questions that must be raised and dealt with as we move forward, and we will

be active participants in the evaluation of how the agency might be restructured.

The

Although the budget assumes that BPA will be sold to non-Federal interests, in the interim the budget also calls for legislation changing the way BPA repays the Treasury for the Federal investment in the Northwest power system. revision would put BPA on a fixed, straight-line amortization schedule for each power investment financed by appropriations. This proposal would add $139 million to BPA's FY 1987 Treasury payment of approximately $654 million, and would increase annual Treasury payments by between $111 and $115 million in subsequent years. We are looking closely at the impact this increase would have on our rates, and on our FY 1987 revenue requirement.

FISCAL SUMMARY

Although our

During FY 1985 strong fiscal management paid off for BPA. revenues underran projections, a combination of underruns in fixed costs and effective management of controllable costs allowed us to carry out our program and more than meet our Treasury payment target by transferring approximately $686 million to the Treasury. This final audited figure is approximately $16 million more than the preliminary estimates which are shown in the budget. This total includes approximately $237 million in amortization payments for investments by the Corps of Engineers, Bureau of Reclamation, and BPA, and $366 million for interest payments.

On July 1, 1985, new rates went into effect that will be in place for a 27-month period covering all of FY 1986 and FY 1987. An increase of only one percent in priority firm rates provided much needed rate stability to the region, after dramatic increases since the mid-seventies.

Bonneville's FY 1986 revenues are being adversely affected by such forces as lower than normal rainfall last fall, the plight of the aluminum industry, and

the impact of falling gas and oil prices on sales of surplus energy outside the region. This combination of forces poses a very real threat to meeting

our FY 1986 revenue requirements and represent a distinct management

However, we are

challenge. As yet, we are unable to predict the outcome. closely monitoring costs, and still plan to meet our $670 million Treasury payment in FY 1986.

We are supporting Federal deficit reduction goals. Treasury borrowing for Bonneville's FY 1986 capital program is being held to $330 million, and a reduction of almost $2.5 million has been applied to our FY 1986 administrative expenses under the sequestration procedures of the

Gramm-Rudman-Hollings Act.

Because of our continuing commitment to controlling costs, BPA's FY 1987 current services budget, at $2.9 billion, is less than one half of one percent--just $13 million--higher than our FY 1986 budget. BPA's rates were set through FY 1987 in the 1985 rate proceeding. It is too early to assess how recent events may impact our FY 1987 fiscal situation. We could, however, experience revenue shortfall due to the softness of California markets caused by the drop in oil and gas prices.

During FY 1987 we plan to borrow $276.1 million from the Treasury for transmission system planning and construction, energy conservation, and mitigation of the impacts on fish and wildlife of the Federal Columbia River Power System. Under the current services budget, our planned Treasury payments include $410 million in interest, and $149 million for amortization. At the end of FY 1987 BPA will have retired over $1.2 billion of the Federal investment, and will have paid a cumulative $4.2 billion in interest.

Before I describe BPA's FY 1987 program to you in more detail, I would like to discuss some of our recent achievements.

DIRECT SERVICE INDUSTRIES

Depressed world market prices for aluminum continue to create financial problems for most Northwest aluminum companies. This is of concern to the entire region because a healthy Pacific Northwest aluminum industry helps keep power rates more stable for all BPA customers. Although the recent spot market price for aluminum ingot has risen from a low of about 43 cents per pound to about 59 cents per pound, it remains significantly below both historical ingot price levels and long run unit costs of most plants in the region. During 1985 we offered temporary discounts to BPA's direct service industrial customers (the DSI's). These discounts were made available only under circumstances which would maintain BPA's total revenues and planned Treasury payments.

These were short-term solutions. We are now undertaking actions to assure long-term stability. Following the 1985 rate proceedings we conducted a DSI Options Study to seek solutions to problems associated with the instability of

DSI loads.

Based on the results of the study and on an extensive public process, we are focusing on three proposals. The first, a variable rate proposal, would offer

aluminum companies a power rate that would fluctuate with changes in the market price for aluminum. We are studying a second rate proposal that would create a long-term link between DSI and preference customer rates. Finally, we are looking at joint-sponsorship of modernization programs at the region's aluminum smelters to achieve greater efficiencies in their consumption of electric energy.

SUPPLY SYSTEM

BPA recently reexamined its resource plans for the FY 1988 through FY 1992 time period in its 1986 Resource Strategy. The Strategy, which was just finalized, concluded that the probability of there being a need to restart construction of Supply System Projects 1 and 3 (WNP-1 and WNP-3) through

FY 1992 was not great enough to warrant the inclusion of construction restart costs in the outyear estimates of our FY 1987 budget. Net reductions in outyear estimates of as much as $140 million from the levels contained in our FY 1986 budget reflect the decrease in debt service requirements associated with deferring construction beyond FY 1991.

Another very important achievement during FY 1985 was the settlement of a lawsuit brought against BPA for delaying construction of WNP-3 in May 1983. BPA and the four investor-owned utilities, which owned 30 percent of WNP-3, reached an agreement in September 1985. Damages stemming from the suit, if successful, could have amounted to more than $2 billion.

WNP-2 became operational in December 1984. During FY 1985, the plant's capacity factor was 54 percent. This was down from the planned 70 percent

plant factor, primarily because of the delay in commercial operation from

July 1984 to December 1984, as well as recirculation pump problems the project Nevertheless, the plant's power made a significant contribution to BPA's

had.

revenues during a period of poor hydro conditions.

THE FY 1987 BUDGET

FY 1987 budget levels under both current services and the modified repayment proposal are compared below with the FY 1986 current services program. A short discussion of the more substantive current services program plans for FY 1987 is also provided.

The resource planning, acquisition, and oversight program remains relatively stable, reflecting current forecasts of a substantial energy surplus until the mid to late 1990's. Consistent with it's Resource Strategy, BPA is developing programs which provide a capability to meet an unexpectedly rapid load growth without prematurely committing BPA to costly, large-scale resource

acquisitions.

The slight decrease in this program area between FY 1986 and FY 1987 reflects a reduction in WNP-2's expenditures as construction contracts are closed out. FY 1989 through FY 1991 budget estimates for WNP-1 and WNP-3 have been reduced to reflect deferred construction of those plants beyond FY 1991, consistent with the 1986 Resource Strategy.

RESIDENTIAL EXCHANGE

The budget includes about $1.1 billion for the residential energy exchange program created by the Pacific Northwest Power Act. The exchange program provides rate relief to homes and small farms served by about 25 utilities. Approximately 80 percent of the $1.1 billion will be recovered from these utilities. The balance, $228.6 million, will be paid by BPA's other ratepayers. The increase from FY 1986 to FY 1987 in exchange costs is due to a combination of four factors: increases in utilities' average system costs,