Today's IssueAlert Sponsors: 

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Southeastern Electric Exchange 2001 Utility Odyssey:
Engineering & Operation/Accounting, Customer Billing and Finance Conference 
and Trade Show
The Doral Resort Miami, FL


 
Featured speakers include Wall Street Analysts Ed Tirello and Dan Ford and 
SEE Company Utility Executives Donald Hintz, Entergy Corp., Dennis Wraase, 
Pepco, and Bill Coley, Duke Power 

For full details: www.theexchange.org 

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"Global Power & Western U.S. Coal:  Domino Factors at Play in Today's Energy 
Markets" is the theme of the 2001 Spring Pacific Coal Forum (Coal Forum'2001) 
to be hosted by the Western Coal Council, June 4-6, 2001 in Park City, Utah.  
Keynote Speakers include: Honorable Mike Leavitt, Governor, State of Utah; 
Hitoshi Tagawa, Tokyo Electric Power Company; Eng. Jesus Buentello, Comision 
Federal de Electricidad; Malcolm Thomas, Kennecott Energy Company; Manfred 
Raschke, International Strategic Information Services (ISIS).   
Contact Janet Gellici at (303) 431-1456 or info@westcoal.org 
www.westerncoalcouncil.org
Miss last week? Catch up on the latest deregulation, competition and 
restructuring developments in the energy industry with SCIENTECH's 
IssuesWatch 




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June 4, 2001

Bonneville Power Administration: 
Vulnerable to Western Power Crisis, But Protected by Federal Status 

By Will McNamara
Director, Electric Industry Analysis 

[IMAGE]Two mainstays of the Northwest's economy&#151public power and the 
aluminum industry-waging a war of words over the Bonneville Power 
Administration's attempts to set rates for the electricity it sells. Both 
sides have hired public relations companies in their attempts to sway public 
opinion before the federal power marketing agency sets new electricity rates 
effective Oct. 1. BPA, which sells power produced at 29 federal hydroelectric 
dams and a nuclear plant, has signed contracts for about 11,000 MW but has 
generating capacity for only 8,000 MW. To help make up the 3,000-MW 
shortfall, BPA is pushing a plan to idle the region's 10 aluminum smelters 
for two years, until additional generating capacity comes online.  

Analysis: Given the barrage of media coverage that continues to hang over 
California's energy problems, the fact that the Pacific Northwest is 
suffering from its own related maladies is often overlooked. Perhaps the most 
extreme case that illustrates the severity of problems to the north of 
California is the BPA, which in addition to attempting to increase its 
wholesale rates by as much as 250 percent this fall is now unable to fulfill 
many of its long-term power contracts. Much like Pacific Gas & Electric and 
Sierra Pacific Resources before it, the BPA now stands among a handful of 
power firms in the West that have sustained devastating financial blows due 
to volatility of the region's market. However, unlike investor-owned 
utilities (IOUs), BPA is owned by the federal government and as such has been 
criticized for having access to federal funding and protection not extended 
to other Western power victims.  

It is important to remember that BPA is a federal organization that was 
formed in 1937 to market power from the Bonneville Dam. It holds a lock on 
approximately 46 percent of the Pacific Northwest power market, and is one of 
the primary providers of power to incumbent utilities in the area such as 
Tacoma Power and Seattle City Light. 

In the 1990s, the BPA experienced an excess of power and sought power 
contracts outside the Pacific Northwest in order to retain a positive cash 
flow and support various programs to ensure the lives of salmon and 
steelhead, which populate the Bonneville Dam. The BPA formed contracts with 
such out-of-region buyers as Enron, Avista Energy and the main California 
utilities. The BPA signed long-term contracts to sell 1,223 MW of 
hydropower&#151enough to light the city of Seattle-utilities outside the 
Pacific Northwest and to private power marketers, adding to the base of its 
contracts with Northwest utilities and C_customers (mostly aluminum 
manufacturers). However, these contracts have aggravated regional power 
problems in a new era of shortages and soaring prices.  

For the most part, BPA's troubles have stemmed from weather-related 
circumstances, unlike California and Nevada (where weather has served to 
exacerbate fundamental restructuring problems). The Pacific Northwest, which 
relies heavily on hydropower, has suffered one of its worst droughts in 
recent history, which has greatly compromised what has typically been a 
reliable and abundant power source. In fact, the Northwest is reportedly 
between 1,500 MW and 3,000 MW short of the power it needs. Further, power 
that the Northwest could typically rely upon from California and the 
Southwest to supplement any shortage it might encounter in its own territory 
is no longer available due to power demands in other states. Given its role 
as the primary power supplier to the region's utilities, the BPA has become 
increasingly vulnerable to the volatility of the spot market. The end result 
is that BPA, which clearly overextended itself regarding power contracts 
formed in the last decade, has been forced to either buy expensive power on 
the spot market to serve its customers or negotiate buyouts of its power 
obligations.  

