Bonneville Power Administration:

Better Management of BPA's Obligation to Provide Power Is Needed to Control Future Costs

GAO-04-694: Published: Jul 9, 2004. Publicly Released: Aug 9, 2004.

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The Bonneville Power Administration (BPA) has experienced significant financial problems in recent years. BPA's cash reserves at the end of fiscal year 2002 had fallen to $188 million, and BPA estimated in February 2003 that it had a 74 percent chance of missing its Treasury debt payment that year. While BPA's finances have recently improved, and the agency made its Treasury payment in 2003, BPA's financial condition is still far from robust. In this context, GAO was asked to report on (1) the advantages and disadvantages BPA faces in marketing electric power in a more competitive environment, (2) the major causes of BPA's recent cost increases, and (3) the extent to which BPA is taking actions to control its costs.

BPA has advantages that have typically enabled it to sell electric power to its customers--primarily public utilities--at lower prices than other sellers in the Pacific Northwest. Most importantly, BPA sells power produced by the federal power system, which includes 31 hydroelectric dams that generally have lower costs as compared with other power sources. However, BPA also has disadvantages that potentially increase its costs. Specifically, BPA is required by law to meet the demands of utilities in the region, even if those demands exceed the production capacity of the federal power system. This open-ended requirement has at times required BPA to purchase additional power at relatively high prices. BPA has other costly obligations as well, including providing financial benefits to investor-owned utilities and protecting fish and wildlife that increase its costs relative to competing sources of electricity. BPA's open-ended obligation to provide power to the region is the major cause of its recent cost increases. This obligation led to cost increases as BPA purchased large amounts of relatively expensive power to meet rising demand. BPA's rate structure also contributed to increased demand and increased costs, because it did not reflect BPA's incremental costs of acquiring additional power and therefore did not give customers adequate incentives to conserve or seek power from alternative sources. In addition, drought and other factors have also increased BPA's costs in recent years. BPA has not resolved problems associated with its open-ended obligation to be the net provider of wholesale electricity in the region--the major cause of its recent cost increases. BPA officials intend to resolve this problem by seeking agreement with BPA's customers to limit its commitment to provide power. BPA proposes to establish the amount of power each customer is able to buy at its lowest cost-based rate and is considering charging incremental rates for any power it sells beyond this amount. However, BPA has not clearly defined the limits for its commitments or how it would implement incremental rates. Whether this approach ultimately will be adopted is also unclear; BPA had similar plans in the late 1990s but did not implement them because of pressure from customers to serve more demand. In the meantime, BPA has taken positive steps to centralize its risk management process to better control costs. However, BPA's plan outlining its new approach does not contain some key elements to successful implementation, including details on specific activities, resources, and time frames needed to implement the plan.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In July 2004, GAO issued a report entitled "BONNEVILLE POWER ADMINISTRATION: Better Management of BPA's Obligation to Provide Power Is Needed to Control Future Costs". In this report, GAO recommended that BPA define the rights to purchase the firm output of the federal power system so that (1) the amount of power that BPA sells at its lowest, cost-based rate is equivalent to the firm output of the existing federal power system, and (2) customers who demand additional power from BPA are charged incremental rates that fully reflect the additional costs BPA incurs in acquiring or otherwise providing such power. GAO made these recommendations to help BPA control the costs associated with future power purchases that it may incur in order to meet its open-ended obligation to provide power to the Pacific Northwest region. However, during the audit, GAO found that while BPA had considered implementing a similar proposal in the past, it ultimately declined to do so, in part because of pressure from BPA's customers to provide more power. As a result, GAO concluded that a rule issued under the Administrative Procedure Act to establish a policy on allocating rights to power from the existing federal power system and charging incremental rates would provide greater assurance that BPA would not change direction in the future. Therefore, as a way to lend credibility to and reinforce BPA's actions, GAO recommended that BPA study the feasibility of issuing a rule under the Administrative Procedure Act to define the rights to purchase the firm output of the existing federal power system and set the terms of incremental rates for any power sold beyond that amount. According to an October 2004 letter to GAO, BPA stated its intent to study the feasibility of issuing a rule under the Administrative Procedure Act. In February 2005, BPA issued a Record of Decision describing how BPA intends to implement its policy through new contracts and rates. This action is consistent with and responsive to GAO's recommendation.

    Recommendation: The Administrator of BPA should, as a way to lend credibility to and reinforce BPA's actions, study the feasibility of issuing a rule under the Administrative Procedure Act to define the rights to purchase the firm output of the existing federal power system and set the terms of incremental rates for any power sold beyond that amount.

