oversight

Federal Power: Issues Related to the Divestiture of Federal Hydropower Resources

Published by the Government Accountability Office on 1997-03-31.

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

                 United States General Accounting Office

GAO              Report to Congressional Requesters




March 1997
                 FEDERAL POWER
                 Issues Related to the
                 Divestiture of Federal
                 Hydropower
                 Resources




GAO/RCED-97-48
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-275838

      March 31, 1997

      Congressional Requesters

      As you requested, this report provides information on (1) the profiles of three power marketing
      administrations, including their similarities and differences and their interactions with the
      agencies that operate federal water projects; (2) the general parameters of the process by which
      federally owned assets can be sold; and (3) the factors that would have to be addressed in a
      divestiture of federal hydroelectric assets, such as the relationship between power generation
      and the other purposes of federal water projects. We agreed to include in our study only the
      Southeastern, Southwestern, and Western Area Power Administrations.

      As agreed with your offices, we are sending copies of this report to the appropriate House and
      Senate Committees; interested Members of Congress; the Administrators of the Southeastern,
      Southwestern, and Western Area Power Administrations; the Commissioner, Bureau of
      Reclamation; the Director for Civil Works, U.S. Army Corps of Engineers; and other interested
      parties.

      If you or your staff have any questions, please call me at (202) 512-3841. Major contributors to
      this report are listed in appendix IX.




      Victor S. Rezendes
      Director, Energy, Resources,
        and Science Issues
B-275838

List of Requesters

Representative Charlie Norwood
Representative John M. Spratt, Jr.
Representative Bill Barrett
Representative Doug Bereuter
Representative George E. Brown, Jr.
Representative Ed Bryant
Representative Richard Burr
Representative Sonny Callahan
Representative Eva M. Clayton
Representative Bob Clement
Representative James E. Clyburn
Representative Jerry F. Costello
Representative Bud Cramer
Representative Nathan Deal
Representative Peter A. DeFazio
Representative Terry Everett
Representative Bart Gordon
Representative Lindsey Graham
Representative W. G. (Bill) Hefner
Representative Van Hilleary
Representative Robert T. Matsui
Representative Cynthia McKinney
Representative George Miller
Representative David Minge
Representative Mike Parker
Representative Collin C. Peterson
Representative Earl Pomeroy
Representative Glenn Poshard
Representative Bob Stump
Representative Zach Wamp
Representative Ed Whitfield
Representative Roger F. Wicker

Senator (formerly Representative) Tim Johnson




                     Page 2                     GAO/RCED-97-48 Federal Power
B-275838




           Page 3   GAO/RCED-97-48 Federal Power
Executive Summary


             The nation’s five power marketing administrations (PMA)—Alaska,
Purpose      Bonneville, Southeastern, Southwestern, and Western Area—are agencies
             within the Department of Energy (DOE) that sell the electricity generated
             by hydropower plants operated by the Department of the Interior’s Bureau
             of Reclamation (Bureau) and the U.S. Army’s Corps of Engineers (Corps).
             These powerplants are located at federal water projects. In the 1986
             budget, the President proposed divesting the Alaska Power Administration
             from federal ownership. Ten years later, this sale—delayed by numerous
             technical details, such as the need to more clearly define postdivestiture
             rights-of-way and easements—still has not been completed. The long time
             to arrange the successful transfer of the smallest of the PMAs emphasizes
             the complexity and the number of issues to be addressed before divesting
             any of the larger PMAs.

             In recent years, various bills to divest the federal assets used for
             generating, transmitting, and marketing hydroelectricity (called
             “hydropower assets”) have been introduced. In response to these
             proposals, on January 18, 1996, various Members of Congress requested
             that GAO examine the issues related to the sale of these assets. GAO agreed
             to develop a “primer” discussing the issues to be considered in any
             discussions of the divestiture of the federal hydropower assets, including
             the PMAs. GAO agreed to provide information on (1) Southeastern,
             Southwestern, and Western, including their similarities and differences,
             and their interactions with the agencies that operate federal water projects
             (mostly, the Bureau and the Corps); (2) the main objectives and general
             decisions involved in divesting federal assets, along with how these
             objectives and decisions apply to divesting the federal hydropower assets;
             and (3) the specific issues related to hydropower to be addressed before a
             divestiture of the PMAs.


             Federal water projects consist of several resources, such as dams,
Background   reservoirs, and in cases where hydropower is generated, hydropower
             plants. The PMAs market the power generated at these projects and, with
             the exception of Southeastern, own and operate the facilities that transmit
             the power. The hydropower plants are owned and operated by other
             agencies—primarily the Bureau and the Corps. These agencies (called
             “operating agencies”) balance how water is used at federal water projects
             among various purposes, including the enhancement of fish and wildlife
             habitat, flood control, irrigation, municipal and industrial uses, navigation,
             power generation, and recreation. The amount of hydropower generated




             Page 4                                             GAO/RCED-97-48 Federal Power
                   Executive Summary




                   and marketed is affected by the availability and use of water for these
                   other purposes.

                   The federal power marketing program has developed incrementally since
                   it began in the early 1900s. Hydropower plants were authorized to provide
                   power for the project’s needs. Legislation also sought to use hydropower
                   generated in excess of those needs to be used to aid in the financial
                   undertaking of the project and to promote social and economic
                   development by directing the PMAs to market power at the lowest possible
                   rates consistent with sound business principles. In their sales, the PMAs are
                   also directed to give priority to “preference customers,” or public bodies
                   and cooperatives, such as municipal utilities, rural electric cooperatives,
                   and irrigation districts.

