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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "SCIENTECH IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Mark_Haedicke_Jun2001\Notes Folders\Notes inbox X-Origin: Haedicke-M X-FileName: mhaedic.nsf Today's IssueAlert Sponsors:=20 [IMAGE] Southeastern Electric Exchange 2001 Utility Odyssey: Engineering & Operation/Accounting, Customer Billing and Finance Conference= =20 and Trade Show The Doral Resort Miami, FL =20 Featured speakers include Wall Street Analysts Ed Tirello and Dan Ford and= =20 SEE Company Utility Executives Donald Hintz, Entergy Corp., Dennis Wraase,= =20 Pepco, and Bill Coley, Duke Power=20 For full details: www.theexchange.org=20 [IMAGE] "Global Power & Western U.S. Coal: Domino Factors at Play in Today's Energ= y=20 Markets" is the theme of the 2001 Spring Pacific Coal Forum (Coal Forum'200= 1)=20 to be hosted by the Western Coal Council, June 4-6, 2001 in Park City, Utah= . =20 Keynote Speakers include: Honorable Mike Leavitt, Governor, State of Utah;= =20 Hitoshi Tagawa, Tokyo Electric Power Company; Eng. Jesus Buentello, Comisio= n=20 Federal de Electricidad; Malcolm Thomas, Kennecott Energy Company; Manfred= =20 Raschke, International Strategic Information Services (ISIS). =20 Contact Janet Gellici at (303) 431-1456 or info@westcoal.org=20 www.westerncoalcouncil.org Miss last week? Catch up on the latest deregulation, competition and=20 restructuring developments in the energy industry with SCIENTECH's=20 IssuesWatch=20 [IMAGE] [IMAGE] June 4, 2001 Bonneville Power Administration:=20 Vulnerable to Western Power Crisis, But Protected by Federal Status=20 By Will McNamara Director, Electric Industry Analysis=20 [IMAGE]Two mainstays of the Northwest's economy—public power and the=20 aluminum industry=0F-waging a war of words over the Bonneville Power=20 Administration's attempts to set rates for the electricity it sells. Both= =20 sides have hired public relations companies in their attempts to sway publi= c=20 opinion before the federal power marketing agency sets new electricity rate= s=20 effective Oct. 1. BPA, which sells power produced at 29 federal hydroelectr= ic=20 dams and a nuclear plant, has signed contracts for about 11,000 MW but has= =20 generating capacity for only 8,000 MW. To help make up the 3,000-MW=20 shortfall, BPA is pushing a plan to idle the region's 10 aluminum smelters= =20 for two years, until additional generating capacity comes online. =20 Analysis: Given the barrage of media coverage that continues to hang over= =20 California's energy problems, the fact that the Pacific Northwest is=20 suffering from its own related maladies is often overlooked. Perhaps the mo= st=20 extreme case that illustrates the severity of problems to the north of=20 California is the BPA, which in addition to attempting to increase its=20 wholesale rates by as much as 250 percent this fall is now unable to fulfil= l=20 many of its long-term power contracts. Much like Pacific Gas & Electric and= =20 Sierra Pacific Resources before it, the BPA now stands among a handful of= =20 power firms in the West that have sustained devastating financial blows due= =20 to volatility of the region's market. However, unlike investor-owned=20 utilities (IOUs), BPA is owned by the federal government and as such has be= en=20 criticized for having access to federal funding and protection not extended= =20 to other Western power victims. =20 It is important to remember that BPA is a federal organization that was=20 formed in 1937 to market power from the Bonneville Dam. It holds a lock on= =20 approximately 46 percent of the Pacific Northwest power market, and is one = of=20 the primary providers of power to incumbent utilities in the area such as= =20 Tacoma Power and Seattle City Light.=20 In the 1990s, the BPA experienced an excess of power and sought power=20 contracts outside the Pacific Northwest in order to retain a positive cash= =20 flow and support various programs to ensure the lives of salmon and=20 steelhead, which populate the Bonneville Dam. The BPA formed contracts with= =20 such out-of-region buyers as Enron, Avista Energy and the main California= =20 utilities. The BPA signed long-term contracts to sell 1,223 MW of=20 hydropower—enough to light the city of Seattle=0F-utilities outside the= =20 Pacific Northwest and to private power marketers, adding to the base of its= =20 contracts with Northwest utilities and C_customers (mostly aluminum=20 manufacturers). However, these contracts have aggravated regional power=20 problems in a new era of shortages and soaring prices. =20 For the most part, BPA's