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Obligation to Provide Power Is Needed to Control Future Costs' which 
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Report to the Subcommittee on Energy and Water Development, Committee 
on Appropriations, House of Representatives: 

United States General Accounting Office: 

GAO: 

July 2004: 

Bonneville Power Administration: 

Better Management of BPA's Obligation to Provide Power Is Needed to 
Control Future Costs: 

GAO-04-694: 

GAO Highlights: 

Highlights of GAO-04-694, a report to the Subcommittee on Energy and 
Water Development, Committee on Appropriations, House of 
Representatives: 

Why GAO Did This Study: 

The Bonneville Power Administration (BPA) has experienced significant 
financial problems in recent years. BPA’s cash reserves at the end of 
fiscal year 2002 had fallen to $188 million, and BPA estimated in 
February 2003 that it had a 74 percent chance of missing its Treasury 
debt payment that year. While BPA’s finances have recently improved, 
and the agency made its Treasury payment in 2003, BPA’s financial 
condition is still far from robust. In this context, GAO was asked to 
report on (1) the advantages and disadvantages BPA faces in marketing 
electric power in a more competitive environment, (2) the major causes 
of BPA’s recent cost increases, and (3) the extent to which BPA is 
taking actions to control its costs.

What GAO Found: 

BPA has advantages that have typically enabled it to sell electric 
power to its customers—primarily public utilities—at lower prices than 
other sellers in the Pacific Northwest. Most importantly, BPA sells 
power produced by the federal power system, which includes 31 
hydroelectric dams that generally have lower costs as compared with 
other power sources. However, BPA also has disadvantages that 
potentially increase its costs. Specifically, BPA is required by law 
to meet the demands of utilities in the region, even if those demands 
exceed the production capacity of the federal power system. This 
open-ended requirement has at times required BPA to purchase additional 
power at relatively high prices. BPA has other costly obligations as 
well, including providing financial benefits to investor-owned 
utilities and protecting fish and wildlife that increase its costs 
relative to competing sources of electricity. 

BPA’s open-ended obligation to provide power to the region is the major 
cause of its recent cost increases. This obligation led to cost 
increases as BPA purchased large amounts of relatively expensive power 
to meet rising demand. BPA’s rate structure also contributed to 
increased demand and increased costs, because it did not reflect BPA’s 
incremental costs of acquiring additional power and therefore did not 
give customers adequate incentives to conserve or seek power from 
alternative sources. In addition, drought and other factors have also 
increased BPA’s costs in recent years.

BPA has not resolved problems associated with its open-ended obligation 
to be the net provider of wholesale electricity in the region—the major 
cause of its recent cost increases. BPA officials intend to resolve 
this problem by seeking agreement with BPA’s customers to limit its 
commitment to provide power. BPA proposes to establish the amount of 
power each customer is able to buy at its lowest cost-based rate and is 
considering charging incremental rates for any power it sells beyond 
this amount. However, BPA has not clearly defined the limits for its 
commitments or how it would implement incremental rates. Whether this 
approach ultimately will be adopted is also unclear; BPA had similar 
plans in the late 1990s but did not implement them because of pressure 
from customers to serve more demand. In the meantime, BPA has taken 
positive steps to centralize its risk management process to better 
control costs. However, BPA’s plan outlining its new approach does not 
contain some key elements to successful implementation, including 
details on specific activities, resources, and time frames needed to 
implement the plan.

What GAO Recommends: 

GAO recommends that BPA

* reduce its future risk of being overcommitted by (1) limiting 
the amount of power that BPA sells at its lowest cost-based rate and 
(2) charging incremental rates for any power sold beyond this amount 
that reflect BPA’s cost of acquiring that power, and
* identify specific activities, resources, and time frames for 
implementing its risk management initiatives.

BPA generally agreed with this report’s findings and recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-694.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Jim Wells at (202) 512-
3841 or wellsj@gao.gov.

[End of Section]

Contents: 

Letter: 

Results in Brief: 

Background: 

Inherent Advantages Help BPA to Provide Low-Priced Power, but Its Open-
ended Obligations Are a Competitive Disadvantage: 

BPA's Open-ended Obligation to Provide Power and Other Factors Led to 
Large Cost Increases for BPA: 

BPA Has Not Resolved Problems That Led to Its Recent Cost Increases, 
but It Has Taken Steps to Control Other Costs: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: BPA's Costs Associated with Fish and Wildlife Programs: 

Appendix III: BPA Costs Associated with Its Power Marketing Business, 
Fiscal Years 1997-2003: 

Appendix IV: Comments from the Bonneville Power Administration: 

Appendix V: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Tables: 

Table 1: BPA's Costs Associated with Fish and Wildlife Programs, Fiscal 
Years 1985-2003: 

Table 2: BPA Costs Associated with Its Power Marketing Business, Fiscal 
Years 1997-2003: 

Figures: 

Figure 1: Average Monthly Prices for Wholesale Electricity in the 
Pacific Northwest, 1997-2003: 

Figure 2: Average Production Costs for Different Types of Generating 
Plants in Idaho, Oregon, Washington, and Western Montana, 1996-2002: 

Figure 3: Average Wholesale Prices for Electricity Sold by BPA and the 
Five Largest Investor-Owned Utilities in the Pacific Northwest, 1996-
2002: 

Figure 4: Average Retail Prices of Electricity, 1996-2002: 

Figure 5: BPA's Average Power Rates, Fiscal Year 1972-2001: 

Figure 6: Power Purchased and Power Contracts Signed by BPA's Major 
Customer Groups, Fiscal Year 1993-2006: 

Figure 7: Major Events and Electricity Prices during BPA's Subscription 
and Ratemaking Processes: 

Abbreviations: 

aMW: average megawatt: 

BPA: Bonneville Power Administration: 

FERC: Federal Energy Regulatory Commission: 

MWh: megawatt-hour: 

United States General Accounting Office: 

Washington, DC 20548: 

July 9, 2004: 

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: 

The Bonneville Power Administration (BPA), which markets about 45 
percent of all electric power consumed in the Pacific Northwest, has 
experienced significant financial problems over the past few years. 
BPA's core business of selling power lost more than $300 million each 
year in fiscal years 2001 and 2002, primarily as a result of increased 
costs. As a result, its cash reserves of $811 million at the end of 
fiscal year 2000 had fallen to $188 million by the end of fiscal year 
2002. In February 2003, BPA announced that it had an estimated 74 
percent chance of missing its repayment of Treasury debt that year. 
These difficulties have necessitated increases totaling more than 40 
percent in the rates BPA charges its customers for power since October 
2001. In large part because of these increased rates and, consequently, 
greater revenues, BPA's financial condition has recently improved. BPA 
made its Treasury debt payment in 2003, and its cash reserves have 
risen above $500 million. However, BPA has stated that its financial 
health is still far from robust, and BPA's ability to manage its costs 
and risks has come under scrutiny from customers and stakeholders.

BPA was formed in 1937 to market electric power produced by the 
Bonneville Dam to the Pacific Northwest. BPA's marketing 
responsibilities have since 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. 
The 31 federal dams along with the nonfederal nuclear plant are 
collectively referred to in this report as the federal power system. 
While BPA markets the power produced, other entities are responsible 
for operating the system--the Army Corps of Engineers and the Bureau of 
Reclamation operate the hydroelectric dams; and Energy Northwest, a 
consortium of utilities, operates the nuclear plant. The dams in the 
federal power system are operated for flood control, irrigation, 
navigation, and recreational benefits as well as for the production of 
hydroelectric power. In addition, the river system is home to many 
species of fish and wildlife, including some protected by the 
Endangered Species Act.

BPA sells some of the power from the federal power system, at cost-
based rates designed to recover BPA's full costs, via long-term 
contracts with its customers in the Pacific Northwest--primarily public 
utilities and large industrial facilities such as aluminum smelters in 
Idaho, Montana, Oregon, and Washington. BPA distributes this power to 
its customers largely on transmission lines that BPA owns and operates, 
which account for more than 75 percent of the region's transmission 
lines. When the federal power system generates more power than BPA has 
committed to provide its customers at its cost-based rates--for 
example, when spring run-off allows large volumes of hydroelectricity 
to be generated--BPA sells this surplus or "secondary" power to 
utilities and other entities in the Pacific Northwest and other western 
states. However, at times when the electricity generation of the 
federal power system is insufficient to meet BPA's commitments to its 
customers, BPA purchases or otherwise acquires power from other 
generators to make up the difference. Because of the variability in the 
amount of water resources and therefore available power, BPA generally 
considers, for planning purposes, the "firm" output of the federal 
power system to be only the amount of power that can be produced in a 
low or "critical" water year.[Footnote 1]

BPA is one of four power marketing administrations within the U.S. 
Department of Energy.[Footnote 2] Unlike the other power marketing 
administrations, BPA does not receive annual appropriations from 
Congress; instead, BPA is a self-financing agency whose revenues are 
generated through its sale of power and transmission services. In the 
past, federal money was appropriated to construct the generating and 
transmission projects from which BPA markets power, and BPA currently 
repays these appropriations on an annual basis. As of September 30, 
2003, the outstanding balance of BPA's appropriated debt was about $4.7 
billion. BPA also has authority to borrow up to an additional $4.45 
billion from the Treasury on an ongoing basis; as of September 30, 
2003, BPA had about $2.7 billion of additional Treasury debt.

With the passage of the Pacific Northwest Electric Power Planning and 
Conservation Act of 1980 (Northwest Power Act), BPA's role in the 
region expanded in scope. For example, under the Northwest Power Act, 
BPA became responsible for ensuring an adequate, efficient, economical, 
and reliable power supply for the Pacific Northwest, which required BPA 
to address growing demand in the region--something BPA had previously 
not been required to do. In addition to its obligations to market and 
distribute power, the Northwest Power Act, along with various other 
statutes, treaties, and court cases, also requires BPA to "protect, 
mitigate, and enhance fish and wildlife" resources affected by the 
federal power system. BPA is also required under the Northwest Power 
Act to provide benefits to residential and small-farm customers of 
investor-owned utilities--these benefits have generally taken the form 
of financial payments. The restructuring of national wholesale 
electricity markets that began in the 1990s also changed the 
competitive environment in which BPA operates. Specifically, 
restructuring has created an environment with a greater degree of 
competition among generators and marketers of wholesale electricity.

In light of BPA's recent financial difficulties and cost increases, you 
asked us to determine (1) the advantages and disadvantages BPA faces in 
marketing electric power in a more competitive environment, (2) the 
major causes of BPA's recent cost increases, and (3) the extent to 
which BPA is taking actions to control its costs. To answer our first 
objective, we reviewed BPA documents and historical data, as well as 
studies and position papers by industry experts. In addition, we 
analyzed historical data on costs, regional and national power prices, 
and power production at the federal hydroelectric dams. To answer our 
second and third objectives, we reviewed BPA documents related to 
costs, revenues, risk management practices, and rate-setting policies, 
as well as studies and position papers by industry experts. Unless 
otherwise noted, the financial data we obtained refer to BPA's power 
business (i.e., the expenses and revenues embodied in its power rates). 
We also interviewed BPA officials and collected views from BPA's 
customers and stakeholders, including groups that focus on fish and 
wildlife issues. In addition, we analyzed cost and rate data from BPA. 
Finally, we interviewed officials from the U.S. Army Corps of 
Engineers, one of the agencies that operate the dams of the federal 
power system. We focused our review on the group within BPA that is 
responsible for marketing power from the federal power system, and on 
its costs in the current rate period, which began in fiscal year 2002. 
We tested the reliability of data on generation costs in the Pacific 
Northwest, and on BPA's costs and rates, and found them to be adequate 
to answer the objectives of this report.

We conducted our review from August 2003 through April 2004 in 
accordance with generally accepted government auditing standards. For a 
more detailed discussion of the scope and methodology of our review, 
see appendix I.

