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August 21, 2002
BPA Facing Turbulent Conditions
By Ken Silverstein
Director, Energy Industry Analysis
[News item from Greenwire] The ailing Bonneville Power Administration is reaching out to the public through a series of meetings to discuss its financial hardships and develop a plan to continue supplying power to the Pacific Northwest.
Analysis: The Bonneville Power Administration (BPA) says that it could suffer a $1 billion shortfall over the next four years. With a range of painful choices before it, the federally owned wholesaler of electricity will likely have to make up the red ink through a combination of rate increases and cost reductions.
It’s been a problem exacerbated by the energy crunch in the West in 2000 and 2001, and most recently by falling short-term power prices that have cut into its expected revenues. As a result, it is the second year running that BPA will record net-revenue losses. In 2001, it lost $260 million, which it hoped it could offset by raising rates last October by 46 percent-not the 230 percent that it had threatened. It furthermore expects revenues to decline substantially by $860 million-maybe as much as $1 billion-between 2002 and 2006. It is a consequence of cheaper surplus sales and lost generation, as well as higher-than-expected costs tied to maintenance operations and plant security.
"BPA will most likely experience substantial losses through the remaining four years of the rate period absent substantial use of rate adjustment clauses, cost cuts and increased efficiency, or the use of financial tools that generally we have abstained from using," says Stephen Wright, chief executive officer of Bonneville Power in a letter to stakeholders. BPA has already started to chip away at costs, he adds, by cleaning internal operations to the tune of $300 million and by terminating contracts worth $100 million it had signed with Enron, as well as by asking the Federal Energy Regulatory Commission to allow it to take steps to reduce payments owed to Enron.
Fateful Decisions
BPA can produce 8,300 megawatts of power that is generated from 29 federal dams and one nuclear plant. But it’s committed to supply 11,300 megawatts. BPA and California suppliers typically work together to meet their respective electricity requirements. During the Golden State’s problems in the winter of 2001, however, California suppliers did not have enough excess power to sell to BPA. To complicate the matter, lower-than-expected rainfall and snow levels that fuel hydropower plants meant that BPA was only operating at 80-percent capacity. It therefore had to buy 20 percent of its power on the spot markets, which at the time were prohibitively expensive at $200 a megawatt hour.
Now, short-term power prices have dropped precipitously and the revenues that BPA gets from sales to others not part of its base have fallen sharply. When the utility completed its power-rate case in June 2001, it expected the current year’s seasonal surplus-power prices to average about $55 a megawatt hour. By April 2002, however, prices plunged to $20 a megawatt hour. They fell to as little as $9 a megawatt hour in July, although now they are at $20 a megawatt hour. Altogether, BPA says that it expects revenues from surplus sales to be $710 million less, which consists of a $360 million shortfall this year and a $250 million loss through 2006.
The utility must cover its base before any surplus power can be sold on the open markets. But because hydropower’s supplies vary and affect subsequent production, spot prices for such power have always been unpredictable. BPA made what it thought to be realistic estimates as to how much excess capacity it would have as well as the price that it thought it would get for that power. With too much supply now and falling prices, BPA is in a bind.
"It will have to do some combination of rate increases and cost reductions to make up for its projected shortfalls," says Dick Watson, director of power planning for the Portland-based Northwest Power Planning Council, a four-state compact that develops a regional-power plan. "BPA made judgments about what it thought the future cost of power would be. It was wrong and now it must deal with that."
Painful Choices
CEO Wright’s governing philosophy has been to avoid dictates and to lead by consensus. BPA is currently taking comments from interested stakeholders that are utilities it serves and the environmental community. The sides are polarized, although it is still early in the public-comment period that ends Sept. 30, 2002. BPA expects that by the time it makes its final decision at year’s end groups will begin to coalesce around common positions.
Among the choices being considered are: raise rates high enough to meet the expected deficit while at the same time reducing costs; reset rates at a higher, flat level; and borrow money to pay current expenses that would put it more at risk in the future if the funds could not be paid back. BPA also thought about raising its rates only modestly-a step that would put it at risk of missing its obligations to pay off debt that it owes the federal government and stick taxpayers with the bill. That would have given credence to critics of federal power projects who say that the BPA and other federally owned utilities should play by the same rules as investor-owned utilities.
Publicly owned utilities have had to increase their rates so they could pay for BPA’s price increase last year that totaled 46 percent. They want the focus to be on cost cutting. "I think the people that pay the bills ought to have a higher level of say in how Bonneville spends the money," says Steve Eldridge with the Umatilla Electric Cooperative in an interview with the Associated Press, with the inference being that environmentalists are recipients of BPA’s largess.
The Snohomish County, Wash. Public Utility District said it receives a number of calls from its rural residents who are suffering the wrath of a down economy and who are unable to make their utility payments. As a result, the so-called shut-off rate has more than doubled over the last year. If prices are to increase more, it says, the problem would compound itself. And, a school district in the Tri-Cities region of Washington is now contemplating whether it should run its air conditioners or buy school supplies.
Meanwhile, environmentalists argue that BPA is obligated to preserve aquatic life and to enable endangered species to maneuver around the dams it controls. During periods of financial duress, environmental groups say that their concerns are often given short shrift. The utility spends $350 million annually on fish and wildlife projects.
In the end, all sides are going to need to compromise. Last year, the same stakeholders eventually agreed to a solution that avoided a triple-digit rate increase for wholesale power rates-in what was a more trying period. It’s likely that the remedy to the projected deficit will be a blend of rate increases and cost-cutting measures, although it won’t involve reneging to the federal government or borrowing substantially more money.
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