Bonneville Power Administration
Long-Term Fiscal Challenges Gao ID: GAO-03-918R July 1, 2003The Bonneville Power Administration (BPA) provides about 45 percent of all electric power consumed in the Pacific Northwest--Idaho, Montana, Oregon, and Washington. The power that BPA markets and distributes is generated in large part at hydroelectric projects including dams in the Federal Columbia River Power System. BPA also owns and operates about 75 percent of the region's services. Under the Pacific Northwest Electric Power Planning and Conservation Act of 1980, BPA is responsible for ensuring an adequate, efficient, economical, and reliable power supply for the Pacific Northwest. To do so, BPA balances the needs of its customers against the highly variable water resources available for generating electricity. In maintaining this balance, BPA sometimes buys and sells or otherwise exchanges power with utilities with entities within and outside the Pacific Northwest. In addition to providing power, BPA is required under the 1980 act, various other laws, treaties and court cases, to "protect, mitigate, and enhance" fish and wildlife resources. Recently, BPA has witnessed a substantial deterioration in its financial condition. For example, BPA's cash reserves of $811 million at the end of fiscal year 2000 had fallen $188 million by the end of fiscal year 2002. To cope with its financial difficulties BPA has increased the rates that it charges its customers for power by over 40 percent since 2001. In 2002, BPA asked Congress to increase its ceiling on Treasury debt by about $1.4 billion to fund capital spending and, in 2003, Congress approved a smaller increase of $700 million dollars. In addition, in February 2003, BPA announced that it estimated a 74 percent chance that it would miss a Treasury payment this year. In light of BPA's deteriorating financial condition, request for increased borrowing authority, and increased risk of missing a Treasury payment, Congressional requesters asked GAO to (1) identify cost advantages, disadvantages, and challenges BPA may face in providing power and meeting its debt and other obligations; (2) identify the causes of BPA's recent financial difficulties; (3) determine how BPA plans to use its additional borrowing authority; and (4) evaluate how the risk of default to Treasury has changed over the past 5 years.
BPA has some inherent advantages that have generally enabled it to provide low-cost power to its customers in the Pacific Northwest. However, BPA also faces some inherent challenges related to meeting its obligations to provide economical power while protecting fish and wildlife. These challenges are made greater by the changing demands on its power and its fish and wildlife. These challenges are made greater by the changing demands on its power and its fish and wildlife protection resources. BPA's current financial difficulties are largely the result of decisions that caused rising costs and lower than projected revenues. BPA signed long-term contracts to buy power to serve demand that exceeds the supply capacity of the federal power system. The prices BPA agreed to in these contracts turned out to be significantly higher than recent market prices and were higher than the rates BPA initially set for selling its own power. BPA also projected revenues from its own sale of surplus power that did not materialize when market prices turned out to be lower than BPA had projected. BPA plans to use its expanded borrowing authority to upgrade and improve the transmission system and dams in the federal power system. These capital expenditures are expected to increase the reliability and efficiency of the system and may also increase generating capacity to some degree. BPA staff told us that these capital expenditures are, for the most part, not expected to solve BPA's current financial problems. We found that BPA's longer-term risk of default is greater than in recent years because of BPA's higher costs and because of uncertainty surrounding both its role as electricity provider and its obligations to protect fish and wildlife. While BPA has taken steps to improve its financial condition and deal with its long-term challenges, in the past such efforts have not entirely succeeded.
GAO-03-918R, Bonneville Power Administration: Long-Term Fiscal Challenges
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July 1, 2003:
The Honorable David L. Hobson:
Chairman:
The Honorable Peter J. Visclosky:
Ranking Minority Member:
Subcommittee on Energy and Water Development:
Committee on Appropriations:
House of Representatives:
Subject: Bonneville Power Administration: Long-Term Fiscal Challenges:
The Bonneville Power Administration (BPA) provides about 45 percent of
all electric power consumed in the Pacific Northwest--Idaho, Montana,
Oregon, and Washington. The power that BPA markets and distributes is
generated in large part at hydroelectric projects including dams in the
Federal Columbia River Power System (federal power system). BPA also
owns and operates about 75 percent of the region's transmission lines.
BPA charges for the power it sells and for its transmission services.
