Introduction
Electric utilities, by nature, are capital-intensive businesses and, although a federal agency, the Bonneville Power Administration is no exception. Unlike large private utilities, however, Bonneville does not have the ability to issue stock to help finance its capital investments and must depend on debt. For this reason alone the Administration's proposal to, in effect, limit Bonneville's ability to use third-party financing by bringing it under artificial borrowing caps has serious consequences.
In 1974 two compelling needs led Congress to change Bonneville's federal source of funding from direct annual appropriations to a permanent but capped authority to use federal Treasury bonds. The first reason was Bonneville's urgent need to upgrade its transmission system. The second was a recognition that Bonneville needed to act more like a business in financing and managing large construction projects. These two needs still exist, but today the borrowing cap has replaced the appropriations process as an impediment to investment and more businesslike practices. To operate in a businesslike manner, Bonneville must plan its capital investments over a period longer than the five-year federal government budgeting horizon. Thus, the Administration's proposal would further constrain Bonneville's ability to operate in a businesslike manner under the existing borrowing cap.
This paper will examine more fully the nature and composition of BPA's total debt and how that debt is structured. The fundamental problem is that federal Treasury debt is now $2.9 billion, which is just $1.55 billion less than the statutory cap of $4.45 billion. At currently planned average annual borrowing and repayment rates, Bonneville is expected to reach the cap by 2010. This looming inability to finance investments in transmission facilities, conservation, fish and wildlife, and the hydroelectric system threaten Bonneville's ability to meet its obligation to provide the region with an adequate, efficient, economical and reliable power system.
Bonneville's Current Debt
At the end of Fiscal Year 2004 Bonneville carried a total of $13.1 billion in debt. Bonneville expects that service on this debt will account for 40 percent of its $2.7 billion average annual revenue requirement during fiscal years 2007 through 2009. Bonneville carries three major kinds of debt; reimbursable appropriations, bonds issued to the U.S. Treasury, and nonfederal third-party debt. Figure 1 shows how Bonneville's $13.1 billion debt is allocated among these categories. The distinctions among these categories are important. The $2.9 billion U.S. Treasury debt is the only portion subject to the borrowing authority limit. However, it also is the primary avenue available to Bonneville for future capital borrowing.
The first category of debt, reimbursable appropriations, primarily is the debt owed on early development of the dams and transmission system. Most reimbursable appropriations, 82 percent, are attributable to power generation, and the rest are for transmission. In 1997 these reimbursable appropriations were refinanced and assigned higher market rates of interest under the BPA Appropriations Refinancing Act [16 U.S.C. 8381]. In addition, the Act increased the present value of Bonneville's future debt payments by $100 million as a refinancing fee.
The second category of debt is bonds issued to the U.S. Treasury. The Federal Columbia River Transmission System Act of 1974 changed the way capital investments in the Federal Columbia River Power System (FCRPS) were financed. It gave Bonneville the authority to issue bonds directly to the U.S. Treasury to finance investments in the power and transmission systems. However, this Treasury borrowing authority currently is limited to $4.45 billion, of which $1.25 billion is reserved for conservation and renewable investments. Currently $2.9 billion of this Treasury debt is outstanding. About 70 percent of this debt is related to the transmission system; the rest is related to power.
Figure 1
Major Categories of Bonneville Debt
(September 30, 2004)
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The third category of debt is nonfederal third-party debt. At $6.5 billion it is the largest of the three types of debt. The vast bulk of this debt was acquired during construction of nuclear power plants by the Washington Public Power Supply System (since renamed Energy Northwest). A total of $6.1 billion of this debt relates to nuclear plants, completed and abandoned, in the region. The remainder is for various small hydropower projects and for conservation and renewable investments by utilities that were ?net-billed? to Bonneville. Net billing is an arrangement by which Bonneville can acquire the output of new generation or conservation resources, pay for them by crediting the bills of the utilities that developed the resources, and blend the higher cost into the cost of power for all of Bonneville's customers. The Bush Administration's recent budget proposal includes a provision that requires new third-party debt to be included under the borrowing authority limitation, thus removing one of the paths Bonneville has to operate within its debt cap and still meet its obligations.
