oversight

Charges for Use of Federal Electrical Power Transmission Should Be Reevaluated

Published by the Government Accountability Office on 1971-09-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

z,    REPORT          TO    THE    CONGRISS               X




 i$   ~REPORT         TO THE CONGRESS..
                                         '-Jco &7t




      Charges For Use Of Federal
      Electrical Power Transmission
      Lines Should Be Reevaluated             B-1 14858



      Department of the Interior




      BY THE COMPTROLLER GENERAL
      OF THE UNITED STATES



                 4         X by A,-EPT. 29, 1 9 7 1
                           827
           COMPTROLLER GENERAL OF THE UNITED STATES
                      WASHINGTON. D.C.   20548




B-114858




To the President of the Senate and the
Speaker of the House of Representatives

     This is our report on the need for a reevalu-
ation of charges for use of Federal electrical
power transmission lines by the Department of the
Interior.

     Our review was made pursuant to the Budget
and Accounting Act, 1921 (31 U.S.C. 53), and the
Accounting and Auditing Act of 1950 (31 U.S.C. 67).

     Copies of this report are being sent to the
Director, Office of Management and Budget, and to
the Secretary of the Interior.




                               Comptroller General
                               of the United States




                50TH ANNIVERSARY           1921-1971 -
  COMPTROLLER GENERAL'S                    CHARGES FOR USE OF FEDERAL
  REPORT TO THE CONGRESS                   ELECTRICAL POWER TRANSMISSION
                                           LINES SHOULD BE REEVALUATED
                                           Department of the Interior
                                           B-114858

  DIGEST

 WHY THE REVIEW WAS MADE

             "Wheeling" is the trade term for transmitting electricity
             generated by one party over transmission lines owned by
             another party.  A charge for the service is made by the
             owner of the transmission facilities.

             The Bonneville Power Administration and the Bureau of
             Reclamation--two agencies of the Department of the Inte-
             rior--wheel power generated by non-Federal producers.
             The amount of power wheeled by them has increased signifi-
             cantly in recent years.

          Because the two agencies have developed policies for de-
          termining wheeling charges independently of one another,
          the General Accounting Office (GAO) examined into the
         ,methods followed by each.


 FINDINGS AND CONCLUSIONS

             Bonneville's revenues from wheeling non-Federal power over
             its main and secondary transmission systems were inadequate
             to recover the cost of providing the services.

               --The charges were based on standard wheeling rates
                 which had not been revised after 1956 and which did
                 not reflect the current operating costs.  (See p. 5.)

               -- The standard wheeling rates had not been applied con-
                  sistently in establishing charges.   (See p. 7.)

               -- Inappropriate adjustments had been made to reduce
                  wheeling charges to customers who purchased Federal
                  power and to customers who provided lines connecting
                  their generators to Bonneville's transmission system.
                   (See pp. 7 and 10.)

             As a result of a GAO recommendation, Bonneville increased
             its standard wheeling rates, effective January 1, 1971, to
             recover additional revenues of about $200,000.  The rates
             in effect during fiscal year 1970, however, were not
             adequate to recover the cost of providing the services.



Tear Sheet                            1
                                                   SEPT. 29, 197 1
     Bonneville's revenues from providing wheeling services
     to non-Federal entities in fiscal year 1970 were further
     reduced by about $1.4 million because of inconsistent
     application of the standard wheeling rates and because
     of inappropriate adjustments.

     At its Missouri River Basin Project, the Bureau of Rec-
     lamation generally pays for Federal power transmitted
     over private transmission systems at a standard rate
     and charges the same rate for non-Federal power trans-
     mitted over the Federal system.

     GAO was unable to determine the basis on which the stan-
     dard rate had been established or whether the rate was
     intended to recover the Government's costs of providing
     the wheeling services.   (See p. 13.)


RECOMMENDATIONS OR SUGGESTIONS

     The Secretary of the Interior should

       --establish a policy providing specific criteria as
         to the cost elements or other factors to be considered
         by the power agencies in developing wheeling rates,

       -- require the power agencies to periodically reevalu-
          ate the adequacy of wheeling rates,

       --require the power agencies to apply the rates con-
         sistently in establishing charges for wheeling ser-
         vices, and

       -- require the Bonneville Power Administration to amend
          its existing contracts at the earliest possible date
          to eliminate the Reduction in wheeling charges to
          customers who purchase Federal power and to customers
          who provide lines connecting their generators to,
          Bonneville's transmission system.   (See p. 18.)


AGENCY ACTIONS AND UNRESOLVED ISSUES

     The Department of the Interior generally disagreed with
     GAO's recommendations and stated that

       --the Department had approved established criteria
         for determining wheeling rates (see p. 18),

       --the Department's power agencies were continuously in-
         volved in the determination of the adequacy of the
         standard wheeling rates (see p. 19),

                              2
               -- it would be "all but impossible" to establish stan-
                  dard wheeling rates covering all possible contrac-
                  tual arrangements (see p. 20), and

               -- it would not be advantageous to amend the contracts
                  to eliminate the provisions for adjusting wheeling
                  charges to those customers who purchase Federal power
                  (see p. 20).

             The Department did not comment on GAO's recommendation
             regarding the adjustments allowed for connecting trans-
             mission lines provided by certain customers.


  MATTERS FOR CONSIDERATION BY THE CONGRESS

             GAO evaluated the Department's comments and continues to
             believe that the actions recommended are necessary to
             recover from wheeling customers the full cost of provid-
             ing wheeling services and therefore should be imple-
             mented. GAO is bringing these matters to the attention
             of the Congress for its consideration in future dealings
             with the Department that involve the Federal transmis-
             sion system.




