Threats to the Golden Goose

The Bonneville Power Administration was charged to bring Columbia River electric power to the people at cost. Back then, the cost was well below the higher rates charged by private utilities. The Administrator employs an immense staff, which accounts for much of the cost of generating electricity. But for most of BPA's history, the largest cost was the cost of the dams. BPA was bound to repay the Federal Treasury for money borrowed to construct the dams.

The Administrator is directed to hold formal hearings and, based upon the record established in the hearings, set rates to recover those costs. Bonneville’s customers, public and private utilities and direct service industrial customers, review BPA’s accounting methods for compliance with the statutory rate setting directives. They argue about how costs should be allocated among the customers, and how costs can be controlled. They are the watchdogs who pay the most attention to BPA.

For decades, fish costs did not rise to a level sufficient to make much difference in BPA rates. In the early and middle 1980s, only the Pacific Northwest Utilities Conference Committee, led by Al Wright, paid a great deal of attention to fish and wildlife issues, occasionally providing BPA with white papers on accounting for fish costs. Most of the Great Salmon Hoax, including the flow-survival hypothesis, the Power Planning Council’s blaming of dams for historic salmon losses, and the beginning of the attack on smolt transportation, arose during this period of time as BPA’s customers slept.

As the fishery agencies and tribes began advancing more and more strident demands for flow-based programs, BPA’s costs began to rise significantly. Under the statutory rate-setting directives, BPA’s rates would collect every dollar of salmon costs from its customers. Many of BPA’s wholesale customers depended upon BPA for all their electricity needs, and would pass BPA’s rate increases along to their customers, the citizens of the Pacific Northwest. In the long run, every dollar that BPA costs increase for fish and wildlife programs is a dollar taxed from companies and individuals in the Pacific Northwest.

But the dams were not constructed merely for the generation of electric power. Congress specifically declared that half the reason to build Bonneville Dam was flood control. Each of the federal projects has a series of Congressionally-authorized purposes: hydroelectricity, flood control, navigation, recreation, etc. And the U.S. Army Corps of Engineers and U.S. Bureau of Reclamation, which operate the dams, have accounts that were established pursuant to a formal inter-agency memorandum, specifying how much of the cost at each dam is to be charged to each purpose.

Under the Northwest Power Act, fish and wildlife costs are supposed to be split between BPA and the other federal agencies on the basis of those accounts. But in the early 1980s, when BPA sought to enforce the law, the Reagan administration said no. By the 1990s, BPA had collected more than $325 million from electric ratepayers that was supposed to have been paid by the other agencies—in other words, by the U.S. Treasury. BPA has never refunded the money.

By 1994, profound pro-competitive changes that had been underway for some years in the structure of the electric power industry began to bear fruit, as wholesale power rates began an inexorable decline. (Retail power rates, propped up by state-granted monopolies, continued to drift steadily upward.) It became clear that BPA's expenses had risen to such extraordinary levels that one could build brand-new natural gas turbine generators and produce power that could be sold at prices below BPA's.

This was remarkable, because hydroelectric power has no fuel costs, and most of the capital costs were accumulated decades ago. Indeed, BPA's real cost to generate hydroelectric power is only about half a cent per kilowatt-hour. (Retail customers in the Northwest typically pay around five cents.) But on top of that half a cent per kilowatt-hour came a series of crushing burdens. First, prodded by environmentalists, Congress decreed that BPA promote "conservation", which in practice turned into a series of cash subsidies for a variety of ill-conceived ventures. For a time, BPA even handed out a $2,000 subsidy for each manufactured home built in the Northwest—provided that they were "efficient" and all-electric. Thus BPA required manufacturers not to use gas heat, which, where available, is far more efficient.

Second, BPA, using dire threats of a power shortage based on projections of energy consumption that turned out to be fanciful, pushed utilities in the Pacific Northwest to build nuclear plants. None turned out well, particularly the five-plant scheme of the Washington Public Power Supply System (WPPSS). WPPSS issued bonds to raise money for the construction of the plants, and when a combination of gross mismanagement and Carter-era inflation caused huge cost overruns, WPPSS defaulted on the bonds.

