oversight

Financial Management: Briefing on Federal Electricity Activities

Published by the Government Accountability Office on 1997-11-10.

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

United States
General Accounting Office
Washington, D.C. 20548

Accounting and Information
Management Division

B-278550

November 10, 1997

The Honorable John R. Kasich
Chairman
Committee on the Budget
House of Representatives

The Honorable John T. Doolittle
Chairman, Subcommittee on
 Water and Power Resources
Committee on Resources
House of Representatives

Subject:    Financial Management: Briefing on Federal Electricitv Activities

At the joint request of your offices, on October 20, 1997, we briefed
representatives of several Members of Congress on the results of our recently
completed review of federal electricity activities. This work was done at your
request and resulted in our September 19, 1997, report entitled, Federal
Electricitv Activities: The Federal Government’s Net Cost and Potential for
Future Losses (GAO/AIMD-97-110 and 97-11OA). The enclosed briefing slides
highlight the findings in that report. The review responded to your concerns
about (1) any ongoing expenses incurred by the federal government to support
the electricity-related activities of the power marketing administrations (PMAs),’
Rural Utilities Service (RTJS), and Tennessee Valley Authority (TVA) and
(2) potential future losses from these activities given the move toward
deregulation and increased competition in the electricity industry.

The federal government incurred net costs of over a billion dollars annually for
fiscal years 1992 through 1996 to support the electricity-related activities of RUS
and the PEAS. We estimated that the net costs to the federal government for
fiscal year 1996 totaled about $2.5 billion-$0.4 billion for BPA, $0.2 billion for


‘We reviewed four of the five PMAs the Bonneville Power Administration
(BPA) and the Southeastern, Southwestern, and Western Area Power
Administrations (which we refer to as the three PM.&). The fifth PMA, the
Alaska Power Administration, was excluded from our review because legislation
has been enacted to sell it to nonfederal entities.

                                  GAO/AIMD-9%33R Federal Electricity Activities
B-278550

the three PM&s, and about $1.9 billion for RUS, including about $982 million in
RUS loan write-offs. Cumulatively, for fiscal years 1992 through 1996, we
estimated that the net costs were about $8.6 billion in constant 1996 dollars,
including over $1 billion in RUS loan write-offs. The net costs ,associated with
TVA were minimal. Under current policies and law, the federal government will
likely continue to incur many of the same types of costs; however, future RUS
loan write-offs cannot be accurately predicted.

We also reported that there is risk to the federal government of future losses
from each of these entities because of financial difficulties faced by RUS
borrowers, BPA, TVA, and one or a few projects at each of the three PEAS. As
of September 30, 1996, the federal government was exposed in varying degrees
to the risk of future losses because of its more than $84 billion in direct and
indirect financial involvement in the electricity-related activities of RUS, the
PMAs, and TVA. The risk of future losses relates to the possibility that RUS
borrowers, the PMAs, or TVA would be unable to repay the full $53 billion in
debt owed to the federal government or that the federal government would
incur unreimbursed costs as a result of actions it took to prevent default or
breach of contract on the $31 billion in nonfederal debt owed by these entities. _



We are sending copies of this letter to the Ranking Minority Members of the
House Committee on the Budget and the Subcommittee on Water and Power
Resources, House Committee on Resources. Copies will also be made available
to others upon request.

We appreciated the opportunity to share the results of our work. In addition to
the briefing slides we presented on October 20, 1997, we have enclosed a list of
the Members of Congress represented at the briefing. Jf you have questions or
desire additional assistance on any of these matters, please contact me at
(202) 512-8341.




Linda’M. Calbom
Director, Civil Audits

Enclosures (2)




 2                               GAO/AIMD-9833R Federal Electricity Activities
B-278550
Members of Congress Remesented at the Federal Electricitv Activities Briefing

                        October 20, 1997, 10:00 a.m.
                Longworth House Office Building - Room 1334
                             Washington, D.C.



Rep. Franks (R-NJ)
Rep. Klug (R-Wl)
Rep. Knollenberg (R-Ml’)       .
Sen. Mack (R-K)
Rep. Meehan (D-MA)
Sen. Reed (D-RI)




(913816)


3                              GAO/ATMD-9%33R Federal Electricity Activities
w   Accounting and Information
    Management Division

    FEDERAL ELECTRICITY ACTIVITIES:

    The Federal Government’s         Net Cost
    and Potential for Future
    Losses

    Briefing for Congressional Staff

    October 20,1997       IO:00 AM

                      1
~ZQXIBackground

l       Requesters raised concerns about:
    l   The significant ongoing expenses incurred
        by the federal government to support the
        electricity-related activities of the PMAs and
        RUS and
    a Potential future losses from the PMAs, RUS,
      and TVA given the move toward
      deregulation and increased competition in
      the electricity industry