Tear Sheet                            3
                          CONTENT     S
                                                            Page

DIGEST                                                        1

CHAPTER

   1       INTRODUCTION                                       4

   2       NEED FOR ACTION TO ENSURE EQUITABLE RECOVERY
             OF WHEELING COSTS OF THE BONNEVILLE POWER
             ADMINISTRATION                                   5
               Bonneville's method for establishing
                 wheeling charges                             5
               Standard wheeling rates not based on
                 current information                          6
               Wheeling charges not based on standard
                 wheeling rates                               7
               Adjustments to contract-billing demand        10

   3       BUREAU RATES FOR WHEELING SERVICES                13

   4       CONCLUSIONS, RECOMMENDATIONS, AND MATTERS
             FOR CONSIDERATION BY THE CONGRESS               17
               Conclusions                                   17
               Recommendations and agency comments           18
               Matters for consideration by the Congress     22

   5       SCOPE OF REVIEW                                   23

APPENDIX

       I   Letter dated March 17, 1971, from the Director
             of Survey and Review to the General Account-
             ing Office                                      27
   II      Principal officials of the Department of the
             Interior responsible for the activities
             discussed in this report                        29
COMPTROLLER GENERAL'S                CHARGES FOR USE OF FEDERAL
REPORT TO THE CONGRESS               ELECTRICAL POWER TRANSMISSION   !

                                     LINES SHOULD BE REEVALUATED
                                     Department of the Interior
                                     B-114858

DIGEST

WHY THE REVIEW WAS MADE

     "Wheeling" is the trade term for transmitting electricity
     generated by one party over transmission lines owned by
     another party. A charge for the service 'is made' by the
     owner of the transmission facilities.

     The Bonneville Power Administration and the Bureau of
     Reclamation--two agencies of the Department of the Inte-
     rior--wheel power generated by non-Federal producers.
     The amount of power wheeled by them has increased signifi-
     cantly in recent years.

     Because the two agencies have developed policies for de-
     termining wheeling charges independently of one another,
     the General Accounting Office (GAO) examined into the
     me-th'ods followed by each.


FINDINGS AND CONCLUSIONS

     Bonneville's revenues from wheeling non-Federal power over
     its main and secondary transmission systems were inadequate
     to recover the cost of providing the services.

         --The charges were based on standard wheeling rates
           which had'not been revised after 1956 and which did
           not reflect the current operating costs.   (See p. 5.)

         --The standard wheeling rates 'had not been applied con-
           sistently in establishing charges.   (See p. 7.)

         -- Inappropriate adjustments had been made to reduce
            wheeling charges to customers who purchased Federal
            power and to customers who provided lines connecting
            their generators to Bonneville's transmission system.
            (See pp. 7 and 10.)

     As a result of a GAO recommendation, Bonneville increased
      its standard wheeling rates, effective January 1, 1971, to
      recover additional revenues of about $200,000.  The rates
     'in effect during fiscal year 1970, however, were not
      adequate to recover the cost of providing the services.
     Bonneville's revenues from providing wheeling services
     to non-Federal entities in fiscal year 1970 were further
     reduced by about $1.4 million because of inconsistent
     application of the standard wheeling rates and because
     of inappropriate adjustments.

     At its Missouri River Basin Project, the Bureau of Rec-
     lamation generally pays for Federal power transmitted
     over private transmission systems at a standard rate
     and charges the same rate for non-Federal power trans-
     mitted over the Federal system.

     GAO was unable to determine the basis on which the stan-
     dard rate had been established or whether the rate was
     intended to recover the Government's costs of providing
     the wheeling services.   (See p. 13.)


RECOMMENDATIONS OR SUGGESTIONS

     The Secretary of the Interior should

       --establish a policy providing specific criteria as
         to the cost elements or other factors to be considered
         by the power agencies in developing wheeling rates,

       -- require the power agencies to periodically reevalu-
          ate the adequacy of wheeling rates,

       -- require the power agencies to apply the rates con-
          sistently in establishing charges for wheeling ser-
          vices, and

       -- require the Bonneville Power Administration to amend
          its existing contractscat the earliest possible date
          to eliminate the reduction in wheeling charges to
          customers who purchase Federal power and to customers
          who provide lines connecting their generators to
          Bonneville's transmission system.   (See p. 18.)


AGENCY ACTIONS AND UNRESOLVED ISSUES

     The Department of the Interior generally disagreed with
     GAO's recommendations and stated that

       --the Department had approved established criteria
         for determining wheeling rates (see p. 18),

       -- the Department's power agencies were continuously in-
          volved in the determination of the adequacy of the
          standard wheeling rates (see p. 19),

                              2
       -- it would be "all but impossible" to establish stan-
          dard wheeling rates covering all possible contrac-
          tual arrangements (see p. 20), and

       -- it would not be advantageous to amend the contracts
          to eliminate the provisions for adjusting wheeling
          charges to those customers who purchase Federal power
          (see p. 20).

     The Department did not comment on GAO's, recommendation
     regarding the adjustments allowed, for ,connecting   trans-
     mission lines provided by certain customers..


MATTERS FOR CONSIDERATION BY THE CONGRESS

    :GAO evaluated the Department's comments and continues to
    believe :that the..actions recommended are necessary to
     recover from wheeling customers the full cost of provid-
     ing wheeling services and therefore should be imple-
    mented.   GAO is bringing these matters to the attention
    of the Congress for its consideration in future dealings
    with the Department that involve the Federal transmis-
    sion system.




                               3
                          CHAPTER 1


                        INTRODUCTION

     The Bonneville Power Administration and the Bureau of
Reclamation, Department of the Interior, have independently
evolved procedures and practices for determining the charges
for transmitting non-Federal power over their transmission
systems.  The transmission of power generated by one party
over the transmission facilities of another party is a ser-
vice which is generally referred to as wheeling.

     Bonneville constructs transmission facilities and mar-
kets the Federal power generated by the hydroelectric projects
in the Pacific Northwest.  The Bureau constructs transmission
facilities and markets the Federal power generated by the
hydroelectric facilities in the Missouri River Basin.

     Bonneville markets Federal power in the States of Wash-
ington, Oregon, Idaho, Montana, and California.   The Bureau
markets Federal power in the States of North and South Dakota,
Nebraska, Montana, Colorado, Wyoming, New Mexico, Utah,
Arizona, Nevada, California, Minnesota, and Iowa.   The amount
of power wheeled has increased significantly during the past
10 years because of the increased generating capacity by both
Federal and non-Federal entities and because of the increased
number of interconnections between the transmission lines
of these entities.