Results in Brief: 

BPA has inherent advantages that have generally enabled it to sell 
power at lower prices than other sellers of wholesale power in the 
Pacific Northwest. BPA's most important competitive advantage is that 
it markets electricity produced primarily at hydroelectric dams in the 
federal power system, which generally have lower costs, as compared 
with power produced by other sources. In addition, as a federal agency, 
BPA enjoys financial advantages such as access to federally financed 
debt, which generally offers lower interest rates than those available 
to private-sector entities. However, unlike other sellers of wholesale 
power, BPA has open-ended obligations to provide power and other 
benefits to its customers and others in the Pacific Northwest that 
increase its costs. In particular, unlike the other power marketing 
administrations, BPA is required by its governing statutes to serve the 
"net" demand of utilities in the region (that is, the demand that these 
utilities cannot meet with their own generation resources) when 
requested. Over time, this open-ended requirement has increased the 
demands on BPA's finite resources; and at times, BPA has purchased 
power from other sources to augment the generation resources of the 
federal power system. Other statutory obligations that increase BPA's 
costs relative to some of its competitors include providing financial 
benefits to certain customers of regional investor-owned utilities and 
protecting fish and wildlife. Regarding financial benefits to 
residential and small-farm customers of the region's investor-owned 
utilities, BPA is required to provide these benefits to off-set the 
higher prices that--for historical reasons--these customers generally 
pay for power, as compared with public utility customers. Regarding 
fish and wildlife protection, BPA is the sole source of funding for the 
Northwest Power and Conservation Council--a regional agency established 
by the Northwest Power Act to balance the Northwest's environment and 
energy needs, including developing a program to protect and rebuild 
fish and wildlife populations affected by hydropower development in the 
Columbia River Basin. In addition, the multiple-use nature of the dams 
in the federal power system constrains the amount of power that BPA can 
sell. For example, water diverted for irrigation purposes is generally 
unavailable for generating electricity. These open-ended obligations 
and constraints on the generation of power have increased pressure on 
BPA over time and contributed to increases in BPA's costs relative to 
the costs of competing sources of power. Specifically, BPA's costs--as 
reflected in its cost-based rates--more than doubled in the 30 years 
between fiscal years 1972 through 2001, when adjusted for inflation, 
while the average costs of some other sources of power fell. By 1995, 
as BPA reported in its 1995 Business Plan, for the first time in its 
history, BPA's rates had risen to the level of the costs of other 
sources of generation--namely gas-fired electricity generators.

BPA's open-ended obligation to be the net provider of wholesale power 
to the region is the major cause of its recent cost increases. This 
obligation led to BPA's overcommitment to provide power to its 
customers in the current rate period--from fiscal years 2002 to 2006--
and consequently, to BPA's cost increases as it purchased large amounts 
of power at average prices much higher than the costs of the federal 
power system. The demand from BPA's public utility customers in the 
current rate period increased by more than 50 percent over the previous 
rate period--a demand that BPA is statutorily required to serve. BPA 
also agreed to provide power to investor-owned utilities and large 
industrial customers, although BPA was not statutorily required to do 
so. To meet this increased level of demand, BPA spent approximately 
$900 million in fiscal year 2002 and $760 million in fiscal year 2003, 
necessitating a rate increase of more than 40 percent for the majority 
of BPA's customers. BPA's rate structure also contributed to the 
increase in demand and increased costs, because BPA did not charge 
incremental rates equal to its costs of acquiring additional power and 
therefore did not give customers adequate incentives to conserve or 
seek power from alternative sources. In addition, drought conditions 
and other factors have also increased BPA's costs in recent years.

BPA has not resolved problems associated with its open-ended obligation 
to be the net provider of wholesale electricity in the region--the 
major cause of its recent cost increases. While BPA has issued a draft 
strategic plan that includes an objective of clarifying how much power 
it will provide to its customers, and at what price, starting in fiscal 
year 2007, this plan lacks specificity. According to its plan, BPA will 
contractually set the amount of power each customer is able to buy at 
BPA's lowest cost-based rate. BPA's plan also states that BPA will 
consider using incremental rates[Footnote 3] to define pricing and 
terms for supply beyond this amount of power. However, BPA's plan does 
not specify the amount of power BPA will allow its customers to buy at 
its lowest rate nor the specific manner in which incremental rates will 
be charged. If the amount of power sold to customers at its lowest rate 
exceeds the firm output of the federal power system--the amount of 
power that can be generated during a critical water year--BPA could 
still need to purchase power from other sources to meet its commitments 
during low water years. Further, if the incremental rates do not fully 
reflect BPA's costs of acquiring any additional power it sells, BPA's 
customers will not have appropriate incentives to conserve or seek 
alternative sources of power. Finally, whether BPA's strategic plan 
will ultimately be implemented remains unclear. BPA has not carried out 
similar proposals made in the past--such as in the late 1990s, when a 
four-state panel recommended that BPA limit its commitments to the firm 
output of the federal power system and charge incremental rates to 
cover its cost of acquiring any additional power. BPA officials said 
that BPA ultimately declined to implement such an approach under strong 
regional pressure from its customers to provide more power.

Regarding other costs, BPA has taken steps to reduce costs or control 
the extent of future cost increases in the areas of power generation, 
fish and wildlife programs, and internal operations. For example, BPA 
has reduced funding in general areas such as travel, training, 
supplies, and staffing, as compared with 2001 funding levels. In 
addition, BPA has taken steps to centralize its risk management process 
to better control its costs. Among other things, BPA has established a 
management plan outlining a new approach to risk management and has 
hired a Chief Risk Officer. However, BPA's plan to date generally does 
not identify specific activities, resources, and time frames for 
completing implementation of its new approach; and this lack of 
specificity prevented us from reviewing the plan's progress in a 
meaningful way.

We are making four recommendations to BPA to ensure that the agency can 
control costs of future power purchases and that it clarifies key 
elements of the implementation of its new risk management process. 
Specifically, we are recommending that BPA reduce its future risk of 
being overcommitted by (1) defining rights to purchase the firm output 
of the federal power system so that the amount of power that BPA sells 
at its lowest, cost-based rate is equivalent to the firm output of the 
existing federal power system, (2) charging incremental rates for any 
power sold beyond this amount that reflect BPA's cost of acquiring that 
power, and (3) studying the feasibility of issuing a rule under the 
Administrative Procedure Act to define the rights to purchase power and 
the terms of incremental rates. We are also recommending that BPA 
identify specific activities, resources, and time frames for 
implementing its risk management initiatives. In commenting on a draft 
of this report, BPA generally agreed with our findings and 
recommendations.

Background: 

Although BPA is a self-funded agency, it has ongoing authority to 
borrow from Treasury to fund capital expenditures and is repaying funds 
appropriated in the past to finance the construction of dams and 
generating and transmission facilities. According to the Northwest 
Power Act, BPA's revenues from selling power and transmission services 
must cover its costs, which include repayment of its debt, interest, 
operating and maintenance costs, and the cost of any power purchased 
for resale to meet its customers' needs, among other things. BPA's 
current 5-year rates include the ability to adjust rates in response to 
changing cost and revenue conditions.

BPA's customers include public utilities in the Pacific Northwest, as 
well as a few aluminum companies and other large industrial customers, 
known as direct service industries. BPA also provides power to some 
investor-owned utilities in the Pacific Northwest. In addition, BPA 
sells or exchanges power with utilities and power marketers in Canada 
and the western United States. Preference--the opportunity to obtain 
first access to BPA power--is defined by statute and gives priority to 
public utilities and other public entities to ensure that the federal 
hydropower projects are operated for the benefit of the general public, 
particularly residential and rural customers. However, BPA's nonpublic 
customers in the Pacific Northwest have priority in access to BPA power 
over public utilities in other parts of the country.

BPA sells power to its customers through two mechanisms. First, BPA 
sells power through long-term contracts at cost-based rates that are 
established in periodic rate cases, which have recently taken place 
every 5 years. The Federal Energy Regulatory Commission (FERC)--
pursuant to the Northwest Power Act--approves BPA's rates after 
determining that the rates BPA proposes for its firm power are 
sufficient to cover BPA's costs. Second, BPA often sells secondary 
power, defined as power produced beyond the amount that BPA has 
committed to sell to its customers at its cost-based rates. These 
secondary sales are often transacted at market-based prices.[Footnote 
4] The time frames of these secondary sales range from hourly to as 
much as 18 months in advance.

The amount of power produced by the federal power system is highly 
variable, largely depending on prevailing water conditions. For 
example, according to BPA, in the last 10 fiscal years, the annual 
runoff of the Columbia River at The Dalles Dam has varied from a low of 
about 79 million acre-feet in fiscal year 2001 to a high of about 194 
million acre-feet in fiscal year 1997; and the amount of power 
generated by the federal power system has varied from a low of about 
7,300 average megawatts (aMW) to a high of nearly 12,000 aMW.[Footnote 
5] Since BPA's revenues from secondary sales depend on the amount of 
power produced by the federal power system, these revenues are also 
highly variable. Because of this inherent uncertainty about how much 
power BPA will have to sell in any given year, BPA officials estimate 
for planning purposes that the firm output of the federal power system 
is about 8,000 aMW.

To promote competition in wholesale electricity markets, the federal 
government took several actions in the 1990s that affect BPA's 
operations. For example, in 1992, the Congress passed the Energy Policy 
Act, authorizing FERC to require utilities, on a case-by-case basis, to 
allow competitors to use their transmission lines for wholesale sales 
of electricity. In 1996, FERC ordered that electric transmission 
systems be opened to all qualified wholesale buyers and sellers of 
electricity. FERC also required utilities to separate operations and 
management of their generation and transmission businesses to prevent 
discriminatory practices, such as denying competitors equal access to 
transmission lines. While BPA's transmission system is outside of 
FERC's jurisdiction, BPA voluntarily complied with key features of 
FERC's orders. For example, in 1997, BPA split its operations into a 
Power Business Line and Transmission Business Line. BPA took other 
actions to attempt to position itself in the more competitive market 
that was emerging in the 1990s. For example, in its 1995 Business Plan, 
BPA announced its intent to expand its position in the wholesale 
electricity market. Responding to the increased choices and falling 
prices that were available to its customers, BPA planned to increase 
its long-term revenue by entering new markets with new product lines. 
Specifically, the Business Plan proposed an Energy Services Business 
Line to provide planning and analytic services to customers and 
advocated increased spot-market power purchases to provide it resource 
flexibility in a time of shifting demands and increasing obligations to 
migrating salmon.

In the mid-1990s, wholesale power prices dropped in the Pacific 
Northwest, and power marketers began to offer wholesale power prices 
lower than the prices BPA charged its customers. BPA's customers 
responded by reducing their purchases of BPA power by about 1,800 aMW-
-a reduction in demand of almost 25 percent. Because of this drop in 
demand from its customers, BPA became concerned that it would not be 
able to sell its power at prices high enough to cover its costs. In 
response to concerns about BPA's competitiveness and to establish 
regional consensus on BPA's role in a competitive wholesale 
marketplace, the governors of Idaho, Montana, Oregon, and Washington 
convened a committee in 1996 representing BPA and its major customer 
and stakeholder groups. The committee issued a report--known as the 
Comprehensive Review of the Northwest Energy System--recommending that 
BPA return to its historic role of marketing power from the federal 
power system, rather than becoming an aggressive marketer of products 
and services in the emerging competitive power market.[Footnote 6] 
Accordingly, the Comprehensive Review report recommended that BPA avoid 
acquiring resources to meet load growth, except on a direct bilateral 
basis where the customer takes on the risk, and that BPA manage and 
control its costs to remain competitive.

After the low prices of the mid-1990s, Pacific Northwest electricity 
prices became more volatile. Trends in Pacific Northwest wholesale 
electricity prices are shown in figure 1. Average monthly wholesale 
electricity prices increased somewhat in 1998 and 1999, as demand in 
the region grew while little new generation capacity was added. In mid-
2000, electricity prices in California skyrocketed due in part to low 
water conditions that reduced the total supply. Because hydroelectric 
power provides such a large part of the total power supply in the 
region, low water years tend to cause high prices due to the consequent 
reduction in the total supply of power. Because California's 
electricity market is integrated with the rest of the western region, 
prices in the Pacific Northwest quickly followed California's lead and 
rose to unprecedented levels. Average wholesale prices in the Pacific 
Northwest remained high until the summer of 2001. Since then, prices 
have returned to levels similar to those seen in the late 1990s.

Figure 1: Average Monthly Prices for Wholesale Electricity in the 
Pacific Northwest, 1997-2003: 

[See PDF for image]

Note: Wholesale electricity prices are expressed in dollars per 
megawatt-hour (MWh) and are not adjusted for inflation. These prices 
are from the Mid-Columbia Hub and are representative of wholesale 
electricity prices in the Pacific Northwest.

