This
article about the future of wholesale power costs is brought to you by OPALCO’s
General Manager Randy Cornelius. Randy joined OPALCO in August 2002 and was immediately
faced with several regional and national energy issues, including many critical
challenges confronting BPA, as described in this article.
There are three main parts to the electric utility business: generation, transmission
and distribution services. For this edition of It’s Electrifying, I want to focus
on the generation part of our business because I am concerned about the future of
wholesale power supply costs for OPALCO members.
OPALCO purchases 100 percent of its power from the Bonneville Power Administration (BPA). We purchase this electricity at “cost-based” rates, or just what it costs BPA to produce the power. In turn, we resell this power at non-profit rates to OPALCO members.
BPA is an interesting entity with a long relationship to public power utilities like OPALCO. It provides almost 50 percent of the Northwest power supply and owns 80 percent of the region’s transmission lines. It’s a federal agency – called a Power Marketing Administration (PMA) – that was formed in the 1930s and operates under the U.S. Department of Energy. There are four other PMAs in the country – Tennessee Valley, Western Area, Southwestern and Southeastern – that were created to market electricity generated by federally owned hydroelectric projects.
BPA markets power from a system of 29 federal hydroelectric projects and one nuclear plant. These generation projects plus the federal transmission network make up the Federal Columbia River Power System delivering affordable and reliable power to millions of Northwest ratepayers.
OPALCO’s current full service power sales agreement with BPA runs through 2011; however, in 2006, BPA and OPALCO will have to negotiate an adjustment to our wholesale power rates. At the time we signed the current full service power sales agreement, the price of power from BPA was just slightly higher than the market rate for the same. However, OPALCO’s Board of Directors wisely felt that a fixed rate for power supply through a long term agreement was better than having to deal with the unknown fluctuations of market-based pricing.
Other utilities in the region chose a different path. Some diversified their power supply by buying from a source other than BPA. Still others signed different types of power supply agreements with BPA or waited to sign their agreements, thinking BPA would lower its prices. Their agreements included three cost recovery adjustment clauses (CRACs), or rate increases that would trigger if BPA needed additional revenue.
Recently, BPA announced the Safety Net CRAC is going to trigger for most of its utility customers, resulting in another 15% surcharge on the wholesale cost of power. This is the last CRAC of three, which is causing the rate increases impacting most of the region’s electricity consumers. This last CRAC is significant in that BPA is sending a strong message to the region about its worsening financial condition. Because BPA is a cost-based provider of electricity, it must raise rates for power to cover increasing costs and losses that it has incurred since the Energy Crisis of 2000 and 2001.
OPALCO’s current full service power sales agreement with BPA insulates its members from these large rate increases, due to these CRAC adjustments. So, why are we focusing on rate increases for other utilities and the worsening financial situation of BPA in this article? The answer is, as stated above, in 2006, BPA and OPALCO will have to negotiate an adjustment to our wholesale power rates. Obviously, the price of wholesale power now will have an impact on what we pay in the future.
BPA is informing us that OPALCO’s 2006 rate adjustment for wholesale power could be around a 30% increase; however, it could vary in price based on water and market conditions for the price of power. These issues are beyond our immediate control. However, what we can do is work with the other utilities in the region to impact the amount of money spent by BPA on administration, overhead and certain projects.
OPALCO is working with other utilities in the region to encourage BPA to cut costs and reduce overhead wherever possible. BPA Administrator Steve Wright has responded to the concerns of the region by deferring or cutting $350 million in expenses and looking at cutting an additional $500 million by 2006.
Some utilities think more aggressive cost cutting measures need to be taken by BPA to reduce the immediate and future impact on wholesale power costs. Possible measures to reduce costs include keeping BPA financial reserves at a minimum, preventing BPA from paying a $200 million settlement to two of the region’s for-profit utilities, accelerating cost reductions mentioned above, and stopping expenditures on the development of Regional Transmission Organization (RTO) West. These are all good options for BPA to explore instead of raising rates for wholesale power.
One thing we
do know is that the cost of wholesale power is increasing. Many utilities and their
consumers have been impacted by this already; still others, like OPALCO, will need
to prepare for this new reality in advance of renewing our agreement with BPA. We
want to keep OPALCO members informed about this issue as the details unfold so there
are no surprises. OPALCO is working hard to control costs itself and streamline
operations to help control overhead expenses paid by our members. BPA must do the
same. We will continue to keep you informed about the status of our negotiations
with BPA.
Randy and his wife, Dottie, live on Orcas Island and are very busy at the present time remodeling the house they just bought. Randy enjoys NASCAR racing and watching the Miami dolphins.