     During fiscal year 1970 Bonneville had revenues of about
$9.65 million for wheeling about 20.4 billion kilowatt-hours
of non-Federal power and was charged about $1.95 million by
non-Federal entities for wheeling about 3.79 billion kilowatt-
hours of Federal power.  During the same period the Bureau's
Missouri River Basin Project had revenues of about $1.9 mil-
lion for wheeling about 1.8 billion kilowatt-hours of non-
Federal power and was charged about $5.6 million by non-Federal
entities for wheeling about 5.9 billion kilowatt-hours of
Federal power.




                             4
                           CHAPTER 2


                   NEED FOR ACTION TO ENSURE
           EQUITABLE RECOVERY OF WHEELING COSTS OF

             THE BONNEVILLE POWER ADMINISTRATION

     Bonneville's revenues from wheeling non-Federal power
over its main and secondary transmission systems were not
adequate to recover the cost of providing the services in
fiscal year 1970 because (1) the standard wheeling rates on
which the charges were based had not been revised after 1956
and did not reflect the current costs of operating the sys-
tems, (2) the standard rates had not been applied consistently
in establishing the wheeling charges, and (3) inappropriate
adjustments, in our opinion, had been made to reduce the
charges to certain customers.

BONNEVILLE'S METHOD FOR ESTABLISHING
WHEELING CHARGES

     Most of the non-Federal power wheeled by Bonneville is
transmitted over its main and secondary transmission systems
(115-kilovolt lines and above). Since Federal power is also
transmitted over this system, in 1956 Bonneville developed -
a plan which provided for the sharing of the costs of oper-
ating the transmission system between Federal and non-
Federal entities.

      The objective of Bonneville's plan was the recovery of
its transmission costs from its wholesale power customers
and its wheeling customers in such a manner that each group
would bear a fair share of the costs and neither would sub-
sidize the other. Under the plan the costs of operating that
portion of Bonneville's main or secondary transmission system
 (1) needed to transmit Federal power were to be recovered
from its wholesale power customers through wholesale power
rates and (2) needed to wheel non-Federal power were to be
recovered through charges based on standard wheeling rates.

     Bonneville's standard wheeling rates in effect in 1970
were established in 1956 on the basis of estimated 1961 costs
of operating the main and secondary transmission'systems that
would be in existence in 1961 and the estimated-maximum kilo-
watts of Federal and non-Federal power that could be gener-
ated and available in 1961 for transmission over the system.




                               5
     The average standard rates for transmitting power over
each of the major components of the transmission system (115-
kilovolt lines, 230-kilovolt lines, terminals, etc.) were
computed by dividing the estimated 1961 cost of operating
each of the components by the estimated 1961 maximum kilowatts
of Federal and non-Federal power that would be transmitted
over each of the components.

     The standard wheeling rates included in Bonneville's
long-term wheeling contracts are applied to a wheeling cus-
tomer's maximum power-generating capacity--which is referred
to as the contract-billing demand--in computing the monthly
wheeling charges. A wheeling contract, in effect, represents
a lease of a specific capacity in Bonneville's main and sec-
ondary transmission systems for transmitting power to specific
load centers, regardless of whether the capacity is used at
all times. Such contracts provide that the standard wheeling
rates may be changed at 3-year intervals to reflect any
changes in the cost of operating the major system components.

     When Bonneville wheels non-Federal power over lines that
are not part of its main and secondary transmission systems,
the customer is usually charged on a "use of facilities" basis.
Wheeling contracts which provide for charges on this basis
generally are for the use of the excess capacity of such lines
for transmitting small amounts of power. Such contracts may
be canceled on 1 year's notice by either party.

     The wheeling charge for transmitting such power is com-
puted by dividing the cost of operating the transmission
facilities used by the kilowatt capacity of the facilities
and applying the resulting rate to the greatest amount of
kilowatts that is wheeled during any 60-minute period in the
previous year. The amount of power wheeled on a use-of-facilities
basis is relatively insignificant.
STANDARD WHEELING RATES
NOT BASED ON CURRENT INFORMATION

     Bonneville's standard wheeling rates in effect in fiscal
year 1970 had not been adjusted for changes in costs and other
factors that had occurred after the rates were established
in 1956 and therefore did not represent the 1970 cost of pro-
viding the wheeling services. For example, the rates did
not give effect to Bonneville's increased investment in its
main and secondary transmission systems from about $381 mil-
lion in 1961 to about $802 million at June 30, 1970.




                              6
     Bonneville's expansion of the systems was necessitated
by the increase during that period in the Federal power-
generating capacity in the Pacific Northwest from 7,120 mega-
watts to 9,036 megawatts and by the increase in its firm
wheeling commitments from 1,440 megawatts to 5,301 megawatts.
Also the rates, which were based on an interest factor of
2.5 percent on the Government's unrepaid investment in the
transmission facilities, did not give effect to the 1970 in-
terest rate. In addition, all other operating costs had
increased after the rates were established.

     In 1963 Bonneville made a study of the adequacy of the
standard wheeling rates and concluded that annual revenues
at that time were about $500,000 less than the related wheel-
ing costs. As a result of that study, a recommendation was
made to the Assistant Administrator of Bonneville that the
wheeling rates be revised. This recommendation, however,
was not adopted.
     In 1969 we recommended to the Administrator of
Bonneville that a review be made to determine the adequacy
of the wheeling rates. As a result of our suggestion,
Bonneville undertook a comprehensive study of its transmis-
sion system costs.

      In a letter dated July 27, 1970, the Administrator of
Bonneville advised the Assistant Secretary, Water and Power
Development, Department of the Interior, that Bonneville had
completed the study and that an increase in the standard
wheeling rates appeared to be needed to ensure that the rates
would provide for equitably compensating the Government for
furnishing wheeling services.
     The Administrator, in view of the increasing operation
and maintenance costs including interest rates on the invest-
ment in new construction, proposed the adoption, effective
January 1, 1971, of revised wheeling rates. He estimated
that the new rates would result in an increase in wheeling
revenues of $200,000 annually. On July 31, 1970, the Assis-
tant Secretary concurred with the proposal of the Adminis-
trator, and, effective January 1, 1971, revised wheeling
charges were adopted.
WHEELING CHARGES NOT BASED ON
STANDARD WHEELING RATES

     Since Bonneville's standard wheeling rates are based
on the average cost of operating its main and secondary
transmission systems and on the maximum Federal and non-
Federal power that could be generated and be available for
transmission over the systems, it follows that, to recover

                                7
the cost of providing the wheeling services, the wheeling
charges must be based on a consistent application of the
standard rates to the maximum non-Federal power-generating
capability of its wheeling customers.