[End of figure]

Inherent Advantages Help BPA to Provide Low-Priced Power, but Its Open-
ended Obligations Are a Competitive Disadvantage: 

BPA has inherent advantages, including its access to power from the 
federal power system, that have generally enabled it to provide power 
to customers in the Pacific Northwest at prices lower than other 
sellers of wholesale power. However, unlike other sellers of wholesale 
power, BPA has open-ended obligations to provide power and other 
benefits to its customers and others in the Pacific Northwest that have 
increased BPA's costs. In addition, the multiple-use nature of the dams 
in the federal power system constrains the amount of power that BPA has 
available to sell. These open-ended obligations and constraints have 
increased pressure on BPA over time, engendering disputes in the region 
over the allocation of the limited resources of the federal power 
system, and contributing to increases in BPA's costs relative to the 
costs of competing sources of electricity.

BPA's Access to Hydroelectric Power and Federal Financing Offer 
Competitive Advantages: 

BPA's most important cost advantage is that power from the federal 
power system is primarily produced at hydroelectric dams, which overall 
have low costs. According to BPA data, hydroelectric generation has 
accounted for more than 90 percent, on average, of the generation 
output of the federal power system over the past 2 decades. Many of 
these hydroelectric facilities were built decades ago and had 
relatively low construction costs compared with newer generating 
facilities. In addition, these hydroelectric facilities tend to have 
lower operating costs than other sources of electricity that consume 
costly fossil or other fuels. As a result of these advantages, 
hydroelectric power plants in the Pacific Northwest typically produce 
power for less than $5 per MWh (as shown in fig. 2), compared with the 
region's coal and nuclear plants, which produce power for between $15 
to 20 per MWh, or combined cycle turbine facilities that burn natural 
gas or oil, which produce power for more than $20 per MWh.

Figure 2: Average Production Costs for Different Types of Generating 
Plants in Idaho, Oregon, Washington, and Western Montana, 1996-2002: 

[See PDF for image]

Note: In inflation-adjusted dollars, base year 2003. Production costs 
are measured in dollars per MWh and reflect data for the North American 
Electric Reliability Council's Northwest Power Pool subregion. 
Production costs reflect variable and fixed costs associated with a 
generating plant. Source dataset does not have a value for nuclear 
generation in 2002. Combined cycle turbine generators use natural gas 
or oil.

[End of figure]

BPA also enjoys advantages related to financing due to its status as a 
federal agency. BPA has access to federally financed debt, which 
generally offers lower interest rates than those available to private-
sector entities. BPA's federal financing is divided into two 
categories--appropriated debt and Treasury debt. Appropriated 
debt[Footnote 7] consists of appropriations received by BPA and the 
generating agencies to construct the generating and transmission 
projects from which BPA markets power. As of September 30, 2003, the 
outstanding balance of BPA's appropriated debt was about $4.7 billion. 
As a result of legislation passed in 1996, BPA's appropriated debt was 
restructured in 1997 to increase the interest rates to bring them in 
line with the prevailing Treasury rates. However, the principal on this 
debt was adjusted downward so that, except for the interest on the $100 
million that BPA paid as part of the restructuring, the annual interest 
BPA pays on the debt remains the same.[Footnote 8]

In addition to its appropriated debt, BPA has authority to borrow from 
the Treasury on an ongoing basis. BPA's Treasury borrowing stems from 
authority granted in the Federal Columbia River Transmission System Act 
of 1974, as amended, which allows BPA to have up to $4.45 billion in 
Treasury debt outstanding at any one time. The $4.45 billion consists 
of two separate borrowing limits: $1.25 billion is reserved for 
conservation and renewable resource loans and grants, and $3.2 billion 
for transmission and other capital investments. This debt is issued at 
market interest rates that are comparable to other government agency 
obligations, and these rates are higher than Treasury rates. As of 
September 30, 2003, BPA had about $2.7 billion of debt held by the 
Treasury. As BPA pays off debt, it has greater funds available for 
future borrowing.

BPA's status as a federal agency also has conferred advantages in 
securing financing from the private sector. BPA does not have authority 
to borrow directly from nonfederal sources, but BPA has secured private 
sector financing by taking responsibility for the debt of other 
entities. For example, BPA is responsible for the debt service of bonds 
issued by Energy Northwest, a consortium of public utilities, to build 
three nuclear plants, only one of which is currently operating. While 
the federal government explicitly does not guarantee Energy Northwest 
bonds, Moody's Investors Service views them as having an implicit 
federal guarantee. In addition, Moody's Investors Service and Fitch 
Ratings give credit strength to BPA's ties to the federal government. 
Thus, the interest that BPA pays on Energy Northwest bonds is lower 
than would be paid without BPA's ties to the federal government.

As a result of BPA's inherent cost advantages, it generally has been 
able to sell electricity at lower wholesale prices than other major 
investor-owned utilities in the Pacific Northwest, as shown in figure 
3.

Figure 3: Average Wholesale Prices for Electricity Sold by BPA and the 
Five Largest Investor-Owned Utilities in the Pacific Northwest, 1996-
2002[A]: 

[See PDF for image]

Note: Prices are given in inflation-adjusted dollars, base year 2003.

[A] Average wholesale prices are expressed in cents per kilowatt-hour, 
where a kilowatt-hour is equal to one thousand watt-hours. Average 
wholesale prices are calculated by dividing a utility's total revenue 
from power sales by the total amount of power it sold. The resulting 
weighted average may not represent the actual price paid by any 
particular customer, but it reflects the average annual prices paid by 
customers as a group.

[End of figure]

BPA's advantages contribute significantly to the relatively low retail 
price of electricity sold in the Pacific Northwest. Because BPA sells 
about 45 percent of all the electricity used in the Pacific Northwest, 
its wholesale prices play a large role in determining the average 
retail price of electricity throughout the Pacific Northwest. As shown 
in figure 4, the average retail price of electricity (as expressed in 
average revenue per kilowatthour) in states in the Pacific Northwest is 
generally lower than electricity sold in much of the rest of the United 
States. While the nationwide average retail price of electricity from 
1996 to 2002 was 7.41 cents per kilowatthour, Washington state's 
average price of electricity over this period was 4.81 cents per 
kilowatthour, Oregon's was 5.46 cents per kilowatthour, Idaho's was 
4.63 cents per kilowatthour, and Montana's was 5.61 cents per 
kilowatthour.[Footnote 9]

Figure 4: Average Retail Prices of Electricity, 1996-2002: 

[See PDF for image]

Note: Prices are given in inflation-adjusted dollars, base year 2003, 
and have been rounded to hundredths of a cent per kilowatt-hour. 
Average retail prices are expressed in cents per kilowatt-hour, 
calculated by dividing total revenue from power sales by the total 
amount of power sold in a state. The resulting weighted average may not 
represent the actual price paid by any particular customer, but 
reflects the average annual prices paid by customers as a group.

[End of figure]

BPA Has Competitive Disadvantages That Increase Its Costs: 

BPA also has competitive disadvantages--stemming mainly from statutory 
obligations--that increase its costs relative to other sellers of 
wholesale power. Most importantly, unlike other power marketing 
administrations, BPA has a legislative mandate under the Northwest 
Power Act to be the "net provider" of wholesale electricity in the 
region--i.e., BPA must meet the power needs of all utilities in the 
region to the extent that the utilities' own generating resources are 
insufficient to meet the demand of their retail customers. If a utility 
requests power from BPA, BPA must provide this power regardless of 
whether its own generating resources are sufficient to meet the demand.

Past attempts by BPA to meet growing regional demand have led to 
significant cost increases that BPA has had to cover in its power 
rates. For example, in the early 1970s, BPA entered into financing 
agreements with Energy Northwest to acquire the generating capability 
of three nonfederal nuclear power plants.[Footnote 10] Later, a variety 
of events, including construction cost overruns and lower-than-
estimated power demand growth, made it clear that some of these plants 
would not be economical to complete or operate. Accordingly, 
construction was halted on two of these plants. As a result, BPA is 
currently responsible for about $3.8 billion in nonfederal debt 
associated with two nonoperating nuclear plants, along with $2.2 
billion in nonfederal debt for the one operating nuclear plant, the 
Columbia Generating Station. Servicing the debt related to the 
nonoperating plants that don't generate any revenue to help offset this 
cost has raised BPA's average costs significantly, requiring BPA to 
charge more for its power sales. In 1994, BPA again tried to expand the 
capacity of the federal power system by entering into a financing 
agreement to acquire the capacity of a proposed nonfederal gas-fired 
power plant for a 20-year period. Later, as wholesale market prices for 
power fell, some of BPA's customers reduced their demand for BPA power, 
and BPA found that it did not need the power from the gas-fired plant. 
BPA then breached its contract, which cost the agency over $280 million 
in net settlement payments.

Under the requirements of the Northwest Power Act, BPA also provides 
financial payments to some of its customers in lieu of providing power 
through a program called "residential exchange." The residential 
exchange program is designed to share the benefits of low-cost power 
from the federal power system with residential and small-farm customers 
of investor-owned utilities.[Footnote 11] Because investor-owned 
utilities in the Pacific Northwest have typically had higher costs than 
the region's public utilities, the residential exchange program 
attempts to compensate for the difference and reduce the prices paid by 
the investor-owned utilities' retail customers by making financial 
payments to the investor-owned utilities. The size of these payments is 
determined by comparing an investor-owned utility's average cost of 
producing power to the rates BPA charges its public utility customers, 
with BPA making up the difference. Between fiscal years 1982 and 2003, 
BPA's financial records show that the annual cost of the program has 
averaged about $210 million.[Footnote 12]

The Northwest Power Act also requires BPA--along with the other federal 
agencies responsible for managing, operating, or regulating 
hydroelectric facilities in the Columbia River Basin--"to protect, 
mitigate, and enhance fish and wildlife" resources impacted by the 
development and operation of those facilities. Under the Act, BPA is 
required to implement and fund measures supporting fish and wildlife in 
a manner consistent with the program developed by the Northwest Power 
and Conservation Council--a regional agency established by the 
Northwest Power Act to balance the Northwest's environment and energy 
needs, including developing a program to protect and rebuild fish and 
wildlife populations affected by hydropower development in the Columbia 
River Basin. BPA must also implement and fund actions contained in the 
biological opinions directed at avoiding jeopardy to and recovering the 
14 Columbia River Basin fish populations listed as threatened or 
endangered under the Endangered Species Act. Because BPA is the primary 
source of funding for the Northwest Power and Conservation Council's 
program and for the implementation of the actions contained in the 
biological opinions, BPA's costs are impacted by the costs of 
protecting fish and wildlife to a greater degree than some of its 
competitors. BPA financial records show that between fiscal years 1985 
and 2003, BPA's costs to implement these actions have increased on an 
annual basis, from about $85 million in 1985 to about $256 million in 
2003, in 2003 dollars. BPA's total spending on these programs during 
the same period was over $3.3 billion. (For more detailed information 
on the growth in BPA's program spending on fish and wildlife from 1985 
through 2003, see app. II.): 

In addition, the multiple-use nature of the dams in the federal power 
system can reduce the amount of power that BPA has available to sell, 
which increases BPA's average costs of providing power. In addition to 
generating power, the dams of the federal power system are also 
operated for the protection of fish and wildlife, flood control, 
irrigation, navigation, and recreational benefits. These other uses 
change the timing and amount of the water flow, which in turn can 
reduce the total amount of power that the federal power system 
produces--and therefore, the amount of power that BPA has to market. 
For example, to fulfill the obligations of the Northwest Power Act and 
the Endangered Species Act, water is released from storage reservoirs 
in the Columbia River Basin to aid migrating salmon and steelhead, 
including many threatened or endangered fish populations. Water 
releases for fish migration can generate power, but such releases 
typically occur during springtime when water flows are already high 
and, consequently, power prices are low. As a result of these releases, 
less water is retained behind the dams to be released later to generate 
power when prices are higher. In addition, water is sometimes spilled 
without generating electricity to aid fish migration instead of being 
sent through the dams' turbines to generate power. As a result of these 
constraints on power production at the federal dams, BPA must at times 
purchase power to meet its contractual obligations; and at other times, 
BPA's revenues from secondary sales are reduced. Purchasing additional 
power and having less power to sell combine to increase BPA's average 
costs--defined as BPA's total costs divided by the total power 
generation that BPA sells. According to BPA estimates for fiscal years 
1985 through 2003, water releases for fish and wildlife purposes have 
cost BPA almost $4 billion in power purchases to meet contractual 
obligations and in foregone revenues.[Footnote 13] Diverting water for 
irrigation purposes has a similar effect on BPA's revenues and average 
costs. BPA estimates that foregone revenues attributed to irrigation 
withdrawals are currently about $180 million per year.[Footnote 14]

As population and economic activity in the Pacific Northwest region 
have grown, the demand for power from the federal power system has 
increased. While in the past BPA typically provided power to public 
utilities and had power left over for some large industrial customers, 
demand from public utilities has grown so that, according to BPA 
officials, this demand is currently about equal to the entire firm 
output of the federal power system. Demand from investor-owned 
utilities has also grown, and consequently, the number of these 
utilities' customers who are entitled to financial benefits through the 
residential exchange program has increased. In addition, the demands on 
the operation of dams for other uses--particularly for fish and 
wildlife programs--have increased. These increasing and often competing 
demands for the resources of the federal power system have led to 
disputes among the beneficiaries over how these resources are 
distributed. For example, the method by which BPA calculates 
residential exchange payments has spurred disputes within the region. 
Investor-owned utilities and state regulators have argued that BPA has 
manipulated the method to reduce payments below appropriate levels. 
Conversely, public utilities have argued that payments to investor-
owned utilities have been too high and that BPA has inaccurately 
applied a statutory provision designed to protect public utilities from 
increased prices. Some public utilities recently filed a lawsuit 
against BPA, claiming that a settlement agreement BPA signed with 
investor-owned utilities inappropriately increased program costs.