When the bondholders sued WPPSS, the Supreme Court of Washington declared the bonds null and void. The bondholders sought review by the Supreme Court of the United States. Ducking its obligation to enforce the unfashionable Contracts Clause in the Constitution, as it has for decades, the Supreme Court refused to review the case.

Once again, politically-driven decisions by the legal system produced a mess: a multi-billion dollar obligation. The bondholders moved to federal court and charged fraud on the part of WPPSS and its participants, and eventually won a $600 million settlement. BPA volunteered to fund significant portions of the settlement and guarantee the remaining bonds. When ratepayers challenged BPA's generosity, the Ninth Circuit held that the Administrator had broad authority to settle disputes, and the courts would not second-guess the wisdom of his decisions. That is another textbook example of the mess that results when there is no real law to apply and Congress simply punts an issue to federal bureaucrats.

In any event, BPA's wholesale electric power rates consist primarily of three components: 1/2 for generating electricity, 1 for bailing out peddlers of bogus bonds and nuclear plant mismanagement, and 1/2 for salmon and wildlife protection and other “public purpose” programs (like conservation). Another way of looking at this is that but for the series of bad decisions by federal bureaucrats and judges, electric power rates for BPA customers could easily be far lower than they are.

Former Oregon Senator Mark Hatfield, who devoted his career to, among other things, protecting BPA, was one of the first to see that spiraling fish and wildlife costs posed a threat to BPA’s future. He pushed hard for a solution. One of his former staffers, Jack Robertson, now at BPA, thought BPA’s salmon problem could be solved like the striped bass problem in the Hudson River in New York. He proposed to create a trust fund for improvements in salmon habitat and other measures. What Robertson failed to appreciate is that the most critical element of the recovery of striped bass was simple: the commercial harvest of striped bass was shut down.

Robertson tirelessly promoted the idea of setting aside a portion of BPA revenues into a trust fund, but no one would settle for a fixed and bounded amount of salmon funding, and the idea never came to fruition. Instead of attempting to focus on what salmon needed, the fish advocates focused on extracting as much money as possible from BPA. The Trust Fund was one of the many casualties of a failure to define and limit “mitigation” obligations. As events later developed, only the potential collapse of BPA served to put any limit on salmon obligations.

By 1995, BPA was sounding the alarm that it could not continue to add salmon costs to its rates without losing sales. BPA's customers are not required to purchase power from BPA, although many have signed long-term contracts that limit their flexibility to switch suppliers quickly. Many other utilities have "captive" customers because they have state-sanctioned monopolies for the sale of electric power. If you want to buy electricity in most parts of Oregon, you have no choice but to buy from Pacific Power, or Portland General Electric, or the other local supplier. In Washington, there are no monopolies.

A utility without captive customers can experience a so-called "death spiral" as its costs rise. As customers switch to other suppliers, the cost per customer for the remaining customers goes up, more customers leave, and so on. BPA representative began to circulate charts showing that total revenues would decline as rates went further up, and began to sound alarms in Washington, D.C. If BPA revenues declined, BPA would be forced to stop making payments to the U.S. Treasury on the debts incurred to build the dams, and Congressional attention would be focused on BPA's profligate spending habits.

Senator Hatfield eventually persuaded the Clinton/Gore Administration that such a result was not in its interest. The Clinton/Gore Administration had enough sense not to want to kill the goose that is laying the golden eggs to distribute to its environmentalist and Native American constituencies in the Northwest.

In the fall of 1995, the Adminstration agreed to cap fish and wildlife expenditures by BPA at $435 million a year, a figure that was widely denounced as inadequate. Of that amount, somewhat more than half represented actual cash outlays, with the balance consisting of lost revenues and operational expenses to BPA from changes in hydropower operations (such as the cost of increased power purchases to cover power losses from spill and flow manipulation).