Under the Pacific Northwest Electric Power Planning and Conservation
Act of 1980, BPA is responsible for ensuring an adequate, efficient,
economical, and reliable power supply for the Pacific Northwest. To do
so, BPA balances the needs of its customers against the highly variable
water resources available for generating electricity. In maintaining
this balance, BPA sometimes exchanges power through purchases, sales,
or otherwise with utilities and other entities within and outside the
Pacific Northwest. In addition to providing power, BPA is required
under the 1980 act, various other statutes, treaties and court cases,
to "protect, mitigate, and enhance" fish and wildlife resources
affected by the federal power system.
Recently, BPA has witnessed a substantial deterioration in its
financial condition. For example, BPA's cash reserves of $811 million
at the end of fiscal year 2000 had fallen to $188 million by the end of
fiscal year 2002. To cope with its financial difficulties BPA has
increased the rates that it charges its customers for power by over 40
percent since 2001. In 2002, BPA asked Congress to increase its ceiling
on Department of the Treasury (Treasury) debt by about $1.4 billion to
fund capital spending and, in 2003, Congress approved a smaller
increase of $700 million dollars. In February 2003, BPA announced that
it estimated a 74 percent chance that it would miss a Treasury payment
this year.
In light of BPA's deteriorating financial condition, request for
increased borrowing authority, and increased risk of missing a Treasury
payment, you asked us to (1) identify cost advantages, disadvantages,
and challenges BPA may face in providing power and meeting its debt and
other obligations; (2) identify the causes of BPA's recent financial
difficulties; (3) determine how BPA plans to use its additional
borrowing authority; and (4) evaluate how the risk of default to
Treasury has changed over the past 5 years. This report presents the
preliminary findings of our review of BPA's financial situation and the
risk to Treasury. As agreed with subcommittee staff, we will continue
to work on these objectives as well as others, including an assessment
of options that would enable BPA to reduce the likelihood of future
financial difficulties and accompanying risk to Treasury. To perform
our work we reviewed BPA budget documents and investment plans, as well
as numerous studies and position papers by stakeholders and experts,
and we collected views from BPA's customers, stakeholders, and
oversight bodies.
Results in Brief:
BPA has some inherent advantages that have generally enabled it to
provide low-cost power to its customers in the Pacific Northwest and
meet debt and other obligations. However, BPA also faces inherent
challenges related to meeting its obligations to provide economical
power while protecting fish and wildlife. These challenges are made
greater by the changing demands on its power and its fish and wildlife
protection resources.
BPA's current financial difficulties are largely the result of
decisions that caused rising costs and lower-than-projected revenues.
BPA signed long-term contracts to buy power to serve demand that
exceeds the supply of the federal power system. Of the additional
demand BPA agreed to serve, a significant proportion was for industrial
customers that BPA was not required to serve during the fiscal year
2002-2006 rate period. The prices BPA agreed to in these contracts
turned out to be significantly higher than recent market prices and
were higher than the rates BPA initially set for selling its own power.
BPA also projected revenues from its own sale of surplus power that did
not materialize when market prices turned out to be lower than BPA had
projected.
BPA plans to use its expanded borrowing authority to upgrade and
improve the transmission system and dams in the federal power system.
These capital expenditures are expected to increase the reliability and
efficiency of the system and may also increase generating capacity to
some degree. BPA staff told us that these capital expenditures are, for
the most part, not expected to solve BPA's current financial problems.
We found that BPA's long-term risk of default is greater than in the
previous 5-year rate period because of BPA's higher costs and because
of uncertainty surrounding both its role as electricity provider and
its obligations to protect fish and wildlife. While BPA has taken steps
to improve its financial condition and deal with its long-term
challenges, in the past such efforts have not entirely succeeded.
Background:
BPA was formed in 1937 to market electric power produced by the
Bonneville Dam to the Pacific Northwest. BPA's role in the region has
since evolved. BPA's marketing responsibilities were broadened to
include power from 31 federally owned hydroelectric projects, most
located in the Columbia River Basin. BPA also markets power from one
nonfederal nuclear plant and power purchased from other sources. In
addition, under the Pacific Northwest Electric Power Planning and
Conservation Act of 1980 (Northwest Power Act), BPA is charged with
providing the Pacific Northwest with an adequate, efficient,
economical, and reliable power supply. In this role, BPA serves its
customers' electricity demand at rates that BPA sets to cover its
costs, including debt payments and operations-and-maintenance
costs.[Footnote 1] BPA's rates are fixed in the sense that they do not
typically vary to reflect changes in the prices of power in the market
on an hourly or even daily basis, but rather are set periodically to
cover BPA's costs on average over a long period of time. At times when
the electricity generation of the federal power system is insufficient
to meet the demand of all BPA's customers, BPA has purchased or
otherwise acquired power from other sources, including utilities and
other suppliers in the Northwest, California, and other western states,
to make up the difference. In addition, BPA generates surplus power
when demand from its firm customers is low or when water levels are
high, and has traditionally exchanged this power under various terms
with utilities and other entities in the Northwest and other western
states.
