The close of the second quarter brought a flurry of new financial information for the Bonneville Power Administration as second-quarter forecasts were updated and the Integrated Program Review 2 concluded. These updates show BPA moving in a more positive direction compared to the first-quarter outlook.
The IPR 2 close-out report includes final spending levels for FY 2018 and 2019.
BPA expects to end the year with adjusted net revenues of negative $2 million. While this is $41 million lower than the rate case forecast, it's a $19 million improvement from the first-quarter forecast.
BPA's financial forecast improvement is primarily due to cost-control measures taken in March to reduce fiscal year 2017 expenses. The agency reduced second-quarter forecasted expenses by $46 million compared to the first quarter forecast by lowering program costs and distributing the previously undistributed reductions, which are expense reductions identified in the rate case that are not allocated until the year they are expected to occur.
"I asked managers and staff across the agency to make difficult choices to find reductions in spending within this year and they delivered," said Javier Fernandez, BPA's chief financial officer. "While our finances have improved, there is still uncertainty in this forecast. We will continue to look for opportunities to lower our costs to avoid triggering a cost recovery adjustment clause and improve BPA's financial health."
Where did BPA find changes in spending levels for FY 2018 and 2019 in IPR 2?
- Columbia Generating Station: Energy Northwest identified reductions through its long-term strategy.
- Commercial Operations Key Strategic Initiative: BPA reduced spending levels due to a new project plan and greater certainty around the work likely to be completed in
2018 and 2019.
- Federal hydropower expense: The Corps of Engineers and Bureau of Reclamation identified short-term expense reductions that were offset by new Columbia River System Operations Environmental Impact Statement work. The bulk of the CRSO EIS costs are associated with the alternative impact assessment, which will be taking place during 2018 and 2019.
- Workforce expenses: BPA adjusted workforce spending to more accurately reflect the number of employees likely to be on board and improved modeling for paying post-retirement benefits.
The cost recovery adjustment clause, or CRAC, is a power sales contract mechanism that allows for a temporary one-year upward power rate adjustment to recover costs.
Transmission Services net revenues forecast improved in the second quarter, and the organization is now expected to end the year at $67 million. Transmission's second quarter cost-control measures helped to offset lower-than-expected revenues.
Power Services modified net revenues end-of-year forecast is negative $70 million, similar to the first quarter and lower than rate-case expectations. Lower loads from the start of the year are producing lower revenues than expected. But lower-than-expected market prices have been offset by the increased generation from a high water supply. The increased water supply also will lead to a reduction in the amount of 4h(10)(c) Treasury credits BPA expects to receive, as there will be fewer power purchases needed to offset operational changes made for fish which results in fewer credits and lower revenues.
Power's forecast for financial reserves available for risk improved from $2 million in the first quarter to $21 million. However, market prices, the shape of the runoff and the potential for unforeseen weather changes still place a significant amount of uncertainty on reserves for this year.
In addition to finding short-term reductions found in the second quarter, BPA was finalizing spending level decisions for the next rate period through the Integrated Program Review 2 process.
The IPR 2 was a second round of public discussions on a limited set of spending areas for fiscal years 2018 and 2019. Thanks to the collaboration of BPA's partners and the hard work of its employees, Bonneville has reduced spending levels by an additional $56.6 million for the rate period compared to the final IPR spending levels that BPA shared in October 2016.
"The steps we have taken to mitigate cost escalation for fiscal years 2018 and 2019 are significant, and we would not have been able to achieve these savings without our many partners and engaged stakeholders," said Administrator and Chief Executive Officer Elliot Mainzer. "The final spending levels described in the IPR 2 close-out report represent a focused effort to demonstrate BPA's strengthening capacity to deliver disciplined and enduring cost management practices."
The IPR 2 spending levels will be incorporated into the final record of decision for the BP-18 Rate Case, which BPA expects to publish in July.
"While we have found cost reductions both within this fiscal year and in the IPR 2 process, there is still hard work ahead of us," said Mainzer. "I look forward to your continued engagement as we address the many other challenges and opportunities that will influence the cost of power and transmission services in the next rate period and beyond."