Roughly speaking, $130 million would go to “direct program expenses”, mostly subsidies for the state and tribal fishery agencies. Around $40 million would be handed out from BPA to other federal agencies. Capital expenditures for fish and wildlife would rise from $70 million to $156 million annually. And operational costs (including the lost revenues from spill and flow augmentation) were forecast to fall gradually from $195 million to $161 million.44 Since the deal was struck, wet weather has significantly reduced the operational cost component.

In an attempt to blunt environmentalist criticism, the Administration agreed to take the $325 million in overpayments previously (and unlawfully) collected from ratepayers and to create a reserve fund for additional fish and wildlife spending. The Administration also agreed that other project purposes besides electricity would finally share in fish and wildlife costs, as required in the Northwest Power Act, to the tune of $40 to $60 million a year.

The Agreement was largely negotiated by National Marine Fisheries Service Regional Administrator Will Stelle, Jr., BPA Administrator Randy Hardy, and the then-Chairman of the Northwest Power Planning Council, Angus Duncan. Many of the other Council members were angered when they learned what Mr. Duncan had done; he had simply assumed the authority to act for the Council. In private meetings on Capitol Hill, Washington Senator Gorton told the Northwest representatives working on the Agreement, memorialized in a “Joint Statement”, that none of the Senators thought that so much money was required. But the entire Delegation went along with the deal.

The Delegation blessed the Joint Statement negotiated by Duncan, Hardy and Stelle in a committee report accompanying an appropriations bill. The bill referred to the Joint Statement, setting overall spending guidelines and transforming broad spending limits into an affirmative mandate to spend the entire amount in accordance with detailed directives in the Joint Statement. The plan could be modified at will by the unanimous consent of BPA, NMFS and the Council.

The huge pot of money attracted flies from all over the Pacific Northwest. Legions of federal, state and tribal officials descended upon Washington to argue how the money should be spent. Fights over how to spend the money lasted for almost an entire year. The Interior Department and the tribes were particularly miffed to have been left out of the dealmaking, and wanted their projects funded as well. Thoughout 1996, the tribes visited their Administration allies, presenting a message that “was harsh in tone and non-specific in the complaint department”.45 The White House delayed negotations for months by requiring the federal agencies to meet in “sovereign-to-sovereign” negotiations with each Tribe.

Like other Clinton/Gore Administration budget initiatives, the Memorandum of Agreement postponed the pain of budget limitations by borrowing for the present with the bills to come due after the year 2000. Under the agreement, over the six years it would be in effect (until 2001), BPA would essentially borrow another $800 million for capital expeditures.

As of 1997, the harvest managers in the Northwest are beginning to realize that if the $435 million per year spending level is extended after 2001, their share of spending is going to get cut way back by the need to repay the borrowing for the capital costs. The Vice Chairman of the Columbia River InterTribal Fish Commission, Wendell Harrigan, has been quoted as complaining that “the cap has already begun to strangle restoration efforts” and that extending the cap “will surely . . . provide the salmon with extinction certainty”.46

As the states and tribes stuggle to evade limits to spending, new schemes are emerging to protect BPA at the expense of electric ratepayers. There are proposals to require customers to buy BPA power no matter what the cost, proposals to extract monopoly profits using BPA’s transmission lines, and a host of other means to keep BPA funding the Great Salmon Hoax. As this book goes to press, BPA has suggested that it might generate as much as $200 million a year through special transmission taxes, and negotiations are underway to send salmon spending correspondingly higher. No one is considering cutting wasteful expenditures on flow augmentation and spill as a means of funding other recovery measures.

44 Draft BPA Fish and Wildlife Budget, Jan. 4, 1996, at 1.

45 W. Rudolph, “Tribes Mum on MOA After White House Discussions”, Clearing Up, Aug. 12, 1996, at 8.

46 W. Rudolph, “Tribes Say Extending Fish Cap Will Strangle Salmon Recovery”, Clearing Up, June 30, 1997, at 10.

Previous PageTable Of ContentsNext Page

This Web page was created using a Trial Version of HTML Transit 3.0.