GAO-03-918R Bonneville Power Administration 

United States General Accounting Office 

Washington, DC 20548 

July 1, 2003 

The Honorable David L. Hobson 

Chairman 

The Honorable Peter J. Visclosky 

Ranking Minority Member 

Subcommittee on Energy and Water Development 

Committee on Appropriations 

House of Representatives 

Subject: Bonneville Power Administration: Long-Term Fiscal Challenges

The Bonneville Power Administration (BPA) provides about 45 percent of all electric 

power consumed in the Pacific Northwest—Idaho, Montana, Oregon, and 

Washington. The power that BPA markets and distributes is generated in large part 

at hydroelectric projects including dams in the Federal Columbia River Power System 

(federal power system). BPA also owns and operates about 75 percent of the region’s 

transmission lines. BPA charges for the power it sells and for its transmission 

services. Under the Pacific Northwest Electric Power Planning and Conservation Act 

of 1980, BPA is responsible for ensuring an adequate, efficient, economical, and 

reliable power supply for the Pacific Northwest. To do so, BPA balances the needs of 

its customers against the highly variable water resources available for generating 

electricity. In maintaining this balance, BPA sometimes exchanges power through 

purchases, sales, or otherwise with utilities and other entities within and outside the 

Pacific Northwest. In addition to providing power, BPA is required under the 1980 

act, various other statutes, treaties and court cases, to “protect, mitigate, and 

enhance” fish and wildlife resources affected by the federal power system. 

Recently, BPA has witnessed a substantial deterioration in its financial condition. 

For example, BPA’s cash reserves of $811 million at the end of fiscal year 2000 had 

fallen to $188 million by the end of fiscal year 2002. To cope with its financial 

difficulties BPA has increased the rates that it charges its customers for power by 

over 40 percent since 2001. In 2002, BPA asked Congress to increase its ceiling on 

Department of the Treasury (Treasury) debt by about $1.4 billion to fund capital 

spending and, in 2003, Congress approved a smaller increase of $700 million dollars. 

In February 2003, BPA announced that it estimated a 74 percent chance that it would 

miss a Treasury payment this year. 

In light of BPA’s deteriorating financial condition, request for increased borrowing 

authority, and increased risk of missing a Treasury payment, you asked us to (1) 

identify cost advantages, disadvantages, and challenges BPA may face in providing 
Page 2 GAO-03-918R Bonneville Power Administration 

power and meeting its debt and other obligations; (2) identify the causes of BPA’s 

recent financial difficulties; (3) determine how BPA plans to use its additional 

borrowing authority; and (4) evaluate how the risk of default to Treasury has changed 

over the past 5 years. This report presents the preliminary findings of our review of 

BPA’s financial situation and the risk to Treasury. As agreed with subcommittee 

staff, we will continue to work on these objectives as well as others, including an 

assessment of options that would enable BPA to reduce the likelihood of future 

financial difficulties and accompanying risk to Treasury. To perform our work we 

reviewed BPA budget documents and investment plans, as well as numerous studies 

and position papers by stakeholders and experts, and we collected views from BPA’s 

customers, stakeholders, and oversight bodies. 

Results in Brief 

• BPA has some inherent advantages that have generally enabled it to provide lowcost power to its customers in the Pacific Northwest and meet debt and other 

obligations. However, BPA also faces inherent challenges related to meeting its 

obligations to provide economical power while protecting fish and wildlife. These 

challenges are made greater by the changing demands on its power and its fish 

and wildlife protection resources. 

• BPA’s current financial difficulties are largely the result of decisions that caused 

rising costs and lower-than-projected revenues. BPA signed long-term contracts 

to buy power to serve demand that exceeds the supply of the federal power 

system. Of the additional demand BPA agreed to serve, a significant proportion 

was for industrial customers that BPA was not required to serve during the fiscal 

year 2002-2006 rate period. The prices BPA agreed to in these contracts turned 

out to be significantly higher than recent market prices and were higher than the 

rates BPA initially set for selling its own power. BPA also projected revenues 

from its own sale of surplus power that did not materialize when market prices 

turned out to be lower than BPA had projected. 

