FEDERAL ELECTRIC POWER Views on the Sale of Alaska Power Administration Hydropower Assets 140936 United States General Accounting Office GAO Washington, D.C. 20548 1 Resources, Community, and / Economic Development Division B-238296 I February 22,199O The Honorable Mike Synar Chairman, Environment, Energy and Natural Resources Subcommittee Committee on Government Operations House of Representatives The Honorable George Miller Chairman, Subcommittee on Water, Power and Offshore Energy Resources Committee on Interior and Insular Affairs House of Representatives As requested by your offices in January 1989, we updated our earlier work that examined the federal government’s efforts to sell the assets of the Alaska Power Administration (APA). Specifically, we evaluated the prospective sale to determine the extent to which concerns raised in our March 1987 letter to the Secretary of Energy (see app. I) were consid- ered by the Department of Energy (DOE) in arriving at its current sale proposal. Our primary concern at that time was that APA'S planned divestiture approach would likely lead to a proposed sale at a price that would not (1) provide for full cost recovery for the government or (2) reflect the full potential value of the assets to a purchaser. We, there- fore, believed such a sale would benefit APA ratepayers at the expense of taxpayers. current sale proposal does not address our earlier concerns, Sales Results in Brief APA'S agreements have been reached between APA and potential purchasers of APA'S assets-the Eklutna and the Snettisham hydroelectric power projects. The sales agreements provide for selling prices that approxi- mate APA'S previously established minimum acceptable bid of the pre- sent value of the principal and interest due the Treasury over the life of the loan. The sales agreements also provide that the federal government (1) ensure that existing rights-of-way for the projects’ transmission facilities be transferred to the purchasers and (2) bear any construction cost over-runs related to the nearly completed Crater Lake portion of the Snettisham project. Page 1 GAO/RCED-90-93 Sale of APA Hydropower Assets -8 R-238296 In our 1987 letter, we expressed our concern that APA’S approach to the Stiles Agreements sale would likely lead to a limited number of offers to purchase the Have Been Reached assets and that potential purchasers would likely offer a purchase price representing APA’S announced minimum acceptable bid. This has proven to be an accurate assessment of the situation. APA proceeded with its planned divestiture approach and solicited bids as it had originally proposed at the time of our earlier work. Bids were solicited for Snettisham on April 1, 1987, and for Eklutna on May 20, 1987. In the solicitations, APA limited eligible bidders to (1) electric utili- ties who are currently purchasing power from APA, (2) local municipali- ties, (3) the state of Alaska, or (4) a combination of these entities. We were told by the APA Administrator that other parties expressed interest in bidding for the projects but were told they were not eligible bidders. As a result of the limitation on bidders, it is unlikely that bids actually received represent the fair market value of APA assets. APA received only one bid for each project. It then negotiated with each potential purchaser to arrive at a final sales agreement for each project. These agreements provide for selling prices approximating the minimum acceptable bid criteria specified in APA’S request for proposals. These criteria provided that the sale price be not less than the present value] of future principal and interest payments that the Treasury would have received under continued federal ownership (present value pricing method). The sales agreements will be finalized with congressional approval. A brief discussion of the two sales agreements follows. A description of the projects and background information on APA’S efforts to sell the fed- eral power marketing administrations is contained in appendix II. Details of each sales agreement are contained in appendix III. Eklutna Project The Eklutna project provides about 5 percent of the power for the Anchorage-Matanuska Valley area. Its single power plant, which began operation in 1955, produces 30,000 kilowatts of power. A sales agreement for the project has been reached between the APA Administrator and three publicly owned utilities that currently buy ‘Present value is today’s value of a sum payable at a later date or of a stream of income receivable at a future date. Because a dollar in hand today can be invested to earn interest, it is worth more than a dollar at some time in the future. Page 2 GAO/RCED-90-93 Sale of APA Hydropower Assets R-238296 Eklutna’s power. These three utilities -the Chugach Electric Associa- tion, Inc.; the Mantanuska Electric Association, Inc.; and the Anchorage Municipal Light and Power Company-had submitted a joint offer to purchase the project. The agreed-upon selling price will be the present value of the remaining federal investment and interest payments dis- counted at a g-percent rate, plus an additional $1 million. An October 1, 1989, sale transaction date would have resulted in a sale price of about $10,435,000. The Eklutna agreement further provides that APA will be responsible for transferring project transmission line rights-of-way to the purchasers. -.--____ &ett$sham Project The Snettisham project serves the Juneau, Alaska, area. It currently provides 70 to 80 percent of Juneau’s power from the Long Lake unit of the project. Long Lake began full commercial operation in 1975 and pro- duces 47,160 kilowatts of power. The second portion of the Snettisham project, Crater Lake, is currently under construction. This unit should be fully operational in 1991, adding 31,000 kilowatts of power. It is antici- pated that the additional power will supply the projected increasing power needs of the area. A sales agreement has been reached through the APA Administrator’s negotiations with the Alaska Energy Authority, an Alaska state agency. The agreement provides that the selling price will be determined by the present value of the remaining federal investment and interest pay- ments due when the sale is finalized. Unlike the Eklutna agreement, however, the Snettisham agreement contains two alternative methods of computing the discount rate (and ultimately, the price). The agreement specifies that the method providing the higher sales price be used. The first method sets the price at the present value of remaining princi- pal and interest using a discount rate equal to 2 percent above the state’s bond rate (that is, its financing costs). The second formula, which will guarantee some protection for the federal government by setting a “floor” in the pricing method, sets the sales price at 85 percent of the present value of principal and interest payments using the long-term Treasury rate to discount the future payments. Even though the exact purchase price for Snettisham cannot be determined in advance, the APA Administrator believes that the price will fall between 85 percent and 90 percent of the present value of the remaining principal and interest pay- ments discounted at the 30-year Treasury rate. Pa#? 