BPA's costs--as reflected in its cost-based power rates--more than 
doubled in the 30 years between fiscal years 1972 through 2001, when 
adjusted for inflation, and increased by a factor of about 7 in nominal 
terms (not adjusted for inflation).[Footnote 15] Figure 5 shows BPA's 
rates from 1972 through 2001 both in dollars adjusted for inflation and 
in nominal dollars (not adjusted for inflation).[Footnote 16] During 
this period, BPA's backing of the construction of the nuclear plants 
and the gas-fired plant, discussed previously in this report, 
contributed to the agency's cost increases as reflected in its rising 
rates.

Figure 5: BPA's Average Power Rates, Fiscal Year 1972-2001: 

[See PDF for image]

Note: Data are for BPA's historical average priority firm power rates. 
Nominal prices refer to BPA's rates that have not been adjusted for 
inflation. Real prices refer to BPA's rates that have been adjusted for 
inflation with fiscal year 2003 as the base year.

[End of figure]

Since the late 1970s, while BPA's rates increased significantly, the 
cost of new sources of power generation decreased as the efficiency of 
new technologies improved. For example, in its 1995 Business Plan, BPA 
reported that a number of factors, including "falling fuel prices and 
the emergence of new and aggressive competition" had led to a situation 
where for the first time in BPA's history, BPA's rates were as high as 
the costs of alternative sources of electric power. As a result, as 
discussed previously in this report, some of BPA's customers began to 
reduce their demand for BPA power in favor of these cheaper sources of 
power. BPA has more recently reported that since the West Coast energy 
crisis of 2000 and 2001, and with recent increases in natural gas 
prices, the costs of new power plants are again higher than BPA's 
rates. However, after 1995, BPA stopped regularly tracking and 
reporting consistent data on the cost of the least expensive 
alternative form of power generation, so we were unable to compare the 
agency's rates relative to the cost of such alternatives after that 
year.

BPA's Open-ended Obligation to Provide Power and Other Factors Led to 
Large Cost Increases for BPA: 

BPA's open-ended obligation to be the net provider of wholesale power 
to the region is the major cause of its recent cost increases. This 
obligation led the agency to overcommit to provide power to its 
customers in the current rate period--from fiscal years 2002 to 2006. 
BPA's costs rose dramatically as the agency purchased large amounts of 
power, at average prices much higher than the costs of power from the 
federal power system, and took other steps to meet its obligations. 
BPA's rate structure, which did not charge incremental rates equal to 
BPA's costs of acquiring additional power, contributed to the rising 
costs because it did not give customers adequate incentives to conserve 
or seek power from alternative sources. Drought conditions and other 
factors have also caused BPA's costs associated with its power 
marketing business to increase in recent years.

Open-ended Obligation to Provide Power and BPA's Rate Structure Led to 
Large Cost Increases for BPA: 

BPA experienced a demand increase of more than 50 percent from its 
public utility customers in the current rate period, which began in 
fiscal year 2002. Figure 6 shows the amount of power that BPA's three 
main customer groups purchased from fiscal years 1993 to 2001 and the 
amount of power these same groups signed contracts to purchase during 
the current rate period. Demand from the public utilities increased 
from an average of approximately 4,300 aMW during the fiscal year 1997 
to 2001 rate period to an average of approximately 6,800 aMW during the 
current rate period. As described earlier, the Northwest Power Act 
requires BPA to serve the net requirements of public utilities if these 
utilities request power, regardless of whether BPA's own generating 
resources are sufficient to meet this demand. Therefore, BPA was 
required to serve this increased demand.

Figure 6: Power Purchased and Power Contracts Signed by BPA's Major 
Customer Groups, Fiscal Year 1993-2006: 

[See PDF for image]

[End of figure]

In addition to signing contracts to provide more power to its public 
utility customers, BPA also signed contracts to provide power to 
customers that it was not statutorily required to serve during the 
current rate period. For example, BPA agreed to provide approximately 
1,500 aMW of power to the direct service industries during the fiscal 
year 2002 to 2006 rate period, despite the fact that BPA's statutory 
mandate to serve the direct service industries ended at the end of 
fiscal year 2001. BPA officials told us that the decision to serve the 
direct service industries was made at the request of the then Secretary 
of Energy and that BPA management also felt it was the correct thing to 
do, given BPA's previous requirement to provide power to these 
customers. BPA also agreed to provide 1,000 aMW of power to the 
investor-owned utilities as part of a settlement agreement--previously, 
BPA had only provided financial payments to investor-owned utilities as 
part of the residential exchange program.

The substantial increase in customer demand that occurred at the 
beginning of fiscal year 2002 coincided with the expiration of the 20-
year power sales contracts that BPA signed with the majority of its 
customers after the passage of the Northwest Power Act. To allow 
customers to sign new long-term contracts for firm power, BPA 
established a "subscription window"--from April to October 2000. During 
this subscription process, the majority of BPA's customers signed 10-
year contracts for fiscal years 2002 through 2011.

Figure 7 shows a time line of BPA's major actions during its 
subscription and ratemaking processes against a backdrop of wholesale 
electricity prices in the Pacific Northwest. When BPA began planning 
for the subscription process in early 1997, customers had recently 
reduced their power purchases from BPA by approximately 1,800 aMW to 
take advantage of low wholesale market prices. BPA officials told us 
that, due to the reduction in customer demand, they were concerned 
about the possibility that they might not be able to sell enough power 
to cover their costs. In BPA's December 1998 record of decision on the 
subscription process, BPA stated that two of its principal goals were 
to spread the benefits of the federal power system as broadly as 
possible and avoid rate increases. Toward that end, BPA committed 
itself to providing power to investor-owned utilities and direct 
service industries, as well as serving all public utility demand placed 
on it.

Figure 7: Major Events and Electricity Prices during BPA's Subscription 
and Ratemaking Processes: 

[See PDF for image]

Note: Wholesale electricity prices are expressed in dollars per MWh and 
are not adjusted for inflation. These prices are from the Mid-Columbia 
Hub and are representative of wholesale electricity prices in the 
Pacific Northwest.

[End of figure]

BPA officials told us that when wholesale electricity prices rose 
slightly during the late 1990s, they became concerned about customers 
demanding more power than BPA could provide from the federal power 
system. In May 2000, at the beginning of the subscription window, BPA 
filed a rate case with FERC to set power rates for fiscal years 2002 
through 2006. In the rate case, BPA estimated that it would be called 
on to serve approximately 1,700 aMW of power beyond the firm output of 
the federal power system, based on input from customers on their 
expected power demand.

In June 2000, immediately after BPA filed its rates for 2002 through 
2006 with FERC, wholesale power prices increased to levels never before 
seen in the Pacific Northwest, and BPA's public utility customers 
turned to BPA to avoid the high market prices. By the end of the 
subscription process, BPA's public utility customers had requested 
1,600 aMW more power than BPA anticipated in its May 2000 rate case. In 
total, BPA's customers signed subscription contracts for 3,300 aMW of 
power (roughly equivalent to three times the power used by the city of 
Seattle) beyond the firm output of the federal power system.

BPA's rate structure for the fiscal year 2002 to 2006 rate period 
contributed to the increase in demand for BPA power. According to BPA 
officials, BPA planned to meet customer demand for power by purchasing 
additional power from other sources in contracts of varying durations. 
In its May 2000 rate case, BPA decided to sell all of its power at a 
single rate, which averaged the cost of the purchased power with the 
lower cost of power produced by the federal power system. This averaged 
rate spread the costs of serving the additional demand over all of 
BPA's customers and, as a result, did not distinguish between the price 
of low-cost power from the federal power system and the higher cost of 
power from other sources. In addition, the averaged rate structure gave 
customers poor incentives to seek alternative power sources during the 
subscription process, because customers were not exposed to the 
incremental cost of acquiring additional power on the market. While BPA 
considered the possibility of charging differentiated rates prior to 
its May 2000 rate case, it ultimately declined to do so.

To meet the substantial increase in customer demand, BPA spent about 
$900 million in fiscal year 2002 and about $760 million in fiscal year 
2003 on power purchases and payments to customers to reduce their 
demand. These costs comprised approximately 25 percent of BPA's total 
costs in each year. Due to large increases in the wholesale price of 
power, the power that BPA purchased from other sources to meet the 
substantial increase in customer demand generally cost much more than 
power generated by the federal power system. For example, BPA's average 
cost for the power it purchased for 2002 and 2003 is approximately $37 
per MWh, while the average price of BPA's power, as established in its 
May 2000 rate case, was about $22 per MWh. When purchasing power from 
the wholesale market became extremely expensive, BPA reduced its power 
purchases and instead paid its customers to reduce their demand for BPA 
power, in transactions referred to as "buy-backs." BPA's costs 
associated with buy-backs were about $450 million in fiscal year 2002 
and about $370 million in fiscal year 2003. The majority of the buy-
back payments went to investor-owned utilities and direct service 
industries. BPA was eventually forced to raise its rates by more than 
40 percent for the majority of BPA's customers to recover its costs and 
ensure that it had the funds to meet its payments on Treasury debt.

Drought Conditions and Other Factors Have Also Led to Cost Increases 
for BPA: 

While BPA's overcommitment to provide power is the major cause of its 
cost increases in 2002 and 2003, other factors have also contributed to 
its cost increases in recent years. In 2001, severe drought conditions 
reduced the amount of power produced by the federal power system. 
According to BPA data, the annual runoff volume in the Columbia River 
Basin in 2001 was 40 percent below average and the second lowest since 
fiscal year 1929. To meet its customers' demand for power, BPA spent 
about $2.2 billion on power purchases in fiscal year 2001, an increase 
of $1.9 billion over average annual expenditures on power purchases in 
fiscal years 1997 through 2000.

In addition, some of BPA's other costs associated with marketing power 
have increased in recent years for a variety of reasons. These costs 
are associated with power generation (including costs for the 
residential exchange program), the fish and wildlife program, and BPA's 
internal operations. (For a more detailed presentation of BPA's costs 
associated with its power marketing business from fiscal year 1997 to 
2003, refer to app. III.): 

BPA's power generation costs have increased consistently since 2000 
because of increases in the cost of maintaining and operating the 
federal power system, as well as increases in payments to investor-
owned utilities under the terms of a settlement agreement. BPA has 
reported that the increased costs for the federal power system were 
needed to make up for past under-investment. For example, a 
benchmarking study conducted in 2000 demonstrated that the federal 
hydropower system had not been maintained at the same level as 
comparable facilities and that increased investment was needed to 
improve its reliability, capacity, and safety. In addition, under the 
terms of a settlement agreement related to the residential exchange 
program, BPA's payments to investor-owned utilities increased in 2002 
and 2003 by about $59 million per year, on average, compared with 1997 
to 2001.[Footnote 17] This increase is due to a change in how BPA 
calculates payments to these utilities.

BPA's average annual fish and wildlife program costs for 2002 and 2003 
are 33 percent higher ($42 million) than they were from 1997 to 2001, 
adjusting for inflation. According to BPA officials, the increase is 
due primarily to requirements to protect fish species listed under the 
Endangered Species Act. These requirements include measures designed to 
improve fish passage at the dams, analyze and refine hatchery 
management practices, study and report on ocean conditions, and improve 
spawning and rearing habitat. Fish and wildlife costs also increased 
because additional staff were needed to handle the contracting and 
administrative workload associated with threatened and endangered 
species recovery actions. BPA's fish and wildlife program staff 
increased from 35 in 1997 to 63 by 2003.