• BPA plans to use its expanded borrowing authority to upgrade and improve the 

transmission system and dams in the federal power system. These capital 

expenditures are expected to increase the reliability and efficiency of the system 

and may also increase generating capacity to some degree. BPA staff told us that 

these capital expenditures are, for the most part, not expected to solve BPA’s 

current financial problems. 

• We found that BPA’s long-term risk of default is greater than in the previous 5-

year rate period because of BPA’s higher costs and because of uncertainty 

surrounding both its role as electricity provider and its obligations to protect fish 

and wildlife. While BPA has taken steps to improve its financial condition and 

deal with its long-term challenges, in the past such efforts have not entirely 

succeeded. 
Page 3 GAO-03-918R Bonneville Power Administration 

Background 

BPA was formed in 1937 to market electric power produced by the Bonneville Dam to 

the Pacific Northwest. BPA’s role in the region has since evolved. BPA’s marketing 

responsibilities were broadened to include power from 31 federally owned 

hydroelectric projects, most located in the Columbia River Basin. BPA also markets 

power from one nonfederal nuclear plant and power purchased from other sources. 

In addition, under the Pacific Northwest Electric Power Planning and Conservation 

Act of 1980 (Northwest Power Act), BPA is charged with providing the Pacific 

Northwest with an adequate, efficient, economical, and reliable power supply. In this 

role, BPA serves its customers’ electricity demand at rates that BPA sets to cover its 

costs, including debt payments and operations-and-maintenance costs.1 BPA’s rates 

are fixed in the sense that they do not typically vary to reflect changes in the prices of 

power in the market on an hourly or even daily basis, but rather are set periodically 

to cover BPA’s costs on average over a long period of time. At times when the 

electricity generation of the federal power system is insufficient to meet the demand 

of all BPA’s customers, BPA has purchased or otherwise acquired power from other 

sources, including utilities and other suppliers in the Northwest, California, and other 

western states, to make up the difference. In addition, BPA generates surplus power 

when demand from its firm customers is low or when water levels are high, and has 

traditionally exchanged this power under various terms with utilities and other 

entities in the Northwest and other western states. 

The recent restructuring of the nation’s wholesale electricity markets has affected 

how BPA allocates and distributes its surplus power. The electricity industry is in the 

process of restructuring from one in which monopoly utilities generated and provided 

electricity to consumers at regulated prices to one in which numerous private 

companies compete to sell electricity at prices determined by supply and demand 

conditions. BPA’s response to this change has included developing a power trading 

operation, in part, to sell surplus power as opposed to making exchanges of power.2

BPA has additional obligations beyond providing power. For example, the Northwest 

Power Act also requires that BPA protect, mitigate, and enhance fish and wildlife 

resources affected by the operation of the federal power system. In addition, 

significant declines in the historical returns of salmon and steelhead to the Columbia 

 

1

 BPA’s customers include public and investor owned utilities. BPA serves the net needs of these 

customers—the difference between what these customers produce themselves and what they sell to 

their retail customers. In addition, BPA sells power to some industrial customers. BPA’s rates include 

charges for the electricity BPA generates and for the use of transmission lines that BPA owns. 

2

 For example, prior to this change, BPA frequently provided power to California utilities during the 

spring when BPA had surplus electricity and, in return, the California utilities provided electricity to 

BPA during the fall and winter when BPA was typically short of electricity. This sort of trading also 

sometimes took place in a single day; BPA would send power to California utilities during the peak air 

conditioning hours of the day and receive power back during the night. Now, BPA more commonly 

sells its surplus power to utilities or power marketers. 
Page 4 GAO-03-918R Bonneville Power Administration 

River Basin have resulted in the listing of 12 populations of these fish as endangered 

or threatened under the Endangered Species Act. With these listings, BPA became 

responsible for ensuring that the operation of the federal power system does not 

jeopardize the continued existence of these 12 populations. BPA also has a trust 

responsibility with the 13 federally recognized American Indian tribes in the 

Columbia River Basin, some of whose fishing rights are guaranteed by treaties, 

executive order, and court cases. BPA currently provides the bulk of funding for fish 

and wildlife programs in the Columbia River Basin. 