3 GAO/RCED-90-93 Sale of APA Hydropower Assets B238296 Finally, according to the Snettisham agreement, the federal government will be responsible for all costs associated with completing construction on the Crater Lake portion of the project that exceed APA'S April 1988 estimate of total costs. In our March 1987 letter, we said that APA'S present value method for APA’s Selling Price determining its minimum acceptable bid provided only minimal protec- Minimizes Potential tion for taxpayers. The currently agreed-upon formula for determining Rate Impact on the selling price for APA'S projects closely approximate or may, in the case of Snettisham, be less than APA'S previously established minimal Ratepayers but Limits acceptable bids. While the selling prices will, in the APA Administrator’s Taxpayers’ Recovery view, facilitate accomplishing the sale and should have minimal impact on current APA ratepayers, the selling prices, in our view, are unlikely to reflect the fair market value of the projects and will not recover all fed- eral costs associated with the projects. Market Approach for In March 30 and April 10, 1987, letters, DOE and the Administrator, APA, Valuing Assets Not Used respectively, responded to our March letter. DOE stated that it was essen- tial that the sale be structured to avoid significant rate increases and that approximating the discounted present value of future payments for the repayment of the federal investment was necessary to avoid large rate increases. The APA Administrator reiterated DOE'S view and stated that the alternative pricing methods suggested by our March letter would involve higher returns to the government than available under existing law. In light of these views, the Administrator proceeded with the sale process. We believe that the federal government should receive fair market value when selling government assets. Receiving fair market value is impor- tant both to protect the government’s fiscal interests and to promote economic efficiency. We recognize, however, that in particular cases there could be other issues that make a market valuation approach for an asset sale less compelling. A key issue in this case is whether receiv- ing a fair market value for APA assets would lead to significant rate impacts on Alaskan consumers and on the local economies, particularly in the Juneau area. Since a market valuation of APA assets has not been performed, it is unclear what a sale price representing market value would be and thus how it would impact on Alaskan ratepayers. We would expect, however, Page 4 GAO/RCED-90-93 Sale of APA Hydropower Assets B.238296 that power rates in Juneau would be sensitive to the price for Snet- tisham because power produced by Snettisham represents the majority of power sold in the Juneau area. On the other hand, we would not expect power rates in Anchorage to be as sensitive to the price for Eklutna because its contribution to the Anchorage area’s power supply is rather small. In fact, according to the APA Administrator, a selling price for Eklutna at double or more the currently agreed-upon selling price would not be expected to have a significant impact on power rates. According to the Administrator, APA, a market valuation of APA assets was not done because such an evaluation, in the Administrator’s view, was precluded by Sec. 506 of Public Law 98-360 (Energy and Water Development Appropriation Act, 1985). Under Sec. 506, the administra- tion was prohibited from conducting any studies related or leading to the possibility of changing from a cost-based to a market-based rate for the pricing of hydroelectric power marketed by the power marketing administrations or the Tennessee Valley Authority (TVA). Sec. 506 prohibits the administration from examining alternative, non- cost based methods for pricing power marketed by the power marketing administrations and TVA. We do not concur with the APA Administrator’s view that this provision prohibits examining market values for federal assets that are being considered for sale. Thus, in our view, this provi- sion would not prohibit a market-based valuation of APA hydroelectric power assets even though such an analysis requires an evaluation of power rates that are not cost based. Although a market valuation of APA assets was not performed, in 1986 a study prepared by APA consultants, Coopers and Lybrand, estimated APA assets using various alternative valuation methods, including replace- ment costs.2 Their valuation estimates ranged from $81.8 million (repre- senting the present value of future principle and interest payments) to $319.5 million (replacement cost new less depreciation) and offer, in our view, some perspective on other values, which could be associated with AI)A assets. Replacement cost normally represents an upper limit of the market value of an asset. %placement cost is the cost of replacing the undepreciated portion of an asset with another asset that will provide a similar function but with the most economic current technology. Page 5 GAO/RCED-90-93 Sale of APA Hydropower Assets I R-238290 APA’s Sale Price Limits In our 1987 letter, we said that APA'S present value pricing method pro- Ta%payers’ Cost Recovery vided only minimal protection for taxpayers. We noted, in particular, that this value (1) assumed no residual value3 for the assets even though the hydropower projects would have a continued service life for many years following the federally scheduled repayment period and (2) did not consider that actual federal costs would not be completely recovered under current repayment practices by power marketing administrations. Since federal power project interest rates are often below the Treasury’s actual borrowing rates, interest paid to the Treasury under current repayment practices generally does not fully recover the Treasury’s actual interest costs. The present value pricing method, as applied by APA in determining pro ject selling prices, does not recognize that Treasury interest costs would not fully be recovered in future years through current repayment prac- tices. To illustrate this in regard to the Long Lake and Crater Lake por- tions of the Snettisham project, we calculated the present value of future payments that would be owed to the Treasury if project interest rates reflected long-term Treasury borrowing rates at the time the projects were placed in operation. Our calculations showed that, for Snettisham, the present value of the principle and interest if interest were accrued at nonsubsidized rates (equal to long-term Treasury rates when the projects were placed online) would be approximately $73.6 million greater than the present value of the scheduled repayment stream. Our assumptions and methodology are discussed in greater detail in app. IV. Uncertainty over the cost associated with two issues may reduce the Unresolved Sale Issues proceeds the federal government will receive from selling APA'S assets. May ReduceNet First, as discussed previously, APA has the responsibility under the Proceeds Eklutna sales agreement to ensure the purchaser rights-of-way for Eklutna’s transmission lines that cross nongovernment land. Second, some uncertainty exists about the final cost of constructing the Crater Lake unit of Snettisham. According to the Snettisham sales agreement, APA will bear all Crater Lake construction costs that exceed APA'S April 1988 project cost estimate. While APA took, in our view, reasonable steps to estimate the final Crater Lake costs, an October 1989 cost estimate shows that Crater Lake will cost about $5.8 million more than was pro- vided for in the April 1988 Snettisham sales agreement. %esidual value is the remaining market value that assets will have at the end of the repayment period. Page 6 GAO/RCED-90-93 Sale of APA Hydropower Assets B288296 Rights-Of-Way for The Eklutna project contains about 45 miles of transmission lines from Trarbmission Lines the powerhouse to customers in the Anchorage-Matanuska Valley area (see app. V). These lines cross federal and state lands, as well as land owned by private parties and by Eklutna, Inc., a corporation of Alaskan Native Americans. As part of the Eklutna sales agreement, APA has agreed to assume responsibility for ensuring that the purchaser obtains all rights-of-way for these lines at no cost. While APA plans to transfer its rights-of-way across federal land at no cost to the purchasers, it can- not transfer its existing rights-of-way across private and Native Ameri- can lands to the purchaser. Thus, assuring the purchaser such rights-of- way may involve additional-and as yet unknown-costs. The APA Administrator believes that reaching agreement with land own- ers on rights-of-way is manageable and can be accomplished at minimal or no cost. The Administrator told us that the private landowners and Eklutna, Inc. will find it in their best interests to assign the rights-of- way to the purchasers. APA has made no estimate of any costs that might be involved if this does not occur. We believe obtaining transmission line rights-of-way for the Eklutna purchasers could potentially result in costs being borne by APA in com- pleting the sale. Given that rights-of-way agreements had not been reached as of late September 1989, we believe it’s uncertain whether the Administrator will be able to resolve the rights-of-way issue at no fur- ther cost to the government. Should the rights-of-way issue be unresolved at the time APA submits the sale agreements for congres- sional approval, we expect, based on conversations with DOE officials, that APA will include in its sales agreement package a detailed descrip- tion of this issue including the administration’s plans for resolving it. Costs to Complete Crater The Snettisham purchase agreement states that all costs associated with