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BPA Starts Process to Raise Wholesale Power Rates by CBB Staff Columbia Basin Bulletin - February 7, 2003

The Bonneville Power Administration announced today that, due primarily to poor water conditions and lower-than-expected secondary (surplus power) revenues, it expects to raise wholesale power rates for utilities and large industrial customers.

While the amount of the increase will be determined in a rate case process and could still vary based on actual water and market conditions, it appears the increase could be in the neighborhood of 15 percent above current wholesale rates, according to the federal power marketing agency. If adopted, a new rate will go into effect on Oct. 1.

"We held off proposing higher rates as long as we could, hoping that water and economic conditions would improve," said BPA Administrator Steve Wright. "Neither has happened. We have had some success with cost management, and this is limiting the size of the increase. But much more needs to be done."

A number of things could change the amount of the ultimate increase up or down, Wright said. Some of these conditions, such as hydro availability and market prices, are largely outside BPA's control. For example, plentiful water or even worse water conditions could push the rate increase in opposite directions.

Other conditions, such as further cost reductions on the part of BPA and its partners, could mitigate the size of the increase. BPA is on a stringent cost management program and is working with others who impact BPA rates to bring costs down. These parties include utilities, the Northwest Power Planning Council, Energy Northwest (which operates the region's only nuclear plant), the U.S. Army Corps of Engineers and the Bureau of Reclamation.

BPA will immediately begin a rate-setting process that will conclude this summer. In March, BPA will submit an initial proposal that will include an official proposed rate for the formal rate process.

"Between now and mid-March, we still have a chance to reduce the proposed rate increase by finding additional cost cuts," Wright said. "However, it will take bold and collaborative actions by many parties in the region to pare down the rate increase. We are challenging the region to help us accomplish more cost reductions."

Last November, BPA officials told the region that the agency was projecting a $1.2 billion revenue shortfall over the current rate period, which extends through September 2006. Since then, BPA has been working with customers and other regional stakeholders to narrow the gap between revenues and expenses.

BPA has identified additional cost cuts and actions that depend largely on achieving agreements with other parties. During the next several weeks, BPA will be working with its customers and other regional stakeholders to capture these savings. Included are resolution of a lawsuit involving public agency customers and investor-owned utilities; further reductions in costs of operating power plants in the federal system; and fish and wildlife spending.

Among cuts already achieved are just under $140 million in BPA's internal operating costs. These include freezing almost all outside hires and significant reductions in travel, training, awards and recognition, contract employees, research and development, and other costs. BPA has frozen power-related operating costs through 2006 at the fiscal year 2001 level, with no adjustments for inflation.

"Holding our 2003 through 2006 operating costs to 2001 actuals is a difficult but necessary action for us to take at this time," said Paul Norman, BPA senior vice president for the Power Business Line. "It's particularly challenging when we are dealing with both poor water conditions and poor market conditions, as well as serving an additional 3,000 megawatts of customer load placed on us in 2002."

In normal water and market years, secondary -- or surplus -- power revenues account for around 25 percent of BPA's power revenues. These revenues help keep rates down. But with less water available and low wholesale market prices for that water, those revenues aren't materializing to offset expenses.

BPA's financial condition is increasingly challenging as the agency wrestles with three primary issues: loss of financial liquidity, decreasing net revenues and shrinking access to capital. BPA had $800 million in financial reserves at the start of fiscal year 2001. Since then, reserves have dropped to $200 million, the lowest in more than a decade, according to the agency. Reserves help BPA survive the ups and downs of unpredictable water and market conditions. Current estimates have BPA losing another $200 million to $300 million dollars this year.

"We could be heading into the worst three-year water condition on record," said Norman. "And, even if we have the water, it appears the prices we receive for our secondary energy will be below initial projections for the remainder of the rate period. This provides us little opportunity to make up the shortfall through surplus power sales."

Even so, Wright said that he is optimistic that BPA and the region can work their way through this difficult time and put the agency back on firm financial footing by 2006.

"The key is a collaborative approach. BPA provides tremendous benefits to the region. These include payments to investor-owned utilities to lower the rates of their residential and small farm customers, as well as funding for fish and wildlife, conservation and energy efficiency programs. We may have to spread the pain among all of us who benefit if we are to get through this period and secure those benefits for the future," Wright said.