BPA Has Inherent Cost Advantages and Some Disadvantages and Faces 

Challenges in Meeting Competing Demands on Its Resources3

BPA has inherent cost advantages that have generally allowed it to keep its electricity 

rates below those of nonfederal utilities in the Pacific Northwest. For example, BPA 

predominantly relies upon electricity produced at hydroelectric dams in the federal 

power system, which generally have low capital and operating costs. Many of these 

projects were built decades ago and had relatively low construction costs compared 

with newer generating facilities constructed by nonfederal utilities. BPA tends to 

have lower operating costs in part because, unlike some competing generating units, 

hydropower projects do not burn fossil fuels.4

 Further, as a federal agency, BPA is 

not required to pay income taxes. In contrast, according to the Energy Information 

Administration, investor owned utilities paid taxes averaging between 8.1 and 13.5 

percent of operating revenues from 1995 through 2001.5 In addition, BPA does not 

include a profit margin in its power rates. In contrast, public utility commissions 

typically approve a profit margin, in the form of a return to investment, to be included 

in and thus increase the power rates of investor owned utilities. Moreover, BPA has 

had access to more favorable financing conditions than investor owned utilities; 

interest income to bondholders from BPA’s nonfederal debt is exempt from federal 

personal income tax and some state income taxes. In addition, BPA has in the past 

received favorable loan terms from the Treasury. Finally, these cost advantages have 

historically benefited the region’s electricity consumers and enabled BPA to repay its 

debt to Treasury and cover other costs, obligations, and debt. 

However, BPA also has disadvantages compared with some nonfederal utilities. For 

example, BPA operates under a different financial structure than investor owned 

utilities with which it competes. Investor owned utilities can use equity (sale of stock 

 

3

 This section is not intended as a complete enumeration of BPA’s advantages, disadvantages, and 

challenges. Nor have we tried to assess the relative weight or importance of the examples provided in 

this section. 

4

 Many of the newer built generating facilities burn fossil fuels to generate electricity. While the 

efficiency of fossil fuel burning power plants has generally increased over time, hydroelectric power 

plants still tend to have cost advantages because of the length of life of dams and the cost of fossil 

fuels. 

5

 While publicly owned utilities typically do not pay income taxes, many do make payments in lieu of 

taxes to local governments. 
Page 5 GAO-03-918R Bonneville Power Administration 

or retained earnings) to finance some capital spending. BPA cannot issue stock and 

generally operates without a profit and, therefore, cannot generally use equity to 

finance its capital investments. As a result, BPA generally relies on debt for financing 

capital investments. Carrying higher levels of debt translates into greater average 

fixed costs that ultimately must be recovered in BPA’s power rates. In addition, 

BPA’s obligation to protect, mitigate, and enhance fish and wildlife resources adds to 

its total costs, thereby increasing its power rates.6

 For example, from fiscal years 

1997 through 2001, BPA spent over $1.1 billion in support of fish and wildlife—

primarily to benefit salmon and steelhead. These expenditures have funded fish and 

wildlife efforts, including those undertaken by BPA, other federal agencies, American 

Indian tribes, and the four northwest states (Idaho, Montana, Oregon, and 

Washington) and have funded operations-and-maintenance and capital costs for the 

U. S. Army Corps of Engineers, Bureau of Reclamation, and the Fish and Wildlife 

Service for projects such as fish bypass facilities at dams and fish hatcheries. BPA 

also estimates that from fiscal years 1997 through 2001, spilling water from dams and 

augmenting river flows to enhance fish survival resulted in over $2.2 billion in 

forgone revenues or increased power purchases.7

 

BPA’s dual roles—as supplier of economical and reliable power and as protector of 

fish and wildlife—present a challenge. BPA’s stakeholders include both consumers 

of electricity and proponents of fish and wildlife protection, and both groups pressure 

BPA to deliver more of what they want. However, providing more support for fish 

and wildlife comes at the cost of less electricity and higher electricity rates. 