The recent restructuring of the nation's wholesale electricity markets
has affected how BPA allocates and distributes its surplus power. The
electricity industry is in the process of restructuring from one in
which monopoly utilities generated and provided electricity to
consumers at regulated prices to one in which numerous private
companies compete to sell electricity at prices determined by supply
and demand conditions. BPA's response to this change has included
developing a power trading operation, in part, to sell surplus power as
opposed to making exchanges of power.[Footnote 2]
BPA has additional obligations beyond providing power. For example, the
Northwest Power Act also requires that BPA protect, mitigate, and
enhance fish and wildlife resources affected by the operation of the
federal power system. In addition, significant declines in the
historical returns of salmon and steelhead to the Columbia River Basin
have resulted in the listing of 12 populations of these fish as
endangered or threatened under the Endangered Species Act. With these
listings, BPA became responsible for ensuring that the operation of the
federal power system does not jeopardize the continued existence of
these 12 populations. BPA also has a trust responsibility with the 13
federally recognized American Indian tribes in the Columbia River
Basin, some of whose fishing rights are guaranteed by treaties,
executive order, and court cases. BPA currently provides the bulk of
funding for fish and wildlife programs in the Columbia River Basin.
BPA Has Inherent Cost Advantages and Some Disadvantages and Faces
Challenges in Meeting Competing Demands on Its Resources[Footnote 3]
BPA has inherent cost advantages that have generally allowed it to keep
its electricity rates below those of nonfederal utilities in the
Pacific Northwest. For example, BPA predominantly relies upon
electricity produced at hydroelectric dams in the federal power system,
which generally have low capital and operating costs. Many of these
projects were built decades ago and had relatively low construction
costs compared with newer generating facilities constructed by
nonfederal utilities. BPA tends to have lower operating costs in part
because, unlike some competing generating units, hydropower projects do
not burn fossil fuels.[Footnote 4] Further, as a federal agency, BPA is
not required to pay income taxes. In contrast, according to the Energy
Information Administration, investor owned utilities paid taxes
averaging between 8.1 and 13.5 percent of operating revenues from 1995
through 2001.[Footnote 5] In addition, BPA does not include a profit
margin in its power rates. In contrast, public utility commissions
typically approve a profit margin, in the form of a return to
investment, to be included in and thus increase the power rates of
investor owned utilities. Moreover, BPA has had access to more
favorable financing conditions than investor owned utilities; interest
income to bondholders from BPA's nonfederal debt is exempt from federal
personal income tax and some state income taxes. In addition, BPA has
in the past received favorable loan terms from the Treasury. Finally,
these cost advantages have historically benefited the region's
electricity consumers and enabled BPA to repay its debt to Treasury and
cover other costs, obligations, and debt.
However, BPA also has disadvantages compared with some nonfederal
utilities. For example, BPA operates under a different financial
structure than investor owned utilities with which it competes.
Investor owned utilities can use equity (sale of stock or retained
earnings) to finance some capital spending. BPA cannot issue stock and
generally operates without a profit and, therefore, cannot generally
use equity to finance its capital investments. As a result, BPA
generally relies on debt for financing capital investments. Carrying
higher levels of debt translates into greater average fixed costs that
ultimately must be recovered in BPA's power rates. In addition, BPA's
obligation to protect, mitigate, and enhance fish and wildlife
resources adds to its total costs, thereby increasing its power
rates.[Footnote 6] For example, from fiscal years 1997 through 2001,
BPA spent over $1.1 billion in support of fish and wildlife--primarily
to benefit salmon and steelhead. These expenditures have funded fish
and wildlife efforts, including those undertaken by BPA, other federal
agencies, American Indian tribes, and the four northwest states (Idaho,
Montana, Oregon, and Washington) and have funded operations-and-
maintenance and capital costs for the U. S. Army Corps of Engineers,
Bureau of Reclamation, and the Fish and Wildlife Service for projects
such as fish bypass facilities at dams and fish hatcheries. BPA also
estimates that from fiscal years 1997 through 2001, spilling water from
dams and augmenting river flows to enhance fish survival resulted in
over $2.2 billion in forgone revenues or increased power
purchases.[Footnote 7]
BPA's dual roles--as supplier of economical and reliable power and as
protector of fish and wildlife--present a challenge. BPA's stakeholders
include both consumers of electricity and proponents of fish and
wildlife protection, and both groups pressure BPA to deliver more of
what they want. However, providing more support for fish and wildlife
comes at the cost of less electricity and higher electricity rates.