     We noted that Bonneville had entered into contracts for
wheeling non-Federal power over its main transmission system
that provided for (1) basing the wheeling charges to the
customers on a use-of-facilities basis rather than on the
applicable standard wheeling rates and (2) allowing the cus-
tomers annual credits against the charges for the cost of
constructing transmission lines connecting their generating
units to Bonneville's transmission system.

     Bonneville's establishment of wheeling charges for the
transmission of non-Federal power over its main transmission
system on a use-of-facilities basis and allowance of annual
credits against such charges are inconsistent with its policy
of having each wheeling customer bear its fair share of the
cost of operating the main transmission system.

     An example of such contracts is a 15-year contract to
wheel 270,000 kilowatts of non-Federal power each year over
Bonneville's main transmission system to three delivery points.
The charges specified in the contract were computed on the
use of facilities and provided for the allowance of annual
credits against the wheeling charges totaling $315,000--$225,000
for the customer's cost of providing a 26-mile, 230-kilovolt
line to connect its generating facilities to Bonneville's
transmission system and $90,000 for the Government's reduced
power losses resulting from reverse power flows.

     These credits, in our opinion, were inappropriate be-
cause they did not provide for recovering the cost of pro-
viding the wheeling services to the customer.  The contract
should have provided for basing the wheeling charges on the
standard wheeling rates applicable to non-Federal power
wheeled over Bonneville's main transmission system.

     Also the customer should not have been allowed an annual
credit for the cost of constructing its transmission line
connecting its generating facilities to Bonneville's trans-
mission system, since Bonneville's charge to the customer
was based only on the cost of that portion of Bonneville's
existing transmission facilities that was necessary to
wheel the customer's power and did not include the cost of
the line provided by the customer.  Further, the allowance
of the annual credit of $90,000 for reverse power flows was
inconsistent with Bonneville's usual practice of not pro-
viding for such reverse power flows in its standard wheeling
contracts.

                              8
     Bonneville's wheeling revenue from this customer in fis-
cal year 1970 was $346,000 less than the revenue that would
have been received had wheeling charges been based on the
applicable standard wheeling rates.  This reduction in reve-
nue consisted of a reduction in wheeling charges of $31,000
as a result of basing the charges on the use of facilities
rather than on the standard wheeling rates and of inappropriate
allowances of $315,000, as summarized below.

Reduced wheeling charges:
    Charges based on applicable
      standard wheeling rates          --             $468,000
    Actual charges based on use
      of facilities                                    437,000

                                                        31,000

Inappropriate allowances:
    For customer's cost of
      constructing transmission
      lines connecting its
      generating facilities to
      Bonneville's transmission
      system                          $225,000         -
    For reduced powerilosses            90,000          315,000

        Total reduction in
          revenues from wheeling
          services                                    $346 ,000

The'revenues in fiscal year 1970 were further reduced by $6,000
resulting from errors in computing the charges..

     Bonneville officials advised us that the contract pro-
vided that the wheeling charges be based on the use of facil-
ities because the customer believed that charges based on
the standard wheeling rates would be excessive.   They also
stated that the"'cost of the specific portion of Bonneville's
main transmission system used to deliver the customerw's
power was being recovered under the use-of-facilities.
charges.

     Although Bonneville:'s wheeling:charges to this.customer,
exclusive of the -inappropriate- allowances, may have been
adequate' to recover the actual cost of operating the portion
of Bonneville's main transmission system that was used to
wheel the customer's power, the wheeling costs associated
with the entire main transmission system would not have been
recovered because the standard wheeling rates were developed
on the premise that their consistent application in estab-
lishing wheeling charges f6r non-Federal power wheeled over
the system would result in recovering the cost of operating
the portion of the system used for wheeling.

                              9
     We noted, in addition to the contract discussed above,
two other Bonneville wheeling contracts which (1) did not
provide for basing the wheeling charges to the customers on
the established standard rates for wheeling non-Federal
power over Bonneville's main transmission system and (2)
provided for annual allowances to the customers for the cost
of constructing connecting transmission lines--a cost, as
previously stated, which should not be borne bX Bonneville.
We estimated that, as a result, the revenues under these two
contracts in fiscal year 1970 were reduced by about $218,000.

ADJUSTMENTS TO CONTRACT-BILLING DEMAND

     Our review showed that each of several wheeling contracts
negotiated by Bonneville during the early development of the
major non-Federal hydroelectric projects on the main stem
of the Columbia River and its tributaries provided for an
adjustment to the customer's monthly contract-billing demands.
This adjustment, which is commonly referred to by Bonneville
as the Z-factor adjustment, resulted in a reduction in
Bonneville's wheeling revenues of about $867,000 under six
of these contracts in fiscal year 1970.

     The Z-factor adjustment relates to long-term, firm
wheeling contracts--some of which will remain in effect until
the year 2017--and is applicable only where the wheeling cus-
tomer also purchases Federal power from Bonneville.

     Bonneville's monthly wheeling charges to a wheeling cus-
tomer are computed by applying the standard rates to the cus-
tomer's contract-billing demand which is reduced by the
difference--the Z factor--between Bonneville's load factor
for the preceding year and the customer's monthly load factor
in those months in which Bonneville's load factor is the
higher.  The load factor is the ratio of the actual power
generated to the maximum power-generating capacity.

     Bonneville's justification for making the Z-factor ad-
justment is based on the premises that (1) when a wheeling
customer purchases power from Bonneville to meet its own
power demands, Bonneville's wholesale power rates are suffi-
cient to recover its cost of generating and transmitting
power to its customers, (2) the transmission capacity used
to deliver the supplemental power to the wheeling customer
is essentially the same as that which the customer has
leased under the wheeling contract, and (3) such adjustment
is necessary to avoid a duplicate charge for the transmission
capacity.

