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Drought conditions in the west

Western’s service territory covers many multipurpose water projects in 15-states. As may be expected the precipitation conditions across this vast territory can vary widely. While recent increased hydrology has helped some water systems in California and the Upper Great Plains Region, there are still some areas in the West where the drought continues to deplete the ability to generate hydropower (see the U.S. Drought Monitor site Redirect link to a non-Western sitefor more detail). For example, the 11 years between 2000 and 2010 has been the driest period in the last 100 years of historical records for the Colorado River Basin. In general, Western is optimistic with the recent hydrology reports from Bureau of Reclamation and the Army Corps of Engineers.

When less hydropower is available due to drought, how does that affect current Western contracts?
Commitments for firm power in current contracts remain firm for the life of the contract. However, due to changes in hydrology or river operations during the contract term, contracts containing resource commitments that are extended under the Energy Planning and Management Program can be modified to change the amount of power delivered after Western completes a public process and provides five years’ notice.

Drought conditions vs. Western power sales
Continued drought for more than a decade across the West caused lower water inflows, which, in turn, create decreased reservoir storage levels and decreased available capacity and energy. Because of the drought, generation decreased to the point where it was insufficient to meet firm power contract commitments, causing Western or its customers to purchase power from other suppliers. The drought has lessened its hold on marketed hydropower West and we are seeing recovery in some areas.

Repayment to Treasury
Although Western must repay all the investment and operating costs of the power facilities, short-term decreases in power sales would not necessarily negatively impact future repayment obligations to the U.S. Treasury. Each year, Western prepares a power repayment study for each rate-setting system. We analyze current power rates to determine if they will provide enough revenue to cover all costs, including future repayment obligations. Western’s power repayment studies forecast cycles of above and below average water as that information becomes available to derive the power rate. Surplus sales accelerate repayment, while deficits are capitalized at a current interest rate. If the study projects that rates will under collect the required revenue, Western begins a public process to adjust its rates accordingly.

Impact on power rates 
For more than 10 years, Western saw higher expenses to cover increased power purchases due to drought. As the drought lowered generation, Western purchased more power to meet its firm power commitments to customers. As the water systems recover and refill the reservoirs, Western anticipates having more hydropower to market. Even through the drought, Western customers continued to cover all of its operating costs, including purchase power, through firm power rates, except where Western has contract arrangements in place to make purchases on a pass-through cost basis. Using flexible provisions in our power sales contracts, Western can adjust power rates through a public process to deal with changes in the environment.

The status of some of Western’s most drought-impacted rate-setting systems in FY 2010 include:

  • Central Valley Project saw the end of the drought period in FY 2011. Several different services are marketed under the current Power Marketing Plan. So depending upon the product or service received, the percentage of rate increase will vary with the increases associated with any actions taken to lessen the impacts of the drought. Base Resource power is marketed as a “take or pay resource.” Under this arrangement, since the power customers are not guaranteed a defined quantity of power, they, and not Western, assume the entire hydrological variability and risk. Their derived rate is dependant primarily on the available CVP hydropower subject to water conditions and operating constraints due to environmental and biological opinions. So as the hydrology has improved, CVP has been able to increase the amount of hydropower marketed to customers, thus improving the value of power.
  • Boulder Canyon Project is expected to see a 13.4 percent rate increase Oct. 1, 2012.
  • Loveland Area Projects saw an 11.2 percent increase Jan. 1, 2010. The increase is due mostly to the extended impact of the drought. The drought-adder rate component (16.34 mills/kWh of the 41.42 mills/kWh composite rate) clearly identifies how much of the rate is due to drought-related expenses. In the last two years, the LAP river basins have experienced above normal inflows and reservoir levels are currently above normal.
  • Pick-Sloan Missouri River Basin Program—Eastern Division is still in financial recovery mode from the effect of years of drought and the need to increase purchase power. In January 2010 the new rate for firm electric service resulted in an overall composite rate increase of about 13.3 percent above the 2009 composite rate. In the last two years, the Missouri river system has experienced above normal runoff and reservoir levels have returned to normal. Recent generation forecasts from the Army Corps of Engineers for the regionRedirect link to a non-Western site and the Bureau of Reclamation for Yellowtail DamRedirect link to a non-Western site put generation for 2011 above average.

    Jointly with the Loveland Area Projects, Pick-Sloan—Eastern Division implemented a drought-adder rate component in January 2008 to specifically identify drought-related expenses. Making up almost half of the composite rate (16.67 mills/KWh of the 33.54 mills/kWh overall rate) explains how costly the drought has been. The drought adder can be annually adjusted to account for changes in hydropower availability because of drought.
  • Salt Lake City Area Integrated Projects saw a 22-percent increase Oct. 1, 2005 and another 6-percent increase Oct. 1, 2008 with the first step of a two-step rate. The second step increased the rate in 2009 by 11 percent and since then has remained the same with then next potential rate change projected for FY 2014.

Drought-adder rate component
A drought-adder rate component recovers costs due to drought-related expenses. Identifying the component as a separate rate clearly identifies those costs specifically due to drought and allows for more timely adjustments of the drought adder rate. Currently both Loveland Area Projects and Pick Sloan Missouri River Basin Program use this component to recover those costs directly related to drought, seasonal flooding and low system storage.

Power production at Hoover Dam
While many other systems in Western territory have seen increased hydrology, Lake Powell and Lake Mead (Hoover Dam) continue to see depleted hydropower generation capability due to low reservoir levels. Marketed as the Boulder-Canyon Project, Western does not need to purchase power to compensate for any reduced generation at Hoover because that power is sold on an as-available basis for both capacity and energy. These contracts allow Boulder Canyon customers to ask Western to purchase energy on their behalf and pass-through the cost, but such requests have been infrequent.

If an emergency water shortage is declared for the Lower Colorado River Basin, how would that affect Western?
Western sells power from four dams on the Lower Colorado River, including Davis, Glen Canyon, Hoover and Parker dams. In response to the persistent drought and declining Hoover Dam elevations, the Department of Interior issued its December 2007 Record of Decision on the Colorado River Interim Guidelines for Lower Basin Shortages and the Coordinated Operations of Lake Powell and Lake Mead, otherwise known as the Interim Guidelines. For the first time, shortage criteria was put in place to govern the operation of Hoover and Glen Canyon dams. The shortage criteria basically states that at certain Hoover Dam elevations, downstream water demands will be reduced accordingly, and subsequently power production. In November 2010, the Hoover Dam elevation came within 7 feet of triggering the shortage criteria. Not since May 1937, when Hoover Dam was initially filling, has Hoover Dam elevation been this low. If generation is further reduced for the Boulder-Canyon project, customers could request Western to purchase energy on their behalf and pass-through the costs to supplement their power supply.

Purchase Power Costs chart shows:Western's spend on purchased power in FY 2010 compared to purchases in previous years
Western spent almost $377.1 million in FY 2010 Western wide for 9.3 million MWh of purchased power, compared to almost $612 million in FY 2008 for 11.1 million MWh—the highest amount Western has paid for purchased power in more than 10 years.