preparing the Snettisham assets for conveyance to the Alaska Energy Lake Authority, including any costs that exceed APA'S April 1988 construction cost estimate, shall be the responsibility of the federal government. The agreement includes APA'S April 1988 estimate of projected final costs. As of November 1989, construction was still underway at the Crater Lake unit. In October 1989, the APA Administrator was provided with a revised construction estimate. The revised estimate indicated that the cost to construct Crater Lake would be about $5.8 million more than provided for in the sales agreement and thus would not be recovered in the project sales price. As with right-of-way matters, we anticipate that Page 7 GAO/RCED-90-93 Sale of APA Hydropower Assets E238296 any additional cost stemming from this situation will be identified by APA at the time the sales agreements are provided to the Congress for its approval. Establishing a selling price for APA assets necessarily involves a tradeoff Cchclusions between ratepayers’ and taxpayers’ interests. Based on our current review of the proposed sale of APA'S hydropower projects, we continue to believe that the sales agreements that have been reached benefit APA ratepayers at the expense of taxpayers and thus do not balance the interests of both groups. Current APA ratepayers are expected to experi- ence a minimal initial rate impact from the proposed sale and, according to APA, will likely experience a decrease in rates below what would have occurred under continued federal ownership after about 10 years. On / the other hand, while the agreed-upon selling prices generally provide an amount of revenue to the Treasury equivalent to that which would have been received under continued federal ownership and under APA scheduled repayment of the federal investment with interest, these prices do not include the recovery of all federal costs associated with the projects. In addition, they do not reflect the fair market value of these assets. In a sense, the proposed selling price represents a situation similar to a homeowner selling a house for the present value of the future scheduled mortgage payments while foregoing the value of the owner’s equity. Beyond our concern about how the selling prices have been determined, our recent review also found that some additional costs will be incurred by the federal government in accomplishing the sale. Based on the recent construction cost estimate for Snettisham project’s Crater Lake unit, the federal government will not recover about $5.8 million of the unit’s cost in the agreed-upon selling price. In addition, some costs to the federal government in transferring the transmission line rights-of-way for the Eklutna project may be incurred. If the Congress wishes to pursue the divestiture of APA assets and Matter for believes the sale of APA assets should be accomplished through a balanc- Congressional ing of ratepayers’ and taxpayers’ interests, it should reject the adminis- Consideration tration’s proposal and direct DOE to identify sales proposals that better balance ratepayers’ and taxpayers’ interests. Y Page 8 GAO/RCED-90-93 Sale of APA Hydropower Assets R-238296 In completing this review, we held discussions with APA officials and reviewed various documents and reports related to the proposed sale, including the negotiated purchase agreements. We also interviewed rep- resentatives of various utilities and governmental entities in the state of Alaska. We performed our field work from March to September 1989 in accordance with generally accepted government auditing standards. Appendix VI provides our objectives, scope, and methodology. As you requested, we did not obtain official agency comments on a draft of this report. As arranged with your offices, we will make no further distribution of this report until 30 days from the date of this letter, unless you release its contents earlier. At that time, we will send copies to the Secretary of Energy; the Director, Office of Management and Budget; and other interested parties. Copies will also be provided to others upon request. This work was performed under the direction of Victor S. Rezendes, Director, Energy Issues (202) 275-1441. Other major contributors are listed in appendix VII. / J. Dextek Peach Assistant Comptroller General Page 9 GAO/RCED-90-93 Sale of APA Hydropower Assets Cbntents Letter Appendix I GAO’s March 1987 Letter to the Secretary, Department of iEnergy Appendix II 21 Project Description Project Description Background 21 23 and Background Appendix III 25 Details of APA Sale Agreements Appendix IV 29 Calculation of Alternate Interest Costs for APA’s Snettisham Project Appendix V 32 Map of Eklutna Lands Under Private or Native American Corporation Ownership Appendix VI 34 Objectives,Scope, and Methodology Page 10 GAO/RCED-90-93 Sale of APA Hydropower Assets 4 Aphendix VII 34 Major Contributors to This Report Tables Table II. 1: Size of Federal Power Marketing 23 Administrations, Fiscal Year 1988 Table III. 1: Projected Selling Price for Selected Dates 26 Table IV. 1: Impact of Alternate Interest Rates on Long 30 Lake Repayment Table IV.2: Impact of Alternate Interest Rates on Crater 31 Lake Repayment Table IV.3: Impact of Alternate Interest Rates on 31 Repayment of Total Snettisham Project Figure Figure II. 1: Location of APA Facilities 21 Abbreviations AI’A Alaska Power Administration DOE Department of Energy GAO General Accounting Office I’MA power marketing administration HCED Resources, Community, and Economic Development Division TVA Tennessee Valley Authority Page 11 GAO/RCED-90-93 Sale of APA Hydropower Assets I :!’ 1) * a*’ , Appendix I G$iO’sMarch 1987 Letter to the Secretary, IJepartment of Energy Ualted States GAO General Accounting Ofllce Washington, D.C. 20548 March 23, 1987 The Honorable John S. Herrington, The Secretary of Energy Dear Mr. Secretary: At the request of the Chairman of the Subcommittee on Environment, Energy, and Natural Resources, House Committee on Government Operations, we are reviewing the Department’s efforts to sell the Alaska Power Administration’s (APA’s) assets. Because the proposed sale of APA assets may set important precedents for divesting the other four power marketing administrations (PMAs), a goal of the current Administration, our review is focusing on several factors which may be important to Congressional approval of the proposed sale. These factors include (1) the justification and timing of the sale; (2) information made available to and involvement opportunities for the affected parties, especially the Congress and Alaskan ratepayers; (3) protection of the economic interests of U.S. taxpayers; and (4) APA’s assessment of the economic, social, and environmental impacts of the sale on the Alaskan communities served by APA. On April 1, 1987, the APA Administrator plans to issue a request for proposals (RFP) for purchase of APA’s assets. Although we have not completed our review, we would like to share with you some concerns we have about the sale process so that you can consider them before an RFP is issued. These concerns involve matters which, if not clarified, could hinder the APA sale as well as the overall Administration goal of divesting all PMAs. Our primary concern is that APA’s planned divestiture approach appears to give greater emphasis to protecting current APA ratepayers rather than balancing ratepayera’ and taxpayers’ interests. Specifically, the current plan to initially limit eligible bidders to several entities within Alaska could result in few bids being received and a low sale price. Further, APA’s approach for establishing a minimum acceptable bid, in our view, does not appear to consider the full potential value of APA assets to a purchaser, nor does it reflect all costs incurred by the government in constructing APA facilities. In addition, we noted several other matters which we believe merit your consideration before an RFP is issued. Page 12 GAO/RCED-90-93 Sale of APA Hydropower Assets Appendix I GAO’s Mnrch 1987 Letter to the Secretary, Department of Energy In our work to date, we have held discussions with APA officials and with representatives of various utilities and governmental entitles In the State of Alaska. We have also reviewed various APA documents and reports leading up to the reviaed work plan of January 14, 1987, which reflects APA’s current strategy for pursuing the diveetiture. BACKGROUND APA produces and markets electric power generated by two widely separated hydroelectric facilities