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BPA Holds Off Rate Hike for Now; Revisit Issue First of Year by Barry Espenson Columbia Basin Bulletin - November 22, 2002

The Bonneville Power Administration's top official announced today that the agency will not, at least for now, pursue a rate increase as a remedy for a growing budget deficit but instead continue to scour its own activities and the programs it funds for $500 million in cost savings over the next four years.

BPA Administrator Steve Wright, in "communication to the region," said that "we have not hit the conditions that would trigger another rate increase in order to deal with BPA's financial condition. But it is an extremely close call and it won't take much to push us into that condition." BPA implemented a 46 percent wholesale power rate increase in October 2001 after being forced to buy power on a super-inflated power market and being limited by drought that reduced its system's power generating capabilities.

"We will need to closely monitor streamflows and markets affecting net secondary revenues, as well as our ability to realize additional savings," Wright said. "We will revisit a decision about whether or not to trigger the safety net adjustment after the first of the year."

The safety net "cost recovery adjustment clause" goes into effect when BPA has a less than 50 percent probability of making its annual U.S. Treasury payment. The Treasury bankrolled construction of the Columbia River Basin federal hydrosystem, which generates the power marketed in the region and elsewhere by BPA.

"This financial picture assumes BPA will see a substantial upturn in revenues form the secondary (surplus power) market. Our revenue forecasts are based on a reasonable set of assumptions, but still represent substantially more net secondary revenue than BPA has generated historically," Wright wrote.

"If these revenues do not materialize because of poor hydro conditions or low market prices, our financial gap will grow," he said.

The communication says that "in 2001, BPA lost $300 million after a severe drought left us with virtually no inventory to sell into secondary markets and, in fact, caused us to purchase power during the West Coast energy crisis when market prices for wholesale electricity soared.

"BPA has continued to lose money, another $300 million in 2002. We began that year with an inventory shortfall due to the previous year's drought, and, when we finally had surplus power to sell, market prices had dropped precipitously and then stayed low.

"Through much of 2002, wholesale power prices often fell to single digits and average in the low $20s per megawatt hour -- a stark contract to the $200 per megawatt-hour and higher prices seen as late as June 2001."

The power marketing agency says it is tracking toward a $1.2 billion deficit through the balance of the 2002-2006 rate period without cost reductions and/or rate increases.

After recognizing the potentially dire economic situation, the BPA launched a "Financial Choices" process to gather input on proposed solutions -- essentially rate increases, cost cuts, borrowing to potentially push off obligations until rosier economic times or increasing the risk that it would miss Treasury payments.

"An overwhelming message was that cost control is a key part of the solution," Wright wrote. "We intend to fight hard to hold the line on rates, primarily by seeking ways to accomplish our objectives in a more cost effective manner.

The agency says it has reduced its fiscal year 2002 expenses by about $100 million. And costs paid by power revenues in FY 2003-2006 have been reduced $350 million through a combination of expense reductions, expense deferrals and cash management actions, the agency says.

BPA now expects its 2003-2006 internal operating costs will be below FY 2001 actual spending levels, with no allowance for inflation. This accounts for about $140 million of the $350 million in savings and deferrals. BPA has frozen almost all outside hires and cut travel, training, retention allowances, employee rewards, contract employees, consultant contracts, market research, research and development and other costs.

"Much of this has come from reductions in BPA's internal power-related costs as a result of our new target aimed at keeping BPA's internal power-related cots as close to 2001 levels as possible trough 2001," Wright wrote.

Further reductions now being explored are less directly controlled by BPA. These include investor-owned utility benefits, which require the agreement of the utilities receiving the benefits; enhancing the cost effectiveness of fish and wildlife programs, which BPA is exploring in partnership with other federal agencies, the Northwest Power Planning Council and the public; and potential changes in higher-priced energy purchase contracts. Those targeted savings could be in excess of $500 million.

The agency has asked instead that regional entities, such as the NWPPC and fish and wildlife managers, to help find cost efficiencies within programs.

BPA intends to "allow that regional public involvement process to play out in the fish and wildlife arena," said BPA spokesman Mike Hansen.

Hansen said the agency has not set a certain percentage or amount that must be carved from a particular program, such as expenses related to the NWPPC fish and wildlife program or those related to implementation of federal biological opinions issued in December 2000. The BiOps and companion federal salmon recovery strategy prescribe actions to be taken to avoid the continued existence of fish listed under the Endangered Species Act.

But the search for cost savings will give "priority to the BiOp and existing investments," Hansen said.

