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BPA Rate Increase Could Cost Utilities by Steve Ernst Puget Sound Business Journal, February 7, 2003

The Bonneville Power Administration is expected to announce Friday a 15 percent net increase in wholesale electricity rates.

The increase will raise $900 million over the next three years for the Portland-based power marketing agency, which is projecting a budget deficit of $1.2 billion through 2006. That deficit was largely incurred during the energy crisis, when power prices surged to unprecedented levels.

Bonneville's rate increase could siphon as much as $450 million out of the Northwest economy. Just a 1 percent increase in BPA rates removes between $20 million to $30 million from the Northwest economy, according to various reports and the BPA.

The rate structure includes a 25 percent increase in what's called the "safety-net" rate, an emergency financing mechanism, while lowering other charges by about 10 percent. That would leave an overall net increase of 15 percent, said sources familiar with the administration's plan.

The increase won't take effect until October and will have varying effects on local utilities, most of which were forced to raise their rates by more than 50 percent in the wake of the energy crisis.

Over the past two years, Bonneville's financial condition has been steadily eroding. Since 2000, the BPA has raised the rates it charges utilities and large industrial customers by about 50 percent and has been forced to tap into its cash reserves to cover its operating costs.

Now BPA's reserves have fallen from $800 million to $200 million. And for the second year in a row BPA is at risk of missing its $736 million debt payment to the U.S. Treasury.

Wholesale rates may rise again in the spring 2004. That's when many of the charges BPA plans to reduce are scheduled to rise again, sources say.

Through 29 dams on the Columbia River and one nuclear power plant, the BPA supplies roughly 60 percent of the electricity consumed in Washington state.

The rate increase will not be welcome news. The Northwest is already saddled with some of the highest unemployment rates in the country.

Hardest hit by the rate increase could be the Snohomish County Public Utility District, which receives roughly 80 percent of its power from the BPA.

The increase in wholesale power would cost the district about $10 million.

In the wake of the energy crisis, the Snohomish County PUD raised its rates by more than 50 percent. Because of the high rates and slumping local economy, a record 15,000 SnoPUD customers had their power disconnected in 2002.

Because of that, SnoPUD will raise rates only as a last resort, said Glenn McPherson, assistant general manager for finance.

"Our board will look at cutting our capital expenditures, and operations and maintenance costs even further," McPherson said. "We'll look to our reserves to see if we can absorb it, or consider borrowing money. As a last resort we'll look at adjusting our rates."

The utility has an operating reserve of about $60 million, McPherson said.

Tacoma Power receives about half of its power from the BPA. An overall increase of 15 percent in wholesale rates would mean a rate hike of about 3.5 percent for Tacoma customers, said Steve Klein, superintendent of Tacoma Power

"We are proposing an automatic rate adjustment," Klein said. "We have a rate case already under way and plan to put new rates in by March 31."

Tacoma was already considering increasing its rates by 5 percent to help meet a $25 million deficit expected over the next two years, Klein said.

Customers at Seattle City Light could see their bills increase by about 1 percent.

City Light receives only about a third of its power from BPA.

"We already have permission to pass the increase on to our customers, but we would talk with the mayor and the City Council before we did that," said Gary Zarker, superintendent of Seattle City Light.

City Light raised its rates by more than 50 percent in 2001 in reaction to having to buy power during the energy crisis.

Over the past two years, BPA has increased its rates by more than 50 percent as it tries to dig its way out of financial hole that was started in 2000 when it signed contracts to provide 3,000 megawatts of power that it could not generate.

The administration has since either had to buy power on the open market or pay customers not to take the power.

During the energy crisis, BPA bought $2.3 billion worth of power from power marketers. It is now trying to have several of those contracts overturned.

The BPA tried to save power by paying the aluminum industry $261 million not to use power.

The administration has also agreed to pay the region's investor-owned utilities, like Bellevue-based Puget Sound Energy, $1.4 billion not to take BPA power through 2006.

That's in addition to the $1.8 billion the investor-owned utilities will receive from BPA in accordance with the Northwest Power Act of 1980, which requires the BPA to pay those utilities' customers for their share of the federally financed hydroelectric system, said Ed Mosey, spokesperson for the BPA.

Meanwhile, BPA is cutting money from its salmon recovery budget and limiting money it invests in conservation and renewable energy programs.

The administration's financial position is expected to be eroded even further because of an expected drought this summer, which could limit revenues the BPA receives from sales of excess power.

"We've looked at every program and are doing everything we can short of folding up the tent and going out of business," Mosey said.

The rate increase will need to be approved by the Federal Energy Regulatory Commission.