May 31, 2019
By Tom Karier
It’s not bankrupt yet, but Bonneville Power Administration has made it clear that it is facing a financial crisis and may be in trouble by 2028. What happens in 2028? In that year Bonneville’s long-term power contracts expire, allowing its customers — Northwest power utilities — to consider selecting a new, cheaper wholesale power provider. No one knows for sure if Northwest utilities will abandon Bonneville, but the fact that it is being discussed is itself a sign of trouble. For the past 20 years, I had the good fortune of working for governors Gary Locke, Christine Gregoire, and Jay Inslee as a Washington state representative to the Northwest Power and Conservation Council, a four-state body that provides some oversight over Bonneville. From this position I had a front-row seat on regional power planning, salmon recovery and Bonneville’s increasingly precarious financial situation. Why should we be concerned about Bonneville’s financial condition? Because Bonneville manages the sale of electricity from 31 federal hydropower facilities in the Northwest, including Bonneville and Grand Coulee dams. This electricity is extremely valuable because it is low-cost, carbon-free and flexible in the sense that it can be ramped up to meet peak loads in the Northwest. Less obvious is the fact that the federal hydrosystem acts like a big battery to help balance renewable wind and solar. Fortunately, federal law gives the Northwest preference for these benefits that are sold to Northwest utilities at cost. For all these reasons, a financially healthy Bonneville is important to the Northwest economy and environment, especially to Washington state, which accounts for 65 percent of Bonneville’s cost-based sales. As evidence of its economic fragility, Bonneville points out that its financial reserves for its all-important power business line have fallen to essentially zero while its total debt soared to 88 percent of its annual revenues, a remarkable level for this kind of business. And recently Bonneville’s cash-on-hand, necessary to pay bills, slipped to a nail-biting few weeks. All this makes it difficult for BPA to compete with low market prices for electricity driven by the growth of renewables and low natural-gas prices. It is not unusual, for example, to see wholesale electricity prices trading below Bonneville’s cost-based rates. This creates legitimate grounds for concern. Bonneville needs to do a lot to recover its financial health, but four strategies rise to the top of the list. It should start by promoting the cheapest and cleanest resources for the future. It can do this by providing incentives for all their customers to use energy more efficiently and contracting with some customers to shift consumption from peak to off-peak, called demand response. We know demand response can work in the Northwest. Bonneville, for example, once contracted with aluminum smelters to cut their power use for a few hours when electricity was scarce and make it up later when it was abundant and cheap. Idaho Power compensates irrigators when they shift their electric power pumping to periods of lower, off-peak prices. We know that many more Northwest businesses will provide this service for the right incentive. And Washington state just required the phase-in of smart electric hot-water heaters that will allow customers to heat water when power is abundant and store it for later use. Demand response can also provide a low-cost option for integrating wind and solar into the power system if Bonneville and utilities are willing to promote it. While Bonneville has a great history of investing in efficiency it needs to renew that enthusiasm and add demand response to the portfolio. These two resources can free up hydropower generation that will improve Bonneville’s balance sheet and reduce carbon emissions across the West. Second, Bonneville needs to get serious about salmon recovery. The $8.5 billion it has spent over the past 30 years for fish and wildlife is a lot of money, but it has been deployed more like a litigation and political strategy than a salmon-recovery effort. For starters, it needs to incorporate basic performance targets into every fish and wildlife contract. Bonneville can avoid even greater future salmon costs if it makes an effort today to ensure that every dollar spent on recovery is producing more and healthier fish and wildlife. Third, it is time to stop pushing costs out into the future. If Bonneville remains deep in debt, by 2028 there is no amount of cost-cutting that can produce competitive rates. Bonneville had many opportunities to pay off long-term debt, including the debt associated with a costly nuclear-power plant, but each time it chooses to cut short-term rates instead. These decisions added to Bonneville’s debt burden and contributed to its current crisis. And finally, Bonneville needs a little help from the U.S. State Department, which is currently renegotiating the Columbia River Treaty. A new treaty should relieve Bonneville of much of its current obligation to give Canada hundreds of megawatts of clean hydro energy and even more hydro peaking capacity every year. The logic behind this innovative 1960s agreement has expired, leaving a financial and environmental burden for Bonneville and Northwest ratepayers. A new, modernized treaty would ensure that Bonneville’s power payments to Canada are proportional to actual power benefits. The year 2028 may seem far away, but Bonneville needs to make changes now to remain competitive for future decades. The potential benefits of low cost, carbon-free power and abundant, harvestable salmon, make it worth the effort. Tom Karier is a professor of economics at Eastern Washington University and was the longest serving member of the NW Power and Conservation Council.