Similarly, serving ever-increasing demand for economical electricity
can put greater stress on fish and wildlife, either through more
intensive use of hydroelectric generating facilities at the expense of
spilling water to support fish migration, or through rising costs and
the resulting pressure from rate-payers to reduce funding for fish and
wildlife programs, as has occurred during the current financial crisis.
BPA, like its competitors, operates in an unstable environment with
regard to demand for its electricity and also with regard to its costs
for fish and wildlife protection. For example, while the regional
demand for BPA's electric power has generally grown throughout BPA's
existence, demand for BPA's power fell in the mid-1990s as some of its
customers found lower prices in the market. Demand for BPA's power
increased dramatically after market prices rose during the western
electricity crisis of 2000 and 2001. While other utilities face
similarly uncertain demand and market conditions, BPA appears to have
greater competing pressure from its various stakeholders. For example,
in an April 18, 2003 open letter to its customers and Northwest
citizens, BPA stated that it had been influenced by arguments and
demands from its stakeholders on such issues as how much power it would
provide and how it would structure its power rates. In addition, over
the past two decades, BPA's spending and actions in support of fish and
wildlife have grown considerably with the enactment of various
environmental laws and with increased regulations put in place to
protect the environment. BPA provides the majority of fish and wildlife
program money in the region, which increases its challenges relative to
its competitors.
BPA's Financial Difficulties Caused by Rising Costs, Lower Than
Expected Revenues:
BPA's current financial difficulties have been largely caused by
decisions resulting in rising costs and lower than projected revenues.
In April 2003, BPA estimated that its costs over the current 5-year
rate period, covering fiscal years 2002 through 2006, would be $5.3
billion dollars greater than over the previous 5 years. This increase
in costs is quite substantial given that BPA's total operating
revenues--funds available to cover its costs--were about $13.7 billion
over the previous 5-year period from 1997-2001.[Footnote 8] A large
part of the increase in costs is related to serving demand at levels
above the estimated average power production of the federal power
system during a "critical water year."[Footnote 9] BPA agreed to serve
this additional demand and, to do so, BPA signed long-term contracts to
purchase power from other sources.[Footnote 10] Of the additional
demand BPA agreed to serve, a significant proportion was for industrial
customers that BPA was not required to serve during the fiscal year
2002-2006 rate period. The prices that BPA paid for the additional
power were significantly higher on average than the rates BPA initially
set for the current rate period and are also higher than recent market
prices. More generally, BPA's costs attributed to both its sale of
electric power (power business line) and sale of transmission services
(transmission business line) have risen in almost every cost category
since 1997. Further, BPA's fish and wildlife expenditures increased
from about $80.5 million in fiscal year 1997 to $109.6 million in 2001
in constant 2001 dollars--an increase of about 36 percent--and are
projected to be even higher over the next few years. Finally, staffing
levels have also increased, from a recent low of 2,738 full-time-
equivalent positions (FTEs) in 1999 to an estimated 3,206 in 2003--an
increase of about 17 percent.
In April 2003, BPA also projected lower revenues than it had planned
for in the original rates set for the current rate period. A large part
of this expected revenue shortfall comes from lower than expected
market prices. For example, because market prices since the beginning
of fiscal year 2002 have been lower than BPA projected, BPA recently
estimated that revenues from surplus sales of power would be about $700
million lower than BPA had assumed when setting its initial rates for
the rate period.[Footnote 11] BPA's projected revenues are also lower
because of lingering impacts of the drought of 2000 and 2001, which
have reduced the amount of water available to generate surplus
electricity.
BPA Plans to Use Borrowing Authority to Upgrade Transmission and
Generation Systems:
BPA plans to use the bulk of its borrowing authority to upgrade its
transmission system and make other investments to increase system
reliability. Specifically, about 62 percent of BPA's planned capital
spending is directed at the transmission system. Another about 5
percent of capital spending is for corporate uses, such as information
technology investments and projects. The remaining 33 percent is
directed toward reliability and efficiency improvements at federally
owned dams. Some of these dam improvements will also slightly increase
the capacity of the federal power system to produce electricity.