Similarly, serving ever-increasing demand for economical electricity can put greater 

stress on fish and wildlife, either through more intensive use of hydroelectric 

generating facilities at the expense of spilling water to support fish migration, or 

through rising costs and the resulting pressure from rate-payers to reduce funding for 

fish and wildlife programs, as has occurred during the current financial crisis. 

BPA, like its competitors, operates in an unstable environment with regard to 

demand for its electricity and also with regard to its costs for fish and wildlife 

protection. For example, while the regional demand for BPA’s electric power has 

generally grown throughout BPA’s existence, demand for BPA’s power fell in the mid1990s as some of its customers found lower prices in the market. Demand for BPA’s 

power increased dramatically after market prices rose during the western electricity 

crisis of 2000 and 2001. While other utilities face similarly uncertain demand and 

market conditions, BPA appears to have greater competing pressure from its various 

stakeholders. For example, in an April 18, 2003 open letter to its customers and 

Northwest citizens, BPA stated that it had been influenced by arguments and 

demands from its stakeholders on such issues as how much power it would provide 

and how it would structure its power rates. In addition, over the past two decades, 

BPA’s spending and actions in support of fish and wildlife have grown considerably 

with the enactment of various environmental laws and with increased regulations put 

 

6

 BPA has pointed out that it has other obligations, including providing benefits to customers of 

investor owned utilities and providing some irrigation assistance. 

7

 We have not audited BPA’s estimates of foregone revenues or increased power purchases. 
Page 6 GAO-03-918R Bonneville Power Administration 

in place to protect the environment. BPA provides the majority of fish and wildlife 

program money in the region, which increases its challenges relative to its 

competitors. 

BPA’s Financial Difficulties Caused by Rising Costs, Lower Than Expected 

Revenues 

BPA’s current financial difficulties have been largely caused by decisions resulting in 

rising costs and lower than projected revenues. In April 2003, BPA estimated that its 

costs over the current 5-year rate period, covering fiscal years 2002 through 2006, 

would be $5.3 billion dollars greater than over the previous 5 years. This increase in 

costs is quite substantial given that BPA’s total operating revenues—funds available 

to cover its costs—were about $13.7 billion over the previous 5-year period from 

1997–2001.8

 A large part of the increase in costs is related to serving demand at levels 

above the estimated average power production of the federal power system during a 

“critical water year.”9

 BPA agreed to serve this additional demand and, to do so, BPA 

signed long-term contracts to purchase power from other sources.10 Of the additional 

demand BPA agreed to serve, a significant proportion was for industrial customers 

that BPA was not required to serve during the fiscal year 2002-2006 rate period. The 

prices that BPA paid for the additional power were significantly higher on average 

than the rates BPA initially set for the current rate period and are also higher than 

recent market prices. More generally, BPA’s costs attributed to both its sale of 

electric power (power business line) and sale of transmission services (transmission 

business line) have risen in almost every cost category since 1997. Further, BPA’s 

fish and wildlife expenditures increased from about $80.5 million in fiscal year 1997 

to $109.6 million in 2001 in constant 2001 dollars—an increase of about 36 percent—

and are projected to be even higher over the next few years. Finally, staffing levels 

have also increased, from a recent low of 2,738 full-time-equivalent positions (FTEs) 

in 1999 to an estimated 3,206 in 2003—an increase of about 17 percent. 

In April 2003, BPA also projected lower revenues than it had planned for in the 

original rates set for the current rate period. A large part of this expected revenue 

shortfall comes from lower than expected market prices. For example, because 

market prices since the beginning of fiscal year 2002 have been lower than BPA 

projected, BPA recently estimated that revenues from surplus sales of power would 

be about $700 million lower than BPA had assumed when setting its initial rates for 

the rate period.11 BPA’s projected revenues are also lower because of lingering 

 

8

 Neither the $5.3 billion nor the $14.6 billion figure has been adjusted for inflation. 