                              2
w           Overall Objectives


l       For the federal government’s electricity-
        related activities,’we designed our work to
    l    Estimate the fiscal year 1996 net recurring
         cost and, where possible, fiscal years 1992
         through 1996 cumulative net recurring cost
         and
    l    Assess the likelihood of future losses
         beyond the net recurring costs


                               3
tx3           Scope

          l   Rural Utilities Service
      l       4 Power Marketing Administrations
               l   Southeastern
              l    Southwestern
              0 Western
              0 Bonneville
      l       Tennessee Valley Authority

                                  4
    w         Scope Limitations

l   GAO did not:
        0   Estimate the forgone revenue for federal,
            state, or local aovernments resultina from the
            tax-exempt st;us of the RUS borroiers, the
            PMAs, and TVA
        0   Assess the reasonableness of the
            methodologies used by the operating
            agencies to allocate power-related costs to
            the PMAs for recovery

                                5
*       Net Costs


l   For fiscal year 1996, th.e federal government
    incurred net costs of about $2.5 billion for
    BPA, the 3.PMAs, and RUS
l   For fiscal years 1992 through 1996, the
    federal government’s net cost of operating
    these entities was about $8.6 billion, in
    constant 1996 dollars
l   The net costs incurred by the federa
    government to operate TVA for fiscal years
    1992 through 1996 were minimal
                          6
@Q           Net Costs

     l       Criteria used to determine net cost
         l    Federal accounting
              standards
                                              Full
         l    OMB Circular A-25               cost
         l    Industry Practice        >




                                  7
                QD                                                                    Net Costs


                                                                        Estimated Net Costs to the Federal Government
      (Dollars in millions)
                                                                               .........................                      ....................................................                                     .................................               ..............            .........       ................            ............
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    Financing                                                                                  $874                                    $3,812                                          $208                                   $1,155                                                $377                                   $1,974.                                                                                                                                         $1,459                                                                              $6,941

    Loan write-offs                                                                                 982                                      1,049                                                                                                                                                                                                                                                                                                                                       982                                                                          1,049

    Benefits                                                                                                    1                                               3                                 16                                              82                                          21                                         110                                          $1                                              $4                                                      39                                                                                199
    Construction                                                                                                                                                                                 30                                          138                                                                                                    1                                                                                                                                         30                                                                                139
    Other                                                                                                21                                          112                                   (69)                                              157                                                                                                                                                                                                                                        (48)                                                                                    269
                                 Total                                                $1,878                                          $4,976                                                                                                                                       $398                                   $2,085                                                     $1                                              $4                                    $2,462                                                                             $8,597




                                                                                                                                                                                                                                                                                           8
CSQD Federal Financial Involvement


       Dollars in billions

           Entity            Direct          s   Indirect         Total

       RUS                       $32.3                                $32.3

      Three PMAs                       7.0              $0.2               7.2


       BPA                            10.1                  7.1           17.2

      TVA                              3.8              24.1              27.9

      Total                      $53.2                 $3.1.4         $84.6




                                             9
w           Federal Financial Involvement

l       The federal government would incur a future
        loss:
    l    Direct involvement - to the extent the RUS
         borrowers, the PMAs, or TVA fail to make
         payments on federal debt
    l   Indirect involvement - to the extent it incurs
        unreimbursed costs as a result of actions it
        took to prevent default or breach of contract
        on nonfederal debt

                              10
w              Risk of Loss


l       Criteria for assessing risk
    l       Statement of Federal Financial Accounting
            Standards (SFFAS) No. 5, Accounting for
            Liabilities of the Federal Government
        l    Probable, reasonably possible, or remote
    l       Consistent with criteria used by bond
            rating services to assess credit risk for
            nonfederal utilities

                                  11
w       Risk of Loss


0 For RUS, we reviewed the loan portfolio,
  assessed the production costs of key
  borrowers relative to their respective markets,
  and considered state regulatory actions
l   For the PMAs and TVA, we considered the
    cost of electricity production and rates, key
    financial ratios, generating mix, competitive
    environment, management actions, and
    legislative and other factors


                          12
G+W Risk of Loss - FNJS

    l       $10.5 billion owed by 13 financially
            stressed G&Ts
        l    4 borrowers owing $7 billion are in
             bankruptcy
        0 9 borrowers have invested in
          uneconomical plants and/or have
          formally requested debt forgiveness
          from RUS