    Agency Affected: Department of Energy: Bonneville Power Administration

  2. Status: Closed - Implemented

    Comments: In July 2004, GAO issued a report entitled "BONNEVILLE POWER ADMINISTRATION: Better Management of BPA's Obligation to Provide Power Is Needed to Control Future Costs". In this report, GAO found that the major cause of BPA's recent cost increases was its open-ended obligation to provide power to the Pacific Northwest region. This obligation led to cost increases as BPA purchased large amounts of relatively expensive power to meet rising demand. BPA's rate structure also contributed to increased demand and increased costs, since it did not reflect BPA's incremental costs of acquiring additional power, and therefore, did not give customers adequate incentives to conserve or seek power from alternative sources. To reduce the risk that BPA will be overcommitted in the future and to help BPA control the costs of future power purchases, GAO recommended that BPA define the rights to purchase the firm output of the federal power system so that customers who demand additional power from BPA are charged incremental rates that fully reflect the additional costs BPA incurs in acquiring or otherwise providing such power. In February 2005, BPA issued a Record of Decision stating that its policy is to limit the amount of power it sells at its lowest-cost rates to approximately the firm capability of the existing federal power system. BPA further stated that it anticipates implementing this policy decision through new long-term contracts and rates to be implemented as early as October 2008. In addition, BPA stated that it will consider the use of an incremental or tiered rate as part of an integrated long-term power contract and rate solution. This action is consistent with and responsive to GAO's recommendation.

    Recommendation: The Administrator of BPA should, to reduce the risk that BPA will be overcommitted in the future and to help BPA control the costs of future power purchases, define the rights to purchase the firm output of the federal power system so that customers who demand additional power from BPA are charged incremental rates that fully reflect the additional costs BPA incurs in acquiring or otherwise providing such power.

    Agency Affected: Department of Energy: Bonneville Power Administration

  3. Status: Closed - Implemented

    Comments: In July 2004, GAO issued a report entitled "BONNEVILLE POWER ADMINISTRATION: Better Management of BPA's Obligation to Provide Power Is Needed to Control Future Costs". In this report, GAO found that the major cause of BPA's recent cost increases was its open-ended obligation to provide power to the Pacific Northwest region. This obligation led to cost increases as BPA purchased large amounts of relatively expensive power to meet rising demand. BPA's rate structure also contributed to increased demand and increased costs, since it did not reflect BPA's incremental costs of acquiring additional power and, therefore, did not give customers adequate incentives to conserve or seek power from alternative sources. To reduce the risk that BPA will be over-committed in the future and to help BPA control the costs of future power purchases, GAO recommended that BPA define the rights to purchase the firm output of the federal power system so that the amount of power that BPA sells at its lowest, cost-based rate is equivalent to the firm output of the existing federal power system. In February 2005, BPA issued a Record of Decision stating that its policy is to limit the amount of power it sells at its lowest-cost rates to approximately the firm capability of the existing federal power system. BPA further stated that it anticipates implementing this policy decision through new long-term contracts and rates to be implemented as early as October 2008. This action is consistent with and responsive to GAO's recommendation.

    Recommendation: The Administrator of BPA should, to reduce the risk that BPA will be overcommitted in the future and to help BPA control the costs of future power purchases, define the rights to purchase the firm output of the federal power system so that the amount of power that BPA sells at its lowest, cost-based rate is equivalent to the firm output of the existing federal power system.

    Agency Affected: Department of Energy: Bonneville Power Administration

  4. Status: Closed - Implemented

    Comments: In July 2004, GAO issued a report entitled "BONNEVILLE POWER ADMINISTRATION: Better Management of BPA's Obligation to Provide Power Is Needed to Control Future Costs". In this report, GAO found that the major cause of BPA's recent cost increases was its open-ended obligation to provide power to the Pacific Northwest region. This obligation led to cost increases as BPA purchased large amounts of relatively expensive power to meet rising demand. GAO also found that BPA has taken positive steps to centralize its risk management process to better control costs. However, BPA's plan outlining its new approach to risk management did not contain some key elements to successful implementation, including details on specific activities, resources, and time frames needed to implement the plan. To strengthen BPA's management plan and to ensure that progress is made in implementing its new risk management approach, GAO recommended that BPA identify specific activities, resources, and time frames to implement its risk management initiatives. In November 2004, BPA issued a work plan that identified specific activities, resources, and time frames associated with the establishment of a transacting and credit risk management plan, which is the first area of strategic risk to be treated under BPA's Enterprise Risk Management program. This action is consistent with and responsive to GAO's recommendation.

    Recommendation: The Administrator of BPA should, to strengthen BPA's management plan and to ensure that progress is made in implementing its new risk management approach, identify specific activities, resources, and time frames to implement BPA's risk management initiatives.

    Agency Affected: Department of Energy: Bonneville Power Administration

 

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