Overall, BPA staff told us that while these investments are needed to
improve reliability and efficiency, most planned capital investments
are largely unrelated to BPA's current financial difficulties and are
unlikely to resolve them.
Risk of Failure to Meet Debt Obligations to Treasury Has Likely
Increased As a Result of High Costs and Market Uncertainty:
Several factors appear to have increased the risk over the past 5 years
that BPA may be unable to meet its full future debt obligations to
Treasury. In a 1997 report,[Footnote 12] we noted that BPA would likely
face a higher risk of default on its debt to Treasury after fiscal year
2001 as a result of (1) high fixed costs,[Footnote 13] which BPA must
cover regardless of how much electricity it sells; (2) high operating
costs, including internal costs and fish and wildlife protection costs;
(3) greater market uncertainty, in part because of the impacts of
electricity restructuring on market prices and demand; and (4) an
increased likelihood that BPA will lose part of its customer base as
its costs increase relative to costs of alternative supplies of
electricity. This likelihood of greater risk to Treasury seems to be
coming to pass. We found in our current review that BPA's fixed costs
are expected to rise over the next few years, that its operating costs
are much higher than when the 1997 report was published, that market
and other uncertainty affecting BPA's costs and revenues has increased,
and that there is significant risk that BPA will lose some of its
customer base in the future. Specifically:
With regard to fixed costs, the 1997 GAO report stated that as of 1996,
BPA's high fixed costs inhibited its flexibility to lower its rates and
meet competitive pressures. For example, financing costs for BPA's
long-term debt ate up 32 percent of BPA's revenues--compared to a
nationwide average of 14 percent for investor owned utilities.
Currently, BPA expects its total debt to rise over the next few years
as BPA undertakes its planned capital investments on transmission and
generation upgrades. This additional debt will increase BPA's fixed
costs above current levels. Further, because the bulk of these planned
investments are focused on reliability of the transmission system, the
investments will have little positive impact on BPA's revenues, while
paying off the additional debt obligations will require higher total
rates, including electricity and transmission charges.
With regard to high operating costs, BPA's condition is worse than it
was 5 years ago. The 1997 report stated that after 2001 BPA faced
potential upward pressure on its operating costs, including fish and
wildlife costs. For example, a memorandum of agreement that limited
BPA's fish and wildlife protection costs was set to expire in 2001,
opening the door to possibly higher costs. Costs have indeed risen
since 1997. For example, as discussed previously in this report, costs
associated with fish and wildlife protection have increased
significantly since 1997, as have most other categories of operating
costs.
BPA also faces greater uncertainty than it did 5 years ago. The 1997
report stated that BPA may face greater market uncertainty in the
future, and our current review indicates that market uncertainty has
indeed been an increased problem for BPA. For example, as discussed
previously, BPA had difficulty making accurate projections of market
prices for its surplus power sales and this difficulty led BPA to sign
long-term contracts to purchase power at high prices and resulted in a
downward revision in BPA's expected revenues from surplus electricity
sales. BPA also experienced an unanticipated increase in demand for its
power following the 2000-2001 western electricity crisis. Further, BPA
faces uncertainty with regard to future fish and wildlife costs with
the recent federal court decision that rejected the National
Oceanographic and Atmospheric Administration's National Marine
Fisheries Service (NOAA Fisheries) 2000 biological opinion--a document
setting out how NOAA plans to avoid jeopardizing the existence of
certain listed species. Any changes to the operations of these projects
resulting from the federal court decision may diminish BPA's ability to
control costs and/or earn revenue. For example, physical alterations to
dams, changes in how the dams are operated, and changes to river flows
or reservoir levels to improve fish survival may increase capital and
operations costs for the projects and reduce the flexibility to
generate power.
Finally, there is a significant long-term risk that customers will
leave BPA in light of BPA's current financial condition. The 1997
report noted that customers may opt to leave BPA if they can find
cheaper power than BPA is offering. The availability of cheaper power
depends in part on the cost of generating power by alternative means,
such as generation plants fired by natural gas or coal. With regard to
natural gas generators, the costs of operating these plants for any
constant level of natural gas prices, has decreased significantly in
recent years because of improvements in operating efficiency.[Footnote
14] In contrast, BPA's current costs, as reflected in its power rates,
are at historical highs and are currently higher than regional market
prices for wholesale electricity have been in most weeks from January
1, 2002, through March 17, 2003.[Footnote 15] If demand for BPA's power
falls, BPA's revenue may be subject to greater volatility because BPA
will have to sell more of the power generated by the federal power
system in the market where prices have been quite volatile. Greater
revenue volatility increases the risk to Treasury, especially as BPA's
debt increases over the next few years.