9

 BPA estimates its available power based on water conditions in a “critical water year.” In a critical 

water year less than normal amounts of water are available to generate hydroelectricity. 

10 These contracts were for periods of up to 5 years. Many of the contracts were signed before and 

during BPA’s formal rate-setting process for the fiscal year 2002–2006 period. 

11 As discussed previously in this report, BPA sometimes has surplus power to sell, even in years when 

its capacity is insufficient to serve its entire demand. 
Page 7 GAO-03-918R Bonneville Power Administration 

impacts of the drought of 2000 and 2001, which have reduced the amount of water 

available to generate surplus electricity. 

BPA Plans to Use Borrowing Authority to Upgrade Transmission and 

Generation Systems 

BPA plans to use the bulk of its borrowing authority to upgrade its transmission 

system and make other investments to increase system reliability. Specifically, about 

62 percent of BPA’s planned capital spending is directed at the transmission system. 

Another about 5 percent of capital spending is for corporate uses, such as 

information technology investments and projects. The remaining 33 percent is 

directed toward reliability and efficiency improvements at federally owned dams. 

Some of these dam improvements will also slightly increase the capacity of the 

federal power system to produce electricity. Overall, BPA staff told us that while 

these investments are needed to improve reliability and efficiency, most planned 

capital investments are largely unrelated to BPA’s current financial difficulties and 

are unlikely to resolve them. 

Risk of Failure to Meet Debt Obligations to Treasury Has Likely Increased 

As a Result of High Costs and Market Uncertainty 

Several factors appear to have increased the risk over the past 5 years that BPA may 

be unable to meet its full future debt obligations to Treasury. In a 1997 report,12 we 

noted that BPA would likely face a higher risk of default on its debt to Treasury after 

fiscal year 2001 as a result of (1) high fixed costs, 13 which BPA must cover regardless 

of how much electricity it sells; (2) high operating costs, including internal costs and 

fish and wildlife protection costs; (3) greater market uncertainty, in part because of 

the impacts of electricity restructuring on market prices and demand; and (4) an 

increased likelihood that BPA will lose part of its customer base as its costs increase 

relative to costs of alternative supplies of electricity. This likelihood of greater risk to 

Treasury seems to be coming to pass. We found in our current review that BPA’s 

fixed costs are expected to rise over the next few years, that its operating costs are 

much higher than when the 1997 report was published, that market and other 

uncertainty affecting BPA’s costs and revenues has increased, and that there is 

significant risk that BPA will lose some of its customer base in the future. 

Specifically: 

• With regard to fixed costs, the 1997 GAO report stated that as of 1996, BPA’s high 

fixed costs inhibited its flexibility to lower its rates and meet competitive 

 

12 U.S. General Accounting Office, Federal Electricity Activities: The Federal Government’s Net Cost 

and Potential for Future Losses, GAO/AIMD-97-110 (Washington, D.C.: Sept. 19, 1997). 

13 Fixed costs are costs that must be paid regardless of how much electricity BPA sells. These fixed 

costs include meeting long-term debt obligations incurred to build hydro projects, nuclear plants, and 

the transmission system. 
Page 8 GAO-03-918R Bonneville Power Administration 

pressures. For example, financing costs for BPA’s long-term debt ate up 32 

percent of BPA’s revenues—compared to a nationwide average of 14 percent for 

investor owned utilities. Currently, BPA expects its total debt to rise over the 

next few years as BPA undertakes its planned capital investments on transmission 

and generation upgrades. This additional debt will increase BPA’s fixed costs 

above current levels. Further, because the bulk of these planned investments are 

focused on reliability of the transmission system, the investments will have little 

positive impact on BPA’s revenues, while paying off the additional debt 

obligations will require higher total rates, including electricity and transmission 

charges. 

