The Bonneville Power Administration announced a $40 million surcharge to rebuild financial reserves depleted after three years of low water, saying the move could lead to an annual average effective rate increase of 2.2% for most power sales.

BPA said the surcharge for power customers is due to increased costs in power purchases because of challenging water levels over the past three years. The agency said it would recover the $40 million surcharge in rates from December 2025 through September 2026, according to a Dec. 18 announcement.

“We know that a surcharge was unexpected by our ratepayers,” BPA Administrator John Hairston said in a statement. “Our third-quarter forecast indicated a low probability of triggering a surcharge, but continued cost increases in power purchases, resulting from a third bad water year in a row, were the primary driver.”

BPA implemented the surcharge under its Financial Reserves Policy (FRP). The policy aims to maintain sufficient financial reserves and promote rate stability. It said the policy and other cost-management efforts “have resulted in rates that are flat or below national inflation over the previous decade.”

The final Power FRP surcharge rate is $1.01/MWh, and the final annual rate is $0.84/MWh. BPA said the surcharge would result in an annual average effective rate increase of 2.2% for non-slice Tier 1 rates, according to the announcement.

Tier 1 “non-slice” contracts represent most of BPA’s power sales. “Non-slice” refers to a type of contract in which the customer is guaranteed a specified volume of energy regardless of conditions on the hydro system; in contrast, total volumes delivered to “slice” customers can vary based on availability.

Hairston wrote in a Dec. 11 letter that the agency discussed the surcharge during its fourth-quarter review in November. The agency settled on the surcharge amount after a public review and comment period on preliminary calculations. (See BPA Looks to Fill 155 Positions After Hiring Freeze.)

“We received only one comment on the surcharge and the process itself, and none on the data or calculations,” Hairston noted.

The surcharge comes after the agency announced in July that customers’ power rates could increase by about 8 to 9% over the BP-26 rate period covering the 2026/28 interval. (See BPA Customers to See Increased Power, Transmission Rates.)

“We recognize this surcharge impacts our customers, and we are actively working to improve our forecasting and transparency,” Hairston said. “BPA is committing to leading a holistic reevaluation of our current risk mitigation measures, including surcharges, prior to our next rate case and leveraging the lessons learned from these three consecutive poor water years and their strain on the agency’s financial reserves.”

‘Sound Risk Management’

BPA said it has triggered a surcharge only once — in 2020.

“Since then, BPA has provided rate reduction through its reserves distribution clause in 2022, 2023 and 2024, for a total dividend distribution of $529 million,” according to the announcement. “These dividends help reduce mid-period rate pressure and keep the annual average rate change from 2020 to 2026 at 1.5%, significantly less than ongoing inflation in those years.”

Fred Heutte, senior policy associate at the Northwest Energy Coalition, said in an email to RTO Insider that BPA could take three steps to alleviate the impact of hydro deficits, including supporting the new Northwest Energy Efficiency Alliance joint utility initiative on demand response. He also pointed to the agency’s transmission initiatives: the Grid Access Transformation and the Grid Expansion and Reinforcement Program.

“Together these will open the door to thousands of MW of new renewables and other resources that will expand supply and diminish our exposure to super-peak market prices,” Heutte said. He added the agency should reconsider its choice to join SPP’s Markets+ day-ahead market. (See BPA Chooses Markets+ over EDAM.)

“BPA’s own studies show that having two power markets running on top of their grid will raise costs for everyone in our region and across the west,” Heutte said. “The Extended Day-Ahead Market is poised to substantially expand the benefits of the Western Energy Imbalance Market which almost all of the Northwest is in. That will provide further protection from market price spikes and reliability concerns when we most need it, and reduce the risk of future wholesale rate surcharges.”

Scott Simms, executive director of the Portland, Ore.-based Public Power Council, told RTO Insider that the 2.2% increase in wholesale power costs is “a modest adjustment in the context of total rates, but not insignificant for utilities managing tight budgets and facing cost pressures and affordability issues in their communities.”

“The surcharge also comes on the heels of the 8.9% wholesale rate increase from the BP-26 rate proceeding that came into effect Oct. 1,” Simms said. “It’s important to acknowledge that rate increases are a real and growing concern for utilities and their customers, and at the same time, BPA’s action reflects sound risk management to protect long-term rate stability. PPC sees the surcharge as temporary, targeted, and tied to transparent policy triggers rather than arbitrary cost shifts, and we remain vigilant in thoroughly reviewing any BPA rate changes and their drivers.”