                   The three PMAs covered by GAO’s review (Southeastern, Southwestern, and
                   Western) receive annual appropriations to cover their operating and
                   maintenance (O&M) expenses and, if applicable, the capital investment in
                   transmission assets. Federal law calls for the PMAs to set their power rates
                   at levels that will repay these appropriations; it also calls for the PMAs to
                   set their rates to recover the annual power-related O&M expenses and
                   annualized capital costs expended by the operating agencies to generate
                   the power. DOE’s implementing order specifies that unless otherwise
                   prescribed by law, the appropriations used for O&M expenses must be
                   recovered in the same year that the expenses were incurred but that
                   appropriations used for capital investments must be recovered, with
                   interest, over periods not to exceed 50 years.


                   While Southeastern, Southwestern, and Western all market the
Results in Brief   hydropower generated at federal water projects, they serve different
                   geographical areas and have different assets. Their customers vary in size
                   and in their electric energy purchases. On average, 52 percent of the
                   customers of these three PMAs are considered “small” (delivering 100,000
                   megawatt hours (MWh) or less to end-users), while 19 percent are
                   considered “large” (delivering more than 500,000 MWh to their end-users).1
                   PMAs are not the main source of electricity for most of their customers; the
                   three PMAs in our report supply about 7 percent of the electricity
                   requirements of their customers. However, because the PMAs’ power is
                   purchased primarily during times of peak demand at rates that are, on

                   1
                    A watt is the basic unit used to measure electric power. A kilowatt (kW) is 1 thousand watts of power,
                   and a megawatt (MW) is 1 million watts. A kilowatt-hour (kWh) is 1 thousand watts applied for 1 hour
                   and a MWh is 1 million watts applied for 1 hour. The average home in the United States uses about
                   10,000 kWh of electricity per year.



                   Page 5                                                             GAO/RCED-97-48 Federal Power
Executive Summary




average, half of the rates charged by other utilities, great demand exists for
the PMAs’ power, and there are waiting lists to become customers. The
PMAs have a close working relationship with the Bureau and the Corps.
These interactions are based in part on written agreements and on flexible
arrangements that recognize the operating agencies’ role in managing
water releases in a way that balances a project’s multiple purposes.

Two principal objectives have typically been cited by other nations and by
the United States for selling government assets: (1) eliminating or reducing
the government’s presence in an activity that some view as best done by
the private sector and (2) improving the government’s fiscal situation. As
the basis for deciding to divest government assets, these two objectives
will affect many subsequent decisions needed to implement a sale.
Implementation issues include decisions about such concerns as what
specific assets to sell, how to group these assets, what conditions and
liabilities to transfer to the buyer, and what sales mechanism to employ.
The two broad objectives, which apply to any divestiture of government
assets, have also been advanced by proponents of divesting the federal
hydropower assets.

If, based on a broad policy evaluation of the pros and cons of privatization,
a decision to divest federal hydropower assets is reached, several key
issues specifically related to hydropower would need to be addressed.
These issues include balancing how water is used among the multiple
purposes of federal water projects; assigning the numerous contractual
obligations and liabilities of the Bureau, the Corps, and the PMAs; handling
Native Americans’ claims to water, property, and tribal artifacts; and
determining the future responsibility for protecting the environment and
endangered species—a commitment that already constrains the operations
of many projects. The potential effects of a divestiture on wholesale and
retail electric rates, which in turn would affect regional economies, are
other important issues. To a large degree, these impacts would be
determined by the prevailing wholesale electric rates of the local utilities
in the region in which power from the PMA is sold, the region’s reliance on
this power, and the availability of other sources of power. The issues
affecting the divestiture of any large government enterprise, including the
federal hydropower program, are complex. However, complex issues have
arisen and been successfully addressed in other federal and private sector
transactions and asset transfers.




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                             Executive Summary




GAO’s Analysis

PMAs, Which Differ in Size   Western, Southeastern, and Southwestern—which jointly sold about 1.6
and Assets, Sell to Varied   percent of the nation’s electricity in fiscal year 1994—differ in size and
Customers                    assets. Western is the largest of the three, marketing power in 14 states
                             from 56 hydropower plants and one coal-fired power plant operated, for
                             the most part, by the Bureau. Western, which markets from a total
                             generating capacity of about 9,800 MW, had revenues from power sales of
                             about $658 million in fiscal year 1994. Southeastern markets power in 11
                             states from 23 hydropower plants operated by the Corps with a generating
                             capacity of about 3,100 MW. Southeastern had revenues from power sales
                             of about $156 million in fiscal year 1994. Unlike the other two PMAs,
                             Southeastern owns no transmission lines and therefore relies on regional
                             utilities for transmission services. Serving six states from 24
                             Corps-operated hydropower plants with a generating capacity of about
                             2,100 MW, Southwestern had revenues from power sales of about
                             $98 million in fiscal year 1994.

                             In fiscal year 1994, Western, Southeastern, and Southwestern had 637, 294,
                             and 62 customers, respectively. These customers, who are generally
                             preference customers, vary in terms of type, size, and the amount of power
                             they purchase. Some customers are public utilities that are among the
                             largest in the nation, while others are small rural electric cooperatives in
                             sparsely populated areas. Some customers generate and transmit
                             internally generated electricity, while others only distribute electricity
                             purchased from other utilities and suppliers. About 7 percent of the power
                             sold by these PMAs is purchased by other federal agencies.