• With regard to high operating costs, BPA’s condition is worse than it was 5 years 

ago. The 1997 report stated that after 2001 BPA faced potential upward pressure 

on its operating costs, including fish and wildlife costs. For example, a 

memorandum of agreement that limited BPA’s fish and wildlife protection costs 

was set to expire in 2001, opening the door to possibly higher costs. Costs have 

indeed risen since 1997. For example, as discussed previously in this report, costs 

associated with fish and wildlife protection have increased significantly since 

1997, as have most other categories of operating costs. 

• BPA also faces greater uncertainty than it did 5 years ago. The 1997 report stated 

that BPA may face greater market uncertainty in the future, and our current 

review indicates that market uncertainty has indeed been an increased problem 

for BPA. For example, as discussed previously, BPA had difficulty making 

accurate projections of market prices for its surplus power sales and this 

difficulty led BPA to sign long-term contracts to purchase power at high prices 

and resulted in a downward revision in BPA’s expected revenues from surplus 

electricity sales. BPA also experienced an unanticipated increase in demand for 

its power following the 2000–2001 western electricity crisis. Further, BPA faces 

uncertainty with regard to future fish and wildlife costs with the recent federal 

court decision that rejected the National Oceanographic and Atmospheric 

Administration’s National Marine Fisheries Service (NOAA Fisheries) 2000 

biological opinion—a document setting out how NOAA plans to avoid 

jeopardizing the existence of certain listed species. Any changes to the operations 

of these projects resulting from the federal court decision may diminish BPA’s 

ability to control costs and/or earn revenue. For example, physical alterations to 

dams, changes in how the dams are operated, and changes to river flows or 

reservoir levels to improve fish survival may increase capital and operations costs 

for the projects and reduce the flexibility to generate power. 

• Finally, there is a significant long-term risk that customers will leave BPA in light 

of BPA’s current financial condition. The 1997 report noted that customers may 

opt to leave BPA if they can find cheaper power than BPA is offering. The 

availability of cheaper power depends in part on the cost of generating power by 

alternative means, such as generation plants fired by natural gas or coal. With 

regard to natural gas generators, the costs of operating these plants for any 

constant level of natural gas prices, has decreased significantly in recent years 
Page 9 GAO-03-918R Bonneville Power Administration 

because of improvements in operating efficiency.14 In contrast, BPA’s current 

costs, as reflected in its power rates, are at historical highs and are currently 

higher than regional market prices for wholesale electricity have been in most 

weeks from January 1, 2002, through March 17, 2003.15 If demand for BPA’s power 

falls, BPA’s revenue may be subject to greater volatility because BPA will have to 

sell more of the power generated by the federal power system in the market 

where prices have been quite volatile. Greater revenue volatility increases the 

risk to Treasury, especially as BPA’s debt increases over the next few years. 

BPA is currently taking steps to address its financial problems and improve its 

outlook over the next few years, but the outcome of these efforts is in doubt. For 

example, BPA is planning to reduce its internal costs. However, past efforts by BPA 

to reduce internal costs have produced mixed results. For example, in 1996, BPA 

planned to reduce its staffing level to 2,755 FTEs, down from its staffing level at the 

time of 3,160 FTEs. While BPA met this goal, achieving an FTE level of 2,738 in 1999, 

staffing has increased since then and is currently well above 1996 levels. 

BPA expects a number of other factors to lead to more favorable financial conditions 

in the future. For example, BPA hopes that improved water conditions and higher 

market prices will boost revenues. BPA officials have recently told us that a wet late 

winter and early spring and somewhat higher market prices for surplus power sales 

have indeed improved BPA’s financial outlook in 2003 and reduced significantly the 

risk that BPA will miss a Treasury payment this year. However, water and market 

conditions remain subject to volatility, an ongoing revenue and cost risk for BPA. 

Further, BPA expects its power acquisition costs to fall as its long-term contracts 

expire between now and fiscal year 2006. Whether or not this cost reduction occurs 

depends on market conditions in the future and on how much power BPA buys after 

2006. 

