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Restoring the Lower Snake River

July 8, 2018

by Eric Barker

sr.dam

Battling growing competition and looking at

costly upgrades, Northwest power agency is

trying to right its ship. Could dam breaching

be a solution?

The Bonneville Power Administration is one of a few self-funded federal

agencies that operates like a private concern, but difficult market

conditions are eroding the business model it's depended on for

decades and threatening to upend its future.

In response, the agency is looking at cutting its fish and wildlife

budget, among other measures. That could have an impact on the

effort to recover salmon and steelhead runs protected under the

Endangered Species Act. But some environmentalists say the agency

could save money, improve its financial standing and help fish by

walking away from costly future upgrades to the four lower Snake River

dams.

The agency is also trying to shore up its finances by reducing its debt

ratio and maintaining its credit rating while making needed investments to infrastructure, coming up with new products like reliable power for noncontract customers and better meeting the needs of customers.

Cheap renewable energy like wind and solar produced in California and

the southwest, along with conservation and the low cost of abundant

natural gas, have driven down the price of wholesale electricity and

disrupted the market for surplus electricity.

The agency once counted on selling its surplus electricity to places like

California for a nice profit, which it used to keep its own rates low. But

with prices and demand both down, Bonneville has often been forced

to sell its surplus electricity at a loss. It has also had to raise the rates

it charges regional customers by about 30 percent in the past decade.

Those customers are locked into long-term contracts and are now

paying well above the market price. For instance, Bonneville sells its

power for roughly $36 a megawatt. On the spot market, which

fluctuates constantly, the price is often around $20 a megawatt, or

even lower.

Agency officials such as BPA administrator Elliot Mainzer are diligently

seeking ways to right the ship, particularly prior to the expiration of

those contracts held by small and large utilities in the Pacific

Northwest. Utilities managers are naturally eyeing the cheaper prices

elsewhere. Most of the contracts expire in 2028, but negotiations for

renewal are expected to heat up in the next three to four years.

"The trend would not allow them (BPA) to be a competitive power

supplier when the next set of contracts are signed," said Scott Corwin,

executive director of the Public Power Council, a coalition of publicly

owned utilities that use BPA power. "It's an important matter for

Bonneville to get control of their costs and turn the trajectory of what

have been significant rate increases over the last several rate periods."

BPA markets power it produces at 31 federal hydroelectric dams and

energy produced at the Columbia Generating Station, a nuclear plant

in Washington. According to its website, it provides about 28 percent of

the electricity used in the vast Pacific Northwest region and maintains

about three-quarters of the transmission lines in its service territory.

Customers include big public utilities such as Cowlitz Public Utility

District and tiny rural cooperatives like Clearwater Power and Idaho

County Light and Power.

Clearwater Power, which supplies electricity to homes and businesses

in parts of north central Idaho, is keeping a close watch on BPA's

efforts to curb costs as well as its rates as the so-called 2028 contract

cliff approaches.

"Our cost of wholesale power is about 42 percent of our monthly bills

for our members," said David Hagen, Clearwater Power general

manager at Lewiston. "It's impacting us. We are concerned about the

trajectory Bonneville is on. With rate cases every two years and rising

rates depending on the year, it's a concern, especially when you

compare it to what the wholesale market is right now."

Hagen said it's too early to say if Clearwater will seek to reduce the

amount of power it purchases from Bonneville in the next contract and

replace it with other sources. But it's a possibility. It's also a possibility

other, much larger utilities will seek to diversify from Bonneville, which

could raise rates on those who remain customers of the agency.

"I'm guessing we are going to have to make a decision in 2023 or 2024

about those contracts," Hagen said. "Until we know all the terms and

the pricing, it's going to be very difficult to make a decision."

The fact that Bonneville customers are at least mentally shopping

for better deals has the agency worried. Mainzer said power from BPA,

even at a higher price than the volatile spot market, still has value, but

he knows rising agency costs and prices are a looming problem.