BPA is currently taking steps to address its financial problems and
improve its outlook over the next few years, but the outcome of these
efforts is in doubt. For example, BPA is planning to reduce its
internal costs. However, past efforts by BPA to reduce internal costs
have produced mixed results. For example, in 1996, BPA planned to
reduce its staffing level to 2,755 FTEs, down from its staffing level
at the time of 3,160 FTEs. While BPA met this goal, achieving an FTE
level of 2,738 in 1999, staffing has increased since then and is
currently well above 1996 levels.
BPA expects a number of other factors to lead to more favorable
financial conditions in the future. For example, BPA hopes that
improved water conditions and higher market prices will boost revenues.
BPA officials have recently told us that a wet late winter and early
spring and somewhat higher market prices for surplus power sales have
indeed improved BPA's financial outlook in 2003 and reduced
significantly the risk that BPA will miss a Treasury payment this year.
However, water and market conditions remain subject to volatility, an
ongoing revenue and cost risk for BPA. Further, BPA expects its power
acquisition costs to fall as its long-term contracts expire between now
and fiscal year 2006. Whether or not this cost reduction occurs depends
on market conditions in the future and on how much power BPA buys after
2006.
Another factor that BPA believes mitigates risk to Treasury is that
many of BPA's customers have signed contracts requiring them to pay BPA
for power, whether or not they take the power. These contracts,
referred to as "take-or-pay" contracts, may shield BPA from the risk in
the short run that customers will leave if BPA's rates remain high or
rise further. Further, the take-or-pay obligation may make it easier
for BPA to recover its costs as long as the contracts are in force.
However, BPA's high rates may increase the likelihood that it will
alienate its customers or drive them to lower cost suppliers in the
long term or even out of business in some cases. For example, a number
of BPA's utility and industrial customers filed suit this spring to
attempt to stop BPA from imposing further rate increases. In addition,
some industrial customers have claimed that they are unable to operate
at BPA's current rates and may be forced to close down completely if
BPA's rates do not fall. If customers do leave BPA in the long term as
their take-or-pay contracts end, this may increase future Treasury risk
to the extent that BPA ends up selling a greater proportion of its
power in the volatile market.
Finally, BPA is engaged in a regional dialogue with its stakeholders to
try to resolve issues regarding how much power BPA will provide and
under what terms, as well as how best to assess the risks and
distribute the benefits of the federal power system. While the current
regional dialogue to deal with BPA's financial problems is a positive
step, in the recent past BPA did not adopt key recommendations of a
previous regional effort to resolve similar issues. Specifically, in
1996 a comprehensive review of the Northwest energy system, undertaken
at the request of the governors of Idaho, Montana, Oregon, and
Washington, advocated that BPA limit its role as power supplier by not
serving future demand increases beyond the expected generation of the
federal power system in a critical water year. However, as discussed
previously in this report, BPA did not follow this recommendation when
it agreed to serve additional demand during the current rate period.
BPA has stated that its decision to depart from the recommendations of
the comprehensive review resulted from pressure from its customers.
Agency Comments and Our Evaluation:
We provided the Administrator and CEO of BPA with a draft of this
report for comment. In a June 20, 2003 letter (see enclosure), the Vice
President for National Relations of BPA provided overall comments on
the report. These overall comments relate to BPA's potential to lose
customers and to its costs--factors we identified that affect BPA's
risk of defaulting on Treasury debt.
Regarding BPA's risk of losing customers, BPA's overall comments state
that the risk is no greater and is probably lower than in 1997 because
while BPA's rates have risen since 1997, the market price for
electricity has risen even faster and because many of BPA's customers
have signed long-term contracts requiring them to pay for power whether
or not they actually take the power.
We believe that the risk is greater than projected in BPA's comments.
We agree that the fundamental advantages of the federal power system--
most notably the relative low cost of hydroelectric generation--
continue to create an opportunity for BPA to provide economical power
to its customers. However, we also believe BPA's large rate increases
make alternative supplies of electricity more attractive. Moreover,
BPA's power rates are currently over 40 percent higher than they were
in the mid-1990s when some BPA customers left to find cheaper power,
while the costs of new electricity generation have generally fallen in
recent years. While some of these customers returned to BPA during and
after experiencing extremely high electricity prices during the western
electricity crisis of 2000 and 2001, prices in many months since the
crisis have returned to levels much closer to prices in the mid-1990s.