The BPA also has traditionally sold power directly to industrial customers, 
and over the last few months has attempted to rescind many of those 
contracts. For instance, the Columbia Falls Aluminum Company, a Kalispell, 
Mont.-based aluminum manufacturer, has agreed not to use 167 average MW of 
the 171 average MW BPA had agreed to sell it from October 2001 to September 
2002. Reportedly, the BPA has bought back the power under contract to 
Columbia Falls for $19.50/MWh. This marked the second industrial customer 
that has allowed the BPA to terminate a power contract, following a deal with 
Alcoa (another aluminum producer), in which the BPA bought back about 400 
average MW. Typically, the C_customers have agreed to break their contracts 
with the BPA due to their own halted production schedules that have resulted 
from soaring power costs.  

However, aluminum production is a critical part of the Northwest's economy, 
and several lobbying groups have emerged to block the BPA from negotiating 
with any additional aluminum manufacturers to cease production. Arguing that 
the BPA has an obligation to fulfill its power contracts, the advocacy 
groups&#151comprised of public power and manufacturing representatives-
attempting to secure some form of legal restriction against the BPA before 
the agency increases rates this fall. Without knowing the terms of the 
contracts, it is not clear whether BPA has an exit clause that entitles it to 
stop providing power to the various buyers. 

Regarding its Northwest customers, which are given priority to BPA power 
supplies, the BPA has requested that these utilities implement conservation 
programs to reduce the amount of power that must be purchased on the 
wholesale market. Nevertheless, the BPA has already disclosed that it will be 
forced to increase rates by as much as 250 percent this October to cover its 
spot market power purchases (a condition that echoes similar movements by 
PGOand Sierra Pacific Resources). BPA reportedly charges its utility 
customers about $25/MWh for electricity. Wholesale electricity on the spot 
market is now selling at between $250 to $300/MWh, and wholesale power sold 
through long-term contracts sells for $75 to $150/MWh.  Consequently, the 
250-percent increase could be the minimum at which the BPA raises its rates, 
which would in turn impact the retail rates that Northwest utilities must 
charge their customers.  

PacifiCorp recently became the first IOU under contract with the BPA to 
voluntarily reduce load on the federal agency. Under the agreement, 
PacifiCorp has released BPA from its commitment to sell the utility an 
average of 251 MW each year for the next five years. Other IOUs are not 
acquiescing to the BPA's proposal. For instance, the BPA informed Southern 
California Edison (SCE) that it would not provide 500 MW of power this summer 
to the utility, under the terms of a previously reached agreement. The BPA, 
which unilaterally changed the terms of the contract from a strict sales 
agreement into an exchange when SCE began to have its own financial problems, 
has argued that SCE has ceased providing needed power to the BPA. As a 
result, the BPA will provide no further power to SCE unless it receives 
financial guarantees in advance. SCE has deemed this threat as a potential 
breach of contract and is currently pursuing the matter in the 9th Circuit 
U.S. Court of Appeals. 

Moreover, the crux of the matter presently is the dichotomy that BPA 
represents in a deregulated energy market. On one hand, BPA is a federally 
protected agency with access to federal funding and control over federal 
lands. On the other hand, BPA&#151unlike any other federal 
agency&#151controls about half of the Northwest's energy supply and in the 
past has profited from power sales to other regions (mostly California). In 
addition to the growing resistance from public power and aluminum groups over 
BPA's plan to increase rates, other groups have raised the claim that BPA is 
receiving preferential treatment from the federal government. Some critics 
find it inconsistent that the Bush administration supports free market 
principles in the West (evidenced by the resistance to put wholesale price 
caps into place) and increased production, but at the same time might allow 
BPA to break long-term power contracts. Such critics (mostly clearly 
represented by the Northeast-Midwest Institute, a nonprofit Washington, D.C. 
think tank) believe the Bush administration should force BPA to sell its 
power to anyone who wants it at free-market rates (which of course are 
consistently higher than its current cost-based rates). 

In addition to potential rate increases, the BPA is attempting to secure 
increased funding from the federal government. As a federal agency, the BPA 
is allowed to borrow from the federal treasury to support infrastructure 
upgrades such as transmission capacity and maintain federal dams that 
generate the BPA's power. Recent reports have indicated that the BPA already 
is spending around $1.3 billion in federal funds to modernize the region's 
power grid and will request an additional $800 million from the federal 
treasury for transmission upgrades and to modernize existing power-generating 
facilities. Yet, at the same time, several regional groups are attempting to 
block any increase in the BPA's access to federal funds, arguing that the 
administration has continuously lowered its annual payments into the treasury 
and therefore should not be entitled to a credit increase.  

The BPA may not have directly caused the current power problems in the 
Northwest, but it is clear that the federal agency engaged in overly 
optimistic power contracts that it now cannot fulfill. Moving forward, the 
question will be whether or not, in a supposedly deregulated market, the BPA 
should be governed by any special standards given its status as a federal 
agency or whether it should be held to the same rules that apply to IOUs. 
While the for-profit economy of the Northwest is now in jeopardy due to 
volatile power prices, stakeholders in the region object to the BPA being 
able to break contracts and increase rates. Once again, this appears to be 
another matter that will fall under the jurisdiction of the Bush 
administration to decide as part of the nation's unfolding energy agenda. 

An archive list of previous IssueAlerts is available at
www.scientech.com


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