in the State of Alaska. Its Eklutna project was completed In 1955 and provides the Anchorage-Palmer area with about 5 percent of ite electrical needs. The Snettisham project serve8 the Juneau area and Is presently being expanded. The facilities constructed in the initial phase (Long Lake) began operations in 1973 and provide about 70 percent of Juneau’s electrical needs. A second construction phase (Crater Lake) is under way and should be completed in 1988. This will add 59 percent more firm energy to the Snettlsham powerplant’s annual production, although demand for that added power ia unlikely to develop for several years, according to APA. APA is required by law, as are all PMAs, to recoup through its power rates sufficient revenues to pay all operation and maintenance costs as well as to repay, with interest, the federal investment required to construct its facilities. After considering estimated costs to complete the second phaae of Snettisham, APA estimates that as of October 1, 1988, about $162 million in federal investment will remain to be paid to the Treasury on APA’s two projects. The Administration originally proposed the divestiture of APA in its fiscal year 1986 budget. Since that time, several studles have been completed on the proposed sale, including a joint study by the State of Alaska and APA on potential divestiture issues, and two studies by the firm of Coopers & Lybrand on the value of APA assets and on alternative ways to structure the sale. According to APA’s revised work plan, APA will issue an RPP on April 1, 1987. After completing a bid selection/negotiation process, APA plans to submit a sale proposal to the Congress by February 1988. APA’s work plan specifies that the primary goal of the divestiture is to close out all federal responsibilities of APA. As key objectives, the work plan states that the sale should (1) achieve a fair return to the U.S. taxpayer and (2) avoid llnacceptable impacts on the economy of the Page 13 GAO/RCED-90-93 Sale of APA Hydropower Assets Appendix I GAO’s March 1987 Letter to the Secretary, Department of Energy region. As a guideline for carrying out the divestiture process, the work plan specifies that the sale will be pureued in an open, competitive manner involving all interested and affected parties. As noted by APA, the diveatiture objectives involve a balancing of Interests, particularly between Alaskan ratepayers In seeking to avoid power rate increases and the government in trying to obtain a fair price for its assets. COMPETITION IN BIDDING IS BEING LIMITED APA’s current divestiture work plan states that competition in bidding may be Important to help assure that the federal government receives a fair price. Although the concept of a competitive bidding process has been retained as a sale guideline, the work plan concludes that a fair price can be achieved without having a fully competitive bidding process. The work plan calls for limiting the initial bidders to (1) electric utilities now served by the projects, (2) municipalities in the projects’ service areas, (3) the State of Alaska, or (4) some combination of these entities. According to the APA Administrator, the decision to limit bidding was made, in part, to help assure Alaskan support for the proposed sale. Comments from Alaskan entities on an earlier APA work plan had opposed divestiture to non-Alaskan interests or to purchasers other than the existing customer utilities, municipalities, and/or the state. Although there is interest by Alaskan entities in purchaeing APA’s assets, factors such as the lack of potential bidders with adequate financial resources and experience in hydroelectric operations, as well as weakness in the local economy, could limit the number of bids actually received to a very few. In the administrator’s view, there is likely to be one bid for the Snettisham project and one or two bids for the Eklutna project. We are concerned that the initial limitation on those eligible to bid and the expected results may work against taxpayer interests. In our view, limiting competition to Alaskan entities Increases the likelihood that actual bids received may approximate APA’s minimum acceptable bid since there would be little incentive for a bidder to offer more. APA plans to broaden the competition only if initial bidders are unsuccessful in meeting APA’s acceptable bid criteria. Furthermore, limiting qualified bidders to Alaskan entities would preclude an opportunity to consider potentially beneficial proposals from non- Alaskan entities. For example, Coopers & Lybrand ” Page 14 GAO/RCED-90-93 Sale of APA Hydropower Assets Appendix I GAO’@ March 1987 Letter to the Secretary, Department of Energy concluded that the APA projects offer some interesting investment opportunities for investor-owned utilities (IOUs); however, they stated that an IOU purchase would increase power rates. While we recognize that support for the sale from Alaskan entities is important, we note that APA’s criteria for selecting among proposals received contain many elements designed to assure that Alaskan interests are protected. We therefore question whether it is appropriate under these circumstances to preclude, in the initial RFP, an opportunity for any interested party to submit a purchase proposal which could, potentially, best meet the sale objectives. In addition, the limited bidding approach seems to us to be inconsistent with APA’s commitment to provide for an “open, competitive process involving all interested and affected parties.” APA’S MINIMUM ACCEPTABLE BID MAY ONLY MINIMALLY PROTECT TAXPAYERS APA has proposed that a minimum acceptable bid for APA facilities would be the present value of the future principal and interest payments APA would make to the Treasury if the projects remained under federal ownership (present-value method). This, valuation method was one of several used by Coopers & Lybrand to estimate the value of APA’s assets. Applying the present-value method, Coopers & Lybrand calculated a value of $89.3 million for APA assets when using a discount rate of 7.6 percent. As shown in the table below, other valuation methods resulted in estimated values up to a high of $319.5 million. Table 1: Summary of APA Asset Values and Methods Developed By Coopers & Lybrand (In Millions)a Valuation Method Snettisham Total Replacement Cost S221.5 $319.5 Reproduction Costb 97.9 184.7 282.6 Unpaid Debt Balance 14.7 146.9 161.6 Net Book Value 23.1 120.6 143.7 Present Value of Principal and Interest Payments 12 .o 77.3 89.3 Notes: a Estimates projected for October 1, 1988. b Estimates are net of depreciation. Replacement cost refers to the cost to construct comparable facilities. Reproduction cost refers to the cost to reconstruct APA’s facilities exactly as they now exist. We note that the discount rate is a key component in calculating the value of APA’s assets using the present- Y Page 15 GAO/RCED-90-93 Sale of APA Hydropower Assets /, Appendix I GAO’s March 1987 Letter to the Secretary, Department of Energy value method. While the Coopers & Lybrand asset valuation study used a discount rate of 7.6 percent, APA has not diacloeed in its work plan the discount rate it will,u’se or how the rate will be determined when computing the actual value of its minimum acceptable bid. Because changes in the rate can produce large differences in the minimum acceptable bid computation, we believe this matter should be clarified prior to issuing a final RFP. APA’s work plan provides for using the present,-value method for establishing a minimum acceptable bid because it would (1) enable the purchaser to maintain rates at the same relative level as under federal ownership and (2) keep the Treasury “whole” In the sense that the proceeds would be equivalent to those that would be realized under continued federal ownership. Establishing APA’s minimum acceptable bid based on the present-value method could set an important precedent for other planned PMA sales. Although we take no position on whether this method should be used, we believe that policymakers need to carefully consider the implications of using this method. In our view, setting a minimum acceptable bid for APA based on the present-value method provides only minimal protection for U.S. taxpayers since this method (1) assumes that the hydropower projects would have no residual value at the point in time the federal investment would have been repaid by APA even though both projects are projected to have a continued service life, (2) does not consider the