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The Bonneville Power Administration is Ensnared in a Financial Sinkhole by Tom Detzel, The Oregonian staff The Oregonian, January 30, 2003

The bad news just keeps coming for the Bonneville Power Administration as it struggles to climb out of a chronic financial crisis.

During the past six months, the federal power-marketing agency that supplies nearly half the Northwest's electricity has struggled to pare back a $1.2 billion budget deficit only to have a meager winter snowpack add $250 million more to the problem.

The agency's utility customers, still smarting from rate surcharges that will reach 50 percent this spring, soon face the prospect of even higher rates that Stephen Wright, BPA administrator, is expected to propose as early as next week.

"We're not talking about a 1 or 2 percenter here," Wright said. "We're talking about a significant number."

- Precisely how significant, Wright would not say. But many customer groups are expecting a double-digit addition to the current surcharge, with some analysts estimating it could grow to 60 or 70percent.

The rate decision presents a delicate balancing test for Wright, a BPA veteran who managed the Washington, D.C., office for eight years and took over the agency's helm at the apex of the Western power crisis in November 2000.

Every 1 percent boost in the BPA's rate means a $20 million hit on the Northwest's economy. Wright will have to weigh the impact of a rate increase against Oregon's highest-in-the-nation jobless rate and longing for a regional recovery.

Yet the BPA's financial condition is so dire that the agency is at risk of running out of cash to operate. For the second year in a row, it might not be able to make a $736 million payment on debts owed to the U.S. Treasury.

How high to raise rates is as much a political decision as a financial one.

"This is such a precarious time," said Sen. Ron Wyden, D-Ore., who with other Northwest politicians has urged Wright to minimize the increase. "Just look at what people are faced with in schools and layoffs and the fact that agriculture is hit so hard."

BPA power -- drawn from 29 federal dams in the Columbia River system and one nuclear plant in Washington -- is sold at cost to the region's public and investor-owned utilities, aluminum companies and large irrigators.

Another BPA rate increase would accelerate a historic shift in the economics of Northwest power in the past two years.

Since the BPA's creation in the late 1930s, the region consistently had some of the lowest electricity costs nationwide, a big competitive advantage for backbone industries such as timber, aluminum, aircraft and high-tech.

But since the power crisis, the average cost of electricity has risen sharply. Oregon and Washington now rank solidly in the middle among states, according to statistics compiled by the U.S. Energy Information Administration.

Projected deficit mushrooms

Not since the early 1990s, when consecutive drought years sucked the agency's budget dry, has the BPA been in such severe financial straits:

• The Bonneville Power Administration lost $337 million in 2001. It about broke even in 2002, but Wright maintains that the agency really lost more than $300 million that was masked by the accounting effects of an ongoing debt-restructuring program.

• The agency's cash reserve shrank by $613 million in the past two years. With less than $200 million available to pay bills, the agency for the first time might have to tap a $250 million, short-term line of credit with the Treasury.

• Last summer, the BPA said it faced a new, four-year budget deficit of $860 million and that quickly mushroomed to $1.2 billion.

Then the dry winter aggravated things. New water forecasts predict the BPA could lose $250 million it hoped to collect by selling surplus power in California. Normally, such sales help subsidize rates for Northwesterners.

Some analysts contend the BPA faces an even larger shortfall in revenues from surplus sales because of overly optimistic assumptions built into the agency's estimates through 2006, when its current rate period ends.

Using more realistic assumptions, they say, Wright might beconfronted with a $1 billion shortfall, even counting remedies the BPA has announced so far. That could peg the rate surcharge at 65 percent beginning this fall. The higher surcharge would have to stay in place three years unless the agency has above-average sales of surplus power.

New contracts, high prices

How did things get to this point?

There is no simple answer, but many BPA watchers point to a period three years ago, when the agency offered new contracts to its customers just as Western power prices began to explode in reaction to California's market cataclysm.

Utilities and industries that once considered buying at least some power on the open market scurried to the BPA, which had just set rates at $22 per megawatt-hour. The raging market was charging 10 or 20 times more.

By October 2000, the BPA signed contracts to provide 3,000 more megawatts of power than it could generate -- the equivalent of three Seattles. The agency would have to either buy that power at record prices or get customers to cut back.

It did both. By June 2001, the agency had cut deals to cover its needs, but at costs that guaranteed hefty rate surcharges through at least 2006.

The agency committed $261 million to the region's aluminum companies, most through 2003, rather than provide power under their contracts. Most plants in the region remain closed because of low aluminum and high power prices.