                             Because the three PMAs have a limited amount of electricity to sell, about
                             three-quarters of their preference customers obtain more than half of their
                             electric energy from other sources. However, their customers benefit from
                             purchasing power from the PMAs because their rates average about half of
                             those from other sources. The PMAs’ ability to set lower rates stems from
                             several factors, including the low cost of hydropower in comparison to
                             power generated from other sources as well as the lower embedded
                             capital cost of their hydropower plants.

                             The PMAs maintain close working relationships with the Bureau and the
                             Corps. The Bureau’s and the Corps’ operating plans and manuals define
                             the timing and amount of water to release from the reservoirs. These




                             Page 7                                           GAO/RCED-97-48 Federal Power
                            Executive Summary




                            agencies generate hydropower subject to these operating conditions and
                            other factors, such as environmental restrictions and the water quality
                            standards of state water boards. The PMAs try to sell hydropower in a way
                            that is consistent with these patterns of water releases while maximizing
                            the value of federal power.


The Government’s            Similar to divestitures by foreign governments, as examined in the surveys
Objectives Will Influence   of international experiences, the proposals to divest federal assets in the
General Decisions About     United States, such as hydropower assets, have generally stemmed from
                            two objectives: (1) eliminating or reducing the federal role in an activity
Divesting Federal Assets    that some view as best done by the private sector and (2) improving the
                            federal fiscal situation. Both of these objectives have also been advanced
                            by those who favor divesting federal hydropower assets. For example, the
                            proponents of divesting federal hydropower assets question the role of
                            government in producing and marketing electricity and contend that the
                            marketplace for electricity has become increasingly competitive because
                            of such various production and marketing changes as the ability of buyers
                            to purchase electricity from competing sources in wholesale markets, the
                            development of low-cost gas-fired electricity generation, and the
                            emergence of power brokers. Proponents also assert that the
                            government’s ability to operate, maintain, and repair these assets is not
                            well served by the government’s capital planning and budgeting systems.

                            On the other hand, the opponents of this divestiture stress the importance
                            of many other policies and goals that are related to the production of
                            federal hydropower—for instance, providing reasonably priced electricity
                            to remote rural, low-income areas. They also contend that federal
                            hydropower is generated subject to the other purposes of federal water
                            projects, such as irrigation, and that a divestiture could complicate the
                            government’s ability to protect these purposes. Opponents also maintain
                            that the acquisition of federal hydropower assets and marketing services
                            by the private sector, combined with continuing mergers and acquisitions
                            in the electric utility industry, would lead to a concentration of greater
                            market power in the hands of fewer utilities. This, in turn, would increase
                            the likelihood of higher electric rates for consumers.

                            The proponents believe that the net effect of the sale of federal
                            hydropower assets on the U.S. Treasury would be positive because, among
                            other reasons, the new owners would be subject to taxes and the
                            divestiture would eliminate what the proponents perceive to be financial
                            subsidies to the PMAs’ ratepayers. In contrast, the opponents of this



                            Page 8                                           GAO/RCED-97-48 Federal Power
Executive Summary




divestiture believe that the PMAs’ rates are not subsidized and, if these
assets were sold, the Treasury’s loss of revenue over time would exceed
the proceeds from the sale. Assessing the full financial impact of a
divestiture requires examining the estimates of the sale price as well as the
magnitude and timing of expected revenues and expenditures (including
the impact on future tax revenues), assessing a variety of direct and
indirect costs, expressing these amounts in present value terms, and
addressing underlying uncertainties in sensitivity analyses.2 An analysis of
the budgetary treatment of an asset divestiture, however, does not fully
capture the long-term financial implications on the federal budget.
Budgets are usually projected and analyzed in terms of 5-year windows.
Such a short time frame, however, does not capture the financial
implications of divesting federal hydropower facilities, because these
assets frequently have projected useful lives of many decades.

Establishing the underlying objectives for a sale of federal assets, in
general, and for the PMAs, specifically, is important because the emphasis
accorded each objective will determine the subsequent decisions in the
divestiture process. Because many alternative divestiture paths exist,
specific choices can enhance or compromise the government’s divestiture
goals. In general, the government faces decisions on determining the
specific assets to be sold, the conditions to be placed on their use by the
prospective buyer, the liabilities to be transferred to the buyer or
otherwise retained, and the sales mechanism and the processes to be
employed. For example, if the government decides that seeking full market
value for its assets is paramount to other goals, it could choose sales
methods that allow for competitive bidding and place few restrictions on
the number or identity of bidders. Alternatively, if the government’s
primary goal is obtaining private sector operation of its assets and
receiving a full market price is only a secondary goal, it could choose to
negotiate a sale price with a selected buyer. In addition, decisions about
the sales processes to employ—for instance, trade sales or stock
offerings—need to be made. Finally, the government will need to decide
who will manage the sale.3




2
 A sensitivity analysis examines how the result of a calculation is affected by changes in the variables
used.
3
 A trade sale occurs when assets are sold to firms in the relevant trade or industry.



Page 9                                                               GAO/RCED-97-48 Federal Power
                            Executive Summary




Specific Issues That        A divestiture of federal hydropower assets raises many complex issues to
Should Be Addressed in      be addressed. Among them is an issue that pertains to the very nature of
Connection With Divesting   federal water projects—their multiple purposes, as specified in their
                            authorizing legislation. For instance, most projects managed by the Corps
Federal Hydropower          were built with the authorized purposes of flood control and navigation
Assets                      while other laws have specified additional uses for the water in these
                            projects. For example, the Endangered Species Act directs the Bureau and
                            the Corps to implement programs to conserve endangered and threatened
                            species and to ensure that their actions do not jeopardize those species or
                            their critical habitat. Unless the legislation authorizing a divestiture
                            exempted the transfer from the preexisting legal provisions that had
                            established the project’s purposes, these provisions would continue to
                            affect how the new owner could manage the water project, how much
                            power the new owner could generate, and potential sales prices.

