LOS ANGELES - The Bonneville Power Administration on Friday proposed a rate increase of 15.7% for preference customers, which include public utility districts and municipalities.

The proposed increase should reassure the municipal finance community because the hike will help boost the federal agency's projected reserves to a target of about $370 million by the end of fiscal 1995, Bonneville administrator Randall Hardy said.

Hardy also said the agency expects to have about $150 million to $175 million of reserves at the end of the current fiscal year on Sept. 30, rather than the $90 million projected in earlier estimates.

The proposed rate increase would take effect Oct. 1, the beginning of Bonneville's fiscal 1994 year, and would cover a two-year fiscal cycle.

In April, Standard & Poor's Corp. put $6.5 billion of Washington Public Power Supply System nuclear power projects 1, 2. and 3 bonds on Credit Watch with negative implications, citing concern about Bonneville's recent financial deterioration. Bonneville secures that WPPSS debt and other tax-exempt utility bonds.

Among other things, Standard & Poor's expressed concern that Bonneville's reserves could dwindle to $90 million by the end of the current fiscal year, rather than the $1 billion figure projected during the agency's last rate-setting process in 1991.

Standard & Poor's said maintenance of its current AA rating would depend on acceptance by Bonneville's customers of a credible long-term financial plan that would restore reserves to the $300 million to $400 million level over the next few years.

The proposed rate increase will be submitted Aug. 2 to the Federal Energy Regulatory Commission for approval. Bonneville said in a statement that it "anticipates rate approval on an interim basis effective Oct. 1."

In a conference call with reporters Friday, Hardy said Bonneville's overall proposed average rate increase is 14.6%, which he said falls within the range "customers set out as a goal to achieve."

Bonneville has also proposed a 14% increase for its industrial aluminum customers.

The proposed rate levels were anxiously awaited throughout the Pacific Northwest, especially after Bonneville officials said in the spring that an increase of 23.7% might be necessary to restore the agency's fiscal stability.

Hardy said budget cuts and slightly better water conditions, which benefit hydroelectric energy production, helped lower the level of the proposed rate increase.

In addition, Hardy said Bonneville will rebuild reserves to ensure an 85% probability of making its annual payment, in full and on time, on existing debt to the U.S. Treasury. Bonneville's long-range goal is to build reserves back to a level that will guarantee a 95% probability.

However, "because drought conditions so severely depleted reserves, the rate increase necessary to restore reserves to that level would have been unacceptable" at this point in time, Bonneville said in a statement.

James Curtis, Bonneville's assistant administrator of financial management, noted in a separate interview Friday that the agency wants to restore the 95% probability level in its two-year rate case for fiscal 1996 and 1997. Under that scenario, targeted reserves would climb even further - to about $535 million - by Sept. 30, 1997, Curtis said.

Hardy said Bonneville would make its upcoming Treasury payment of about $730 million this fall.

Bonneville markets power throughout the Pacific Northwest, and its rates affect the planning of numerous local utilities.

Bonneville's recent financial deterioration partially reflects a drought that reduced hydroelectric power production and forced Bonneville to rely more heavily on higher-cost outside power purchases.

Hardy said the revenue impact of the drought is responsible for almost half of the required rate increase.

This year has been "the most extraordinary operating year I've ever been through," Hardy said. "I've seen serious challenges before, but never such a combination [of] drought, subnormal winter temperatures, plummeting aluminum revenues, and increased costs for wild salmon protection. "

Hardy added that Bonneville's so-called competitiveness project will be a key factor in determining whether the agency can pursue a lower rate increase in the fiscal 1996-97 period. "Our goal is to keep any increase [for those two years] to a single digit." he said.

The competitiveness project aims for more efficiency, which "probably implies a smaller Bonneville" in terms of employees, Hardy said.

Agency officials also are "reevaluating our relationship with all our customers," Hardy said. Among other things, he said, Bonneville is "clearly considering" a possible change in the present policy that provides major aluminum customers with variable-rate power based on the price of aluminum.

Dulcy Mahar, a spokeswoman for Bonneville, said the current rate proposal also allows for an interim rate adjustment of up to 10% in fiscal 1995 if reserves dip below $145 million. But that adjustment is only available to address "uncontrollable events" such as a worse-than-expected drought, Mahar said, and "can't be due to higher program costs" for Bonneville's regular activities.

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