Finally, BPA's average annual internal operations costs associated with 
its power marketing business for 2001 to 2003 are 34 percent higher (or 
$32 million, adjusting for inflation) than they were from 1997 to 2000, 
largely because of new requirements regarding employee retirement costs 
and increased demand placed on BPA during the current rate 
period.[Footnote 18] Beginning in 2001, BPA began to pay certain 
retirement costs for its employees and some partner agency employees 
that it previously was not required to pay.[Footnote 19] Between 2001 
and 2003, these costs averaged almost $17 million, adjusting for 
inflation, accounting for more than half the increase in internal 
costs, as compared with 1997 to 2000 average cost levels. In addition, 
according to BPA officials, a more complex rate structure created by 
greater demand for BPA power and new contracts increased BPA's need for 
staffing and support, which raised its staffing and support costs.

BPA Has Not Resolved Problems That Led to Its Recent Cost Increases, 
but It Has Taken Steps to Control Other Costs: 

BPA has not resolved problems associated with its open-ended obligation 
to be the net provider of wholesale electricity in the region--the 
major cause of its recent cost increases. BPA has issued a draft 
strategic plan that includes an objective of clarifying its commitments 
to sell power to its customers. BPA proposes to contractually define 
the amount of power it will sell its customers at its lowest, cost-
based rates and is also considering charging incremental rates for any 
power it sells beyond this amount. However, BPA has not clearly defined 
how much power it will sell at its lowest cost-based rates or the way 
it will implement incremental rates. It is also unclear whether BPA's 
draft plan will be implemented. BPA had similar plans in the late 1990s 
but did not implement them because of pressure from customers to 
increase, rather than limit, the amount of demand BPA served. BPA has, 
however, taken steps to reduce costs or control the extent of future 
cost increases in the areas of power generation, fish and wildlife 
programs, and internal operations. Further, BPA is improving its risk 
management process in order to maintain better control over its costs. 
However, regarding its risk management process, BPA's plan outlining 
its new approach does not contain some key elements, including details 
on specific activities, resources, and time frames.

BPA Has Not Resolved Problems That Led to Recent Cost Increases: 

BPA has not established a final, formal policy on how it plans to 
manage its open-ended obligation to be the net provider of wholesale 
electricity in the region--the major cause of its recent cost 
increases. In March 2004, BPA issued a draft strategic plan to define a 
direction for the agency. As part of that plan, BPA established an 
objective of clarifying how much power it will provide to its 
customers, and at what price, starting in fiscal year 2007. BPA's plan 
states that it will establish, via long-term power contracts with its 
customers, the amount of power that customers are able to buy at a low 
rate.[Footnote 20] If customers request power beyond this amount, BPA's 
plan states that BPA will consider use of incremental rates to 
distinguish between low-cost power from the federal power system and 
power from higher-cost resources. According to BPA, establishing rights 
to BPA's power and using incremental rates would send appropriate price 
signals to its customers and would be consistent with broad customer 
interest in allocating rights to power from the federal power system.

However, BPA's draft strategic plan does not provide key details on how 
it plans to implement its approach to defining rights to purchase power 
and using incremental rates. For example, BPA's plan does not specify 
the amount of power that its customers would be able to buy at BPA's 
lowest rates. If this amount exceeds the firm output of the federal 
power system, then during low water years, BPA could still need to buy 
power to meet its contractual obligations. In addition, BPA's plan does 
not clarify how BPA's approach to incremental rates would be 
implemented. As long as BPA's rates do not fully reflect its costs of 
acquiring power to meet excess demand, then customers will not have 
appropriate incentives to conserve or seek alternative power supplies.

In addition, it remains unclear whether BPA will succeed in making 
these changes once they are more clearly defined. While BPA officials 
told us that they have the discretion to implement BPA's plan, they 
said that they would strongly prefer to have regional agreement before 
making a final policy decision. Accordingly, BPA intends to hold a 
series of public meetings with its customers and stakeholders in 2004 
to discuss its proposals. According to BPA officials, once they have 
received input and comments from all their customers and other 
stakeholders, the BPA Administrator will make a final policy decision 
and sign a record of decision in the fall of 2004. However, even if BPA 
reaches regional agreement on its plan, BPA has not followed through on 
similar proposals made in the past when faced with pressure from its 
customers. As discussed previously in this report, in the mid-1990s, 
BPA endorsed the recommendations of the Comprehensive Review report, 
which represented the views of BPA and its major customer and 
stakeholder groups. The report specifically recommended that BPA not 
acquire additional resources to serve its customers' load growth, 
except where the customers take on all the risk of the acquisition, 
such as by paying incremental rates that cover BPA's full cost of 
acquiring the additional power. However, under what BPA has 
characterized as strong regional pressure from its customers, BPA 
ultimately declined to implement such an approach in its 2000 rate 
case.

The possibility remains that BPA will face similar pressures again, 
although BPA officials identified several reasons why the agency is 
less likely to need to purchase significant amounts of power in the 
future, compared with recent years. For example, most of BPA's direct 
service industry customers, such as aluminum smelters, are no longer in 
operation, and some smelters are being dismantled. However, public 
utility demand is currently about equal to the firm output of the 
federal power system, according to BPA officials, and this demand is 
expected to increase over time. Since public utilities have a statutory 
right to purchase power from BPA, if future demand from public utility 
customers exceeds the firm output of the federal power system, BPA may 
again face pressure to average the cost of federal system power with 
higher cost power from other sources.

In a recent report, the Northwest Power and Conservation Council 
expressed concern that BPA's plan to allocate rights to power from the 
federal power system and charge incremental rates, using policy 
statements and records of decision, may not be sufficient to provide a 
necessary level of policy durability, leaving open the possibility that 
BPA could change its policy in the future[Footnote 21]. To improve the 
durability of BPA's plan, the Council stated that BPA must clearly 
identify the priority issues that are to be resolved, the process by 
which they will be addressed, and adopt an aggressive schedule for 
doing so. That schedule should result in offering new long-term 
contracts by October of 2007. Further, while the Council decided not to 
press for substantive rulemaking at this time, it noted that if BPA's 
current approach proves incapable of resolving issues within that time 
frame, alternative processes should be considered, including issuing a 
rule under the Administrative Procedure Act to establish a policy on 
allocating rights to power from the existing federal power system and 
charging incremental rates. If adopted, this policy would be 
implemented through subsequent contract and ratemaking procedures. 
Unlike a record of decision, a policy adopted through a rulemaking 
procedure would have the force of law, bind future BPA and customer 
actions, and could not be altered unless BPA conducted a similar 
process. Such measures would increase assurance that BPA would not 
change direction in the future because of customer pressure.

BPA Is Taking Actions to Reduce and Control Costs in Other Areas: 

BPA has recently taken a number of actions to reduce costs or to 
control the extent of future cost increases in the areas of power 
generation, fish and wildlife programs, and internal operations. When 
setting its current rates, BPA estimated that the average costs of its 
generating partners (the Army Corps of Engineers, Bureau of 
Reclamation, and Energy Northwest) for the 2002 to 2006 rate period 
would be $24 million less per year than from 1997 through 2001. BPA 
officials based this estimate primarily on a 1998 review of BPA's costs 
that projected (1) savings by increasing coordination of and investment 
in the federal hydropower system and (2) operation and maintenance cost 
reductions and increased revenues from the nuclear power plant. While 
BPA and its partner agencies developed a strategy for jointly operating 
the federal power system with the goal of reducing system 
costs,[Footnote 22] BPA has acknowledged that it did not develop 
adequate cost management plans to achieve the projected reductions and 
that BPA's partner agencies never committed to the reductions. For 
example, Corps officials stated that they had previously underinvested 
in maintenance and needed to increase expenses to improve the 
reliability, capacity, and safety of the hydroelectric facilities. BPA 
officials agree that increased investment in the power system is 
warranted but said that BPA is working with the partner agencies to 
minimize these cost increases. For instance, BPA has worked with Energy 
Northwest to defer maintenance and alter the fuel replacement schedule 
to reduce costs for the nuclear plant. In all, BPA has reduced the 
projected increase in the average annual costs of its generating 
partners by $36.4 million for 2003 through 2006.

BPA has also taken several actions to control its costs associated with 
the fish and wildlife direct program and reduce their uncertainty. The 
direct program includes costs associated with (1) noncapital 
expenditures for measures funded in support of the Endangered Species 
Act and the Northwest Power and Conservation Council's fish and 
wildlife program, (2) off-site capital projects (i.e., capital costs 
not associated with a federal power system facility), and (3) a portion 
of BPA's internal costs associated with its fish and wildlife related 
support activities. In light of its financial problems, BPA directed 
the Northwest Power and Conservation Council to ensure that actual 
expenses for the direct program did not exceed $139 million annually 
for fiscal years 2002 and 2003.[Footnote 23] In addition, BPA has taken 
other measures to control direct program costs, including placing a 
temporary hold on funding for land purchases and easements while BPA 
reviewed its financial and liquidity position. While BPA's actions have 
achieved its desired result of holding direct program expenses in 
fiscal year 2003 to approximately $139 million, they have also 
generated controversy among some stakeholders. For example, some 
stakeholders maintain that BPA cut funding for the direct program when 
it decided not to carry over more than $38.8 million that remained when 
an earlier funding agreement for the direct program expired in 2001. 
According to BPA officials, this decision was made in 1996, as the 
funding agreement was being negotiated, and should not be considered 
part of their recent efforts to control costs. In addition, some 
stakeholders stated that BPA had cut another $17.4 million from its 
direct program budget when it changed its planning and budgeting 
methods for fish and wildlife programs in November 2002. This change 
meant that because some costs incurred for projects in 2002 and prior 
years were not identified and paid by a certain date, they had to be 
paid from the 2003 and 2004 budgets, thereby reducing the amount of 
funding available for new projects by an estimated $17.4 million in 
those years. According to BPA officials, BPA changed its fish and 
wildlife planning and budgeting methods to align them with the 
budgeting and planning processes used in its other program areas.

Finally, to reduce internal operations costs, BPA initiated two 
agencywide initiatives. As a first step, BPA reduced the fiscal year 
2002 budget of each manager in its power marketing business and has 
reduced funding in many general areas, such as travel, training, 
supplies, staffing, research and development, and building upgrades. 
For example, BPA reduced agency travel expenses by about half and 
training expenses by about two-thirds from 2001 levels. According to 
BPA officials, these steps have helped BPA reduce its internal 
operations costs by $42 million from fiscal year 2002 to 2003. Second, 
BPA is consolidating functions, such as procurement and information 
technology, that were previously dispersed throughout the agency. In 
addition, in March 2004, BPA contracted with a consulting firm to 
perform a comprehensive overview of BPA's major functions, systems, and 
processes to identify specific opportunities for program and 
performance improvement, which may yield additional savings.

While some of these actions have led to decreased costs in certain 
areas, BPA projects that its overall costs for the three categories in 
fiscal years 2004 to 2006 will remain 27 percent higher than its 
average from fiscal years 1997 to 2000. BPA officials said that without 
the cost control measures, costs for these categories would be expected 
to increase even more. They also noted that some of the cost increases-
-such as those required for fish and wildlife under the Endangered 
Species Act--are largely beyond BPA's control.

BPA Is Taking Steps to Improve Its Risk Management Process and Better 
Control Costs: 

BPA recently concluded that its risk management process had not kept 
pace with the changes taking place in the electricity industry and the 
increasing demands being placed on it by its stakeholders, and that 
this problem has contributed to BPA facing increased financial risk. 
Specifically, in an April 2003 report to its customers and Northwest 
citizens, BPA stated that, while it has historically assumed and 
managed significant amounts of risk on behalf of its customers, BPA's 
decision to take on demand beyond the firm output of the federal power 
system has gone beyond the limits of risk that it can accept. As a 
result, BPA is taking steps to improve its risk management process.

In June 2002, BPA hired a consulting firm to independently evaluate its 
risk management process. Risk management includes risk assessment and 
monitoring, which are two of the key elements of internal 
control.[Footnote 24] Risk assessment identifies and analyzes the 
relevant risks associated with achieving an organization's objectives, 
while monitoring assesses the quality of performance of the risk 
management process over time and identifies any departures from this 
process. In its contract with the consultant, BPA asked the firm to: 

* identify, evaluate, and rank BPA's enterprise-wide risks;

* assess the state of BPA's risk management;

* compare BPA's risk management approach and structure with the 
industry's best and emerging practices;

* identify gaps in its risk management and control framework where 
improvements may be appropriate; and: 

* recommend an "Enterprise Risk Management" model and alternative 
organizational structures.