     In our-opinion, reducing a wheeling customer's contract-
billing demand by the Z factor is not a proper adjustment
because it is inconsistent with the basic principle on which

                             10
the standard wheeling rates were developed. The standard
wheeling rates were based on Bonneville's estimated annual
cost of operating that portion of the transmission system
capable of transmitting the maximum amount of power that
could be generated by the plants of its wheeling customers.
Thus the standard wheeling rates represent the estimated
cost to transmit the estimated non-Federal power that could
be generated without regard to the actual use made of the
transmission system.

     The wheeling contracts, in effect, represent leases by
the wheeling customers of a specific capacity of the transmis-
sion system. For Bonneville to recover the cost of operating
its transmission system, its wheeling customers must pay
wheeling charges based on the standard wheeling rates, re-
gardless of whether they make use of the leased capacity at
all times.

      The wheeling customer contracting with Bonneville for
the transmission of non-Federal power over the Federal trans-
mission system is in about the same position that it would
be if it had constructed a transmission system capable of
transmitting the maximum power it generated. In such case
the customer's cost of operating the system would have been
fixed, regardless of the use it made of the system.

     The overriding objective of Bonneville's plan for recov-
ering the cost of operating its transmission system was the
establishment of rates for transmitting power for its wheeling
customers in such a manner that its wholesale power customers
and its wheeling customers would bear a fair share of the
costs and neither group would subsidize the other.

     In summary, the adjustment of a wheeling customer's
contract-billing demand results in charging the customer on
the basis of actual use made of the transmission system rather
than on the basis on which the wheeling rates were developed,
that is, the recovery of the cost of operating a transmission
system capable of transmitting the maximum power that would
be generated by Bonneville and by its wheeling customers.

     Bonneville's reducing the contract-billing demand of
six of its wheeling customers by the Z-factor adjustment re-
sulted in reducing the wheeling charges to the customers by
about $867,000 in fiscal year 1970.  In our opinion, the
Z-factor adjustment is inconsistent with the principle on
which Bonneville developed the standard wheeling rates and
results in a failure to equitably compensate the Government
for providing wheeling services.



                             11
     Our conclusions and recommendations and the comments
of the Department of the Interior on the matters presented
in this chapter are contained in chapter 4.




                             12
                          CHAPTER 3


             BUREAU RATES FOR WHEELING SERVICES

     At the Missouri River Basin Project, the Bureau gener-
ally pays for power transmitted over private transmission
systems at a standard rate of 1 mill per kilowatt-hour and
charges the same rate for non-Federal power transmitted over
the Federal system.  We were unable to determine from the
available records of the Bureau the basis for development
of the 1-mill rate or to what extent, if any, the rate was
intended to cover the Federal cost of providing the wheeling
services.

     A Department power policy statement issued in 1950 stated
that compensation payable by the Bureau for use of non-Federal
transmission facilities must be reasonable and that the com-
pensation in money or other values would be limited to what
the Bureau's cost would be for constructing the necessary
facilities.  The statement further provided that:

     "Based on cost studies on the Missouri River Basin
     Project, the Bureau is justified in paying a fee
     not exceeding one mill per kilowatt-hour for the
     transmission of Bureau energy over transmission
     facilities of a third party ***."

     A 1954 power-marketing criterion for the Missouri River
Basin Project provided that the Bureau would not absorb more
than 1 mill per kilowatt-hour for Federal power wheeled over
the transmission facilities of other parties but that care
must be taken to hold wheeling commitments to less than
1 mill per kilowatt-hour if, because of the short distance
involved or other reasons, compensation at a lower rate would
be adequate.

     Although the 1-mill rate was adopted as the maximum pay-
ment for having Federal power wheeled over the transmission
systems of private parties, it appears that it was adopted
also as a reasonable charge for transmitting non-Federal
power over the Federal system, regardless of the distance
the power was wheeled.

     The wheeling contracts for the Missouri River Basin Proj-
ect, for the most part, provide that wheeling charges be based
on 1 mill per kilowatt-hour for non-Federal power transmitted
over the Federal system.  The contracts also establish 1 mill
as the rate at which the Bureau will pay for transmitting
Federal power over the systems of others.



                              13
     Discussions with regional officials and a review of
available records indicate that the 1-mill rate is an arbi-
trary rate originally established as a maximum payment.
Generalized statements offered in justification of the rate
include:

     1. The rate is reciprocal and therefore offsetting in
        that, if wheeling for the Government and wheeling
        by the Government are balanced, no charge results.

     2. Wheeling generally involves several delivery points
        and the short-distance deliveries are offset by the
        long-distance deliveries so that they average out.

     We found, however, that the amount of Federal power
transmitted over the lines of others and the amount of non-
Federal power transmitted over the Federal lines were not
balanced.  For example, during fiscal year 1970, the Bureau
paid about $5.6 million for transmitting about 5.9 billion
kilowatt-hours of power over the systems of others and re-
ceived revenues of about $1.9 million for transmitting about
1.8 billion kilowatt-hours of non-Federal power over the
Federal system.  In the absence of cost studies demonstrating
that the cost of the unbalanced transmission of power is
offset by the short and long distances involved, there is
no assurance that the payments or revenues represent proper
compensation for the transmission services.

     As previously indicated, information was not available
to show whether the rate of 1 mill per kilowatt-hour for
transmitting non-Federal power had been developed on the ba-
sis of recovering the cost of providing the wheeling services.
In our opinion, wheeling customers should bear their fair
share of the Bureau's cost of operating its transmission sys-
tem.  A failure to charge the Bureau's wheeling customers
for their share of such costs results in a disproportionate
share of the costs being passed on to the Bureau's wholesale
power customers.

     Even if the 1-mill rate, when established in the early
1950's, was considered by the Bureau to be adequate to recover
the cost of providing the wheeling services, we question its
adequacy as a basis to recover the current cost of providing
the services.  We believe that the Bureau should initiate
a comprehensive study to determine whether the rate is adequate
to recover the costs involved in providing the wheeling ser-
vices.  We believe also that any rate established should be
periodically reevaluated to determine its adequacy.