Bonneville's Future Investment Needs
Most of Bonneville's future borrowing plans rely on U.S. Treasury financing, which falls under the existing borrowing cap. These capital requirements average $517 million a year from 2005 through 2010. Table 1 shows how the capital requirements are allocated among several purposes. More than half of the requirements is for expansion and maintenance of the transmission system. Another quarter of the requirements is for associated project costs, which are improvement and maintenance of the Corps of Engineers and Bureau of Reclamation hydroelectric facilities. Conservation and fish and wildlife include capitalized components of projects such as construction of hatcheries and acquisition and preservation of habitat.
Table 1
Average Annual Bonneville Treasury Borrowing Needs, 2005 to 2010
| Category | Average Annual 2005 Through 2010 (Million $) |
| Transmission | $ 281 |
| Associated Project Cost | $ 131 |
| Conservation & Energy Efficiency | $ 32 |
| Fish & Wildlife | $ 36 |
| Capital Equipment | $ 35 |
| |
| Total | $ 517 |
Remaining Borrowing Allowed Under the Cap
Bonneville's current amount of U.S. Treasury debt is $2.9 billion. This means there is $1.55 billion still available under the $4.45 billion borrowing cap. The use of this additional borrowing authority is subject to the reservation of $1.25 billion of the authorization for conservation and renewable investments. The existing debt for conservation and renewables is $780 million, leaving $470 million under the cap for those investments. There is $1.08 billion left for other investments, primarily in the transmission system, but they also include capitalized fish and wildlife costs and other capital equipment for Bonneville operations. Investments in fish-related improvements to the dams by the Corps of Engineers, such as removable spillway weirs or bypass and guidance systems, are funded through reimbursable appropriations and are not affected by Bonneville's limited borrowing authorization.
The effect of Bonneville's planned future borrowing in reducing the remaining room under the cap is partially offset by planned amortization of existing Treasury debt. The planned amortization averages $228 million per year from 2005 through 2010 compared to planned new borrowing averaging $517 million a year. Thus the available borrowing authority would be depleted by $289 million per year ($517 million - $228 million). At that rate, Bonneville would use up the borrowing authority under the cap in five years and by 2010 would be about $200 million short of capital for ongoing upgrade and maintenance of the power and transmission systems and for conservation and fish and wildlife capital investments. Figure 2 shows the projected depletion of the available borrowing authority on an annual basis from 2004 through 2010.
Figure 2
Remaining Bonneville Borrowing Authority, 2004 through 2010
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Efforts to Extend the Remaining Borrowing Authority
Bonneville has a few options for dealing with the limited borrowing authority. These include accelerating the retirement of high-cost debt, using other sources of borrowing, recovering more of the investment costs in current electricity or transmission rates, delaying needed capital investments, or obtaining increased borrowing authority from Congress.
Bonneville has been particularly focused on the first option, early debt retirement. Through its Debt Optimization Program, Bonneville achieved early retirement of $1.1 billion of its Treasury debt between 2000 and 2004. It has plans to retire another $461 million of Treasury debt early by 2012. The primary mechanism that permits early retirement of Treasury debt is the refinancing of maturing Energy Northwest bonds. Cash that would have been used to pay off the maturing bonds instead is used to pay off Treasury debt while the bonds are refinanced at recent low interest rates. In this way Bonneville reduces its interest expense and also reduces its Treasury debt, thus increasing room under the cap. It is our understanding that the Bush Administration's budget proposal is not intended to interfere with this refinancing of existing third-party debt.
More recently, Bonneville has used third-party debt for construction of the Schultz-Wautoma transmission line. The Northwest Infrastructure Financing Corporation issued $119.6 million in taxable bonds to finance the construction of the line. Bonneville took a 30-year lease on the line and the lease revenues are used to back the bonds. It seems clear that the administration's budget proposal would count such third-party arrangements under Bonneville's debt cap. Some transmission investments are financed by third parties under Bonneville's Open Access Transmission Tariff, which was developed under FERC guidelines. Many of these transmission investments are to connect new generation to the transmission grid, and they are paid by the generator. Bonneville's plans for these types of third-party financing are relatively modest at about $150 million in 2005 and 2006, decreasing to $118 million in 2007 and only $20 million per year thereafter. These numbers include only projects that Bonneville is certain to construct. Additional projects are likely to be confirmed later.
