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BPA Urges Council to Take Lead in Cutting Fish Project Costs by Barry Espenson Columbia Basin Bulletin - December 13, 2002

A tidal wave of invoices expected during fiscal year 2003 has the potential to push spending in the Northwest Power Planning Council's fish and wildlife program some $41 million, at minimum, beyond the $139 million cap set by the program's funding agency, the Bonneville Power Administration.

And that cannot happen, BPA's top executive, Steve Wright, told the NWPPC Tuesday.

"That would be a big problem for us given the fragile nature of our business right now," Wright said. He updated the Council on a dire BPA financial situation in which the federal power marketing agency projects it would, if it maintains the status quo, face as much as a $1.2 billion loss for the 2002-2006 rate period.

He and other BPA officials urged the Council to take the lead in finding ways to cut, defer and/or cancel fish and wildlife contractual obligations for new projects and for project renewals. The prioritization must have at its core "projects needed to meet the requirements of the various biological opinions that apply to Bonneville, in particular the 2003 and 2005 check-ins for the 2000 Federal Columbia River Power System Biological Opinion and to preserve previous important investments of the Fish and Wildlife Program," Wright said in a letter to the Council.

"In particular we ask the Council's help in prioritizing program spending in a way that will continue the pace of the recovery effort that, based on increased runs and promising jack counts, appears to be under way," Wright wrote.

Fish and wildlife managers said Tuesday that they feared that progress would be compromised with such a drastic cutback in the amount of money BPA has obligated for projects. They also said that volatile power markets and overcommitments by BPA to provide power are the cause of the crisis, not fish and wildlife budgets that have been and remain within limits outlined by the funding agency.

And while fish and wildlife spending is not the cause of the shortfall, it is one of the many costs the power marketing agency is trying to reduce to ease the problem and help forestall, or limit, rate increases. Wright this past summer asked the Council as well as fish and wildlife managers to help cut costs. And that was before spending patterns for FY 2002 and FY 2003 (beginning Oct. 1, 2002) reached sharper focus.

"This rapid increase in program spending has surprised us," Wright said in a Dec. 10 letter to the Council. A "draft FY2003 estimated "accrual" estimate for the program showed a bottom line of nearly $180 million with three spending categories "to be determined" and others still subject to refinement.

The agency has been thrown into a deep financial slump, hit last year by a drought that limited the federal hydrosystem's ability to produce power and forced to make power purchases at wholesale market prices that reached unprecedented heights that year. BPA has had surplus power to sell at times over the past year, but prices have now sunk to low levels.

"And we're not off to a very good start in terms of the water year," Wright said. If the precipitation deficit continues it will again limit BPA's chances of boosting its revenue stream with surplus power sales.

The odds of BPA having to increase power rates increased throughout a dry October and November and early December. "Every day of sunshine really hurt us," Wright said.

The result of the two-year tailspin, Wright said, is a paring of the agency's financial reserve to its core.

"It wouldn't have been such a big deal for us if we had $800 million (the amount lost over the past two years) in reserves," Wright said of the unexpected surge in fish and wildlife accruals -- the amount the agency has actually paid out in response to invoices from fish and wildlife projects sponsors.

A key question, Wright said after his NWPPC presentation, is "do we have enough to stay liquid?"

The cause of the accrual problem has not been strictly defined, other than to say the program has grown some 39 percent over spending levels during the 1996-2001 period. The swelling accruals also include contractual obligations made in previous years that are now demanding payment.

Wright admitted that BPA's financial reporting systems have been lacking in their ability to forecast the phenomenon that occurred last year and this -- bills coming in at a volume much greater than anticipated. Accruals ranged from $68.5 million to $108.2 million during the 1996-2001 rate period. The number grew to $136.9 last year.

". substantial work remains to be done to assure that we get a much earlier understanding of the budget path we are on than occurred this year," Wright wrote.

The Council has made its program funding recommendations based on advice from BPA that $186 million would be available, on average, annually -- $150 million for "expense" and $36 million for capital. In establishing the wholesale power rates for the 2002-2006, BPA estimated that that $150 million in contract "obligations" would require only $139 million annually in actual accruals or payments since accruals normally lag obligations in time.