                              14
     Although the Bureau's wheeling contracts provide that,
for the most part, wheeling charges be based on the rate of
1 mill per kilowatt-hour for'transmitting non-Federal power
over the Federal system, we noted that certain contracts pro-
vided that charges be computed on other bases.   One of these
contracts provided for wheeling charges for transmitting non-
Federal power over the Federal systemi on the basis of a
capacity charge computed in accordance with the provisions!
of the Missouri Basin Systems Group Pooling Agreement of
January 1963.

      Under this agreement, an annual wheeling charge of $4.90
per kilowatt was established for transmitting non-Federal
power over those Federal transmission facilities set forth
in the pooling agreement that were in service or under con-
struction within the Eastern Division of the Missouri River
Basin Project in December 1965.   This rate was based on the
total estimated annual cost of operating the Federal trans-
mission system and the total Federal and non-Federal power
that could be generated and transmitted over the system.   In
April 1969 the rate was increased to $5.05 per kilowatt per
year on the basis of estimated fiscal year 1970 operating
costs,.

     The basis for computing the wheeling charge under this
agreement is somewhat similar to Bonneville's method for
computing its standard wheeling rates and, in our opinion,
provides more adequately for the recovery of the current
costs of providing the wheeling services than does the 1-mill
rate included in most Bureau contracts.

     It appears that the need for consistency in the develop-
ment of wheeling rates was recognized as early as 1957 when
the Bureau's Regional Director of Region 6 inquired of
Bonneville regarding its policy and procedures for establishing
wheeling charges for transmitting non-Federal power over its
transmission system.  In February 1957 the Administrator of
Bonneville advised the Regional Director that Bonneville had
not established an overall comprehensive policy applicable
to all wheeling situations that might arise but had attempted
to meet each situation as it arose.
     For long-term contracts, he advised also that wheeling
charges were uniform for all wheeling customers, regardless
of whether the existing facilities were adequate to transmit
the non-Federal power or whether additional facilities had
to be constructed. He stated that Bonneville also transmitted
non-Federal power on a short-term, excess-capacity basis for
which the charge was based on the cost of operating the facil-
ities actually used. Correspondence between the Bureau's
Region 6 and Bonneville in 1962 showed that Region 6 had

                               15
requested and received a detailed explanation of how Bonneville
computed its standard wheeling rates.

     Our conclusions and recommendations and the comments
of the Department of the Interior on the matters presented in
this chapter are contained in chapter 4.




                             16
                             CHAPTER 4


              CONCLUSIONS,   RECOMMENDATIONS,   AND

          MATTERS FOR CONSIDERATION BY THE CONGRESS

CONCLUSIONS

     Bonneville's standard wheeling rates for transmitting non-
Federal power over its transmission system were not adequate
to cover the cost of providing the wheeling services in fis-
cal year 1970 because the rates had not been revised after
1956, the rates had not been applied consistently, and inap-
propriate adjustments had been made to reduce the charges
to certain wheeling customers.  Bonneville revised its
wheeling rates effective January 1, 1971, to reflect the
current cost of operating the transmission system.  The revised
rates provide for an increase in wheeling revenues of about
$200,000 annually.

     Bonneville has not, however, made any changes to the
contracts to eliminate the deficiencies noted during our re-
view that resulted in reduced revenues in fiscal year 1970
of about $1.4 million--$570,000 from failure to base the
wheeling charges on the standard wheeling rates and the al-
lowance of inappropriate credits (see pp. 9 and 10) and
$867,000 from inappropriate adjustments to wheeling customers'
contract-billing demands (see p. 10).

     Bonneville's annual revenues will continue to be simi-
larly reduced until its wheeling contracts are revised to
provide for wheeling charges based on the standard wheeling
rates and to eliminate the allowances for the inappropriate
adjustments.

     At the Missouri River Basin Project, the Bureau generally
pays for Federal power transmitted over private transmission
lines at the rate of 1 mill per kilowatt-hour and charges
the same rate for non-Federal power transmitted over the Fed-
eral transmission lines.  We were unable to determine, from
Bureau records and discussions with Bureau officials, the
basis for the development of the rate of 1 mill or the extent,
if any, to which the rate was intended to result in the recov-
ery of the cost of providing the wheeling services.

     Because wheeling services are becoming a more significant
factor in the Federal power program, we believe that proce-
dures should be adopted to provide assurances that the wheel-
ing customers bear a fair share of the cost of the Federal
transmission system and that they are not being subsidized
by the wholesale power customers.

                                17
RECOMMENDATIONS AND AGENCY COMMENTS

     We recommend that the Department of the Interior

     --establish a policy which will provide specific criteria
       for the guidance of the power agencies as to the cost
       elements or other factors to be considered in develop-
       ing wheeling rates,

     --require the power agencies to periodically   reevaluate
       the adequacy of the wheeling rates,

     -- require the power agencies to apply the wheeling rates
        consistently in establishing charges for wheeling ser-
        vices, and

     --require Bonneville to initiate action toward amending
       its existing contracts to eliminate the provision for
       reducing wheeling charges to customers for the Z-factor
       adjustment and the adjustment for transmission facili-
       ties provided by the customers.

     In commenting on our first recommendation, the Director
of Survey and Review, Department of the Interior, in a letter
dated March 17, 1971 (see app. I), stated that the Department
had, within general principles, approved established criteria
and guidelines for determining wheeling rates that provided
that non-Federal power would be transmitted at rates that
would recover its predetermined proportionate share of the
total transmission system cost.  He stated, however, that
specific criteria had not been established because of (1) the
complexities which were involved due to varying circumstances
and (2) the advantages in system management of retaining
flexibility of criteria in determining specific wheeling
charges applicable to individual projects.

     Department officials did not furnish us with any
Department-approved criteria or guidelines which required
that wheeling rates be adequate to recover the cost of provid-
ing wheeling services.  Further, we were unable to determine
whether the rates used at the Missouri River Basin Project
for charging wheeling customers for power transmitted over
the Federal transmission system were intended to recover the
cost of providing the wheeling services.

     The varying circumstances involved in wheeling power
and the advantages of having flexible criteria do not, in
our opinion, overcome the need for a policy which clearly




                             18
defines the elements of cost to be considered in devel-
oping wheeling rates.

