PORTLAND - The Bonneville Power Administration estimates its wholesale power rates could go up approximately 5 percent over current rates for the next three years, beginning Oct. 1. That's significantly less than the 15 percent increase proposed last February. The agency reported the preliminary number last week in a draft record of decision in its rate process.

BPA Administrator Steve Wright said the reduction in the proposal is due primarily to improved water conditions, better than expected secondary (surplus power) revenues and stringent cost management. The agency proposes to make a final adjustment in August. Retail rate impacts will vary by utility.

"We listened to stakeholders and took aggressive steps to cut costs," Wright asserted. "That, along with better water and power market conditions, has put us in much better shape than we were just a few months ago."

But the unpredictable nature of the weather and the volatility of western power markets make the final rate uncertain, Wright emphasized. Revenue from sales of surplus power into the market holds down the rates of BPA's Pacific Northwest customers. The final number will depend on any additional cost or revenue changes when BPA reviews the situation in August.

Under last week's proposal, the single largest outstanding item is the potential settlement of a lawsuit filed by public agency customers challenging the benefits currently flowing to the region's investor-owned utilities under their BPA contracts.

"We continue to work with the parties to resolve this litigation, which would mean a significant additional reduction in our rates," Wright said.

Given the rapid changes in circumstances in the utility industry in recent years, BPA will continue to adjust the rate every six months, based on actual conditions. Parties have the opportunity to argue for more changes. BPA will issue a final record of decision by late June or July.

With a 5 percent rate increase and financial reserves at currently projected levels, BPA's U.S. Treasury payment probability for 2004-2006 would increase from 50 percent in the initial rate proposal to 80 percent. BPA repays with interest money borrowed from the Treasury to build the Federal Columbia River Power System.

"Missing a Treasury payment would imperil the long-term benefits of the federal power system - the major economic asset to the region we are trying now to protect," Wright said. "So more certainty about repaying the Treasury is good news for the long-term economic health of the region."

In November 2002, the agency projected a $1.2 billion revenue shortfall over the current rate period, ending September 2006. When the initial rate adjustment was filed, the shortfall was projected at $900 million through 2006. BPA worked with its customers and others to reduce this gap between revenues and expenses.

BPA has saved about $90 million over the remainder of the rate period by terminating its remaining ENRON contracts. Additional cost cutting has saved another $80 million, including $35 million in internal budget reductions. The agency has also been able to improve cash flow in fiscal 2003 by refinancing debt, taking advantage of historically low interest rates.

On the revenue side, BPA's outlook improved when a dramatic change in weather brought more water into the Columbia River System. A dry winter led to forecasts of about

70 percent of average annual water volume, but heavy precipitation in March and April recharged the hydro system to nearly 85 percent of average. BPA has surplus power to sell into the market, where higher than forecasted prices are improving the agency's revenue and relieving upward pressure on rates for BPA's Northwest customers.

This latest rate estimate, which is part of the draft Record of Decision (ROD) for the 2003 Safety Net Cost Recovery Adjustment Clause (SN CRAC), will cover the remaining three years of the rate period, fiscal years 2004-2006. BPA accepted many of the recommendations of customers and other parties to the rate case, including:

Customers called for the lowest possible rates, and the proposal has been reduced from

15.6 percent to 5 percent through additional cost reductions and other means.

Tribes and environmental groups argued that the proposal was too low to protect Treasury payments, while customers said new financial standards were too costly. The proposal bolsters Treasury payment probability while eliminating the questioned financial standards.

Customers requested, and BPA agrees, that utilities would receive rebates if revenues improve beyond what BPA requires.

BPA agrees with customers that increases in certain cost categories be capped and should not be automatically recovered through the SN CRAC.

BPA agreed to ongoing cost disclosures with opportunities for customers and others to comment. This would occur outside the rate process.

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