Another factor that BPA believes mitigates risk to Treasury is that many of BPA’s 

customers have signed contracts requiring them to pay BPA for power, whether or 

not they take the power. These contracts, referred to as “take-or-pay” contracts, may 

shield BPA from the risk in the short run that customers will leave if BPA’s rates 

remain high or rise further. Further, the take-or-pay obligation may make it easier for 

BPA to recover its costs as long as the contracts are in force. However, BPA’s high 

rates may increase the likelihood that it will alienate its customers or drive them to 

lower cost suppliers in the long term or even out of business in some cases. For 

 

14 As of January 2003, average natural gas prices for the entire nation at the wellhead were over 50 

percent higher than the average in 2002. However, the Energy Information Administration forecasts 

that natural gas prices will fall in the future from recent levels. 

15 These market prices in the Northwest were obtained from the Energy Information Administration. 

In addition, we reviewed average monthly prices in the Northwest from January 1997 through 

December 2001, published by Dow Jones. This review indicated that in 41 out of 60 of these months 

(about 68 percent), average prices were below BPA’s current rates of around $32 per megawatt-hour. 

These prices are for wholesale electricity sold at the Mid-Columbia hub in the Northwest. Because 

these prices have not been adjusted for inflation, the number of months that average prices have been 

lower than BPA’s current rates may be less than 41 when measured in constant dollars. 
Page 10 GAO-03-918R Bonneville Power Administration 

example, a number of BPA’s utility and industrial customers filed suit this spring to 

attempt to stop BPA from imposing further rate increases. In addition, some 

industrial customers have claimed that they are unable to operate at BPA’s current 

rates and may be forced to close down completely if BPA’s rates do not fall. If 

customers do leave BPA in the long term as their take-or-pay contracts end, this may 

increase future Treasury risk to the extent that BPA ends up selling a greater 

proportion of its power in the volatile market. 

Finally, BPA is engaged in a regional dialogue with its stakeholders to try to resolve 

issues regarding how much power BPA will provide and under what terms, as well as 

how best to assess the risks and distribute the benefits of the federal power system. 

While the current regional dialogue to deal with BPA’s financial problems is a positive 

step, in the recent past BPA did not adopt key recommendations of a previous 

regional effort to resolve similar issues. Specifically, in 1996 a comprehensive review 

of the Northwest energy system, undertaken at the request of the governors of Idaho, 

Montana, Oregon, and Washington, advocated that BPA limit its role as power 

supplier by not serving future demand increases beyond the expected generation of 

the federal power system in a critical water year. However, as discussed previously 

in this report, BPA did not follow this recommendation when it agreed to serve 

additional demand during the current rate period. BPA has stated that its decision to 

depart from the recommendations of the comprehensive review resulted from 

pressure from its customers. 

Agency Comments and Our Evaluation 

We provided the Administrator and CEO of BPA with a draft of this report for 

comment. In a June 20, 2003 letter (see enclosure), the Vice President for National 

Relations of BPA provided overall comments on the report. These overall comments 

relate to BPA’s potential to lose customers and to its costs—factors we identified that 

affect BPA’s risk of defaulting on Treasury debt. 

Regarding BPA’s risk of losing customers, BPA’s overall comments state that the risk 

is no greater and is probably lower than in 1997 because while BPA’s rates have risen 

since 1997, the market price for electricity has risen even faster and because many of 

BPA’s customers have signed long-term contracts requiring them to pay for power 

whether or not they actually take the power. 

We believe that the risk is greater than projected in BPA’s comments. We agree that 

the fundamental advantages of the federal power system—most notably the relative 

low cost of hydroelectric generation—continue to create an opportunity for BPA to 

provide economical power to its customers. However, we also believe BPA’s large 

rate increases make alternative supplies of electricity more attractive. Moreover, 

BPA’s power rates are currently over 40 percent higher than they were in the mid1990s when some BPA customers left to find cheaper power, while the costs of new 

electricity generation have generally fallen in recent years. While some of these 

customers returned to BPA during and after experiencing extremely high electricity 

prices during the western electricity crisis of 2000 and 2001, prices in many months 

since the crisis have returned to levels much closer to prices in the mid-1990s. 
Page 11 GAO-03-918R Bonneville Power Administration 

Moreover, we disagree with BPA’s statement that market prices rose faster than 

BPA’s rates. While market prices for wholesale electricity were very high by 

historical standards from about May 2000 through July 2001, for most months 

between January 1997 and February 2003 market prices of wholesale electricity in the 

Northwest have been lower than BPA’s current power rates of over $32 per MWh, 

even before BPA’s recently announced additional 5 percent rate increase. 