troubles have stemmed from weather-related=20 circumstances, unlike California and Nevada (where weather has served to=20 exacerbate fundamental restructuring problems). The Pacific Northwest, whic= h=20 relies heavily on hydropower, has suffered one of its worst droughts in=20 recent history, which has greatly compromised what has typically been a=20 reliable and abundant power source. In fact, the Northwest is reportedly=20 between 1,500 MW and 3,000 MW short of the power it needs. Further, power= =20 that the Northwest could typically rely upon from California and the=20 Southwest to supplement any shortage it might encounter in its own territor= y=20 is no longer available due to power demands in other states. Given its role= =20 as the primary power supplier to the region's utilities, the BPA has become= =20 increasingly vulnerable to the volatility of the spot market. The end resul= t=20 is that BPA, which clearly overextended itself regarding power contracts=20 formed in the last decade, has been forced to either buy expensive power on= =20 the spot market to serve its customers or negotiate buyouts of its power=20 obligations. =20 The BPA also has traditionally sold power directly to industrial customers,= =20 and over the last few months has attempted to rescind many of those=20 contracts. For instance, the Columbia Falls Aluminum Company, a Kalispell,= =20 Mont.-based aluminum manufacturer, has agreed not to use 167 average MW of= =20 the 171 average MW BPA had agreed to sell it from October 2001 to September= =20 2002. Reportedly, the BPA has bought back the power under contract to=20 Columbia Falls for $19.50/MWh. This marked the second industrial customer= =20 that has allowed the BPA to terminate a power contract, following a deal wi= th=20 Alcoa (another aluminum producer), in which the BPA bought back about 400= =20 average MW. Typically, the C_customers have agreed to break their contracts= =20 with the BPA due to their own halted production schedules that have resulte= d=20 from soaring power costs. =20 However, aluminum production is a critical part of the Northwest's economy,= =20 and several lobbying groups have emerged to block the BPA from negotiating= =20 with any additional aluminum manufacturers to cease production. Arguing tha= t=20 the BPA has an obligation to fulfill its power contracts, the advocacy=20 groups—comprised of public power and manufacturing representatives=0F- attempting to secure some form of legal restriction against the BPA before= =20 the agency increases rates this fall. Without knowing the terms of the=20 contracts, it is not clear whether BPA has an exit clause that entitles it = to=20 stop providing power to the various buyers.=20 Regarding its Northwest customers, which are given priority to BPA power=20 supplies, the BPA has requested that these utilities implement conservation= =20 programs to reduce the amount of power that must be purchased on the=20 wholesale market. Nevertheless, the BPA has already disclosed that it will = be=20 forced to increase rates by as much as 250 percent this October to cover it= s=20 spot market power purchases (a condition that echoes similar movements by= =20 PGOand Sierra Pacific Resources). BPA reportedly charges its utility=20 customers about $25/MWh for electricity. Wholesale electricity on the spot= =20 market is now selling at between $250 to $300/MWh, and wholesale power sold= =20 through long-term contracts sells for $75 to $150/MWh. Consequently, the= =20 250-percent increase could be the minimum at which the BPA raises its rates= ,=20 which would in turn impact the retail rates that Northwest utilities must= =20 charge their customers. =20 PacifiCorp recently became the first IOU under contract with the BPA to=20 voluntarily reduce load on the federal agency. Under the agreement,=20 PacifiCorp has released BPA from its commitment to sell the utility an=20 average of 251 MW each year for the next five years. Other IOUs are not=20 acquiescing to the BPA's proposal. For instance, the BPA informed Southern= =20 California Edison (SCE) that it would not provide 500 MW of power this summ= er=20 to the utility, under the terms of a previously reached agreement. The BPA,= =20 which unilaterally changed the terms of the contract from a strict sales=20 agreement into an exchange when SCE began to have its own financial problem= s,=20 has argued that SCE has ceased providing needed power to the BPA. As a=20 result, the BPA will provide no further power to SCE unless it receives=20 financial guarantees in advance. SCE has deemed this threat as a potential= =20 breach of contract and is currently pursuing the matter in the 9th Circuit= =20 U.S. Court of Appeals.