The consultant found that although BPA had significant risk management 
resources in specialized areas, based on BPA's business lines or 
specific types of risk, the agency's risk management efforts were 
decentralized and were not integrated into an enterprise-wide 
structured approach.[Footnote 25] The consultant made numerous 
recommendations for improvements in the following areas: planning and 
preparedness; risk identification and prioritization; monitoring, 
control, and reporting; follow-through and organizational learning; and 
general organization and leadership.

In March 2003, BPA developed a management plan to implement some of the 
consultant's key, high-level recommendations. The plan calls for two 
main strategies. First, the plan calls for the establishment of a Chief 
Risk Officer position and organization. According to the plan, the 
Chief Risk Officer position is designed to elevate risk issues to the 
senior management level on a par with business, financial, and program 
strategies. The Chief Risk Officer would lead BPA's revamped risk 
assessment and mitigation efforts and work across BPA's business lines 
and program offices.

Second, BPA's plan calls for the establishment of two oversight 
committees to operate under the direct, delegated authority of the BPA 
administrator. The Enterprise Risk Management Committee would oversee 
BPA's risk management program and would identify, analyze, evaluate, 
treat, monitor, and communicate risks across BPA's business lines and 
program offices. This committee is to consist of senior executives and 
would facilitate integration of risks across BPA and ensure that risk 
and strategy are considered in tandem. The committee would also 
establish the acceptable zones or boundaries for risk, often referred 
to as risk tolerances, within which the business lines will operate. 
The second committee, called the Transacting Risk Management Committee, 
would be headed by the Chief Risk Officer and handle the more tactical 
and technical transacting risks within business lines. This committee 
would focus on risks inherent in commodity market transactions and 
counterparty credit exposures. It would also oversee policies and 
procedures and establish risk monitoring and limits that will govern 
the commodity transaction risks.

BPA has taken several significant actions to implement its management 
plan. As of April 2004, BPA had made the following major changes to its 
risk management process: 

* centralized its risk management operations into a newly created Chief 
Risk Office that is headed by a newly appointed Chief Risk Officer, 
completed the initial transfer of risk-related jobs to the new Chief 
Risk Office, and announced additional staff recruitment for the office 
through the federal merit and competitive process;

* chartered and established the Transacting Risk Management Committee 
and hired a staff manager for the Enterprise Risk Management Committee, 
which has not yet been established; and: 

* instituted a requirement for its power marketing business that 
decisions in which the total lifetime costs, revenues, or potential 
risks are estimated to exceed $500,000 will be formally documented in a 
standard form BPA refers to as a "Decision Support Template."

While BPA continues its efforts to implement its plan and establish a 
more centralized risk management process, work remains to be done to 
ensure that the plan is successful. At this point, the plan provides 
limited information on how BPA will complete its implementation of the 
new approach to risk management. While the plan includes strategies and 
high-level descriptions, it generally does not yet identify specific 
activities, resources, and time frames for completing the 
implementation of BPA's new approach. Neither does the plan address 
when, and to what extent, BPA will address all of the consultant's 
detailed recommendations. Without this type of information, it is 
unclear when BPA intends to fully implement its new approach and to 
what extent its approach will address the consultant's recommendations. 
According to BPA, its management plan is not intended to provide the 
full details necessary to implement its approach, and BPA intends to 
monitor the implementation of the plan and perform an internal 
assessment by September 2004. BPA officials told us that the Chief Risk 
Officer will lead the effort to revise BPA's risk management process, 
including responding to the consultant's detailed findings. However, 
BPA was unable to provide documentation of the activities, resources, 
and time frames it plans to take to fully implement its plan. Without 
such documentation, it was not possible to review the plan's progress 
in a meaningful way.

Conclusions: 

Growing population in the Pacific Northwest region, combined with BPA's 
open-ended obligation to provide power, have increased financial 
pressures on BPA. Past BPA attempts to meet growing demand--by 
providing financial backing for the construction of two nuclear power 
plants that were never completed and one gas fired power plant, the 
power from which BPA later determined it did not need--caused BPA's 
costs to rise. This obligation to provide power was also the 
fundamental cause of recent cost increases and financial difficulties. 
Looking forward, this obligation remains a major source of risk for 
BPA. BPA must control its costs or risk not being able to compete with 
other power producers, potentially forcing it to default on its debt to 
the Treasury. One way to avert this risk and resolve the problems 
associated with BPA's open-ended obligation is to allocate (or define) 
the rights to purchase the firm output of the existing federal power 
system and use incremental rates to distinguish between this "low-cost" 
power and any other power that BPA sells. While BPA currently plans to 
contractually set the amount of power its customers can buy at its 
lowest rate and to use incremental rates, similar intentions in the 
recent past were not implemented, in part because of pressure from 
BPA's customers to provide more power. It is therefore important for 
BPA to credibly commit to allocating rights to purchase the firm output 
of the federal power system and using incremental rates. To assist BPA 
with its commitment to implement its draft strategic plan and increase 
assurance that BPA will not change direction in the future, the 
Northwest Power and Conservation Council has stated that a rule issued 
under the Administrative Procedure Act to establish a policy on 
allocating rights to power from the existing federal power system and 
charging incremental rates may provide greater durability. If 
established, such a rule would be implemented through subsequent 
contract and ratemaking procedures and would be more difficult to 
change than would an identical plan adopted in a record of decision.

In addition to growing pressure to provide power and financial 
benefits, BPA has faced a changing business environment as the 
electricity industry has undergone restructuring. These changes have 
posed management challenges for BPA and highlighted areas that need 
improvement. In particular, BPA's decision to serve demand beyond the 
firm output of the federal power system at average rates puts the 
agency at risk of becoming uncompetitive. Recognizing this 
vulnerability, BPA has taken positive steps by developing a new 
approach to managing its risks. Following through on this approach with 
specific activities, resources, and time frames to fully implement its 
risk management initiatives is crucial to BPA's ability to anticipate 
and prepare for challenges to its overall competitiveness. Better risk 
management should also help BPA in the future to avoid the kinds of 
decisions that contributed to its recent financial difficulties.

Recommendations for Executive Action: 

We recommend that the Administrator of BPA take the following four 
actions: 

To reduce the risk that BPA will be overcommitted in the future and to 
help BPA control the costs of future power purchases, define the rights 
to purchase the firm output of the federal power system so that: 

* the amount of power that BPA sells at its lowest, cost-based rate is 
equivalent to the firm output of the existing federal power system, 
and: 

* customers who demand additional power from BPA are charged 
incremental rates that fully reflect the additional costs BPA incurs in 
acquiring or otherwise providing such power.

As a way to lend credibility to and reinforce BPA's actions, study the 
feasibility of issuing a rule under the Administrative Procedure Act to 
define the rights to purchase the firm output of the existing federal 
power system and set the terms of incremental rates for any power sold 
beyond that amount.

To strengthen BPA's management plan and to ensure that progress is made 
in implementing its new risk management approach, identify specific 
activities, resources, and time frames to implement BPA's risk 
management initiatives.

Agency Comments: 

We provided BPA with a draft of this report for review and comment. BPA 
generally concurred with our recommendations and said that the report, 
as a whole, accurately portrays the advantages and disadvantages BPA 
faces in marketing electricity as well as the root causes of its 
financial difficulties and associated rate increases during the last 
few years. Regarding our recommendation that BPA study the feasibility 
of issuing a rule under the Administrative Procedure Act to define the 
amount of power it sells at its lowest cost-based rate and to charge 
incremental rates for additional power, BPA stated that it plans 
instead to establish long-term contracts and rates under the terms of 
section 7(i) of the Northwest Power Act, which apply to the 
establishment of all BPA rates. However, this statement does not 
directly address our recommendation. We continue to believe that it 
would be prudent for BPA to consider the feasibility of issuing a rule 
under the Administrative Procedure Act because such a rule would have 
the force of law and could improve the durability of BPA's policy 
decisions. Concerning our presentation of BPA's increasing average 
annual internal operations costs associated with its power marketing 
business for 1997 to 2003, BPA stated that the inclusion by GAO of 
employee retirement costs in BPA's internal operations costs skews the 
costs upward in the latter years because those years included catch-up 
payments that accrued but were not paid in earlier years. We have 
discussed this point in the report and acknowledged that a large part 
of the increase in BPA's internal costs were the result of these catch-
up payments for employee retirement costs. However, we continue to 
believe that including costs associated with employee retirement 
payments presents a more complete picture of BPA's internal operations 
costs since 1997 because these retirement payments represent a 
significant increase in BPA's internal costs going forward. The 
complete text of BPA's comments on our draft report is presented in 
appendix IV. BPA also made technical clarifications, which we 
incorporated in this report as appropriate.

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of it until 30 
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. Key contributors to this 
report are listed in appendix V.

Signed by: 

Jim Wells: 
Director, Natural Resources and Environment: 

[End of section]

Appendix I: Scope and Methodology: 

To address the overall objectives, we interviewed and obtained 
documentation from Bonneville Power Administration (BPA) officials, 
BPA's customers, and a variety of regional stakeholders. Among BPA's 
customers, we interviewed representatives of public utilities from each 
of the four primary states where BPA sells its power--including 
representatives from small and large public utilities as well as urban 
and rural public utilities. We also interviewed representatives of 
investor-owned utilities and direct service industries in the region, 
as well as members of state commissions regulating the investor-owned 
utility customers of BPA. Among BPA's regional stakeholders, we 
interviewed officials from the Northwest Power and Conservation 
Council, Columbia Basin Fish and Wildlife Authority, Columbia River 
Intertribal Fish Commission, Industrial Customers of Northwest 
Utilities, Northwest Energy Coalition, and Renewable Northwest Project. 
We also collected the views of several experts on the electricity 
market in the Pacific Northwest and BPA's role in that market.

To determine the advantages and disadvantages that BPA faces in 
marketing electric power in a more competitive environment, we 
interviewed and obtained documentation from BPA and its major customers 
and stakeholder groups. To compare BPA's power rates and generation 
costs with those of other wholesale providers of electricity, we 
obtained data from the Energy Information Administration and Platts'/
RDI PowerDat. In assessing the reliability of these data through (1) 
interviews with knowledgeable officials and (2) electronic data 
testing, we determined that the reliability of these data was adequate 
to describe BPA's power rates and generation costs. To understand BPA's 
financing mechanisms, we examined published and unpublished financial 
data from BPA, interviewed BPA officials, and interviewed 
representatives from Standard and Poors and Fitch Ratings. We also 
reviewed pertinent laws and documents describing the history of the 
federal power system.

To determine the major causes of BPA's recent cost increases, we 
focused our review on the costs related to BPA's Power Business Line 
that are included in the power rates that BPA charges its customers. 
These costs differ from those available in BPA's annual reports, which 
include costs for the entire agency. We reviewed publicly available 
records that BPA produced to document the subscription and augmentation 
processes, including its 1998 record of decision on its subscription 
policy, rate cases filed in May 2000 and June 2001, and the April 2003 
Report to the Region. We also interviewed BPA officials and reviewed 
internal BPA documents related to its power purchase and buy-back 
contracts. In assessing the reliability of data related to BPA's costs 
through (1) review of related documentation, (2) interviews with 
knowledgeable officials, and (3) electronic data testing, we determined 
that the reliability of these data was adequate to describe BPA's costs 
associated with its power marketing business. Where possible, we 
compared data received from BPA with BPA's audited financial 
statements. Finally, we interviewed Northwest Power and Conservation 
Council officials, BPA customers, and other stakeholders to obtain 
their views on the reasons for BPA's cost increases.

To determine the extent to which BPA has taken actions to control its 
costs, we obtained relevant documentation and interviewed officials 
from BPA, the Northwest Power and Conservation Council, the Corps of 
Engineers, the Columbia River Intertribal Fish Commission, and the 
Columbia Basin Fish and Wildlife Authority. To determine the steps BPA 
has taken to improve its risk management process, we reviewed documents 
related to risk management standards--including GAO's Standards for 
Internal Control in the Federal Government, and Enterprise Risk 
Management Framework, prepared by the Committee of Sponsoring 
Organizations of the Treadway Commission--and reviewed relevant BPA 
documents, including reports prepared by a consultant hired by BPA to 
evaluate its risk management process and make recommendations for 
improvement. We also examined the BPA Administrator's performance 
contract and BPA's strategic plan as they related to BPA's risk 
management process. In addition, we obtained documentation and 
interviewed BPA officials on proposed changes to BPA's financial 
information system--the Bonneville Enterprise System--that manages its 
accounting data and budgetary allocations. However, we were unable to 
obtain consistent information on the nature and need for BPA's proposed 
changes, and thus could not determine to what extent these proposed 
changes would allow BPA to control its costs.