                              13
w            Risk of Loss - RUS


    l       Some currently viable borrowers are likely
            to face future financial difficulty due to
        l    High production costs (27 of 33 G&Ts
             had average revenues per kilowatt hour
             higher than neighboring IOUs)
        0 Competitive and/or regulatory pressures




                               14
w           Mitigating Factor - RUS


    l       “All-requirements” wholesale power
            contracts between G&Ts and their
            member distribution cooperatives
        l    Long-term contracts obligate the
             distribution cooperatives to purchase all
             of their power needs from the, G&Ts
        l    Short-term shield against competition



                              15
GJQ Risk of Loss -- RUS


 l       Despite the mitigating factor, it is probable
         that
     l    the federal government will continue to
          incur losses on loans to financially
          stressed borrowers
     l    additional losses will be incurred on
          borrowers that are not currently troubled,
          but will likely become troubled in the
          future

                              16
GMJ Risk of Loss - Three PMAs


  l       Three PMAs competitively sound overall
      l    Production costs average more than 40
           percent ,below IOUs and POGs in the
           primary NERC regions in which they
           operate
  l       If required to recover all power-related
          costs, ability to remain competitive might
          be impaired


                              17
GtAQ Risk of Loss - Three PMAs

  0 All three PMAs have at least one project
    or rate-setting system with problems that,
    taken as a whole, make risk of some loss
    to the federal government probable
  l   In aggregate, these problem projects or
      rate-setting systems represent 19 percent
      (about $1.4 billion) of the federal
      government’s involvement in the three
      PMAs


                         18
w        Risk of Loss - Three PMAs

                            Problem Projects at the three PMAs
    Dollars       in millions
    8,000

              -
    6,000

              -
    4,000

    2,000


         0
                  Southeastern Southwestern       Western      Total 3 PMAs

                    q Problem Projects ii!i!/Total Federal Involvement

                                           19
G+U Mitigating Factors - Three PMAs


      l       Management Actions
          0 Staffing
          l    Benchmarking
  l           Cost-based contracts
         Risk of Loss - BPA

l       Risk of loss through fiscal year 2001 is
        remote
    l    Contracts through FY2001 with
         preference and industrial customers
         provide for stable revenues
    l    Fish cost funding responsibility capped
         through FY2001
    l    Current substantial financial reserve
         balance provides flexibility

                           21
w            Risk of Loss - BPA


    l       Risk of loss after fiscal year 2001 is
            reasonably possible
        l    Expiration of customer contracts
        0 Risks from market uncertainties
        l    High fixed costs
        l    Substantial upward pressure on
             operating expenses


                                22
w              Mitigating Factors -.BPA


    l       Mitigating factors reduce risk of loss
        l    Inherent cost advantages
        0,Management actions to reduce operating
          costs
        l    Extensive transmission system
        l    Scheduled paydown of nonfederal debt
             beginning in 2013


                                 23
w      Mitigating Factors - BPA




    While the mitigating factors reduce
    the risk of loss, we believe the risk
    of loss is still reasonably possible.




                         24
w        Risk of Loss -- TVA


l   Under current monopolv-tvpe
                             I    structure, risk
    of loss to the federal government from its
    involvement in TVA is remote
    l   Long-term contracts provide stability and
        ensured cash flow
    l   Exemption from the “wheeling” provisions
        of the Energy Policy Act of 1992 protects
        against outside competition
    l   TVA can set rates with minimum oversight

                           25
w         Risk of Loss -- TVA


l   Risk of loss is reasonablv possible absent
    protection from competition
    l   TVA has chosen to defer costs related to its
        substantial nuclear investment to.future years
        rather than including them in current or prior
        year costs being recovered from ratepayers
    l   This cost deferral has resulted in a high leve I
        of fixed costs and deferred assets which
        leaves TVA vulnerable to future competition
m              Risk of Loss -- TVA

    l       TVA’s vulnerability to wholesale competition
            without protections was recently
            demonstrated when the Bristol Virginia,
            Utilities Board announced that it is going to
            leave the TVA system for Cinergy, Inc
        l    Cinergy offered firm wholesale power at
             2.59 cents per kWh for 7 years, 40 percent
             lower than TVA’s comparable wholesale
             rate of 4.3 cents per kWh


                                 27
w              Mitigaiing
                      i   Factors -- TVA


l           Mitigating factors reduce risk of loss
        l    Inherent cost advantages
    9 Management actions to increase
      revenues, cut operating expenses, and
      reduce debt
    l        Extensive transmission system
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        l
GLQ Mitigating Factors - TVA




      While the mitigating factors reduce
      the risk of loss, we believe the risk
      of loss is still reasonably possible.
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