=20 Moreover, the crux of the matter presently is the dichotomy that BPA=20 represents in a deregulated energy market. On one hand, BPA is a federally= =20 protected agency with access to federal funding and control over federal=20 lands. On the other hand, BPA—unlike any other federal=20 agency—controls about half of the Northwest's energy supply and in the= =20 past has profited from power sales to other regions (mostly California). In= =20 addition to the growing resistance from public power and aluminum groups ov= er=20 BPA's plan to increase rates, other groups have raised the claim that BPA i= s=20 receiving preferential treatment from the federal government. Some critics= =20 find it inconsistent that the Bush administration supports free market=20 principles in the West (evidenced by the resistance to put wholesale price= =20 caps into place) and increased production, but at the same time might allow= =20 BPA to break long-term power contracts. Such critics (mostly clearly=20 represented by the Northeast-Midwest Institute, a nonprofit Washington, D.C= .=20 think tank) believe the Bush administration should force BPA to sell its=20 power to anyone who wants it at free-market rates (which of course are=20 consistently higher than its current cost-based rates).=20 In addition to potential rate increases, the BPA is attempting to secure=20 increased funding from the federal government. As a federal agency, the BPA= =20 is allowed to borrow from the federal treasury to support infrastructure=20 upgrades such as transmission capacity and maintain federal dams that=20 generate the BPA's power. Recent reports have indicated that the BPA alread= y=20 is spending around $1.3 billion in federal funds to modernize the region's= =20 power grid and will request an additional $800 million from the federal=20 treasury for transmission upgrades and to modernize existing power-generati= ng=20 facilities. Yet, at the same time, several regional groups are attempting t= o=20 block any increase in the BPA's access to federal funds, arguing that the= =20 administration has continuously lowered its annual payments into the treasu= ry=20 and therefore should not be entitled to a credit increase. =20 The BPA may not have directly caused the current power problems in the=20 Northwest, but it is clear that the federal agency engaged in overly=20 optimistic power contracts that it now cannot fulfill. Moving forward, the= =20 question will be whether or not, in a supposedly deregulated market, the BP= A=20 should be governed by any special standards given its status as a federal= =20 agency or whether it should be held to the same rules that apply to IOUs.= =20 While the for-profit economy of the Northwest is now in jeopardy due to=20 volatile power prices, stakeholders in the region object to the BPA being= =20 able to break contracts and increase rates. Once again, this appears to be= =20 another matter that will fall under the jurisdiction of the Bush=20 administration to decide as part of the nation's unfolding energy agenda.= =20 An archive list of previous IssueAlerts is available at www.scientech.com [IMAGE] The most comprehensive, up-to-date map of the North American Power System b= y=20 RDI/FT Energy is now available from SCIENTECH. =20 Reach thousands of utility analysts and decision makers every day. Your=20 company can schedule a sponsorship of IssueAlert by contacting Nancy Spring= =20 via e-mail or calling (505)244-7613. Advertising opportunities are also=20 available on our website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us=20 know if we can help you with in-depth analyses or any other SCIENTECH=20 information products. If you would like to refer a colleague to receive ou= r=20 free, daily IssueAlerts, please reply to this email and include their ful= l=20 name and email address or register directly on our site. =20 If you no longer wish to receive this daily email, send a message to=20 IssueAlert, and include the word "delete" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= =20 of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlert= s=20 are not intended to predict financial performance of companies discussed, = or=20 to be the basis for investment decisions of any kind. SCIENTECH's sole=20 purpose in publishing its IssueAlerts is to offer an independent perspecti= ve=20 regarding the key events occurring in the energy industry, based on its=20 long-standing reputation as an expert on energy issues. =20 Copyright 2001. SCIENTECH, Inc. All rights reserved.
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