We conducted our work from August 2003 through April 2004 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: BPA's Costs Associated with Fish and Wildlife Programs: 

This appendix provides details on BPA's costs associated with its fish 
and wildlife programs for fiscal years 1985 to 2003. See table 1.

Table 1: BPA's Costs Associated with Fish and Wildlife Programs, Fiscal 
Years 1985-2003: 

Dollars in millions.

Year: 1985; 
Direct program costs: $24.2; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $30.3; 
Capital investment costs: $30.0; 
High priority/action plan costs[B]: $0; 
Total: $84.5.

Year: 1986; 
Direct program costs: $29.1; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $35.2; 
Capital investment costs: $32.8; 
High priority/action plan costs[B]: $0; 
Total: $97.2.

Year: 1987; 
Direct program costs: $32.1; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $43.0; 
Capital investment costs: $41.3; 
High priority/action plan costs[B]: $0; 
Total: $116.4.

Year: 1988; 
Direct program costs: $26.4; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $26.7; 
Capital investment costs: $43.5; 
High priority/action plan costs[B]: $0; 
Total: $96.6.

Year: 1989; 
Direct program costs: $31.1; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $31.9; 
Capital investment costs: $43.1; 
High priority/action plan costs[B]: $0; 
Total: $106.1.

Year: 1990; 
Direct program costs: $42.7; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $30.5; 
Capital investment costs: $44.7; 
High priority/action plan costs[B]: $0; 
Total: $117.9.

Year: 1991; 
Direct program costs: $41.4; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $30.5; 
Capital investment costs: $48.0; 
High priority/action plan costs[B]: $0; 
Total: $119.9.

Year: 1992; 
Direct program costs: $82.1; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $34.8; 
Capital investment costs: $51.3; 
High priority/action plan costs[B]: $0; 
Total: $168.2.

Year: 1993; 
Direct program costs: $59.4; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $36.5; 
Capital investment costs: $64.2; 
High priority/action plan costs[B]: $0; 
Total: $160.1.

Year: 1994; 
Direct program costs: $65.5; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $40.9; 
Capital investment costs: $71.9; 
High priority/action plan costs[B]: $0; 
Total: $178.3.

Year: 1995; 
Direct program costs: $82.0; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $41.5; 
Capital investment costs: $73.0; 
High priority/action plan costs[B]: $0; 
Total: $196.5.

Year: 1996; 
Direct program costs: $77.2; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $39.9; 
Capital investment costs: $82.4; 
High priority/action plan costs[B]: $0; 
Total: $199.4.

Year: 1997; 
Direct program costs: $91.0; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $39.8; 
Capital investment costs: $84.5; 
High priority/action plan costs[B]: $0; 
Total: $215.3.

Year: 1998; 
Direct program costs: $114.8; 
BPA internal support costs[A]: $0; 
Reimbursable costs: $39.8; 
Capital investment costs: $81.1; 
High priority/action plan costs[B]: $0; 
Total: $235.7.

Year: 1999; 
Direct program costs: $107.9; 
BPA internal support costs[A]: $9.0; 
Reimbursable costs: $42.0; 
Capital investment costs: $82.2; 
High priority/action plan costs[B]: $0; 
Total: $241.1.

Year: 2000; 
Direct program costs: $106.7; 
BPA internal support costs[A]: $7.8; 
Reimbursable costs: $39.8; 
Capital investment costs: $81.7; 
High priority/action plan costs[B]: $0; 
Total: $236.0.

Year: 2001; 
Direct program costs: $94.3; 
BPA internal support costs[A]: $9.1; 
Reimbursable costs: $43.9; 
Capital investment costs: $79.7; 
High priority/action plan costs[B]: $3.0; 
Total: $230.0.

Year: 2002; 
Direct program costs: $128.9; 
BPA internal support costs[A]: $10.5; 
Reimbursable costs: $51.9; 
Capital investment costs: $57.5; 
High priority/action plan costs[B]: $7.2; 
Total: $256.0.

Year: 2003; 
Direct program costs: $128.7; 
BPA internal support costs[A]: $11.9; 
Reimbursable costs: $52.6; 
Capital investment costs: $56.7; 
High priority/action plan costs[B]: $6.5; 
Total: $256.4.

Source: GAO analysis of BPA data.

Note: In constant dollars, base year 2003.

[A] Prior to fiscal year 1999, these costs were included within direct 
program costs but not shown separately.

[B] Special program implemented in fiscal year 2001 to help offset 
fish losses resulting from the power emergency declarations caused by 
the drought. 

[End of table]

Definition of Cost Categories: 

1. Direct program costs--These costs are the noncapital expenditures 
for fish and wildlife activities funded directly by BPA as well as off-
site (not part of a federal power system facility) capital projects. 
The activities funded are based on measures in the Biological Opinions 
and the Council's Fish and Wildlife Program. Prior to fiscal year 1999, 
this category also includes the part of the budget that BPA devotes 
internally to fish and wildlife related support activities.

2. BPA internal support costs--These costs are BPA's internal 
expenditures for program support as well as contracts and other 
expenditures on behalf of the fish and wildlife program. Until fiscal 
year 1999, these costs were included as part of the Direct Program. 
They remain part of direct program costs but are now shown separately.

3. Reimbursable costs--These costs consist of the hydroelectric share 
of operation and maintenance and other noncapital expenditures for fish 
and wildlife related activities by the Corps of Engineers (Corps), 
Bureau of Reclamation (Bureau), and U.S. Fish and Wildlife Service that 
are funded by appropriations and then reimbursed to the U.S. Treasury 
by BPA. In addition, this category includes the part of the Council's 
operating budget allocated to fish and wildlife activities. These costs 
are now funded under direct funding agreements signed with each of the 
three agencies.

4. Capital investment costs--These costs consist of the projected 
amortization, depreciation, and interest payments for (1) past fish and 
wildlife related borrowing by BPA; (2) the portion of past fish and 
wildlife capital investments by the Corps and Bureau for which BPA is 
already obligated to repay the U.S. Treasury; (3) the hydroelectric 
share of future fish and wildlife related capital investments by the 
Corps and Bureau that will be funded by appropriations and then 
reimbursed to the U.S. Treasury by BPA, based on activities called for 
in the Biological Opinion, the Council's Fish and Wildlife Program, and 
other authorities; and (4) other capital investments directly funded by 
BPA borrowing that are based on activities called for in the Biological 
Opinion and the Council's Fish and Wildlife program.

5. High-priority/action plan costs--Costs for a special program 
designed to mitigate for damages to fish resulting from the 2001 power 
system emergency. Criteria for projects included (1) addressing 
imminent risks to the survival of one or more species listed under the 
Endangered Species Act that represent a time-limited opportunity or are 
broadly recognized as projects that would achieve direct anadromous 
fish benefits; (2) are appropriate mitigation for the federal power 
system and not in lieu of expenditures or actions authorized or 
required by other entities and are otherwise consistent with the Power 
Act; and (3) the proposed project had all planning, permitting, and 
landowner agreements completed so that on-the-ground work could begin 
not later than September 30, 2001.

[End of section]

Appendix III: BPA Costs Associated with Its Power Marketing Business, 
Fiscal Years 1997-2003: 

This appendix provides details on BPA's costs that are associated with 
its power marketing business and are charged to its power rates for 
fiscal years 1997 to 2003. (See table 2.) According to a BPA official, 
these data are consistent with BPA's audited financial statements.

Table 2: BPA Costs Associated with Its Power Marketing Business, Fiscal 
Years 1997-2003: 

Dollars in millions.

Power purchases--short term; 
1997: $66.4; 
1998: $151.8; 
1999: $288.2; 
2000: $661.4; 
2001: $2,191.1; 
2002: $306.6; 
2003: $228.8.

Power purchases--long term; 
1997: $0; 
1998: $0; 
1999: $0; 
2000: $0; 
2001: $0; 
2002: $456.0; 
2003: $395.1.

Power buy-backs; 
1997: $0; 
1998: $0; 
1999: $0; 
2000: $0; 
2001: $123.3; 
2002: $461.7; 
2003: $368.4.

Power system generation; 
1997: $639.4; 
1998: $647.9; 
1999: $503.5; 
2000: $477.2; 
2001: $591.2; 
2002: $641.8; 
2003: $672.7.

Fish and wildlife; 
1997: $109.4; 
1998: $133.0; 
1999: $136.3; 
2000: $135.5; 
2001: $127.1; 
2002: $170.2; 
2003: $170.3.

Internal operations; 
1997: $102.4; 
1998: $90.3; 
1999: $99.7; 
2000: $94.7; 
2001: $115.5; 
2002: $157.3; 
2003: $115.0.

Transmission and ancillary services; 
1997: $271.4; 
1998: $303.8; 
1999: $320.1; 
2000: $261.7; 
2001: $234.6; 
2002: $193.1; 
2003: $156.9.

Other; 
1997: $896.2; 
1998: $994.4; 
1999: $1,074.5; 
2000: $949.5; 
2001: $1,020.9; 
2002: $992.2; 
2003: $932.1.

Total; 
1997: $2,085.2; 
1998: $2,321.2; 
1999: $2,422.3; 
2000: $2,580.0; 
2001: $4,403.7; 
2002: $3,378.9; 
2003: $3,039.3. 

Source: GAO analysis of BPA data.

Note: In constant dollars, base year 2003.

[End of table]

Definition of Cost Categories: 

1. Power purchases (short term)--Costs of the power BPA purchases in 
the short term to use the flexibility of the federal power system to 
optimize its value and to provide operational stability to the system.

2. Power purchases (long term)--Costs of the power that BPA signed 
contracts to purchase in 2002 and 2003 to meet demand beyond the firm 
output of the federal power system.

3. Power buy-backs--Costs of buy-back payments that BPA made to 
investor-owned utilities, direct service industries, and public 
utilities in addition to power purchases.

4. Power system generation--Costs associated with operation and 
maintenance costs for the federal dams, the nonfederal nuclear plant, 
and long-term generating projects. Includes BPA expenditures for the 
residential exchange program, energy conservation, and renewable energy 
development. Also includes BPA's share of costs to decommission 
nonoperating power projects and expenses for the benefits BPA receives 
from storage projects in Canada. Does not include payments to investor-
owned utilities to buy back power BPA agreed to sell under a settlement 
agreement of the residential exchange program; these costs are included 
under power buy-backs.

5. Fish and wildlife--Costs associated with BPA's direct program, high 
priority actions, the Northwest Power and Conservation Council, and 
Lower Snake River Hatcheries. Direct program costs include BPA's direct 
noncapital expenditures to protect, mitigate, and enhance fish and 
wildlife affected by the development of the federal power system. The 
activities funded are based on measures in the Biological Opinions and 
the Council's Fish and Wildlife Program. Direct program costs also 
include BPA's internal expenditures for program support. High priority 
actions costs are for a program designed to mitigate for damages to 
fish resulting from the 2001 power system emergency and designed to 
address imminent risks to the survival of one or more species listed 
under the Endangered Species Act. BPA funds the Northwest Power and 
Conservation Council's annual operating budget, which averaged almost 
$8 million per year, from fiscal year 1997 to 2003. Approximately half 
its budget, including staff time, is dedicated to fish and wildlife 
activities. Lower Snake River hatcheries costs include payments to the 
U.S. Fish and Wildlife Service to fund fish hatcheries on the Snake 
River.

6. Internal operations--Costs associated with BPA power nongeneration 
operations, shared services and administration, and the civil service 
retirement system. Power nongeneration operations costs include BPA's 
portion of expenses related to the joint management of the federal 
power system; oversight of the nonfederal nuclear project, development, 
and administration of power contracts; tribal relationship management; 
Canadian Treaty management; public involvement and policy development; 
power rates setting, power financial management, and power billing; 
short-term and long-term marketing and support; development and 
management of conservation and energy efficiency programs; system 
operations support (such as weather and stream flow forecasting, 
scheduling, load forecasting); maintenance of automated systems for 
Power Business Line application and system management; and projects to 
improve overall performance and meet market challenges, such as 
increasing forecasting capabilities to optimize federal power system 
generation. Shared services and administrative costs include the costs 
for information technology services; infrastructure and maintenance; 
building rent, maintenance, and security; and mail services, personnel 
services, library and printing services, as well as the portion of 
corporate general and administrative costs allocated to power rates. 
Civil service retirement system costs are associated with the unfunded 
liability of the Civil Service Retirement and Disability Fund, the 
Employees Health Benefits Fund, and the Employees Life Insurance Fund, 
which had not been covered prior to fiscal year 1998. These costs also 
include the power related portion of the Army Corps of Engineers, 
Bureau of Reclamation, and the U.S. Fish and Wildlife Pension and Post-
retirement Benefits.