                            Irrigation is a unique authorized purpose because power revenues pay a
                            portion of the irrigation costs. Specifically, the Secretary of the Interior
                            assigns to be repaid through these revenues most, but not all, of the
                            federal investment in irrigation facilities that the Secretary deems the
                            irrigators cannot afford to repay. For instance, according to Bureau
                            officials, power revenues are ultimately expected to cover about 70
                            percent of the federal investment in completed irrigation projects. As of
                            September 30, 1995, Western—through its power revenues—was
                            responsible for recouping about $1.5 billion over periods ranging up to 60
                            years for individual projects; however, only about $32 million of the
                            federal investment in irrigation had been repaid because this investment is
                            typically repaid after the federal investments in power assets have been
                            repaid. If Western and the related assets are to be sold, the issues of how
                            to repay the federal investment in irrigation and how to accommodate the
                            use of water for irrigation would need to be addressed.

                            The ramifications of the PMAs’ and the Bureau’s and the Corps’ contractual
                            obligations and liabilities, which are numerous and complex, would also
                            need to be recognized. For instance, the Bureau’s Great Plains Region in
                            Billings, Montana, has over 2,200 contracts and agreements, including 580
                            right-of-use permits concerning such things as buffers, crops, drainage,
                            and weed control. Although the transferability of these obligations would
                            need to be considered, according to agency officials, the PMAs’ and the
                            operating agencies’ contracts and agreements typically do not address
                            whether contractual obligations would be assigned to a nonfederal buyer
                            and what, if anything, would happen to related federal liabilities.




                            Page 10                                          GAO/RCED-97-48 Federal Power
Executive Summary




Importantly, the PMAs also have contractual obligations to sell power to
their preference customers.

Concerns about the impacts of water projects on the environment,
especially the habitat of endangered and threatened species, are
increasingly constraining the ability of the operating agencies to generate
hydropower, especially during hours of peak demand. Since the late 1980s,
these restrictions have decreased generating capacity, resulting in forgone
power revenues of millions of dollars to the PMAs as well as costs of equal
magnitude to replace the lost generating capacity and to buy replacement
power. For example, according to Bureau officials, to protect the
migrations of Chinook salmon, the Bureau has restricted the use of five
hydropower units at the Shasta powerplant in the Central Valley Project in
California. According to these officials, since 1987 these restrictions have
resulted in additional costs of about $50 million to purchase power to
meet Western’s contractual obligations. According to officials from the
Bureau, the Federal Energy Regulatory Commission (FERC), the PMAs,
environmental groups, and trade associations, the effects of environmental
constraints on power production will likely continue in the future and
could affect the price the government would obtain if it sold some
hydropower assets. A divestiture proposal would need to address the
postdivestiture responsibilities of the buyer and the government in
accommodating environmental concerns.

Various issues related to Native Americans’ rights would have to
addressed prior to a divestiture because their rights to water could affect a
divestiture. According to Bureau officials, Native Americans’ rights to
water at some federal water projects are the earliest, thus superseding the
use of water for other purposes, including hydropower generation. As an
example, they cited a legal settlement with tribal entities of the Fort Peck
Reservation, Montana, that includes the right to about 1 million acre-feet
of water from the Missouri River.4 Also, under federal legislation, excess
federal land in Oklahoma is subject to transfer to the Secretary of the
Interior in trust for Native American tribal entities in Oklahoma. In
addition, under the Native American Graves Protection and Repatriation
Act, certain Native American artifacts found on federal lands must be
returned to the relevant Native American tribal entity. Corps officials
responsible for managing federal projects from which Southwestern
markets power explained that they have been involved in numerous cases
in the past several years involving this law.

4
 One acre-foot is the amount of water that it would take to cover one acre of land with water to a
depth of one foot.



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Executive Summary




Before a divestiture, the future regulatory treatment of federal hydropower
assets would also need to be specified—especially, whether or not the
future regulatory treatment would require a license from FERC, which
oversees nonfederal hydropower plants. FERC’s licensing process, which
requires input from many affected parties, can take up to 15 years to
complete. If the new owners of a hydropower facility were allowed to
operate the facility without a FERC license, they would have a competitive
advantage over other hydropower operators who are subject to FERC’s
licensing requirements. The type of regulatory mechanism that would
apply would largely depend on whether the federal government
maintained or transferred control of the water storage. If only a PMA’s
assets were sold (including the right to market power and its transmission
lines) and not the powerplants, the dams, and the reservoirs, the overall
management of the affected project would change little, except that the
Bureau and the Corps would have to deal with a new power marketer
whose incentives would be different from the PMA’s. However, if all of the
assets were sold, then FERC’s licensing process could reassess and revise
the management and uses of the water, thereby affecting the project’s
electricity-generating capacity.

