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BPA Pushes Rate Increase Decision to Next Year by Ben Tansey NW Fishletter, November 26, 2002

BPA last week said the conditions that would trigger a new rate increase are not in place, but that "it is an extremely close call, and it won't take much to push us into that condition." The comments came in a letter BPA Administrator Steve Wright sent to customers Friday, a week after the passing of the agency's original self-imposed deadline to decide whether it would trigger a rate increase under the rubric of the safety net cost recovery adjustment clause, or SN CRAC.

"We will need to closely monitor streamflows and markets affecting net secondary revenues, as well as our ability to realize additional savings," wrote Wright. He said the agency will revisit the matter of an SN CRAC trigger "after the first of the year." Sources said a decision is likely no later than the end of January.

The letter echoes what the agency said the week before on the uncertainty of present conditions and its cost cutting efforts. BPA has identified $350 million in expense reductions, deferrals and other actions that can be put into place without further haggling. Another $500 million in less certain cuts are pending and "will take cooperative efforts on the part of many parties in the region"--including IOUs and fish managers--to achieve. Even if BPA gets the $500 million in added cuts, that's not enough to prevent an SN CRAC.

A major component of the cost cuts stems from what the letter refers to as the agency's "new target aimed at keeping BPA's internal power-related costs as close to 2001 levels as possible through 2006." The previous week BPA cast this commitment as "keeping internal operating costs flat," but a spokesman said there is nothing to be read into the subtle difference in language.

BPA's commitments to internal cost control are especially important to customers because of some bad blood over the authenticity of BPA's original cost projections during the rate case and grating anomalies such as the agency's decision to send 41 employees to a software conference in the southeast.

The BPA letter elicited almost instantaneous criticism from Columbia Basin treaty tribes, who said BPA's plan "to slash up to $200 million from its fish and wildlife budget" is "profoundly irresponsible.

"This reckless approach clearly represents disregard for the fish and wildlife project recommendations of the tribes and the NW Power Planning Council," said CRITFC's Donald Sampson.

"They make it sound like we're gutting the program," BPA spokesman Ed Mosey said, whereas the agency is simply asking the tribes for suggestions on how fish costs, among others, might be held as close as possible to 2001 levels.

"It can be reasonably argued that today the BPA system is financially overcommitted," Wright conceded in the letter. "If the system cannot generate net secondary revenues substantially in excess of what's been achieved historically, the problem will be worse. BPA and all those who get benefits from this system are going to be struggling to get expenses in line with revenues for the remaining four years of this rate period."

Wright added that BPA "will also need to be vigilant on how we structure our commitments and costs for post-2006," but did not elaborate further.

Pat Reiten, CEO of Pacific Northwest Generating Cooperative, said BPA deserved credit for its commitment to keeping internal costs at 2001 levels, especially because the SN CRAC was never envisioned as a mechanism to pay for increases in BPA's internal costs. But he said there are still some other "shoes to drop" that were not explicitly part of the Financial Choices process that led to Friday's letter.

In particular, he said, BPA is closing in on a decision over how to allocate proceeds from Energy Northwest bond refinancing. Reiten said rumor has it that BPA means to credit the funds to its Transmission Business Line, as opposed to the Power Business Line, so as to enhance borrowing authority for infrastructure improvement. That's "a laudable goal," he said, but one that would have a negative impact on the Slice true-up due to be calculated next month, and one that would ultimately put more pressure on an SN CRAC trigger. Reiten said members of the Slice implementation group have asked the agency to put off a decision on whether to credit the proceeds to TBL or PBL for now and that the agency seemed willing to do so.

Reiten said another factor will be whether DSIs pay liquidated damages accrued under their take-or-pay contracts. BPA's letter alludes to this matter as an area of uncertainty--the agency has said some $30 million is at stake in the near term and an estimated $60 million for the rate period--but it was not a feature of the Financial Choices process. Even so, "the amount of revenue that comes from the DSIs will be a major factor" for BPA in the SN CRAC decision, Reiten said, and has "an even more immediate impact for Slice customers," also because of the imminent Slice true-up.

According to the letter, the cuts the agency is making "are not all good decisions for the long term, but they reflect our view that near-term rate considerations have taken on higher priorities."

In addition to cuts, BPA is taking "increased risk with our Treasury payment," and estimated that repayment probability is now below the level targeted in the last rate case, but still above the 50 percent that would trigger an SN CRAC. "Unless there is a dramatic increase in net secondary revenues, [Treasury repayment probability] is unlikely to get back to historic levels during this rate period."

The letter goes on to say that BPA's $1.2 billion shortfall for the current rate period assumes a 10 percent rate decrease from the 2002 level in years 2004 to 2006. Foregoing that decrease would reduce the gap by $330 million. But then, even with $350 million in certain and $500 million in hoped-for cuts, BPA would have only a "50/50 probability of financially breaking even through this rate period."

Wright also addressed the uncertainty of secondary revenue projections. The agency is forecasting secondary revenues substantially above those produced historically, and insists the forecast is "based on a reasonable set of assumptions." But there is "huge uncertainty about the amount of precipitation we'll see next year and for the remainder of the rate period. If the water or market prices are low this year, we're likely to lose money again."