Moreover, we disagree with BPA's statement that market prices rose
faster than BPA's rates. While market prices for wholesale electricity
were very high by historical standards from about May 2000 through July
2001, for most months between January 1997 and February 2003 market
prices of wholesale electricity in the Northwest have been lower than
BPA's current power rates of over $32 per MWh, even before BPA's
recently announced additional 5 percent rate increase.
With regard to the long-term take-or-pay contracts that many of BPA's
customers have signed, we agree that these contracts provide BPA with
somewhat of a guarantee that their customers will not leave BPA.
However, in our discussions with BPA officials we were told that, in
the event of a prolonged period of high water and low electricity
market prices, it is likely that BPA will be under pressure from its
customers to lower its rates or change the terms of the take-or-pay
contracts.
With regard to costs, BPA said in its overall comments that the risk
that BPA will default on Treasury debt is mitigated because, among
other things, the take-or-pay contracts in conjunction with cost-
recovery clauses built into BPA's rate case for fiscal years 2001-2006
protect BPA's ability repay its Treasury debt, and because BPA's
Transmission services face virtually no competition and so can recover
BPA's costs associated with these services, including its investments
in electricity infrastructure funded using Treasury debt.
We do not agree. While take-or-pay contracts in conjunction with cost
recovery clauses, in principle, allow BPA to raise its rates
unilaterally and prohibit customers from leaving BPA for lower priced
power elsewhere, in practice, this is not guaranteed. For example, in
spring 2003, a number of BPA's customers, including public utilities
and industrial customers filed suits to prevent BPA from implementing
additional rate increases. The outcome of these suits has not yet been
decided, but if the ruling goes against BPA, then BPA's ability to
raise its rates to fully cover its costs and debt obligations may be in
question.
We also do not agree that the absence of competition for transmission
services in the Northwest mitigates Treasury risk. As stated in this
report, higher costs, whether in the transmission or power business
lines of BPA, all must be recovered in its rates. Further, as stated in
our 1997 report, higher debt--incurred to expand or improve the
transmission system--also decreases BPA's flexibility to compete with
market prices. Therefore, higher debt on the transmission side
potentially makes BPA less competitive.
BPA also made a number of detailed technical comments that addressed,
among other things, its roles and responsibilities, the causes of its
financial difficulties, additional advantages and disadvantages BPA has
compared with its competitors, and actions that BPA has taken to
improve its financial condition. We have incorporated these comments as
appropriate in our draft.
Scope and Methodology:
In conducting our work, we reviewed BPA budget documents and investment
plans, numerous studies and position papers by stakeholders and
experts, our past reports. We also met with BPA officials and
stakeholders, including public utilities, direct service industrial
customers, investor owned utilities, representatives of American Indian
tribes, and industry experts. We also met with BPA's oversight bodies,
including staff of the Department of Energy and staff of the Northwest
Electric Power and Conservation Planning Council. We conducted our
review from April through May 2003 in accordance with generally
accepted government auditing standards.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 14
days from the report date. At that time, we will send copies of this
report to interested Members of Congress and make copies available to
others upon request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.
If you have any questions about this report or need additional
information, please call me at (202) 512-3841. Major contributors to
this report include Frank Rusco, Jill Berman, Jonathan Dent, Samantha
Gross, Jon Ludwigson, Cynthia Norris, and Barbara Timmerman.
Jim Wells:
Director, Natural Resources and Environment:
Enclosure:
Signed by Jim Wells:
Enclosure:
Department of Energy:
Bonneville Power Administration Washington, D.C. 20585:
June 20, 2003:
In reply refer to: KGN-7:
Mr. Jim Wells:
Director, Natural Resources and Environment United States General
Accounting Office Washington, D.C. 20548:
Dear Mr. Wells:
Thank you for furnishing us with a copy of your proposed draft report
entitled Bonneville Power Administration: Long Term Fiscal Challenges
(job number 360331). The Bonneville Power Administration (Bonneville)
appreciates the opportunity the General Accounting Office (GAO) has
provided us to review and comment on the draft you sent us on Tuesday
June 17, 2003, and to discuss our comments with GAO staff. Summarizing
complex issues such as those dealing with Bonneville's financial
matters is challenging. In general, we believe you have done a very
good job given the time constraints you were provided. While we have
made many comments, there is one area that we want to emphasize in
particular. The risk of Bonneville losing customers seems no greater
than, and is probably lower than, in 1997. While BPA's rates have risen
substantially since 1997, the market price of power has risen even
faster. The volatility of west coast power markets has made customers
more reticent to move away from a cost-based power product. Recognition
also should be given to Bonneville's long-term power sales contracts,
signed in 2000, which require customers to pay for power regardless of
whether they actually take such power, and the establishment of power
rates that include Cost Recovery Adjustment Clauses designed to protect
BPA's ability to repay the Federal government on time for its
investments in the electricity infrastructure of the region. In
addition, Bonneville's Transmission Business Line operates in a
regulated monopoly market and faces virtually no competitive pressure.
