BPA weighs buying out big contracts to curb rates

The federal power-marketing agency wants to reduce demand to avert a financial crisis

Friday, February 9, 2001

-------------------------------------------------------------------------------- By Jim Barnett of The Oregonian staff

WASHINGTON -- Hoping to head off a rate increase of historic proportions, the Bonneville Power Administration plans to buy out contracts from some of its biggest customers, including electricity-hungry aluminum smelters, the agency's chief said Thursday.

The move, outlined in meetings with members of the Oregon congressional delegation, is aimed at reducing the BPA's obligations when new, long-term contracts go into effect Oct. 1, said Stephen J. Wright, acting administrator.

While the BPA hopes to rein in its proposed rate increase, buyouts could leave portions of the Northwest economy in disarray. Smelters, irrigators and other businesses could choose to go out of business, leaving rural areas especially hard hit.

"Not only is this knocking out the Northwest's advantage, which has historically been reasonably priced energy, but it is going to produce shocks all through the economic foundation of our region," said Sen. Ron Wyden, D-Ore.

The BPA has options. Rather than raise rates, the agency could continue relying on its cash reserves. Or, as Oregon Gov. John Kitzhaber suggested Wednesday, it could postpone its annual payment to the U.S. Treasury of $700 million to $800 million.

But members of Congress from the Northwest rejected those ideas, saying they would raise political risks. If the BPA becomes a financial burden to the Treasury, it would give critics in Congress good reason to strip the Northwest states of their legal right to the agency's power.

"If you come in and you don't make your Treasury payment, folks start coming after you in a big way," said Rep. David Wu, D-Ore.

The immediate cause of the BPA's predicament is the power shortage gripping California. Although the agency can meet most of its demand with electricity from dams in the Northwest, it must buy some power on the West Coast spot market, where prices have soared.

For the time being, BPA can continue drawing on its reserves to pay spot-market prices to fill holes in its supply. But when new contracts kick in this fall, the agency could face a deficit of 3,000 megawatts or nearly 30 percent of its total demand.

Rep. Peter DeFazio, D-Ore., said Wright warned him in a meeting Wednesday afternoon that without contract buyouts, the BPA could be forced to raise rates by 300 percent to cover the cost of power bought on the West Coast market.

"He painted an extraordinarily dire picture of electricity rates in the Northwest," DeFazio said.

In an interview, Wright said the prospect of passing on huge rate increases left the BPA with one practical choice: Persuade some customers to reduce their demand or leave the BPA system altogether in hopes that settlements would include cash for laid-off workers.

"The idea that people should just take a hit, that people should be put out of work, is something that I don't particularly care for," Wright said. "So we're trying to find something that helps mitigate the impact on the economy."

Plans for buying out BPA contracts are still in the earliest stages, and it's unclear exactly which customers will come forward, Wright said. Some irrigators already have expressed interest, and other industries might choose to fend for themselves on the spot market.

"I'm going to be looking for anybody and everybody who wants to come in the door interested in load reduction," Wright said. "What I want to do is buy the cheapest."

Aluminum producers are likely to be first at the BPA's negotiating table. They face stiff competition from foreign imports, and even a modest increase in rates could turn profits into losses. Some smelters already have closed pot lines in return for cash payments that they have shared with workers.

DeFazio said he favored negotiated buyouts with aluminum companies rather than "brinksmanship" that could force the BPA's remaining customers to endure a massive rate hike.

"We just need to draw the bottom line that we're not going to have the 99 percent of Northwest ratepayers who have nothing to do with the aluminum industry pay grossly inflated prices for their power to support it," DeFazio said. "That's not a starting point for me."

Reducing demand on BPA could go a long way toward curbing rate hikes, according to a fact sheet supplied to members of Congress and other interested parties. With market rates at $125 per megawatt hour, a cut of 2,000 megawatts could reduce a 136.5 percent rate increase to a more palatable 35 percent increase, according to the BPA.

Meanwhile, talk of missed Treasury payments and contract buyouts has emboldened the agency's critics in Washington. They consider the agency's low-cost hydropower to be a form of subsidy that gives the Northwest an unfair advantage over other regions.

Plans to buy out contracts amount to good money after bad, they said. The BPA has no legal obligation to serve the aluminum companies and other so-called direct service industries. But agency officials agreed to offer them 1,500 megawatts under new contracts after being pressured by former Energy Secretary Bill Richardson.

"The whole point was, they didn't have to sign the contracts in the first place," said Dick Munson, executive director of the Northeast-Midwest Institute, a think tank for members of Congress from those regions. Buyouts, he said, "add insult to injury."

Although the threat to BPA is not immediate, Wright said that he takes it seriously and that he did not plan to ask for financial help from the Bush administration.

"I'm not planning to ask for anything that's going to look like a subsidy for the Northwest," he said.

You can reach Jim Barnett at jim.barnett@newhouse.com

http://www.oregonlive.com/news/oregonian/index.ssf?/news/oregonian/01/02/wr_62bpa09.frame

-- Martin Thompson (mthom1927@aol.com), February 10, 2001