Even with these reductions, BPA has a fundamental net revenue problem for the rest of the rate period that will be significantly affected by market prices for BPA's surplus power and water conditions, according to the agency.

"There are not any big surprises" in the Wright announcement, said Jerry Leone, manager of Public Power Council, which represents 114 publicly owned utilities in the four Northwest states. She was heartened by the fact that BPA had pledged to hold its internal power costs at 2001 levels. Earlier projections were for cost overruns, she said.

Leone said that everyone in the region has their own "sacred cows," whether it be power rates, renewable projects, fish and wildlife projects or other things. But given the current situation, the only thing close to a painless Northwest cure would be a combination of heavy rain and snow throughout the coming season, and higher prices for any BPA surplus power.

Tribal entities and other salmon advocates -- the day before Wright's announcement -- condemned a strategy they say ignores federal promises to fully fund fish and wildlife recovery. The Columbia River Inter-Tribal Fish Commission, representing four lower Columbia treaty tribes, said that Bonneville has not exhausted other financial options that would help offset its losses.

"This reckless approach clearly represents disregard for the fish and wildlife project recommendations of the tribes and the Northwest Power Planning Council," said Donald Sampson, CBFWA executive director. "It's a reversal on what the agency promised.

"What this means is that Bonneville is pulling the rug out from under its long-stated promises to our tribes to fully fund fish and wildlife, which fish managers believe to be around $250 million annually," said Justin Gould, CRITFC chairman and chairman of the Nez Perce Tribe's natural resources subcommittee.

"With theses cuts, BPA is not fulfilling its obligations under the Northwest Power Act, the biological opinion, and our treaties," Gould said. "It looks like BPA will take its budgetary blunders out on salmon yet again."

BPA has since 1980's passage of the Northwest Power Act funded the Council program as mitigation for impacts to fish and wildlife caused by construction and operation of the federal hydropower system. The federal BiOps are intended to dull the negative impacts of federal hydrosystem operations on listed salmon, steelhead and resident fish species.

Many of the "off-site" actions proposed in the BiOp -- habitat, hatchery operations and harvest strategies to improve the lot of listed fish -- anticipate funding through the Council program. Hydrosystem passage improvement measures and operational strategies such as spill and augmentation also impose costs on BPA's ratepayers. Bonneville, as a federal agency, as responsibility for carrying out BiOp strategies.

Conservation and fishing groups said the planned cuts in fish and wildlife funding further erode a "failing salmon plan." A "report card" released in March by the Save Our Wild Salmon Coalition said BiOp-driven is underfunded already and implementation is rapidly falling behind schedule.

"Yet again, BPA is looking to gut its salmon recovery programs while praying for more rain to bail them out," said Shawn Cantrell, Northwest regional director of Friends of the Earth.

"De-Funding important salmon restoration work would be insane," said Glen Spain, Northwest regional director of the Pacific Coast Federation of Fishermen's Associations. "BPA and the federal government are committed to restoration -- by law and by moral contract -- for lower river and coastal communities. BPA backing away from those obligations will solve no problems in the Columbia River Basin, but will make every problem worse.

Hansen said that there is no intention to "gut" fish and wildlife programs but rather "cut at the increases, not cut at the core programs." Bonneville says fish and wildlife spending has increased by nearly $100 million "over pre-2002 levels."

The conservation groups want a reckoning.

"We've asked BPA for months to state plainly how much it plans to cut salmon recovery spending, and from what specific projects," said Pat Ford, executive director of the Save Our Wild Salmon Coalition, in a press release issued Thursday. "We are asking again today."

Others fear that cuts will come in programs that emphasis conservation and the development of renewable energy sources.

"BPA's programs aren't good for fish or ratepayers," said Sara Patton, NW Energy Coalition director. "New clean energy takes the pressure off the hydroelectric system and salmon. If we want to save salmon and ensure affordable energy bills, BPA has got to build a stable energy supply through renewable resources and energy efficiency."

The budget balancing effort will involve a certain number of rain, and snow, dances. The rain and melting snowpacks that fill the river system provide BPA and federal dam operators with the wherewithal to generate surplus energy that can be sold to generate revenues beyond contracted amounts. Surplus sales have traditionally made up 20-25 percent of BPA's revenues.

The agency is not fretting yet about what has been a drier than normal start to the winter of 2002-2003.

"But if you get into December and it still looks like this we wouldn't have much power to sell," Hansen said.

BPA controls about three-fourths of the high-voltage transmission grid and almost half of the electric energy used in the Pacific Northwest. The federal power marketing agency delivers distributes power from 31 federally owned dams, one nuclear plant and a large wind energy program.

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