We understand that time is of the essence and have therefore provided
corrections to factual errors, as well as our views, directly within
your draft report. Our edits are intended to add clarity and more
accurately describe issues. We have also provided more detailed
comments, including an update for you regarding our current financial
condition and Bonneville's view of recent actions that have been taken.
As we discussed with GAO staff, we believe the inclusion of our
comments will improve the clarity of the GAO report and more fairly
represent the current status of Bonneville's financial condition.
Again, thank you for allowing us the opportunity to comment on the
draft report.
Jeffrey K. Stier:
Vice-President for National Relations:
Signed by Jeffrey K. Stier:
Enclosures:
[End of section]
(360331):
FOOTNOTES
[1] BPA's customers include public and investor owned utilities. BPA
serves the net needs of these customers--the difference between what
these customers produce themselves and what they sell to their retail
customers. In addition, BPA sells power to some industrial customers.
BPA's rates include charges for the electricity BPA generates and for
the use of transmission lines that BPA owns.
[2] For example, prior to this change, BPA frequently provided power to
California utilities during the spring when BPA had surplus electricity
and, in return, the California utilities provided electricity to BPA
during the fall and winter when BPA was typically short of electricity.
This sort of trading also sometimes took place in a single day; BPA
would send power to California utilities during the peak air
conditioning hours of the day and receive power back during the night.
Now, BPA more commonly sells its surplus power to utilities or power
marketers.
[3] This section is not intended as a complete enumeration of BPA's
advantages, disadvantages, and challenges. Nor have we tried to assess
the relative weight or importance of the examples provided in this
section.
[4] Many of the newer built generating facilities burn fossil fuels to
generate electricity. While the efficiency of fossil fuel burning power
plants has generally increased over time, hydroelectric power plants
still tend to have cost advantages because of the length of life of
dams and the cost of fossil fuels.
[5] While publicly owned utilities typically do not pay income taxes,
many do make payments in lieu of taxes to local governments.
[6] BPA has pointed out that it has other obligations, including
providing benefits to customers of investor owned utilities and
providing some irrigation assistance.
[7] We have not audited BPA's estimates of foregone revenues or
increased power purchases.
[8] Neither the $5.3 billion nor the $14.6 billion figure has been
adjusted for inflation.
[9] BPA estimates its available power based on water conditions in a
"critical water year." In a critical water year less than normal
amounts of water are available to generate hydroelectricity.
[10] These contracts were for periods of up to 5 years. Many of the
contracts were signed before and during BPA's formal rate-setting
process for the fiscal year 2002-2006 period.
[11] As discussed previously in this report, BPA sometimes has surplus
power to sell, even in years when its capacity is insufficient to serve
its entire demand.
[12] U.S. General Accounting Office, Federal Electricity Activities:
The Federal Government's Net Cost and Potential for Future Losses, GAO/
AIMD-97-110 (Washington, D.C.: Sept. 19, 1997).
[13] Fixed costs are costs that must be paid regardless of how much
electricity BPA sells. These fixed costs include meeting long-term debt
obligations incurred to build hydro projects, nuclear plants, and the
transmission system.
[14] As of January 2003, average natural gas prices for the entire
nation at the wellhead were over 50 percent higher than the average in
2002. However, the Energy Information Administration forecasts that
natural gas prices will fall in the future from recent levels.
[15] These market prices in the Northwest were obtained from the Energy
Information Administration. In addition, we reviewed average monthly
prices in the Northwest from January 1997 through December 2001,
published by Dow Jones. This review indicated that in 41 out of 60 of
these months (about 68 percent), average prices were below BPA's
current rates of around $32 per megawatt-hour. These prices are for
wholesale electricity sold at the Mid-Columbia hub in the Northwest.
Because these prices have not been adjusted for inflation, the number
of months that average prices have been lower than BPA's current rates
may be less than 41 when measured in constant dollars.
