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Unregulated Energy

May 30, 2007

Power Drain: Unregulated Energy

The California Public Utilities Commission (PUC) regulates the electricity rates of privately owned utilities in California. [24] The Federal Energy Regulatory Commission (FERC) regulates the transmission and wholesale sales of electricity in interstate commerce. [25] The CVP is a system built and operated with federal taxpayers' money providing water, and the power generated by it, to California agribusinesses. You might think that the intertwining of state and federal money, resources and infrastructure would result in a complex regulatory regime for CVP power.

Think again.

The power that the Bureau of Reclamation sells to CVP agribusinesses for the storage and transportation of Project water is essentially unregulated when it comes to price. No government agency, other than the Bureau itself, oversees its rates. When we asked Barry Mortimeyer, Reclamation's Power Operations chief, why the agency rolls most of the irrigator's power charges in with their water rates, Mortimeyer told us that the agency wanted to avoid the illusion that their power rates might be regulated by FERC. [26]

This freedom from regulation is not unique: FERC has only limited jurisdiction when it comes to federal power marketing agencies, and the California Constitution prohibits the regulation of municipal utilities in the state. [27,28] But what it means is that the Bureau of Reclamation can provide agribusinesses with rock-bottom power rates – even compared to other users of CVP power – and there is no state or federal agency making sure the rate structure is fair to all.

Last year the California and Oregon Public Utility Commissions helped put an end to a long-standing deal between the Bureau of Reclamation and PacifiCorp, a private electricity company in Oregon, which gave agribusinesses in the Klamath Reclamation Project highly subsidized power rates for decades. [29,30] Under this deal, irrigators were charged rates typically ranging from just 0.5 to 0.7 cents per kWh – in some cases, rates were lower in 2002 than in 1917. [29,31] These subsidized rates did not come close to actually covering the costs of producing the electricity, leaving PacifiCorp's other customers and shareholders to pick up the remainder of the tab. The Oregon Natural Resources Council estimated that in 2002 the Klamath farmers were getting power subsidies worth almost $10 million per year. [31]

In an April 2006 press release, the Oregon Public Utility Commission (PUC) explained how it decided to "replace historically low rates enjoyed by some 2000 irrigators in the Klamath River basin" and move them, over seven years, to "rates similar to those paid by other PacifiCorp irrigation customers." PUC Commissioner Chairman Lee Beyer called the agency's decision "fair and equitable." [29]

CVP agribusinesses are paying power rates only slightly higher than the rate given to most Klamath farmers in 1917. Their annual subsidy is about 10 times higher than the subsidies to the Klamath Project. After 90 years, the Klamath farmers' sweetheart deal was finally terminated after PacifiCorp brought the matter before the two Public Utility Commissions. Yet there is no such body for federal taxpayers to complain to about the subsidized power rates the Bureau is giving to CVP agribusinesses at their expense.

The sources of CVP power subsidies

CVP-generated electricity not needed to pump water is sold to various customers around California through a federal entity known as the Western Area Power Administration (WAPA). Power customers include municipalities, state and federal agencies, and some CVP water districts (for within-district power uses).

Since both the Bureau and WAPA are selling CVP power, and both are required by law to price this power at "cost-based" rates that recover the cost of production but involve no profit, one would expect that the prices charges by these two agencies would be similar if not identical. [32] Far from it: In 2002 and 2003 the median price of CVP power sold by Western was about 2.5 cents per kWh, as compared to the approximately 1 cent per kWh rate the Bureau charged to agribusinesses for water pumping. [33,34]

There are several reasons why WAPA customers pay more for their CVP-generated power, and two out of three of these boil down to subsidies.

First, commercial power customers are required to pay back their allocated CVP construction costs with interest, while agricultural customers are exempted from interest payments. This is essentially a taxpayer-funded subsidy. [35,36]

Second, if the Bureau determines that CVP agribusinesses can not afford to pay their contracted water rates, commercial power users are required to foot the bill for their associated capital repayment debts. Here, the CVP's commercial power customers are subsidizing farmers' water rates – and power rates as well, since the two rates are somewhat integrated. [36,37]

The third reason for the price discrepancy is that, in order to meet customer demand, Western sometimes purchases (more expensive) non-CVP power on the commercial power market and passes these higher costs onto its customers. Such purchases were made in both 2002 and 2003, but this practice has since been discontinued. [38,39]

Why is CVP power sold by Western is still so much cheaper than the power sold by other large public and private power providers? Again, government subsidies.

A 1996 review by the Government Accountability Office (GAO), for example, found that WAPA does not recover the full costs of providing pensions and postretirement health benefits for its employees via its power rates. The nation's taxpayers end up footing the rest of the bill. [40] GAO also noted that Congress has prevented WAPA from recovering certain CVP-related environmental mitigation costs from its customers, which means that these costs are again passed on to taxpayers. [40]

Another reason why WAPA's power prices are low is that, unlike most other utilities, it does not have to pay for fuel – rain and snowmelt are free. But to collect this "free" fuel, the government had to spend several billion dollars constructing dams. Although CVP power users are responsible for paying back some of these capital costs to the federal government, part of the price tag for dam construction was written off as "non-reimbursable" because dams are considered to be providing other societal benefits such as flood control and recreation. [40] What's more, WAPA gets federally subsidized interest rates for the money it does actually pay back to the government. [40] In the end it is the taxpayers end up paying for this so-called "free" fuel.