The third and fourth strategies for increasing room under the borrowing cap are difficult for Bonneville to implement at this time. Increasing rates for power and transmission in addition to the dramatic increases already being absorbed by customers is a difficult proposition. Paying for long-term investments from current revenues also creates inequities between current consumers and future consumers who would benefit most from the investments. At the same time it is also difficult for Bonneville to delay necessary transmission investments because these investments have been delayed previously and now the need is urgent. In a related attempt to delay transmission investments, Bonneville has been studying the potential for reducing or delaying transmission expansions by targeted local conservation efforts or distributed generation in locations that would reduce transmission constraints. The Non-Wires Solutions Roundtable has been working with Bonneville to advance this strategy, but to date the potential of this approach is unverified.
The final option, increasing Bonneville's borrowing authority, requires Congressional action. Since 1974, when the borrowing authority was established, it has been increased three times (see figure below). The borrowing authority has increased from $1.25 billion in 1974 to its present $4.45 billion. However, merely adjusting for inflation since 1974 would have increased the cap to $3.9 billion. Accordingly, the real increase has been quite modest in spite of the load growth and aging of the system. The Administration's budget proposal would add $200 million to the current borrowing authority. Additional increases would be difficult to achieve, especially with the current budget deficits and burgeoning federal debt.
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Source: Bonneville Power Administration, Power Function Review
The additional $200 million would postpone depletion of the remaining borrowing authority only one year, to 2011. Bonneville has estimated that full implementation of its debt optimization program would extend the room under the borrowing cap to 2013.
Potential Impacts of the Administration's Budget Proposal
The administration's budget proposal to include new third-party debt under Bonneville's borrowing authorization essentially would remove one tool that Bonneville has to limit the effect of its capital investments on the federal debt. It is difficult to predict how Bonneville will try to meet its goals and obligations as it approaches the point where its borrowing authority is exhausted.
Bonneville's options are limited. It is reasonable to expect that Bonneville first would cut areas of investment that produce no revenue for the system. These include the areas of conservation and fish and wildlife mitigation. Although these are important responsibilities of Bonneville, they require relatively small capital investments. Therefore other areas of investment would be affected as well. Other impacts of restricted access to capital, such as decreased investment, capital project deferrals or revenue financing, would reduce the adequacy and reliability, or increase the costs of the transmission and generation assets that generate the revenues to repay Treasury debt. The resulting delays in investments to maintain and upgrade the transmission and hydroelectric systems could damage the reliability, adequacy and efficiency of the Northwest power supply and lead to higher costs and delayed debt repayment in the future.
The alternative of raising electricity rates to finance capital investments out of current revenues may be the only remaining alternative if Bonneville were to meet its obligations. However, this would burden current consumers with the cost of improvements that will create benefits for future consumers, a practice that is discouraged by the regulators of investor-owned utilities. The resulting increase in rates would weaken Bonneville's competitive position relative to alternative sources of power that its customers could access. If Bonneville's current costs were to rise above market prices it would not be able to recover its cost, and the U.S. Treasury ultimately would be liable for the losses. Bonneville has never missed a mandatory treasury or third-party debt payment, nor has Bonneville used its authority to reschedule debt payments since 1982. Removing an important tool that can help Bonneville reduce its reliance on federal debt only increases the risks that Bonneville already faces and increases the federal government's exposure to those risks.
The Administration's proposal ignores 30 years of history that began when Congress enacted the Federal Columbia River Transmission Act of 1974. The Act is responsible for Bonneville's ownership and operation of more than 15,000 miles of transmission lines in the Pacific Northwest, comprising more than three-fourths of the region's high voltage grid. Congress understood that financing expensive, multi-year construction projects with potentially unstable annual appropriations was not an efficient, business-like practice. Although the physical needs of the transmission system today are increasingly focused on upgrades and improvements to ease congestion and to ensure reliability, the same financing concerns that moved Congress to pass the 1974 Act remain relevant. Any action that disregards Bonneville's ownership of such a large and significant regional asset, and diminishes its ability to maintain and finance improvements to it, threatens the long-term adequacy and reliability of the Northwest's electricity supply.