"We are not strictly competitive on pure price point basis," he told the

Northwest Power and Conservation Council earlier this year. "I would

say that I still think there is tremendous value in the product. I think

right now that when you unpack all the different elements of the

Bonneville product - it's carbon free, it's dispatchable, it's firm reliable

components and everything else that comes with BPA - I still think it's a

tremendously valuable product, but if that (price) spread opens up

more I think we are going to face some significant problems."

Anthony Jones, a Boise economist, thinks the agency's above-market

rates pose a serious danger. The more utilities choose to reduce their

Bonneville purchases, the more the prices will rise for those who

remain.

"Big utilities are saying, 'Why don't I cut back on my big contract with

BPA and buy at least part of my power on the open market.' It's risky,

sure, but if you are willing to assume some risk, there is the potential

to do some big savings," he said. "That is a huge problem for BPA. BPA

has sort of a fixed level of costs and spreads those costs over its known

demand, over customers. If customers cut back, some costs have to be

spread over fewer people, and that means higher rates for the

remaining customers. It's called a death spiral in economics. It's

descriptive and it's true."

The agency also faces liquidity problems and scrutiny from credit

rating organizations. To help make ends meet and to avoid further rate

hikes, the agency has burned through much of its reserves and used

the lion's share of its credit. Mainzer told the Northwest Power and

Conservation Council it has spent about $800 million of its cash

reserves and $5 billion of its $7 billion federal borrowing capacity. He is

trying to maintain at least $1.5 billion in credit and enough cash to

fund each of its division for at least 60 days. The agency is seeking

nonfederal sources of credit to relieve some pressure.

Bonneville officials are also attempting to retire debt, but at the same

time the agency needs to continue to invest about $900 million

annually in upgrades to the dams and transmission system.

It all adds up to stressful times for the agency that's mission is to be

"an engine of economic prosperity and environmental sustainability,"

for the region.”



Mainzer said the agency can't get out of its predicament with cost

cutting alone and must find new revenue by continuing to sell its

surplus electricity, a difficult task given the market.

The agency's costs include debt payments to the federal treasury and

its considerable fish and wildlife obligations. With little control over the

wholesale market, the agency is seeking to control what it can - its own

budget. That will mean a nearly $30 million cut to its $300 million fish

and wildlife budget for fiscal year 2019, in addition to cost-saving

measures at its other divisions. This comes at a time when the return

of Endangered Species Act protected wild salmon and steelhead runs

have been declining. Last year, the return of wild B-run steelhead was

alarmingly low. By some accounts, fewer than 500 wild B-run steelhead

returned to the Columbia River systems. Another estimate by the Idaho

Department of Fish and Game puts the still-unconfirmed number at

about 1,000.

Whichever is right, it's a low number. Spring chinook returns are far

from robust this year, and biologists are not expecting steelhead to

make much of a rebound this fall.

By law, the agency must give equal consideration to providing a

reliable power system for the region and to helping fish and wildlife

populations affected by the construction and operation of dams in the

Columbia River basin. To meet its fish and wildlife obligations, the

agency's fish and wild program pays for a plethora of projects including

hatcheries, habitat improvement in places like Idaho's salmon and

steelhead streams and work designed to ease passage of adult and

juvenile salmon at the dams.

The fish and wildlife budget jumped in 2008 when the agency

negotiated the Columbia Basin fish accords that gave states and tribes

a boost in funding in exchange for them not pursuing litigation over the

impacts of federal dam operations on salmon and steelhead. Those

accords expire this year and are expected to be renewed but for a

shorter time span than the original 10-year agreements. Oregon and

the Nez Perce Tribe did not sign on to the accords.

The fish and wildlife program is undergoing review and cuts are

coming. Thus far, the agency is trying to trim fat without hurting the

projects that most help threatened and endangered fish. It will do that

by looking to slash things like research, monitoring and evaluation,

how much it pays researchers and fisheries managers to attend

scientific conferences, and training. It will also look at cuts to programs

that can't demonstrate success when it comes to improving fish runs.

