Agenda - 07/10/12 Eugene City Council and EWEB Joint Meeting

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Natural gas prices may drive FY 2014-2015 power rates May 30, 2012 It might seem surprising, but the price of natural gas is likely to be a significant driver of BPA’s power rates for the 2014-2015 rate period – most notably, the priority firm rate paid by public utility customers in the Pacific Northwest. Since we concluded the BP-12 rate case, natural gas prices have fallen significantly. Prices have moved steadily downward to levels thought inconceivable just a year or two ago. The changed outlook for the price of natural gas has significant implications for future electricity prices and, therefore, BPA’s net secondary revenue forecasts and resulting power rates. Natural gas prices drive wholesale electricity prices several months of the year, and the price of electricity largely determines the amount of net secondary revenue the agency receives. Net secondary revenue, in turn, augments the agency’s revenues and, thus, affects power rates. As revenues increase, power rates can go down. However, if this source of revenue decreases, then revenue from preference customers needs to make up the difference. At this point, BPA’s forecast of natural gas prices for the FY 2014-2015 rate period suggests that net secondary revenue will decline by $114 million annually relative to what was assumed when the agency set FY 2012-2013 power rates. This decline could increase to $196 million annually if gas prices stay at their currently depressed level. This issue is likely the most significant driver of BPA’s power rates for FY 2014-2015. A $114 million reduction alone results in a roughly 8 percent rate increase for public utility customers. The $196 million reduction translates into a 14 percent increase, all other things being equal. (Note: These forecasts will continue to be updated until rates are set in July 2013.) The graphs below demonstrate the connection between natural gas prices and power prices – and reveal how low both are.