The BPA bought $2.3 billion worth of power from marketers such as Enron, paying up to $171 per megawatt-hour. Federal regulators have been asked to rescind the Enron deals, under which the BPA is paying about $200 million more than forecast market prices.

Finally, the BPA agreed to pay the region's eight investor-owned utilities $1.4 billion not to take most power deliveries they were due through 2006.

Those payments are on top of $1.8 billion the utilities will receive from the BPA under the 1980 Northwest Power Act, which requires the agency to share the benefits of federal power with residential and farm customers of private utilities.

The payments to investor-owned utilities are the subject of lawsuits and continuing hard feelings from the BPA's public utility customers. With most aluminum smelters shut down, public utilities cover the bulk of the BPA's costs.

A recent BPA study, in fact, found that three-fourths of the benefit from the Columbia River system is flowing to customers of investor-owned utilities. Puget Sound Energy and PacifiCorp, whose customers will collect up to $2.7 billion from the BPA through 2006, have some of the region's lowest bills.

"What it means to me, and you can see it, is that our customers are subsidizing their customers," said Dick Borges, general manager of the municipal utility in Canby, where residential rates are up 38 percent since 2001.

Companies fear ripple effect

Some are less eager to criticize the BPA's deals, noting that prices paid to the aluminum companies and private utilities were at a fraction of market rates at the time. And other Northwest utilities also bought into high-priced contracts.

"Any time you try to forecast power prices, it's a pure crap shoot," said Jerry Leone, manager of the Public Power Council. Still, she said, "publics are paying out a bunch of bucks right now, and Bonneville is hemorrhaging."

Northwest employers worry that another steep BPA rate increase could lead to a death spiral, where employers cut back, reducing BPA revenues further and requiring ever more increases to keep the agency afloat.

"There's no guarantee that if you increase your rates by 10 percent you're going to get a 10 percent increase in revenue," said Ken Canon, executive director of Industrial Customers of Northwest Utilities in Portland.

Canon, whose group includes Weyerhaeuser and Boeing, said industry surveys show the region has lost its competitive advantage in power rates. A group of his executives met with Wright this month, he said, and urged him to slash costs. "You need to cut to the bone, and then cut beyond that," he said.

Wright has pledged to look for more cuts, but his maneuvering room is limited. Advocates for the BPA's wildlife programs oppose cuts that could harm salmon runs protected under the Endangered Species Act. And cutting conservation and renewable energy could backfire by boosting long-term costs.

So utility and industrial customers are also pushing a financial strategy: urging Wright to capture proceeds from a debt-restructuring program that has allowed the BPA to prepay about $500 million in Treasury debts the past two years.

Another $315 million prepayment is scheduled this year. BPA customers want to capture that money for rates and get credit from the Treasury for past prepayments. The credits could reduce BPA obligations the next few years.

The BPA's debt to Treasury comes from two sources: $2.6 billion borrowed for transmission, conservation and renewable energy projects, plus another $4.6 billion for taxpayer funds that were used to build the Columbia River hydropower system.

Advance payments spur criticism

Political pressure to tap into the refinancing proceeds seems sure to rise.

"How can an agency that's hurting for money and about to raise rates because it's out of cash advance pay half a billion dollars of its mortgage?" asked Kevin Clark of Seattle City Light, one of the BPA's big customers.

But Wright said using refinancing to pay the BPA's expenses would be like taking out a second mortgage to buy groceries, "and in general that's not good fiscal policy."

The BPA also lives under a debt limit imposed by Congress. Prepaying debts allows more borrowing under the limit for new transmission lines and other investments that can keep rates low over the long term, Wright said.

Still, Wright said he hadn't ruled out the idea and would consider other financial tools that might help keep rates down.

Northwest members of Congress are watching the BPA closely. Both Wyden and Sen. Gordon Smith, R-Ore., said they are open to exploring prepayment credits from the Treasury. Wyden said Wright needs to show the region that he's "been pulling out all the stops to get savings" before boosting rates.

Randall Hardy, a former BPA administrator who steered the agency through financial hardships in the early 1990s, said it's clear that Wright faces a big problem, "and it's going to take a pretty hefty rate increase" to solve.

The hard part will be protecting the BPA while balancing the hardship on ratepayers, the economy and fish and wildlife obligations, he said.

"You just try to spread the pain as equally as possible, and then move on," Hardy said. "Paralysis is your biggest enemy here."