"We are really trying to make sure the investments we retain are the

highest biological value," said Bryan Mercier, executive manager of

Bonneville's Fish and Wildlife Division. "We are not going to do

anything that puts us in jeopardy of meeting our ESA obligations."

The agency has indicated that any additional costs, such as spilling

water at the dams, needs to be made up with cuts elsewhere. Water

spilled at the dams is counted as a cost in the form of forgone revenue

because it doesn't run through turbines.

Fisheries officials who receive funding from the fish and wildlife budget

are both sympathetic to the position the agency is in but also looking

to make sure the agency meets its mitigation obligations.

"They still have a responsibility under the Northwest Power Act to

mitigate for the effects of the hydro system and to give equal

consideration to fish as the power that is produced. That still needs to

be their standing direction," said David Johnson, director of Nez Perce

Tribe Department of Fisheries Resource Management.

Some activists have suggested the agency walk away from the four

lower Snake River dams that need costly turbine upgrades in the

coming decades and are responsible for a significant portion of the

agency's fish and wildlife costs. Breaching the dams is the cornerstone

strategy of many Snake River salmon advocacy groups.

Critics are skeptical that selling more power when the market is

depressed can succeed.

"Good luck and at what price?" said Linwood Laughy of Kooskia, who

worked with economist Jones, journalist Steve Hawley and producer Jim

Norton to write a white paper on the issue.

The men say the agency should consider divesting the four dams,

which could pave the way for their removal. According to their

reasoning, breaching would save money by eliminating the needed

upgrades and reduce mitigation costs associated with the dams.

Buried in the agency's five-year strategic plan is this line: "And through

the Columbia River System Operations Review, BPA and its federal

action agency partners will produce a recommendation on the future of

the lower Snake River dams after completing a comprehensive

analysis."

The single sentence is devoid of details, but for some it is loaded with

foreshadowing regarding the agency's commitment to the dams and

the costly upgrades they will need in the next few decades.

"I read that and said the lower Snake River dams are clearly in their

sights, and I think they should be," Jones said.

Jones sees the dams as something that can relieve some of

Bonneville's financial pressures. The aging dams need turbine

rehabilitation that could cost $1 billion-plus, according to Laughy's

calculations. The dams are responsible for a large chunk of the fish and

wildlife mitigation payments Bonneville is required to make. Work by

the Fish Passage Center indicates breaching the dams could lead to a

fourfold increase in Snake River salmon and steelhead runs.

"It would actually be cheaper to save the fish than to pretend the dams

aren't damaging the fish," Jones said. "Realistically those particular

four dams are just very high-priced assets. They generate 53 percent

of their power April to June when nobody needs the power and prices

are down around $5 to $10 a megawatt and their remaining power the

rest of year, and they really don't supply much. Regardless of how well-

intentioned they were when (the dams were) put in, they are just not a

good fit for the Northwest market."

There is no indication the agency is contemplating a future without Ice

Harbor, Lower Monumental, Little Goose and Lower Granite dams.

Officials say the dams serve as an important backup source for

renewable energy sources. When the wind doesn't blow and the sun is

covered by clouds, the dams can be used to take up the slack.

"The way I view those dams, which have very high concrete survival

rates (survival rates for juvenile fish passing them) by the way, are

very significant in the region for us in integrating renewables such as

wind and solar," Mercier said. "They provide a ton of flexibility for us to

provide reliability in the region. They are four giant batteries, and those

batteries are critical to the operation of a reliable system."

In response to written questions submitted to the agency, BPA

spokesman David Wilson said Bonneville plans to invest about $500

million in the lower Snake River dams over the next 20 years. Most of

that will focus on equipment that is not directly related to power

generation, such as turbines.

Based on the investments, the agency calculates power produced at

the dams will cost $13 to $14 a megawatt hour.

"The cost of production is lower than even the most pessimistic

replacement power forecasts over the same time period, making the

projects cost-effective resources," Wilson said.

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