With regard to the long-term take-or-pay contracts that many of BPA’s customers 

have signed, we agree that these contracts provide BPA with somewhat of a 

guarantee that their customers will not leave BPA. However, in our discussions with 

BPA officials we were told that, in the event of a prolonged period of high water and 

low electricity market prices, it is likely that BPA will be under pressure from its 

customers to lower its rates or change the terms of the take-or-pay contracts. 

With regard to costs, BPA said in its overall comments that the risk that BPA will 

default on Treasury debt is mitigated because, among other things, the take-or-pay 

contracts in conjunction with cost-recovery clauses built into BPA’s rate case for 

fiscal years 2001-2006 protect BPA’s ability repay its Treasury debt, and because 

BPA’s Transmission services face virtually no competition and so can recover BPA’s 

costs associated with these services, including its investments in electricity 

infrastructure funded using Treasury debt. 

We do not agree. While take-or-pay contracts in conjunction with cost recovery 

clauses, in principle, allow BPA to raise its rates unilaterally and prohibit customers 

from leaving BPA for lower priced power elsewhere, in practice, this is not 

guaranteed. For example, in spring 2003, a number of BPA’s customers, including 

public utilities and industrial customers filed suits to prevent BPA from implementing 

additional rate increases. The outcome of these suits has not yet been decided, but if 

the ruling goes against BPA, then BPA’s ability to raise its rates to fully cover its costs 

and debt obligations may be in question. 

We also do not agree that the absence of competition for transmission services in the 

Northwest mitigates Treasury risk. As stated in this report, higher costs, whether in 

the transmission or power business lines of BPA, all must be recovered in its rates. 

Further, as stated in our 1997 report, higher debt—incurred to expand or improve the 

transmission system—also decreases BPA’s flexibility to compete with market prices. 

Therefore, higher debt on the transmission side potentially makes BPA less 

competitive. 

BPA also made a number of detailed technical comments that addressed, among 

other things, its roles and responsibilities, the causes of its financial difficulties, 

additional advantages and disadvantages BPA has compared with its competitors, 

and actions that BPA has taken to improve its financial condition. We have 

incorporated these comments as appropriate in our draft. 
Page 12 GAO-03-918R Bonneville Power Administration 

Scope and Methodology 

In conducting our work, we reviewed BPA budget documents and investment plans, 

numerous studies and position papers by stakeholders and experts, our past reports. 

We also met with BPA officials and stakeholders, including public utilities, direct 

service industrial customers, investor owned utilities, representatives of American 

Indian tribes, and industry experts. We also met with BPA’s oversight bodies, 

including staff of the Department of Energy and staff of the Northwest Electric Power 

and Conservation Planning Council. We conducted our review from April through 

May 2003 in accordance with generally accepted government auditing standards. 

- - - - - - - 

As agreed with your offices, unless you publicly announce the contents of this report 

earlier, we plan no further distribution of it until 14 days from the report date. At that 

time, we will send copies of this report to interested Members of Congress and make 

copies available to others upon request. In addition, the report will be available at no 

charge on the GAO Web site at http://www.gao.gov. 

If you have any questions about this report or need additional information, please call 

me at (202) 512-3841. Major contributors to this report include Frank Rusco, Jill 

Berman, Jonathan Dent, Samantha Gross, Jon Ludwigson, Cynthia Norris, and 

Barbara Timmerman. 

Jim Wells 

Director, Natural Resources 

 and Environment 

Enclosure 
Page 13 GAO-03-918R Bonneville Power Administration 

Enclosure 

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