The accrual dilemma faced this year is focused primarily on the expense side, though Council members such as Washington's Tom Karier said the agency should explore the possibility of capitalizing more projects, such as land acquisitions. That would have the effect of stretching out the cost of those projects over the years, and reducing the pressure on the expense side. BPA officials said they are investigating that possibility, though Wright told the Council he generally preferred not to push costs out into the future if possible.

The "draft" 2003 accrual estimate shows an estimated (coincidentally) $139 million that the BPA expects to pay out for just for existing contracts -- if they are renewed as originally planned. Another $10 million is estimated to pay BPA overhead.

Yet another $19.5 million in bills is expected to roll in for projects that BPA has said it intends to fund but has not yet signed contracts. The projects are for new work recommended for funding by the Council through its provincial review process.

BPA has not yet issued its funding decision on $5.3 million worth of projects recommended by the Council in the five most recent provincial reviews. BPA also estimated that $6 million in new projects will emerge from the mainstem/systemwide review that will be completed next spring.

All of the figures are estimates and somewhat subject to change.

Wright and other BPA officials this week bounced the budget balancing ball into the Council's court, asking the four-state panel to help slow the flow of cash into the program.

"I need to know whether you intend to take this on," Wright said. "If you don't we will." He asked the Council to produce recommendations by Feb. 21.

During a Thursday session, NWPPC Chairman Larry Cassidy called the assignment a huge task but he and the other councilors acknowledged it is one they likely need to take on. Cassidy called a special Dec. 19 meeting to discuss how the Council would proceed.

Oregon Councilor Eric Bloch and other members insisted Thursday that BPA produce a more precise accounting of what it expects its accruals to be.

Cassidy said he couldn't understand how any agency, or business, could have signed contracts for which it can't define the amount payable.

"We can't help you until we know what the number is," Cassidy said.

The prospect of finding "$41 million in projects to either defer or defund" was called draconian by John Palensky, NOAA Fisheries and chairman of the Columbia Basin Fish and Wildlife Authority. CBFWA represents federal, state and tribal fish and wildlife managers. He pointed out that the NWPPC fish and wildlife program was one of the few programs funded by Bonneville that had continuously toed the budget line.

He said a huge part of the problem now being encountered is the fact that some obligations that were incurred over the 1996-2001 period were not fulfilled. But the balance of funding promised under the terms of a 1996-2001 memorandum of agreement was not carried forward.

Those prior obligations are now being "wedged" under the $139 million cap along with new obligations, he said.

"What we are seeing is projects approved and not funded," Palensky said. That can have the effect of ruining partnerships that have built up over the years.

"Relationships are extremely important in a business and this is a business," Palensky said. He also pointed out that cutbacks can affect local economies.

"BPA funding is multiplied not only by direct cost share, but also through contribution to rural economies across the basin," according to CBFWA "financial principles" submitted as testimony to the Council.

Both Bill Tweit of the Washington Department of Fish and Wildlife and Lynn Hatcher of the Yakama Nation said that ever-shifting BPA policies on fish and wildlife issues waste resources and usurp the Council project selection process.

"We don't know the rules of the road when it comes to Bonneville," Tweit said. Those rules, many apparently unwritten, seem to change during the game with project sponsors forced to rework, and rework, projects that are already Council-endorsed.

Some projects don't make it at all, Hatcher said. The Yakama Nation had two contracts terminated in the past month "strictly on a decision by Bonneville."

BPA said that it has already begun to take "interim actions" to contain 2003 fish and wildlife costs. The agency is:

• placing all land or easement purchases on hold. BPA said it will make every effort to work with project sponsors to find ways to preserve the option of completing the purchases at a future time.
• for a limited time, funding contracts that come up for renewal at a reduced level that will preserve existing investments in the projects and keep essential systems operating at the minimum levels necessary to retain the benefits achieved to date for fish and wildlife.

"We are concerned that this may not be enough and that other actions may be required," Wright said in his letter to the Council.

BPA has already implemented a number of actions in its contract renewal process intended to cut costs. They include the elimination of a 10 percent rule that allowed budgets to creep above approved levels and of cost of living adjustments. Travel and training costs are being pared to those deemed absolutely necessary. Also eliminated is "carry over," meaning that budget amounts that go unspent in one year are not automatically added to budget amounts approved for following years.

Related Links:
Wright letter