Assessing how the divestiture of a PMA and/or related federal hydropower
assets would affect the rates paid by its preference customers and their
retail customers is difficult because it depends on numerous factors. Rate
changes for retail customers would depend on how much preference
customers use the PMA’s power, the difference between regional wholesale
market rates and the PMA’s rates, the availability of alternate sources of
power, and the extent to which the PMA’s preference customers would pass
any rate increases on to their retail customers. In general, the higher the
percentage of its total power supply that a preference customer buys from
a PMA and the greater the difference between that PMA’s rates and regional
wholesale rates, the greater the potential increase in wholesale rates after
a divestiture. Retail rates might not increase as much as wholesale rates
after a divestiture because the preference customers might be able to
absorb any wholesale rate increases by improvements in operational
efficiency to the extent possible. The economic impact of a divestiture on
the affected geographic region would be influenced by how much electric
rates would increase, by the economic characteristics of the region, and by
how much water allocations would be changed. Finally, the ongoing and
widespread deregulation and restructuring of the electric utility industry
contributes to the difficulty in assessing the effects of a divestiture on the
power rates and the economy of an affected region.




Page 12                                           GAO/RCED-97-48 Federal Power
                                          Executive Summary




                                          Figure 1 summarizes the key issues affecting a divestiture of federal
                                          hydropower assets—the general decisions needed in divesting federal
                                          assets as well as the specific issues related to hydropower.


Figure 1: Key Issues to Be Addressed in a Divestiture of Federal Hydropower Assets



    General issues to be addressed in divesting federal assets
     Establishing the objectives underlying the decision to divest
     Identifying the specific assets to be sold
     Specifying the conditions and liabilities that would be transferred with the assets, including any restrictions on
     their use
     Determining the trade-offs between these conditions and liabilities and the ultimate value received by the
     government
     Deciding the sales mechanism (e.g., competitive bidding or negotiation), the sales processes (e.g., trade sales or
     stock offerings), and who should manage the sale

    Specific hydropower-related issues that would also need to be addressed
     Balancing the multiple purposes of the water project and specifying the future role of the Bureau and Corps
     Determining how to repay or otherwise address the federal capital investment in irrigation facilities of the affected
     projects
     Assigning the contractual obligations and liabilities of the PMA and the operating agencies
     Determining the current or future environmental responsibilities to be retained or transferred
     Protecting Native Americans' rights to water, interests under the Native American Graves Protection and
     Repatriation Act, and other issues
     Deciding the future regulatory treatment of divested hydropower assets
     Analyzing the impact of the divestiture on the region's power rates and economy




                                          This report contains no recommendations.
Recommendations
                                          GAO provided a draft of this report to DOE (including the PMAs’ liaison
Agency Comments                           office), the Department of the Interior (including the Bureau), FERC, and
                                          the Department of Defense (including the Corps). DOE, Interior, and FERC
                                          provided GAO with their written comments. GAO met with officials of the
                                          Department of Defense, including the Corps’ Director of Hydropower
                                          Operations and the Director of Operations, Construction, and Readiness.
                                          The comments of DOE, Interior, and FERC and GAO’s responses to those




                                          Page 13                                                 GAO/RCED-97-48 Federal Power
Executive Summary




comments are included in appendixes VI, VII, and VIII, respectively. DOE
believes that the report achieves a fair balance in discussing some issues
but added that other issues deserved greater discussion. For example, in
DOE’s view, the position of the opponents of divesting federal hydropower
assets should have been expanded in the report and the report should
have discussed the beneficiaries and those who would be harmed by a
divestiture. GAO believes that the report is balanced and reflects the
positions of both sides of the divestiture debate. GAO contacted
organizations that favored and opposed the divestiture of federal
hydropower assets and included statements from both sides. Also, a
discussion of the specific benefits and costs of a divestiture was outside
the scope of this review. Therefore, GAO did not revise the report as
suggested by DOE. Interior stated that the report recognizes some of the
issues that would have to be addressed in the event of a divestiture, but it
suggested other issues that, in its view, need to be discussed or clarified.
For instance, Interior said the report should clarify that the Bureau and the
Corps generate hydropower while the PMAs market and transmit it. GAO
agreed and revised the report to reflect these distinctions. In its
comments, FERC stated that the report provided an “excellent overview of
the matters that would need to be addressed” in divesting the federal
hydropower assets. FERC also provided several clarifications that were
incorporated into the report. For example, FERC clarified that its limited
flexibility in licensing hydropower projects, as described in the report,
stems from the authority of other federal and state agencies to attach
mandatory conditions to the FERC license. Defense stated that the report
provided a good assessment of the issues related to the “very complex and
controversial” subject and also provided clarifying comments that were
incorporated into the report as appropriate.




Page 14                                           GAO/RCED-97-48 Federal Power
Page 15   GAO/RCED-97-48 Federal Power
Contents



Executive Summary                                                                                4


Chapter 1                                                                                       20
                       PMAs Market Power Generated at Multipurpose Federal Water                20
Introduction             Projects
                       Appropriations Finance Federal Water Projects and PMAs                   22
                       Proposals Have Been Made to Divest the Federal Government of             23
                         Its Hydropower Assets
                       Objectives, Scope, and Methodology                                       24

Chapter 2                                                                                       26
                       PMAs Differ in Service Areas, Customers, and Assets                      26
Profile of the PMAs    Preference Customers of PMAs Vary Greatly                                29
                       PMAs Sell Power at a Lower Wholesale Cost Than Other Utilities           36
                       PMAs Work Closely With the Bureau and the Corps                          39