     Since the Director's comments indicate that it is the
intention of the Department that each wheeling customer be
assessed its fair share of the cost of operating the trans-
mission system, we believe that a departmental policy should
be established, together with the necessary implementing pro-
cedures, which will require power-marketing agencies to estab-
lish wheeling rates based on the agencies' cost of providing
the wheeling services.  In the absence of such a policy and
such procedures, it appears to us that significant variances
will continue to exist between and within the agencies rela-
tive to the establishment of wheeling rates.

     In commenting on our recommendation that the adequacy
of the wheeling rates be periodically reevaluated, the Direc-
tor stated that the power agencies were continually involved
in the determination of the adequacy of the wheeling rates
and that each established wheeling rate was reviewed at
least once every 5 years.

     The Department did not, however, furnish us with any
evidence that periodic reviews of the adequacy of the wheel-
ing rates had been made by the power agencies. Also
Bonneville had not adopted procedures requiring that studies
be made of the adequacy of the wheeling rates.  Although
Bonneville did make a study in 1963 which disclosed that the
wheeling rates were not sufficient to recover the cost of
providing the wheeling services, no action resulted from that
study. The only other study was made as the result of our
recommendation in 1969, which resulted in an increase in the
standard wheeling rates effective January 1, 1971.

     With respect to the wheeling rates at the Missouri River
Basin Project, Bureau officials advised us that periodic re-
views had not been made of their adequacy.  Bureau officials
believed that the rates, which had been in effect from the
time that the project started, were reasonable and that any
inequities would be offsetting since non-Federal entities
also charged the same rates for wheeling Federal power.   As
indicated on page 14, we believe this not to be a valid po-
sition.

     In our opinion, the wheeling rates and the costs asso-
ciated with providing wheeling services should be periodi-
cally reviewed to determine whether the factors on which the
rates were based have changed to the extent that the costs
of providing the wheeling services are not being recovered.
In the absence of such reviews, there are no assurances that
the wheeling costs are being recovered.

                              19
     The Director stated that, although he agreed, in prin-
ciple, with our recommendation that the power agencies be
required to consistently apply the standard wheeling rates
in determining wheeling charges, it would be all but impos-
sible to establish rates covering all possible contractual
arrangements.

     Bonneville's standard wheeling rates are based on the
average costs of operating its main and secondary transmis-
sion systems and on the maximum Federal and non-Federal
power that could be generated.  Therefore, to recover the
cost of providing wheeling services, the charges to the
wheeling customers must be based on the application of the
standard rates to the customers' maximum power that could
be generated and wheeled over Bonneville's main and secondary
transmission systems.  Any deviation from establishing wheel-
ing charges on that basis will result in not fully recovering
from wheeling customers the costs of providing wheeling ser-
vices.

     If the Director's comment regarding the impossibility
of establishing standard rates to cover all possible con-
tractual arrangements is valid, it appears that the concept
of attempting to recover wheeling costs through the ap-
plication of standard rates is impracticable.  The Director
stated that wheeling rates per se might become obsolete in
certain situations because the power-marketing agencies
were moving into complex integrated operations involving
joint planning and construction of facilities.

     In our opinion, the use of standard rates, even under
complex operations, if properly developed and implemented,
appears to be the most equitable basis for recovering wheel-
ing costs.  If situations develop where the use of standard
rates becomes impracticable, it would be necessary for the
power agencies to establish a different methodology to ensure
the equitable recovery of the costs of providing wheeling
services to their wheeling customers.

     Regarding our recommendation that Bonneville amend its
existing contracts to eliminate certain rate adjustments,
the Director stated that, although our report presented a
valid description of the Z factor, our conclusion that the
adjustment was not proper "indicates a lack of understanding
of the principles incorporated in the negotiations of the
*** contracts." -Although he did not elaborate on this point,
he stated that the present management agreed that (1) the
same contracts,. if negotiated today, would not provide for
the Z-factor adj,,ustment and (2) the factor would not be in-
cluded in any ,f.utire contracts.


                                20
      He stated further that, although certain operational
revisions had been made on the basis of Bonneville's review
of. its contracts, it would not be advantageous to eliminate
the Z factor from existing contracts because of the long-term
characteristic of the contracts and because of the necessity
for good contractual relationships.   The Director indicated
that any delay in Bonneville's repayment of the Government's
investment that was created by the Z-factor adjustment could
be met by increasing the power rates to its wholesale power
customers.

     In our opinion, contractual relationships would not be
unduly jeopardized because Bonneville's standard contracts
contain a provision that authorizes the Administrator of
Bonneville to change the Z-factor adjustment when he deter-
mines that the Government's wheeling costs are not being
fully recovered.  The language generally contained in each
wheeling contract specifically provides that:

     "The level of transmission charges, and the formula
     set forth in said Exhibit B for the determination of
     the factor "Z", may be changed by the Administrator,
     upon three (3) months' prior written notice and not
     more frequently than once every three (3) years, if
     the Administrator determines that a change is nec-
     essary to provide proper compensation to the Govern-
     ment for the services of the Government and the use
     of the facilities as provided hereunder.  When the
     level of transmission charges is so changed the trans-
     mission charges and the compensation factor will be
     changed corresponsingly.  Any increase in the level of
     transmission charges shall be based on increase in
     costs of the Government."

     In view of the above, we believe that the Director's
statements concerning the long-term characteristics of the con-
tracts and the danger of weakening contractual relationships
are not sufficient justification for failing to recover from
certain wheeling customers the full costs of providing wheel-
ing services.  In fiscal year 1970 unrecovered revenues
amounted to about $867,000.

     The Director's statement that Bonneville's power rates
to its wholesale power customers could be increased if the
Z-factor adjustment created a delay in repayment of the
Government's investment was, in our opinion, inconsistent
with (1) his statement that the Department had approved
guidelines which provided that rates for wheeling non-Federal
power were designed to recover a proportionate share of the




                             21
total costs of the transmission systems and (2) Bonneville's
objective of establishing standard wheeling rates in- such
a manner that its wheeling customers and wholesale power cus-
tomers would bear a fair share of the cost of operating the
transmission systems and that neither group would subsidize
the other.

     In our opinion, it is not appropriate to assess the
wholesale power customers of the Government for costs that
are not being recovered from its wheeling customers due to
the Z-factor adjustment.

