how a TO can recover such costs should be further discussed through the stakeholder process.

PCTFrecommends implementing a requirement for regionally funded transmission projects to utilize progressively more precise cost estimates throughout their planning and construction cycles. A five-tiered approach is recommended based on the level of project definition that is known while also considering an appropriate level of risk valuation.

The PCTF of the MOPC should define what needs to be included at each level of estimates (i.e.,everything that the TO needs to provide to SPP and everything that SPP needs to provide to each TO to develop consistent estimates).

In order to account for unknowns once a project has been approved by SPP, Designated Transmission Owners should perform risk assessments while developing their refined cost estimates. Because of the wide ranges afforded cost estimates in the conceptual and study stages, no additional contingency should be included above the uncertainty bandwidths. The risk assessment performed in developing the design and construction estimates should be commensurate with the level of unknowns that remain with the project.[CF16]

For the design estimate, the line route, line length, planned station locations, general terrain and land use, and project schedule are relatively certain. The structure locations, clearance constraints, commodity prices, ROW costs, labor costs, and final engineering design may still be unknown. For the unknowns, a suggested contingency cost and probability of occurrence should be assigned. Once the risk assessment has been performed for each item in the estimate, the overall project contingency should not exceed 10 to 20 percent.[CF17]

For the construction estimate, structure locations, environmental issues, terrain and land usage, material costs, labor costs, and project schedule are relatively certain. Weather impacts, clearance constraints, change orders, material delivery issues, etc. are unknown. Like the design estimate, risk assessment should be performed for these unknowns resulting in an overall contingency of not more than 5 to 10 percent of the total project estimate.[CF18]

Estimate Name / Stage / Level of Project Definition / End Usage / Precision Bandwidth
Conceptual / 1 / 0% to 10% / Concept screening for ITP20/ITP10 / -50% to + 100%
Study / 2 / 10% to 40% / Study of feasibility and plan development for ITP10/ITPNT / -30% to +50%
NTC Project
Estimate / 3 / -20% to +20%
Design / 4 / 40% to 70% / Construction design after NTC issued / -20% to +20%
Construction / 5 / 70% to 100% / Build the project / -10% to +15%

Table 1: Cost Estimate Structure

Initial estimates for SPP’s regionally funded transmission projects are study estimates with a 10% to 40% level of project definition, resulting in a precision or accuracy bandwidth of -30% to +50%. Statistical analysis of current SPP Priority Projects indicates that the overall percentage of cost estimate variance was +15%, which is well within the acceptable range.

Figure 4 shows how cost estimates are created and refined in the five stages of the project estimate development process. Below the figure, the details of each stage are described.

Figure 4: Project Estimate Development Process

In order to account for unknowns once a project has been approved by SPP, Designated Transmission Owners should perform risk assessments while developing their refined cost estimates. Because of the wide ranges afforded cost estimates in the conceptual and study stages, no additional contingency should be included above the uncertainty bandwidths. The risk assessment performed in developing the design and construction estimates should be commensurate with the level of unknowns that remain with the project.

Stage 1 – Conceptual Estimate

In this first stage, SPP staff will develop conceptual cost estimates using a generic cost estimate tool (database platform). The tool will be developed in conjunction with the Transmission Owners. The estimating tool will include generic cost data such as cost per mile for specific voltage levels, substation cost estimates, and cost modifiers for different regions, terrain, urban/rural, etc. This allows cost estimates to be developed easily for the purpose of screening large numbers of potential projects and selecting suitable candidates for more detailed study. The simplified example below shows how a cost estimation tool might be developed. To estimate the cost of a project, the cost/mile of conductor and right of way (ROW) for a particular voltage class would be multiplied by the line length. The estimated cost would be multiplied by the applicable ROW multipliers to account for factors that can affect the cost of line construction. Finally, the substation costs would be estimated and added to the total project cost estimate.

The output of the tool will be a table providing the total cost estimate for each project under consideration, as well as all the supporting information for each. This will provide an easy-to-use reference for the cost estimates and the variations among them. An example of this output is shown below.

Cost Estimate Tool Output Example

Project Owner / Owner 1 / Owner 2 / Owner 3
Project Name / Project 1 / Project 2 / Project 3
Voltage / 115 / 230 / 345
Electrical Capacity (amps) / 900 / 1000 / 2000
Length (miles) / 10 / 50 / 100
Total Cost per Mile / $ / $$ / $$$
ROW Conditions / Rural/Plains / Urban/Plains / Rural/Environmental
Substation Adders / $ / $ / $
Total Cost / $ / $$$ / $$$$$

Table 23: Cost Estimate Tool Output

SPP staff, in conjunction with the Transmission Owners, will update the cost data used in the cost estimating tool on an annual basis. To support these updates, SPP staff will provide an aggregate summary of final cost data collected in the Project Tracking process. This will ensure the cost estimate tool is kept up-to-date and will help refine the tool to reflect actual costs.

Figure 5: Stage 1 Development

Stage 2 – Study Estimate