increase in the value of APA assets which would result from the administration’s proposed PMA repayment reforms, (3) does not consider the leas-than-full recovery of federal costs which results from current PMA repayment practices, and (4) produces the lowest value for APA’s assets. Minimum acceptable bid assumes no - residual value in APA assets APA’s present-value approach will assign a value only to the remaining principal and interest payments APA would make to the Treasury, thus assuming the projects have no residual value when the federal investment has been repaid. Applying this valuation method to a project that was completely paid for would produce an asset value of zero regardless of the project’s remaining useful life. It is reasonable, in our view, to assume that APA’s hydropower projects have residual value to a purchaser so long as the facilities have a remaining useful life beyond the period required to repay the federal investment. Page 16 GAO/RCED-90-93 Sale of APA Hydropower Assets . I Appendix I GAO%March1967Letterto theSecretary, Departmentof Energy According to Coopers 6 Lybrand’e asset valuation report, the Eklutna and Snettisham (Long Lake) facilities have useful service lives of 87 years and 75 years, respectively. Because these service lives are considerably longer than the periods in which the federal investment is to be repaid (50 years and 60 years, respectively), it appears that the projects could have considerable residual value to a purchaser. APA’s work plan does not explain why the remaining service lives of these projects are assumed to have no value. Increased value from repayment reforms has not been considered The approach APA will use to establish a minimum acceptable bid does not consider the impact of the administration’s PMA repayment reform proposal discussed in Its fiscal year 1988 budget. This repayment reform is expected to be presented for congressional consideration later this year and is planned for implementation in 1989. As we understand the proposal, the repayment reform would require PMAs to make equal annual principal payments on the federal investment for each of their projects rather than simply requiring the principal be repaid by the end of the repayment period as is currently the practice. Implementing the proposal would generally have the effect of accelerating retirement of the federal investment. In our view, the impacts of the repayment reform proposal should be given consideration when establishing the minimum acceptable bid for APA assets because this minimum is to reflect payments the government would have received under continued federal ownership. Applying the repayment reform to the federal investment in APA would increase the present value of that investment. According to calculations made for us by Coopers & Lybrand, the $89.3 million estimate of present value of the remaining federal investment would be increased by $4.3 million if this repayment reform was considered--only the Snettisham project would be affected by this repayment reform. From the taxpayers’ perspective, it can be argued that the mlnimum acceptable bid should reflect consideration for this increased value. The full federal cost for APA may not be recovered APA’s minimum acceptable bid calculation approach may not reflect the full amount of the federal investment in APA facilities because costs to the government are generally not fully accounted for in determining the federal investment in PMA projects. In the case of APA Y Page 17 GAO/RCED-9083 Sale of APA Hydropower Assets Appendix I GAO’s March 1987 Letter to the Secretary, Department of Energy facilities, for example, Coopers & Lybrand estimeted that the Treasury’s long-term borrowing rate was 7.6 percent in October 1986. APA’s administrator told us, however, that interest charged during the current construction of the Crater Lake phase of the Snettisham project and the interest to be charged on this investment over the 50-year life of this project would be based on the 3 percent interest rate applicable to the original 1962 authorizing legislation for Snettisham. In a September 1986 report, we examined alternatives for PMA pricing of power produced at federal water projects.’ Our work showed that while PMAs’ methods of determining the cost of federal power were generally consistent with existing laws and policies, the federal investment on many projects may not be fully recovered. More specifically, (1) practices for computing interest expense for PMA projects during construction have resulted in understatement of project costs (the federal investment) and (2) interest costs associated with borrowing from the Treasury have been based on interest rates below the Treasury’s borrowing rates. Overall, these practices have the effect of understating the full cost of the government’s investment in federal hydropower projects. As discussed above, we believe our past findings on undervaluation and underrecovery of federal investments in PMAs are applicable to APA. According to the APA Administrator, APA has no plans to determine the full cost of the federal investment in APA’s projects or the extent its minimum acceptable bid would fail to recover these costs. Present-value method results in the lowest value for APA As shown in Table 1, the present-value approach results in a significantly lower value for APA’s assets than do the other valuation methods used by Coopers & Lybrand. For example, the $89.3 million present value of APA’s future debt payments to the Treasury is about (1) 38 percent or $54.4 million below the net book value, (2) 45 percent or $72.3 million below the actual amount of the remaining debt, and (3) 72 percent or $230.2 million below the net replacement value. In congressional hearings last year, concerns were expressed by some members of Congress that PMA sale prices lPricing Alternatives for Power Marketed by the Department of Energy, GAO/RCED-86-186BR, September 1986. Y Page 18 GAO/RCED-99-93 Sale of APA Hydropower Assets Appendix I GAO’slbiarch 1987I&tertotheSecretary, Department of Energy based on the unpaid debt balances would indicate a “fire sale” approach to PMA divestiture. In light of these expressed concerns and APA’s plans to establish a minimum acceptable bid which may be substantially below the unpaid debt balance, we believe additional information is needed to explain how APA’s proposed pricing approach will meet the sale objective of protecting the taxpayers’ interest. OTHER MATTERS In addition to the concerns discussed above, our uork disclosed several other matters which suggest that additional information on the APA sale, before an RPP is issued, may enhance the overall divestiture process. These matters are discussed below. Justification for Sale--APA has not yet fully evaluated several key aspects of the appropriateness of the proposed sale in its basic sale documents and studies. For example, these documents do not include (1) an analysis of the pros and cons of selling or (2) a discussion of the details of why APA is no longer needed to carry out its basic missions. Also, APA has not fully evaluated the likely benefits and costs from the sale and compared these to other alternatives, such as not selling at all or selling based on valuation methods other than the proposed present-value approach. For example, APA has not estimated the likely effect on retail power rates from the proposed or alternative methods for pricing and selling APA’s assets. The APA administrator told us that the purchase proposal to be submitted to the Congress in the future will include the basic rationale for selling APA and an analysis of the costs and benefits of the proposed sale. This proposal, however, will not be prepared until after bidding and evaluation are completed. We believe that the divestiture process may be better served by providing this information for public and congressional debate before an RFP is issued. Not only should these assessments and debate provide meaningful information on the merits of proceeding into the RPP phase of divestiture, but they could also increase the likelihood that an eventual sale proposal would be supportable by Alaskan, congressional, and other interested parties. Timing of Sale --The timing of the proposed sale may not be consistent with protecting taxpayers’ interests or in closing out APA’s responsibilities. According to Coopers h Lybrand, the Alaskan economy is in an unsettled state due to the upheaval in the oil industry and reductions in state government