Chapter 3                                                                                       41
                       Reducing or Eliminating the Government’s Presence in the                 41
The Objectives of a      Private Sector and Lowering the Deficit Are Common Objectives
Federal Divestiture      for Selling Government Assets
                       The Divestiture of Federal Assets Requires Several General               46
Will Shape General       Decisions
Decisions About a
Sale
Chapter 4                                                                                       52
                       The Impact of a Divestiture on Balancing Water Projects’ Multiple        52
Many Specific Issues      Purposes Would Need to Be Addressed
Related to Federal     Irrigation Is a Unique Public Purpose That Would Significantly           55
                          Affect Some Divestitures
Hydropower Would       The Government’s Contractual Obligations Must Be Recognized              56
Need to Be Addressed   Environmental Issues Would Impact the Government’s Ability to            59
Before a Sale             Divest Hydropower Assets
                       The Rights and Concerns of Native Americans Would Affect a               62
                          Divestiture
                       Licensing and Regulating Divested Hydropower Assets Would                63
                          Introduce Uncertainty Into the Divestiture Process
                       Effects of Divestiture on Wholesale Power Rates Would Vary               65
                          Among PMAs’ Customers




                       Page 16                                         GAO/RCED-97-48 Federal Power
             Contents




Appendixes   Appendix I: Objectives, Scope, and Methodology                          70
             Appendix II: Selected Federal Statutes Affecting the Management         74
               of Federal Water Projects and Their Hydropower Assets
             Appendix III: Hydropower Projects From Which the PMAs                   82
               Market Power
             Appendix IV: Contracts of the Southeastern Power                        91
               Administration and the Corps of Engineers in Southeastern’s
               Service Area
             Appendix V: Illustrative Contractual Obligations and Agreements:        94
               Bureau of Reclamation, Great Plains Region, Billings, Montana
             Appendix VI: Comments From the Department of Energy                     96
             Appendix VII: Comments From the Department of the Interior             105
             Appendix VIII: Comments From the Federal Energy Regulatory             110
               Commission
             Appendix IX: Major Contributors to This Report                         114

Tables       Table 2.1: Electricity Purchased From Each PMA by Customer              29
               Type, Fiscal Year 1994
             Table II.1: Key Hydropower-Related Legislation                          74
             Table II.2: Key Environmental Legislation Affecting Hydropower          78
               Generation
             Table II.3: Legislation With Which FERC Licensing Actions Must          80
               Comply

Figures      Figure 1: Key Issues to Be Addressed in a Divestiture of Federal        13
               Hydropower Assets
             Figure 2.1: Map of the Service Areas of Southeastern,                   27
               Southwestern, and Western
             Figure 2.2: Composition of the PMAs’ Customers                          31
             Figure 2.3: Sizes of the PMAs’ Preference Customers, Fiscal Year        33
               1994
             Figure 2.4: Sizes of Customers’ Purchases From Each PMA, Fiscal         34
               Year 1994
             Figure 2.5: Power Purchases From PMAs by Public Power                   36
               Customers as a Percentage of Their Total Power Obtained From
               All Sources, Fiscal Year 1994
             Figure 2.6: Average Revenue Earned Per KWh Sold by PMAs,                38
               Regional Investor-Owned Utilities, and Publicly Owned
               Generating Utilities, 1994




             Page 17                                        GAO/RCED-97-48 Federal Power
Contents




Abbreviations

CVP        Central Valley Project
DOE        Department of Energy
EIA        Energy Information Administration
EIS        environmental impact statement
ELCON      Electricity Consumers Resource Council
FERC       Federal Energy Regulatory Commission
IBWC       International Boundary and Water Commission
kWh        kilowatt-hour
kW         kilowatt
M&I        municipal and industrial
MOU        memorandum of understanding
IOU        investor-owned utility
MW         megawatt
MWh        megawatt-hour
NERC       North American Electric Reliability Council
O&M        operations and maintenance
PG&E       Pacific Gas and Electric Company
POG        publicly owned generating utility
PRWUA      Provo River Water Users’ Association
PMA        power marketing administration
SEPA       Southeastern Power Administration
SERC       Southeastern Electric Reliability Council
SPP        Southwestern Power Pool
SWPA       Southwestern Power Administration
USEC       United States Enrichment Corporation
WAPA       Western Area Power Administration
WSCC       Western States Coordinating Council


Page 18                                      GAO/RCED-97-48 Federal Power
Page 19   GAO/RCED-97-48 Federal Power
Chapter 1

Introduction


                       The federal government owns and operates numerous multipurpose water
                       projects, many of which generate electric power. This power, which is
                       generated subject to the needs of the project, is sold through five federal
                       power marketing administrations (PMA)—the Southeastern Power
                       Administration (Southeastern), the Southwestern Power Administration
                       (Southwestern), and the Western Area Power Administration (Western) as
                       well as the Alaska Power Administration and the Bonneville Power
                       Administration. The PMAs are separate and distinct organizational entities
                       within the Department of Energy (DOE). They are required to market
                       hydropower primarily on a wholesale basis at the lowest possible rates
                       consistent with sound business principles. By law, the PMAs give
                       preference in the sale of federal power to public bodies and cooperatives
                       (called “preference customers”), such as federal agencies, irrigation
                       districts, municipalities, public utility districts, and other public agencies.
                       Each PMA has its own specific geographic boundaries, federal water
                       projects, statutory responsibilities, operation and maintenance
                       responsibilities, and statutory history.1 In 1995, the three PMAs in our
                       study—Southeastern, Southwestern, and Western—sold about 1.6 percent
                       of the nation’s electricity.