7. Transmission and ancillary services--Costs associated with services 
necessary to support the transmission of energy from resources to 
loads, including reliability, scheduling and dispatch, spinning 
reserves, emergency reserves, load following and regulation, automatic 
generation control, energy imbalance, transmission losses, control area 
reserves for resources and for interruptible purchases.

8. Other--Include costs associated with the nonfederal debt service, 
depreciation, amortization, net interest, and bad debt/expense 
adjustment. Nonfederal debt service costs include BPA's portion of the 
debt of Energy Northwest and various nonfederal conservation and 
hydroelectric projects. Depreciation costs are the allocation of 
expenses associated with property, plant, and equipment to each period 
benefited by the asset. Depreciation is calculated by dividing the 
costs of the asset, less any applicable salvage value, by its estimated 
useful life or allowable period of time. Amortization costs are the 
allocation of expenses associated with intangible capital investments, 
such as for conservation and fish and wildlife. Net interest expense 
costs are the net expenses resulting from money borrowed to construct 
and maintain the federal power system and other projects. Costs 
associated with bad debt expenses include money BPA did not receive 
from parties who have declared bankruptcy. Expense adjustments 
represent miscellaneous accounting entries not associated with specific 
programs.

[End of section]

Appendix IV: Comments from the Bonneville Power Administration: 

Department of Energy:

Bonneville Power Administration: 
Washington, D.C. 20585:

JUN 22 2004:

In reply refer to: DC-Wash.

Mr. Jim Wells:
Director, Natural Resources and Environment: 
United States General Accounting Office: 
Washington, D.C. 20548: 

Dear Mr. Wells:

The Bonneville Power Administration (BPA) appreciates the opportunity 
the General Accounting Office (GAO) has provided us to review and 
comment on the draft of your report entitled Bonneville Power 
Administration: Better Management of BPA's Obligation to Provide Power 
is Needed to Control Future Costs (GAO-04-694) and to discuss our 
comments with GAO staff.

We also appreciate the extensive effort GAO has invested over the past 
year to fully investigate these issues. We concur generally with your 
recommendations and believe the draft report as a whole accurately 
portrays the advantages and disadvantages BPA faces in marketing 
electricity as well as the root causes of our financial difficulties 
and associated rate increases during the last few years.

We do have a few observations that we hope will strengthen your report, 
primarily related to progress we have made since April. We have also 
attached a number of technical comments and suggestions.

Defining BPA's load obligation:

Your draft report recommends that BPA reduce its future risk of open-
ended load obligation by:

(1) limiting the amount of power we sell at our lowest cost-based rate 
to the existing federal system firm output, and:

(2) charging incremental rates for any power sold beyond this amount 
that fully reflect the additional costs BPA incurs in acquiring or 
otherwise providing such power.

We concur and have made substantial progress in this area by advancing 
our draft strategic plan.

The draft report states on page 32:

"In March 2004, BPA issued a draft strategic plan to define a direction 
for the agency. As BPA established an objective of clarifying how much 
power it will price, starting in fiscal year 2007. BPA's plan states 
that it will establish, via long-term power contacts with its 
customers, the base amount are able to buy at a low rate. If customers 
request power beyond incremental rates to and power higher-cost 
resources."

[See PDF for page 2 of Comments from the Bonneville Power 
Administration]

[End of page 2 of Comments from the Bonneville Power Administration]

Rates and contracts together will define prices and rights to the firm 
output of the existing federal power system and the incremental rates 
and terms for supply beyond this base amount of existing federal power.

Managing risks systematically:

Your draft report recognizes BPA's planning and implementation of a 
relatively new enterprise risk management framework. This approach 
extends beyond risks associated with cost control and involves a more 
rigorous approach to assessing and responding to risks that affect the 
achievement of our strategic and financial objectives. Since your April 
observation, BPA has continued to execute its risk improvements, 
including making staff hires, convening management governance 
committees, and establishing risk management work plans. We appreciate 
GAO's support for our continued efforts in this area.

A technical point on conveying trends in BPA's internal operating 
costs:

One technical detail of the report is particularly important to BPA. 
The draft report states on page 30:

" ... BPA's average annual internal operations costs associated with 
its power marketing business for 2001 to 2003 are 34 percent higher (or 
$32 million, adjusting for inflation) than they were from 1997 to 2000, 
largely because of new requirements regarding employee retirement costs 
and increased demand placed on BPA during the current rate period."

As is noted in the draft report, GAO included Civil Service Retirement 
System (CSRS) payments in power-related internal operations costs. CSRS 
costs were first reflected in 1998 when the agency was made wholly 
responsible for financing pensions of its employees and those of the 
U.S. Army Corps of Engineers and Bureau of Reclamation associated with 
the Federal Columbia River Power System. Because this new requirement 
occurred in the middle of a rate period, BPA made less than full CSRS 
payments from 1998-2001 with the agreement that it would make 
substantial "catch up" payments beginning in 2002 when BPA re-
established power rates. To compensate for the skew created by these 
catch-up payments and create an accurate comparison of period expenses, 
we believe it is necessary to remove these costs from internal 
operations expenses in both periods.

As you note in footnote number 17, using this approach, our internal 
operations costs allocated to power were 10 percent lower in 2003 than 
in 2001. Our 2004 power internal costs also will be below 2001 levels. 
We believe this more accurately portrays trends in our internal 
operating costs and is the basis for our ongoing commitment to the 
region that we manage internal operations costs at or below 2001 
actuals on average for the remainder of the rate period.

We have done our best in the time allowed to provide the attached 
technical, editorial and policy comments. We believe the inclusion of 
these comments will improve the accuracy of your report and will help 
you improve the final product. BPA will include a link to the final 
audit report and other relevant background information on our web site 
at http://www.bpa.gov/corporate/about BPA/audits/

Again, thank you for allowing us the opportunity to comment on the 
draft report.

Sincerely,

Signed by: 

Jeffrey K. Stier,

Vice-President for National Relations:

Enclosure:

cc:

D. Hill, GC-70:
L. Novitsky, ME-1: 
B. Porter, PML: 

[End of section]

Appendix V: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Jim Wells (202) 512-3841: 
Frank Rusco (202) 512-4597: 

Staff Acknowledgments: 

In addition to the individuals named above, Jill Berman, Jonathan Dent, 
Samantha Gross, Jason Holliday, Jon Ludwigson, Don Neff, Cynthia 
Norris, Eric Wenner, and Doris Yanger made key contributions to this 
report. Important contributions were also made by Janice Lichty, Lisa 
Shames, and Barbara Timmerman.

FOOTNOTES

[1] A critical water year is a year in which the annual runoff in the 
Columbia River Basin is equivalent to the amount recorded in 1937, one 
of the lowest on record. 

[2] The others are the Southeastern Power Administration, the 
Southwestern Power Administration, and the Western Area Power 
Administration. 

[3] BPA has generally used the term "tiered rates" to describe the rate 
design that differentiates between a rate that applies to sales at the 
lowest embedded-cost rate and a rate that applies to sales beyond that 
amount.

[4] BPA sells secondary power at market prices, subject to a self-
imposed average annual price cap--this average annual price cap is 
determined by the cost to BPA of power produced at the Energy Northwest 
operated nuclear plant. BPA may actually receive more than this amount 
when it sells its power in a formal market and when the market-clearing 
price exceeds BPA's self-imposed price cap.

[5] An acre-foot is the volume of water necessary to cover one acre to 
a depth of one foot and is equivalent to 325,851 gallons. A watt-hour 
is a measurement equal to 1 watt of power supplied to, or taken from, 
an electrical circuit steadily for 1 hour. A megawatt-hour is one 
million watt-hours, or enough power to serve the needs of about 750 
homes for 1 hour. An aMW is equal to 8,760 megawatt-hours, or the 
average number of megawatt-hours over the course of 1 year (i.e., 24 
hours x 365 days x 1 megawatt).

[6] Comprehensive Review of the Northwest Energy System--Final Report: 
Toward a Competitive Electric Power Industry for the 21st Century, 
December 12, 1996.

[7] We refer to this as appropriated debt because BPA is required to 
repay appropriations used for capital investments, with interest. 
However, these reimbursable appropriations are not technically 
considered lending by the Treasury.

[8] At the time this debt was restructured, BPA's appropriated debt of 
$6.85 billion carried a weighted-average interest rate of about 3.5 
percent. Effective the first day of fiscal year 1997, the principal of 
the outstanding debt was reduced to an estimated $4.29 billion and the 
associated interest rate was increased to 7.1 percent.

[9] Figures are presented in constant dollars using 2003 as the base 
year. 

[10] At the time these agreements were made, Energy Northwest was known 
as Washington Public Power Supply System, a joint operating agency in 
the state of Washington made up of representatives of public utility 
districts and municipalities. Under these agreements, BPA contracted to 
pay all or part of the annual project budgets, including debt service, 
whether or not the projects were completed.

[11] Some public utilities also can receive payments under this 
program, but the cost to BPA is much smaller, averaging less than $23 
million annually (in 2003 dollars) from 1982 to 2003.

[12] Average costs are in constant dollars, base year 2003. In 2002, 
BPA began providing payments and power to investor-owned utilities 
under a settlement agreement rather than under the residential exchange 
provisions of the Northwest Power Act. The $210 million average 
includes these costs.

[13] These estimates are adjusted for inflation using 2003 as a base 
year.

[14] BPA officials told us that they are not required to track the 
costs of irrigation water releases as they are with fish and wildlife 
related releases. Therefore, they do not have annual figures for the 
dollar impact on revenues of irrigation releases. According to BPA 
officials, flood control, navigation, and recreational uses of the dams 
do not have a significant affect on the amount of power BPA has to 
sell.

[15] BPA is required by statute to set its rates to recover its costs. 
Thus, when BPA's costs increase over time, its rates must increase by 
an equal amount.

[16] The figure shows that in periods, such as in much of the 1970s, 
when BPA's average nominal rates were nearly constant, inflation caused 
the "real" or inflation-adjusted rates to fall, but that on average, 
increases in BPA's rates exceeded inflation over the entire three 
decades. 

[17] These numbers have been adjusted for inflation, base year 2003. 
This increase does not include the average annual cost to BPA of about 
$245 million to buy back the majority of the 1,000 aMW of power it 
agreed to provide to investor-owned utilities under the settlement 
agreement, according to BPA officials. 

[18] BPA has reported to its customers that its internal costs were 10 
percent lower in 2003 than in 2001. In making this calculation, BPA 
excluded the costs associated with the retirement costs it was not 
previously required to pay. While BPA's calculation is correct, we 
believe that including these costs presents a more complete picture of 
BPA's expenses. In addition, since BPA's expenses in 2001 were already 
higher than in previous years, we calculated BPA's average costs for 
1997 to 2000 in order to determine how much BPA's internal operations 
expenses have increased, on average, since 2001.

[19] According to BPA officials, BPA was required to cover these costs 
beginning in 1998. However, BPA deferred payment until 2001, thus 
increasing BPA's payments between 2001 and 2003. 

[20] According to BPA officials, the use of long-term contracts is an 
integral part of BPA's proposal and may be the best means to protect 
U.S. taxpayers' investment in the federal power system.

[21] Northwest Power and Conservation Council, Recommendations on the 
Future Role of the Bonneville Power Administration in Regional Power 
Supply, May 2004.

[22] Bonneville Power Administration, Asset Management Strategy for the 
Federal Columbia River Power System (Portland, OR., June 1999).

[23] BPA originally set a funding target for the direct program in the 
2002 to 2006 rate period at $150 million annually, with the expectation 
that actual expenses would average $139 million. 

[24] Effective internal control should provide for an assessment of 
risks an organization faces from both external and internal sources. 
U.S. General Accounting Office, Standards for Internal Control in the 
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 
1999).

[25] BPA has two main business lines--Power Business Line and 
Transmission Business Line. These business lines are supported by 
several corporate units that also carry out significant functional 
responsibilities of the agency, such as the Environment, Fish, and 
Wildlife group.

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