spending. Although these problems are Y Page 19 GAO/RCED-90-93 Sale of APA Hydropower Assets I r Appendix I GAO’S March 1987 Letter to the Secretary, Department of Energy not expected to adversely impact the Eklutna sale, both Coopers 61 Lybrand and the APA Administrator believe they could significantly affect the sale of Snettisham. Coopers 6 Lybrand stated that the excess capacity of Snettisham, when coupled with the poor economy, may result in potential buyers heavily discounting the value of this project. They said that from the Treasury viewpoint, the value of Snettisham may be increased by delaying the sale. Similarly, the APA Administrator said the current economic uncertainties will tend to lower the offering price from purchasers, and he expressed concern that these conditions may result in not being able to sell Snettisham, particularly in the near-term. Public Involverent-- APA’s efforts to involve all interested and affected parties in the sale process may warrant strengthening at the community level. As we understand APA’s approach to public involvement, most informational outreach efforts (eg. meetings and the distribution of work plans and other documents for comment) have been focused on potential purchasers and other important interest groups, such as electric power associations and congressional committees. According to the administrator, APA has not distributed to general ratepayers documents designed to acquaint the public with sale issues and how the sale might affect them. Additionally, he said that APA has no specific plans for public meetings/workshops in Juneau and Anchorage to secure comments from local ratepayers on the proposed sale. While the APA Administrator believes that his dealings with the local municipalities, utilities, and other interest groups are sufficient to reach the ratepaying public, additional efforts to inform and involve local ratepayers may enhance the overall divestiture process. We are sending copies of this letter today to the Chairman, Subcommittee on Environment, Energy, and Natural Resources, House Government Operations Committee; and to the chairmen of the various congressional committees which have oversight responsibility for PMA activities. We will be available to discuss these matters in more detail at your convenience. Sincerely yours, Keith 0. Fultz ” Associate Director Page 20 GAO/RCED-90-93 gale of APA Hydropower Assets Appendix II Project Description and Background The Alaska Power Administration (APA), one of the five federal power Puject Description marketing administrations within the U.S. Department of Energy, is responsible for marketing electric power from two federal hydroelectric projects in Alaska-the Eklutna and Snettisham projects. (See fig. II. 1.) Flourie 11.1:Location of APA Facllltier Eklutne Project Alaska 1 ProJect Long I Lake : sower Tunnel Source: GAO analysis of APA data Page 21 GAO/RCEDQO-93 Sale of APA Hydropower Assets -1--- Appendix II Project Description and Background . The Eklutna project, which provides power to the Anchorage-Mata- nuska Valley area, has been in service since 1955. The project’s facilities consist primarily of a dam at Eklutna Lake, a powerhouse several miles away, a tunnel for water to pass from the lake to the powerhouse, and approximately 45 miles of high-voltage transmission lines. The 30,000 kilowatts] produced by the project provide about 5 percent of the area’s power. The existing 47,160-kilowatt Snettisham project is Juneau’s main power source, supplying 70 to 80 percent of its power. The project was autho- rized to be built in two stages. The first stage, the Long Lake unit, has been in commercial operation since 1973. The Corps of Engineers, which has construction responsibility for Snettisham, is now building the Crater Lake unit, the second stage of the project. The Crater Lake unit will add 31,000 kilowatts of capacity to the existing powerhouse. The Snettisham project has about 45 miles of transmission lines. APA sells the power produced at these two projects at wholesale prices. Eklutna’s power is marketed to three public utilities in the Anchorage area-the Chugach Electric Association, Anchorage Municipal Light & Power, and the Matanuska Electric Association. Snettisham’s power is marketed to the state of Alaska and to Alaska Electric Light & Power, an investor-owned utility serving Juneau. Combined, the Eklutna and Snettisham projects provide about 8 percent of Alaska’s power. Federal Investment and At the end of fiscal year 1988, the cumulative federal investment made in these projects, excluding the Crater Lake unit of the Snettisham pro- APA Repayment ject, was $128.8 million. According to APA records, about $23.4 million of this investment had been returned to the Treasury, leaving a net invest- ment of $105.4 million ($91.8 million for Snettisham’s Long Lake Unit and $13.6 million for Eklutna). The October 1989 estimate for the total federal investment in constructing the Crater Lake unit was $67.5 million. In addition to repaying a portion of the investment, APA has also paid $34.0 million in interest on the two projects to the Treasury through fiscal year 1988. According to APA'S projection of future Treasury pay- ments, the remaining outstanding investment and an additional $147.6 million in interest, including interest on the Crater Lake investment, ’ A kilowatt is defined as a unit of power equal to 1,000 watts or about 1.34 horsepower. Page 22 GAO/RCED-90-93 Sale of APA Hydropower Assets Appendix11 Project Description and Background would be paid to the Treasury if the projects remain under federal ownership. The Department of Energy’s five federal power marketing administra- Background tions (PMA) market about 6 percent of the electricity generated in the United States. Table II.1 shows the relative size of each of the PMAS in terms of installed generating capacity and power sales revenues. Table 11.1:Sire of Federal Power Marketing Administrations, fiscal Year Dollars in millions 1988 _________ Installed capacity in Power Unpaid Power marketing administration megawatts revenues -. investment ---- .-~-. APA (excluding Crater Lake) 77 $95 $104 ---- Bonneville - 21,507 21,360 9,059 --~.- __-.--.___ Southeastern -..-___. 3,092 1,575 1,121 Southwestern ~~-__~~ ._ __--~. 2,150 1,550 724 ______~.~~___ ~-~. ~. _....~~ Western 10,385 8,231 2,719 Total 37,211 --~ $32,811 $13,727 The administration has expressed its view that the federal government should not be involved in the sale and distribution of electrical power. Beginning in fiscal year 1986, it has proposed the divestiture of the PMAS. In a 1987 letter to the Speaker of the House of Representatives, the Director, Office of Management and Budget, stated that the five PMAS are “commercial activities which in most areas of the country are performed by private and other nonfederal enterprises.” He further stated that because the need for federal power development had long since been filled, the government should divest itself of those activities. In its fiscal year 1986 budget, the Reagan Administration proposed to transfer APA to state or other nonfederal ownership within Alaska. The Administration’s fiscal year 1987 budget contained a broader proposal to sell all five PMAS. At that time APA stated that the process of divesti- ture was to be open and competitive, and was to result in a fair return on investment for federal taxpayers while recognizing the benefits now enjoyed by present customers. However, no specific terms for the sales were proposed, In acting on the fiscal year 1987 budget, the Congress prohibited any further study of divestiture of the PMAS, except for APA, Page 23 GAO/RCED-90-93 Sale of APA Hydropower Assets Appendix II Project Description and Background The former and current presidential administrations have proceeded with efforts to sell APA. In August 1989, APA signed a purchase agree- ment with the Chugach Electric Association, Anchorage Municipal Light & Power, and the Matanuska Electric Association to sell APA'S Eklutna project. In February 1989 APA and the Alaska Energy Authority, a pub- lic corporation of the state of Alaska, also signed a purchase agreement for the Snettisham facility. In addition to its efforts to sell APA, the Bush Administration has contin- ued to support the divestiture of the other PMAS. In its fiscal year 1988 budget, the Reagan Administration proposed legislation to study possi- ble divestiture of the Southeastern Power Administration. In its fiscal year 1990 budget, the Bush Administration