                       A federal water project consists of several resources, such as the dam, the
PMAs Market Power      reservoir, the land around the dam and reservoir, and, where hydropower
Generated at           is generated, the powerplant. In addition to providing hydropower, the
Multipurpose Federal   dams at which hydropower plants are located serve a variety of other
                       purposes, such as promoting fish and wildlife conservation and habitat
Water Projects         enhancement and providing flood control, irrigation, navigation,
                       recreation, water supply, and improved water quality. Each project must
                       be operated in a way that balances its multiple purposes. In most
                       instances, because generating power is not the project’s sole purpose, the
                       amount of hydropower generated and marketed is affected by the
                       availability and use of water for the project’s other purposes.2

                       The PMAs generally do not own, operate, or control the facilities that
                       actually generate the electric power; almost always, they own, operate,

                       1
                        Federal Electric Power: Operating and Financial Status of DOE’s Power Marketing Administrations
                       (GAO/RCED-96-9FS, Oct. 13, 1995).
                       2
                        Section 9(c) of the Reclamation Project Act of 1939 prohibits the Secretary of the Interior from
                       entering into any contract regarding the electric power generated by a reclamation project that, in the
                       judgment of the Secretary, would impair the efficiency of the project for irrigation purposes. This
                       section has been construed to limit sales of project electricity if they would impair the project’s ability
                       to deliver water for irrigation. Also, section 5 of the Flood Control Act of 1944 provides for the sale of
                       power generated at the Department of the Army’s Corps of Engineers’ (Corps) reservoir projects that
                       is “in the opinion of the Secretary of the Army not required in the operation of such project.”



                       Page 20                                                               GAO/RCED-97-48 Federal Power
Chapter 1
Introduction




and control the facilities that transmit power, and they market the power
that is generated at the federal water projects.3 The power-generating
facilities are controlled by other federal agencies—most often by the
Department of the Interior’s Bureau of Reclamation (Bureau) or the
Department of the Army’s Corps of Engineers (Corps)—referred to as
“operating agencies.” Appendix II lists and describes various laws that
guide the Bureau’s and the Corps’ management of federal water projects
and hydropower plants.

The federal power marketing program, which began in the early 1900s, has
developed incrementally over the years. In 1937, the Bonneville Project
Act created the Bonneville Power Administration to market federal power
in the Pacific Northwest. In 1943, a decision by the Secretary of the
Interior established Southwestern under the President’s war powers. The
Congress provided the authority to create permanent PMAs with the
passage of the Flood Control Act of 1944. The Secretary of the Interior
established Southeastern in 1950 and the Alaska Power Administration in
1967. The last PMA, Western, was authorized under the DOE Organization
Act of 1977 when the four existing PMAs were transferred from the
Department of the Interior to DOE.4

Many hydropower plants provide electric power for the multiple needs of
a federal water project, and the project’s operations have first priority for
using it. The PMAs sell the hydropower that exceeds the project’s
operational requirements on a wholesale basis to their preference
customers and use the revenue earned to repay the costs to generate,
transmit, and market power.5 Revenues from the sale of hydropower are
also used to pay for a portion of the irrigation costs assigned for
repayment through these revenues where the project serves irrigation. The
sale of federal hydropower has also served social and economic
development goals. This power is required to be sold at rates that are as
low as practicable, consistent with sound business principles, to
encourage its widespread use. The PMAs helped make electricity available
for the first time to many consumers who lived in rural areas.

3
 The Alaska Power Administration owns two federal water projects that provide power and serve no
other purpose.
4
 The DOE Organization Act transferred power marketing responsibilities and transmission assets that
had been previously managed by the Bureau of Reclamation to Western.
5
 In some cases, PMAs are not required to recover some costs (for instance, certain environmental
costs and the full costs of pensions and postretirement health benefits of PMA employees) because of
specific legal provisions or because the DOE implementing order excludes the costs or is not specific
about them. See Power Marketing Administrations: Cost Recovery, Financing, and Comparison to
Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19, 1996).



Page 21                                                           GAO/RCED-97-48 Federal Power
                        Chapter 1
                        Introduction




                        Nonfederal hydropower projects also generate electricity subject to their
                        multiple purposes. The Federal Energy Regulatory Commission (FERC)
                        licenses and regulates these projects and their hydropower plants that
                        affect the nation’s navigable waterways.6 FERC’s operating licenses for
                        these hydropower plants are in effect for up to 50 years, after which
                        relicensing must occur. Under provisions of such legislation as the Federal
                        Power Act, as amended by the Electric Consumers Protection Act, FERC’s
                        licensing and regulatory activities establish the conditions under which the
                        project must operate, consistent with legal and policy developments. In
                        licensing and relicensing nonfederal hydropower projects, FERC is required
                        to give equal weight to both “developmental factors” (such as power,
                        irrigation, and flood control) and “nondevelopmental factors” (such as
                        protecting fish and wildlife habitat, conserving energy, and providing
                        recreation).

                        FERC’s regulatory activities with respect to electricity from the PMAs are
                        limited to the authority delegated to it by the Secretary of Energy. FERC’s
                        review of the PMAs’ rates is limited to (1) whether the rates are the lowest
                        possible consistent with sound business principles; and (2) whether the
                        revenues generated by the rates are enough to recover, within the period
                        allowed, the costs of producing and transmitting electricity, including the
                        repayment of the capital investment allocated to generate power and the
                        costs assigned by acts of the Congress for repayment. FERC’s review also
                        includes the assumptions and the projections used in developing the rates.
                        Other than reviewing the PMAs’ rates, FERC has no jurisdiction over the
                        operation of federal hydropower facilities.


