BPA Residential Exchange Credit

I always understand people being upset about having to deal with a state monopoly, but I don't understand why they are upset when they spend money that is theirs to spend. We had this problem when my city tried to take over the local monopoly. People were upset when the Electric Co. spent its own money to defend itself with direct mailings, but not when the city tried to attack it with direct mailings, court proceedings, state legislature lobbying, full-page ads in the paper, hiring a full-time PR guy, etc. That actually was our money. Once you buy the electricity, though, that is their money.

the 9th circuit decision determined that the manner in which BPA figured the Residential exchange benefit was incorrect. the Res X benefit was established in the 1980 Regional Power Act for the purpose of balancing the difference in rates between Public Power and Investor Owned utilities. Public Power utilities are regarded as having first rights to the federal based system that BPA manages who provide electricity at cost as opposed to privates that are responsive to a board of directors with a profit motive (enron).

bpa should not have cut off the payments to the privates but should have refigured the benefit and negotiated the difference over time.

Your rate increase replaces the subsidy. what is difficult is that bpa is still collecting these monies from public utilities and keeping it in their piggy bank.

Thanks, Kyle, you got it right. This is the removal of a subsidy, not a rate increase. A couple of additions to the information you provided:

You correctly state that when BPA offered the contracts to private utilities in 2000 (the same ones the 9th found to be illegal), they estimated the benefits to total $140M per year, and that they later escalated (to about $350M per year). The other part of the story is that BPA estimated at the time that following the formula laid out in the Northwest Power Act would have resulted in payments of only about $48M per year. The original contracts, even before the escalation, were too rich by a factor of almost 3X.

You ask what would be wrong with selling BPA power at market rates. While it is true the hydro system was built with federal dollars, those dollars were loaned, not granted. Public power customers have been repaying those original loans and subsequent loans, with market-based interest, over the past 70 years. How is it fair to make them now pay market-based rates when they've been paying for the asset all these years?

The BPA was established in 1937 to market the power produced at federal dams in the Pacific Northwest. A part of the New Deal, one of the primary goals was to provide low cost power to rural areas that investor-owned utilities declined to serve due to the high costs of serving sparsely populated areas. Publicly-owned utilities were formed to serve these areas, through either public utility districts, municipal departments, or cooperative ownership.

By the 1970s, there were about thirty federal dams in the PNW. BPA was selling its power to the publicly-owned utilities, investor-owned utilities, and aluminum and other industries. By law, the publicly-owned utilites have first call on BPA's power (called preference). The growth of the PNW was leading to BPA running out of power to serve all of its commitments, and BPA was prohibited from acquiring more generating resources. At this time, many of the utilities came together to decide on a plan to meet increasing loads. Part of that plan was to build a number of nuclear power plants (WPPSS, Pebble Springs, Skagit, etc.)

In order to make sure that BPA could meet the future load of publicly-owned utilities, Congress passed the Northwest Power Act in 1980. In this law, as with most laws, there is something for everyone. The publicly-owned utilities got the right to place all of their load on BPA and BPA could buy power to serve their loads. The industries got 20-year contracts for power from BPA at a rate close to the publicly-owned utilities rate. The investor-owned utilities did not get power from BPA, rather they got the residential exchange, the right to sell power equal to the loads of their residential customers (not commercial or industrial) to BPA at their average cost of resources and purchase from BPA at a rate similar to the publicly-owned utility rate. [This answers why PGE is fighting for the "rights" of their customers.] All of the benefits of this exchange are obligated by the Act to flow directly to the residential customers of the the exchanging utilities. In addition to all of these service rights, the publicly-owned utilities also got rate protection from certain aspects of the law, including the exchange.

Through the first twenty years of the exchange, many issues arose on how to calculate the average cost of resources for exchanging utilities and how to implement the rate protection. Seeking to settle those issues and give the utilities more certainty in the amount of exchange benefits, BPA and the investor-owned utilities settled the amount of benefits they would receive for the next ten years. This settlement included a combination of financial payments and power sales out of BPA's surplus inventory. As these settlements were being signed, the west coast power markets went bonkers. A large amount of load from publicly-owned utilities, which had been seeking lower-cost sources from the market, now returned to BPA under their preference rights to BPA's power. Now BPA's inventory was insufficient to meet all of its obligations, and the alternative was to buy from the market at prices five to ten times higher than BPA's selling rates. BPA then reached agreement with the investor-owned utilities to buy back the power it had just committed to sell them at a price about three times it would have sold to them, but lower than could be obtained from the market. This increased the amount of money going to the investor-owned utilities from the $140 million to well over $300 million.

Since BPA is a self-financing federal agency, the money to pay the investor-owned utilities had to come from the publicly-owned utilities and the aluminum smelters. BPA increased its rates to pay for its power purchases and the exchange benefits, driving many of the smelters out of business (which reduced BPA's obligations to them).

Faced with these higher rates from BPA, the publicly-owned utilities challenged the exchange settlement as not being consistent with the Power Act. The Act specifies the exchange as the method for passing benefits to the exchanging utilities, not power sales. The court held that BPA could not substitute its own judgment on how to distribute benefits for that which Congress designated. It stated that no matter how well-intentioned BPA's actions might have been for finding a solution to its problems, it is still bound to follow the law. It ruled that the settlement contracts were invalid.

In face of the contracts being invalid, the BPA employee who certifies that payments made by the agency are legal could no longer state that they were legal. Continuing to make the payments would make that employee personally liable for the $28 million per month. So payments were discontinued.

BPA now needs to figure out what the proper amount of exchange benefits are for the investor-owned utilities before payment can be resumed. In doing so, this determination must be made according to all of the laws that BPA is subject to, and as a result, it will take at least a year to go through all of the work unless it can reach agreements with all of its customers on how to determine these amounts. There is an amount of legal benefits that can be paid, its just a matter of working through all of the process of developing new contracts, computing the average cost of resources and the appropriate BPA rates.

I know it doesn't help PGE's customers to ask them to be patient while all of this is being done, but unless all of the parties come to agreements on how to proceed, the process just takes time to accomplish. BPA knows now what happens when it tries to cut corners to speed up its process. The payments will resume, it's just a matter of how much and when.

To your last question of selling BPA power at market rates, you need to realize how much BPA's lower-cost power underpins the economy of the PNW. Also, what would happen to all of the extra money, should it just go to the US Treasury? By selling BPA power at cost, the benefits of the power stays in the PNW. Congress has set up this system, including the residential exchange. Maybe we need to just let it work the way they said.

As to BPA keeping the money in the piggy bank, it's true. But BPA doesn't get to keep it. When it's all figured out, that money will go to the appropriate places, part to the investor-owned and part to the publicly-owned.

BPA has recently posted a history of all this at www.bpa.gov/corporate/pubs/fact_sheets/07fs/fs061507.pdf