proposed selling certain assets of the Southeastern Power Administration in 1991 and to offer selected assets of other PMAS for sale in future years. Page 24 GAO/RCED-90-93 Sale of APA Hydropower Assets Appendix III Qtails of AF?ASaleAgreements Sales agreements for APA'S Snettisham and Eklutna projects were reached in February and August 1989, respectively. The agreements provide for how the final sales prices will be calculated, discuss the pro- cess for how the assets will be transferred, and address various respon- sibilities of the government and purchasers. The pricing method for both projects will generally approximate a value representing the present value of future principal and interest payments that the Treasury would have received under continued federal owner- ship. Since, under continued federal ownership, these payments would be received by the Treasury over many years rather than immediately in a lump sum, future payments were discounted to derive today’s value of payments expected in future years. Discounting is a standard finan- cial analysis method used to derive the present value of future expendi- tures or payments. The method is based on the premise that a dollar in hand today is worth more than a dollar sometime in the future, since money currently available can be invested and grow at the rate of interest. The following sections discuss the agreements for each project as well as provisions of the sales agreements that generally apply to both projects. Eklutna Agreement The Eklutna sales agreement includes the proposed sale dates of October 1 of 1989, 1990, or 1991.’ The sales price in each case is calculated as the present value of all remaining principal and interest payments at the sale date, using a Q-percent discount rate plus an additional $1 million negotiated with the purchasers. Table III. 1 shows the approximate price to be paid for the Eklutna project, depending on the date of sale. The sales agreement provides that payment is required within 5 years of enactment of federal legislation authorizing the sale. ‘The agrcvtment also describes how the selling price is to be determined if the transaction is finalized on a date other than these three. Page 26 GAO/RCED-90-93 Sale of APA Hydropower Assets + -- Appendix III Details of APA Sale Agreements Table 111.1:Projected Selling Price for Selected Dates Dollars in thousands Remaining Present value principal and of remainin Transaction date interest’ payments II Selling pric& 10/01/89 $16,583 - $9,435 $10,435 I o/o l/90 15,544 8,580 9,580 ----__-~ lO/Ol I91 13.912 7.631 8.631 aThis is the amount that over time would be received by the federal Treasury under continued APA ownership. bDiscount rate of 9.0 percent; payments assumed at mid-year %cludes the $1 million negotiated addition to the sales price. The three utilities that have reached an agreement to purchase Eklutna jointly submitted the only bid to purchase the project. The group’s initial purchase price offer was exactly the same as the minimum acceptable bid; however, APA negotiated an additional $1 million in selling price. An additional feature of the Eklutna agreement concerns rights-of-way for Eklutna’s transmission lines. According to the agreement, APA is respon- sible for ensuring that the purchaser has rights-of-way for use of the project’s transmission lines. Snettisham Agreement The method for computing the sales price for the Snettisham project, as provided for in the sales agreement is more complex than that agreed to for the Eklutna project. Unlike Eklutna’s pricing formula, the Snet- tisham sales agreement has alternative pricing formulas. The first com- putation for the Snettisham selling price is the present value of future scheduled Treasury payments using a discount rate 2 percentage points above the interest rate associated with the state’s revenue bonds. These bonds are those that the state of Alaska will sell to obtain funds for the purchase. For example, if the purchaser’s revenue bonds sold for 8.5 percent, a 10.5-percent rate would be used to discount APA'S remaining payments. Under the Snettisham pricing formula, as the purchaser’s borrowing costs (and subsequently the discount rate) increase, the proceeds to the federal government decrease. The APA Administrator told us that if the state’s borrowing cost rose too high relative to Treasury’s borrowing costs, the federal government’s proceeds from the sale would shrink to an unacceptable level. Thus, to preclude an unacceptably low sale price, the sales agreement includes an alternative pricing method that pro- vides a floor to the price the government would receive. This alternative Page 26 GAO/RCED-90-93 Sale of APA Hydropower Assets ArwendJx III Detach of APA Sale Alfreements pricing formula sets a floor in the pricing formula of 85 percent of the present value of the remaining principal and interest payments, dis- counted at a rate equal to the average yield rate on 30-year Treasury bonds. Even though the exact purchase price for Snettisham cannot be deter- mined in advance, the APA Administrator believes that the price will fall between 85 percent and 90 percent of the present value of the remaining principal and interest payments discounted at the 30-year Treasury rate. For example, according to the APA Administrator, if interest rates are 9 percent, the price for Snettisham would be about $60 million, or if current interest rates drop to 7 percent, the price would be about $71 million. According to the Snettisham sales agreement, the purchaser will make full payment of the sales price to the Treasury by wire transfer on the transaction date. One feature of the Snettisham agreement involves the treatment of the costs of constructing the Crater Lake unit, which had not been com- pleted at the time the agreement was reached. When APA negotiated the Snettisham purchase agreement, it included an estimated $3,500,000 as an additional cost to account for the likely construction claims that con- tractors might file after completing the Crater Lake unit. APA'S cost esti- mate was based on the average of construction claims estimates provided by the Army Corps of Engineers, the project constructor. The APA Administrator said that using the average provided a balance of the risks involved in estimating these costs. The actual amount of the claims, however, could be lower or higher than this amount. If the claims are higher than the estimate, the additional costs would be borne by the government. If the actual amount of the claims are less, the “sav- ings” would accrue to the government. Other Features of the Sales The Eklutna and Snettisham sales agreements contain several other fea- Agreements tures designed to provide for a smooth transfer of operations. Within 6 months after congressional approval of the sale, the purchasers and APA are to adopt specific transition plans describing arrangements and a timetable for completing the sale and transfer. Among other things, these plans include the selection of a transaction date to transfer owner- ship, a schedule of payments to the Treasury, and provisions for envi- ronmental, engineering, and safety inspections of the facilities being sold. Page 27 GAO/RCED-SO-93 Sale of APA Hydropower Assets Appendix III Details of APA Sale Agwements The sales agreements also contain provisions protecting existing water agreements between APA and various nonpower beneficiaries of the projects, such as fish hatcheries, cities, and government agencies. For example, the Eklutna agreement provides that the purchasers will assume all APA responsibilities and benefits in regard to APA'S agreement with the municipality of Anchorage concerning the Eklutna water pro- ject. Both agreements state that the purchasers will also continue to make lands and water available to the public for recreational uses. Page 28 GAO/RCED-90-93 Sale of APA Hydropower Assets , Appendix IV Cakulation of Alternate Interest Costs for @A’s Snettisham Project In our March 1987 letter to the Secretary, Department of Energy, we discussed our concern about APA’S method for establishing a minimum acceptable price for the Snettisham and Eklutna projects. One aspect of our concern was that APA'S pricing method failed to provide for a full recovery of the government’s costs associated with these projects. A major reason for the lack of full cost recovery is that interest costs on the APA investment paid to Treasury is less than the interest payments would have been if the Treasury’s actual borrowing rates were used, thus resulting in an interest rate subsidy. In order to obtain an estimate of the interest rate subsidy for the two units of the Snettisham project, we calculated the present value of future payments to the Treasury according to the current repayment schedule and the existing project interest rate of 3 percent, and com- pared that to the present value of what those payments would have been if the APA project interest rate had reflected long-term Treasury borrowing costs at the time each of the projects became fully operational. To analyze an unsubsidized investment recovery by the federal govern- ment, we assumed that the interest rate for the project was equal to the long-term Treasury borrowing cost at the time the projects were placed in service.’ We used these rates to derive alternative streams of interest that would have been paid had the investment not been subsidized by low project interest rates. We then calculated the present value of the actual expected stream of future payments (derived from the project rate of 3 percent) and the alternative stream of interest payments (derived by using the long-term Treasury bond rate at the time each of the units was placed on-line). We used the data on long-term Treasury rates for 1989 that were available at the time we undertook our analysis to discount future payments. The rate we used was approximately 9 percent, which was based on the average of the Treasury rates during the first 7 months of fiscal year 1989. Our calculations for the Long Lake and the Crater Lake units follow. ‘We used the long-term Treasury rate at the time the project was placed into service to derive our alternative interest stream representing a nonsubsidized investment by the federal government. We used this rate since it is common for nonfederal utilities to borrow money on short-term loans during the project’s construction and then to refinance these debts with new long-term debt at the market rate of interest when the project goes on-line. Thus, we are using the analogy of how such a project might be financed in the private sector to determine how a nonsubsidized investment by the federal government might be structured. Page 29 GAO/RCEDBO-93 Sale of APA Hydropower Assets ..* -, Appendix IV Calculation of Alternate Interest Costs for APA’s Snettisham Project Long Lake Unit The Long Lake unit, the first part of Snettisham to be completed, became operational in 1975, 13 years after the authorizing legislation was passed. In 1975, the long-term Treasury bond rate was 6.96 percent, more than double the 3-percent rate that was established at the time of authorizing legislation. Table IV.1: Impact of Alternate Interest Raites on Long Lake Repayment Total payments over life 1989 Present value Long Lake repayment of loan discounted at 9.1% Principal ---_____ .- $90,886,974.00 $15,538,136.47 -____--.---._ Interest (at 3%) 74,492,238.51 25,859,113.61 Total $165,379,212.51 $41,397,250.08 Principal $90,886,974.00 $15,538,136.47 Interest (at 6.96%) 172,821,993.34 59,993,143.57 Total $263,708,967.34 $75,531,280.04 Pr;en;,v”:“e of interest payments Oo a $59,993,143.57 _.- -- at 3.00 % a -25,859,113.61 .-----~ Difference 0 $34,034,030.16 aData not applicable Crater Lake Unit The Crater Lake unit is scheduled to be completed in 1991. The project interest rate applied to this unit will be the original project rate of 3 percent. Because we cannot predict the 1991 interest rate, we have used the long-term Treasury bond rate for 1989 that was available at the time that we undertook our analysis. That rate of approximately 9 percent was based on the average of the long term Treasury rates during the first 7 months of fiscal year 1989. J Page 30 GAO/RCED-90-93 Sale of APA Hydropower Assets . - , Appendix IV Calculation of Alternate Interest Costs for APA’s Snettisham Project Table IV.2: Impact of Alternate Interest Rates on Crater Lake Repayment Total payments o;;;Jlf; 1989 Present value Crater Lake repayment discounted at 9.1% Principal $61,700,000.00 $5,309,282.72 __.-- .._._..-__-..---. .-.- ___. interest (at 3%) 66,693,760.80 19,354,909.70 Total $128,393,760.80 $24,664,192.42 Principal __.. - .._-._ --.---.---..-- $61,700,000.00 $5,309,282.72 --... Interest (at 9.13%) 202.971.345.37 58.903.441.86 Total $264,671,345.37 $64,212,724.588 Pr~~;;~lue of interest payments Oo b $58,903,441.86 at 3.00% b -19,354,909.70 --- Difference b $39,548,532.16 aThe discounted present value at a 9.13 rate of discount of a stream of principal and interest payments where interest is accruing at a 9.13 rate should equal the original investment level, in this case, $61,700,000. Our method only approximates the original investment level due to the mid-year interest accrual used in this analysis. “Data not applicable Total Snettisham Project The alternative interest rate repayment for the combined Long and Crater Lake units of the Snettisham are shown in Table IV.3. Table IV.3: Impact of Alternate Interest Rates on Repayment of Total Snettisham 1989 present value of 1989 present value of Project total principal and 3% total principal and interest discounted at current interest Snettisham Project 9.1% discounted at 9.1% Long Lake __...--~~ ~- -- $41,397,250 $75,531,280 Crater Lake .- $24,664,192 $64,212,725 Total $66,061,442 $139,744,005 Page 31 GAO/RCED90-93 Sale of APA Hydropower Assets Aljpendix V Map of Eklutna Lands Under Private or Native” American Corporation Ownership Substation Problems wlth easements ------------ A could occur along thls part of the transmisslan line ___-.-_.-.--- i Eklutna Powerplant --- Power I Tunnel .. .. . :.. . .. . ..L.... :. . .:. . . . . . . I7 .. .. :: .. .. . .. ... .. . . . .. . . .. . ...:.. .... . . . .. . .... .. Yf . .. ... . .::. ........ .... .... . .. . . . . ,f . .,. .:: . .: . . .. .. .. . :I . .. . .... .. .. . .... ..:. . .. . . . ... . /- Probloms wlth easemenls ... . ... . .. :. . . ---w _ ---_ could occur along this ... . :’ / - ..... . part of the transmlsslon line . . . ;T’i/ . .. I / /’ I A -.d - Substation 0 5 10 Scale in Miles I Source: GAO analysis of APA data. Page 32 GAO/RCED-90-93 Sale of APA Hydropower Assets &p&$x VI Objectives, Scope,and Methodology The staffs of the Environment, Energy and Natural Resources Subcom- mittee, House Committee on Government Operations, and the Subcom- mittee on Water, Power and Offshore Energy Resources, House Committee on Interior and Insular Affairs, asked us to determine which concerns we raised in our March 1987 letter to the Secretary of Energy and which concerns raised during congressional hearings in 1986 had been addressed by DOE in reaching sales agreements for APA'S hydroelec- tric power projects. Our key concern was that the approach being taken by the Department in selling APA'S assets would likely lead to sales agreements that failed to recover all of the government’s costs in con- structing and operating the projects and would not reflect the market value of the assets. We addressed our objective by holding a series of discussions with APA officials and reviewing various documents and reports that they pro- vided. We reviewed the negotiated purchase agreements as well as the purchasers’ original proposals and APA'S analyses of these documents. We examined other documents, such as papers on tax exempt financing and the pricing of the Crater Lake unit for the Snettisham agreement, and various documents discussing personnel plans. We also analyzed alternative selling prices using market interest rates. We interviewed representatives of various utilities and governmental entities in the state of Alaska. We performed our field work from March to September 1989. We con- ducted this assignment in accordance with generally accepted govern- ment auditing standards. Page 33 GAO/RCED-90-93 Sale of APA Hydropower Assets &f)cndix VII I ll@ajorContributors to This Report John W. Sprague, Associate Director Resources, Paul 0. Grace, Assistant Director Community, and Rachel B. Hathcock, Assignment Manager Charles W. Bausell, Jr., Senior Economist Economic Development Division, Amy D. Abramowitz, Economist Washington, D.C. Benjamin S. Gross, Attorney Office of the General COunsel,Washington, DC. Raymond A. Larpenteur, Evaluator-in-Charge Stiattle Regional Office Page 34 GAO/RCED-90-93 Sale of APA Hydropower Assets
Federal Electric Power: Views on the Sale of Alaska Power Administration Hydropower Assets
Published by the Government Accountability Office on 1990-02-22.
Below is a raw (and likely hideous) rendition of the original report. (PDF)