     The Director did not comment on our recommendation re-
garding the elimination of the -adjustment allowed for trans-
mission facilities provided by customers.

MATTERS FOR-CONSIDERATION BY THE CONGRESS

     Although the Department of the Interior generally dis-
agreed with our recommendations, we continue to believe that
the actions suggested -are necessary to recover from wheeling
customers .the' full cost of providing wheeling services and
therefore should be implemented.    In view of the Department's
decision not to act on our 'recommendations, we are bringing
these matters to the attention of the Congress-for its con-
sideration in future :dealings with the Department that in-
volve the- Federal transmission system.




                             22
                           CHAPTER 5


                        SCOPE OF REVIEW

     Our review was conducted at the Office of the Commis-
sioner of Reclamation in Washington, D.C.; at the Bonneville
Power Administration's offices in Portland, Oregon; and at
Regions 4, 6, and 7 of the Bureau of Reclamation.    The re-
gional offices are headquartered  in Salt Lake City,  Utah;
Billings, Montana; and Denver, Colorado;  respectively.   Our
review included an examination of  pertinent legislation,   the
policies and procedures of the agencies,  contracts  with non-
Federal entities for wheeling, and related records and cor-
respondence.




                                23
APPENDIXES




    25
I
                                                           APPENDIX I




           United States Department of the Interior
                        OFFICE O TI E SECRETARY
                         WASHINGTON, D.C. 20240

                                                       MAR 17 1971

Dear Mr. Hirschhorn:

The Department of the Interior has reviewed with interest the GAO Draft
Report, "Reevaluation Needed of Rates Charged Non-Federal Users of Federal
Electrical Power Transmission Systems." We appreciate the opportunity
to comment on the factuality of the report and the specific recommendations
contained therein.

With respect to the four recommendations,we offer the following:

     "(1) The Secretary of the Interior establish specific criteria
     for the guidance of Federal power agencies as to the elements of
     cost or other factors to be considered in determining wheeling
     rates."

Within general principles, the Department has approved established
criteria and guidelines for determining wheeling rates; namely that non-
Federal power will be transmitted at rates that will recover its
predetermined proportionate share of the total transmission system cost.
However, specific criteria as recommended by the GAO has not been established
because of the complexities which are involved due to varying circumstances,
i.e., displacement, integrated operations, etc. Accordingly, the Federal
power agencies have advantages in system management by retaining flexihiity
of criteria in determining specific wheeling charges applicable to individual
projects.

     "(2) The Secretary require Federal power agencies to periodically
     reevaluate the adequacy of the wheeling rates."

The power agencies of the Department are continuously involved in the
determination of the adequacy of wheeling rates and because of contract
review procedures, each established wheeling rate is reviewed at least once
every five years.

     "(3) The Secretary require Federal power agencies to develop policies
     for the consistent application of the standard rates."

While agreeing in principle to the desirability of standard rates, the
fact is that in the power marketing area we are moving into complex,
integrated operations involving joint planning and construction of
facilities which may bring about situations whereby wheeling rates per se
will become obsolete. Systems are becoming more and more interconnected
through joint planning, particularly in the determination of the facilities
to be constructed. Increasing contractual arrangements for facilities,
including individual rights, uses and benefits to be derived therefrom


                                  27
 APPENDIX I



are being entered into. Under these conditions, standard rates covering
all possible arrangements would be all but impossible to establish or
enforce.

     "(4) Require BPA to initiate action to amend its existing
     contracts to eliminate the reduction in revenues resulting
     from the "Z" factor adjustment and the adjustment allowed
     for transmission facilities provided by the customer."

The GAO report presents a valid description of the operation of the
billings demand adjustment known as the "Z" factor. However, the
conclusion that the adjustment is neither reasonable nor proper is not
valid. This conclusion indicates a lack of understanding of the principles
incorporated in the negotiation of the eight contracts containing the
 "Z" factor clause. Present management agrees generally that with today's
circumstances, the same contracts would be negotiated without the "Z"
factor by other methods of interchange arrangements. We are further
advised that the Bonneville Power Administration does not intend to
incorporate the "Z" factor clause in any contract commitments in the
future. Subsequent to the GAO auditors' review, the Bonneville Power
Administration has reviewed its contracts including this factor and have
made necessary revisions to preclude the misapplication on the part of
the private utility to their advantage by scheduling loads through other
transmission facilities. As to the concern that this factor will create
pay-out delays, Bonneville Power Administration and the Federal Columbia
River Power System is protected by contract clauses providing for negotiation
increases in the wholesale rates for power. There currently exists eight
contracts with this clause, six of which utilize the "Z" factor and two
not using it because they are not presently purchasing Federal power.
It is predicted that one of these due to changes in purchasing agreements
will qualify for use of the "Z" factor for the period 1971-1973.

Because of the long-term nature of the contracts and the continuing
necessity for good contractual relationships, it is not to the advantage
of the Federal Government to seek elimination of this clause from the
existing contracts.

We appreciate the opportunity to have commented on this draft report.

                                     Sincerely yours,




                                     Di    or of Survey and       ew

Mr. Max Hirschhorn
Associate Director
Civil Division
U.S. General Accounting Office
Washington, D.C. 20548




                                    28
                                                APPENDIX II



                  PRINCIPAL OFFICIALS OF

              THE DEPARTMENT OF THE INTERIOR

              RESPONSIBLE FOR THE ACTIVITIES

                 DISCUSSED IN THIS REPORT



                                           Tenure of office
                                           From          To

SECRETARY OF THE INTERIOR:
    Rogers C. B. Morton             Jan.     1971    Present
    Fred J. Russell (acting)        Nov.     1970    Dec.  1970
    Walter J. Hickel                Jan.     1969    Nov. 1970

ASSISTANT SECRETARY--WATER AND
  POWER DEVELOPMENT:
    James R. Smith                  Mar.     1969    Present

COMMISSIONER OF RECLAMATION:
    Ellis L. Armstrong              Nov.     1969    Present

ADMINISTRATOR, BONNEVILLE POWER
  ADMINISTRATION:
    Henry R. Richmond               Sept. 1967       Present




                               29