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The Challenge for BPA

by Shelly Strom, Business Journal staff writer
Portland Business Journal, August 25, 2003

Administrator Steve Wright reflects on the agency's issues

Electricity users--primarily industrial, commercial and agricultural customers--await word from the region's largest power provider on whether increased power rates will continue to climb and whether access to low-cost federal power will shrink.

Bonneville Power Administration provides 45 percent of electricity used in Oregon, Washington, Idaho and Montana. The agency has met unmatched uncertainty in the past three years, when a power crisis rocked Western utilities and customers. To reconcile its finances, Bonneville has cut more than $400 million from its 2002-2006, $3 billion budget. The federal agency also has proposed a 5 percent rate increase to stem red ink.

Whether the proposed rate increase will be implemented depends on a pending settlement in a lawsuit brought by public utilities. The lawsuit challenges contracts Bonneville negotiated with investor-owned utilities. Depending on the outcome, BPA could relieved of the need to boost rates and could even enact a rate reduction of approximately 1.5 percent.

With those major issues set to be resolved later this summer, the agency will return to another major task. In 2002, Bonneville began an effort--known as the post-2006 process--to plan for service to its wholesale customers when the current rates expire in 2006.

Utility customers signed contracts extending to 2011, but agreements with aluminum companies end in 2006. Several major decisions loom: How to structure new rates to distribute costs and benefits among the various types of customers and whether to negotiate new contracts to serve the aluminum companies.

To get a sense of how BPA is handling that process and where the agency is headed, The Business Journal interviewed Bonneville Administrator Steve Wright. The following is an excerpt of that conversation.

BJ: As part of the review, Bonneville is hearing from all its constituents--utilities, direct customers, natural resource agencies, environmental groups and so on. What issues do they bring to the table?

Some significant issues hinge on these post-2006 contracts. Constituents are going to want to know how much load in general are we going to serve. Essentially, "Am I going to be able to get power from Bonneville?" Service to aluminum customers is a big one. How much aluminum load will we serve in the region?

We also will be looking at how much are we going to spend on fish and wildlife conservation, activities that Bonneville is mandated to fund.

Another question is what will be [the credits] to utilities. But most critical is, what is our rate structure going to be--how are we going to handle needs for power above and beyond what the federal system is capable of providing.

Bonneville went from being a $2 billion organization to a $3 billion organization in one day. In 2000, customers came to Bonneville and collectively asked for 3,000 megawatts above and beyond what they'd agreed to in contracts that went into effect in 1996. Because we feel morally obligated to meet power needs, we agreed to it. But it meant a 50 percent increase in our budget. And it literally happened over night.

The 3,000 megawatts, by the way, represented a new load that resulted during the boom in the economy between 1996 and 2000.

BJ: Describe some possible scenarios for handling power needs above and beyond what the federal system generates?

Potential scenarios depend on what we hear from constituents this fall. We are mandated by the 1990 power act to supply the region's need for power. But utilties could decide not to place additional supply obligations on BPA after 2006. They would either purchase power in the market, buy from plants owned by independent power producers or build their own generators.

BJ: With the rise in electricity rates and growing global competition, aluminum producers in the Northwest have seen a shakeout since the power crisis. Some are shuttered, some are in bankruptcy and at least one is set to be razed. BPA historically contracted directly with aluminum producers, a situation that provided the industry low-cost power it needed to thrive. Do you think aluminum is a dead industry here?

We had 10 plants in the Northwest and they all were or are in different competitive positions. We clearly are seeing a shakeout and are going to have less aluminum production in this region than we have historically. The question is, where does it stop? Ultimately, we shouldn't think of the industry as monolithic.

BJ: Since Bonneville's inception in 1937, the agency has been an economic driver of industry in the West. Is a shift occurring in the Pacific Northwest away from abundant and relatively affordable energy.

In no way am I prepared to accept that we've lost that. We have the potential for maintaining the competitive advantage we have had historically. The challenge is maintaining our cost structure. We already are seeing some results in the reduced rate increase. We see some real opportunities post-2006.

It's a question of where are our rates going to go? While people are unhappy with the rate increase, we don't have anybody asking to exit their contracts.

There is a reasonable chance that our rates are going to go down. But it's going to take a lot of both management strength and political strength. People are so focused on the near term that it's hard to get them focused on the long-term.

BJ: At the same time, Bonneville always is under pressure from political interests far afield. Is today's threat any more ominous than at other points in history?

When the country runs a large cash deficit, there definitely is more pressure on Bonneville to find ways to benefit the U.S. treasury.

It's clear that the country is going to run a fairly large cash deficit for the foreseeable future and we're already seeing pressure. But we've made payments to the treasury on time for the past 19 years and we expect to do it again in September.

Shelly Strom, Business Journal staff writer
The Challenge for BPA
Portland Business Journal, August 25, 2003

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