                        Each year the Congress appropriates money to the PMAs, the Bureau, and
Appropriations          the Corps. The PMAs’ appropriations are generally to cover operations and
Finance Federal Water   maintenance (O&M) expenses associated with their power marketing
Projects and PMAs       activities and capital investments in their transmission assets. The
                        Bureau’s and the Corps’ appropriations are for all aspects of the federal
                        water projects, including capital investments as well as operation and
                        maintenance (O&M) expenses related to generating power and to providing
                        other functions, such as irrigation and navigation.

                        Federal law calls for the PMAs to set power rates at levels that will repay
                        their appropriations and the power-related O&M as well as the capital
                        appropriations expended by the operating agencies generating the power.

                        6
                         See Electricity Regulation: Issues Concerning the Hydroelectric Project Licensing Process
                        (GAO/RCED-91-120, May 10, 1991) and Electricity Regulation: Electric Consumers Protection Act’s
                        Effects on Licensing Hydroelectric Dams (GAO/RCED-92-246, Sept. 18, 1992).



                        Page 22                                                         GAO/RCED-97-48 Federal Power
                      Chapter 1
                      Introduction




                      DOE’s  implementing order specifies that appropriations used for O&M
                      expenses must be recovered in the same year the expenses were incurred;
                      however, it allows the appropriations used for capital investments to be
                      recovered, with interest, over periods that can last up to 50 years. The
                      order also allows the PMAs to defer payments on O&M expenses if the PMAs
                      do not generate sufficient revenue in a particular year because of the
                      variability of hydropower. Because O&M expenses that are deferred are
                      amortized with interest, the amount of deferred expenses accrues interest
                      until it is fully repaid and may require the PMA to increase its rates.

                      The federal investment in water projects has nonreimbursable and
                      reimbursable components. The nonreimbursable component refers to
                      costs that are not reimbursable by revenues collected from the projects’
                      beneficiaries. The reimbursable component refers to costs that are
                      recovered from the project’s ratepayers and other beneficiaries, such as
                      power and irrigation users. This component includes the construction
                      costs as well as the O&M expenses for power generation, transmission, and
                      marketing; the construction costs allocated to irrigation and O&M expenses
                      for irrigation, if applicable; and the construction costs allocated to
                      municipal and industrial water supply as well as the related O&M expenses.
                      The reimbursable component is further divided into investments repaid
                      with interest (for example, for power and municipal and industrial water
                      supply) and investments repaid without interest (for irrigation only).


                      In 1986, the executive branch first attempted to sell a PMA when the
Proposals Have Been   President’s budget proposed selling the Alaska Power Administration to its
Made to Divest the    preference customers. Despite the enactment of laws in 1995 and 1996 to
Federal Government    authorize this transaction, the sale of the hydropower assets from which
                      the Alaska Power Administration markets its power has not been
of Its Hydropower     completed, in part because of the need to resolve issues related to
Assets                rights-of-way and easements. The length of time taken to complete the sale
                      of the smallest of the five PMAs raises questions about the complexity and
                      number of issues that will need to be addressed before the government
                      can divest itself of the larger PMAs and their related hydropower assets.

                      Numerous bills have been introduced to the Congress to sell the remaining
                      PMAs, and some bills have included the sale of the related hydropower
                      assets of the Bureau and the Corps. These bills have proposed selling only
                      the PMA and its assets; the PMA and the related hydropower assets of the
                      Bureau and the Corps; or all of these assets plus the related dams and
                      reservoirs. For example, in 1996 legislation introduced in the House of



                      Page 23                                         GAO/RCED-97-48 Federal Power
                     Chapter 1
                     Introduction




                     Representatives proposed to divest, among other things, the PMAs and the
                     associated power-generating assets through a competitive bidding process.
                     The bill proposed that FERC be directed to grant a 10-year operating license
                     to the buyers of the federal hydropower plants. It also exempted the
                     divestiture from certain federal laws pertaining to the disposal of surplus
                     federal property and to environmental protection, such as the Federal
                     Land Policy and Management Act of 1976, the National Environmental
                     Policy Act of 1969, the Endangered Species Act of 1973, and the Wild and
                     Scenic Rivers Act of 1968.


                     In response to divestiture proposals, on January 18, 1996, 39 Members of
Objectives, Scope,   Congress requested that we examine the issues related to the divestiture
and Methodology      of the PMAs and related federal hydropower assets. On March 1, 1996, we
                     received a separate request letter from another Member of Congress. We
                     agreed to report on the issues related to divesting the federal hydropower
                     assets, including the PMAs; however, we did not evaluate whether or not
                     the PMAs and federal hydropower assets should be divested. We agreed to
                     provide information on (1) Southeastern, Southwestern, and Western,
                     including their similarities and differences, and their interactions with the
                     agencies that operate federal water projects (mostly, the Bureau and the
                     Corps); (2) the main objectives and general decisions involved in divesting
                     federal assets, along with how these objectives and decisions apply to the
                     PMAs; and (3) the specific issues related to hydropower that should be
                     addressed before a divestiture of the PMAs. As requested, we limited our
                     study to Southeastern, Southwestern, and Western. We did not include the
                     Bonneville Power Administration because it has a unique financial
                     situation or Alaska because it is being divested.7

                     A detailed description of our objectives, scope, and methodology is
                     contained in appendix I. We conducted our review from May 1996 through
                     February 1997 in accordance with generally accepted government auditing
                     standards.


                     We provided a draft of this report to DOE (including the PMAs’ liaison
                     office), the Department of the Interior (including the Bureau), FERC, and
                     the Department of Defense (including the Corps). DOE, Interior, and FERC
                     provided us with their written comments. These comments and our
                     responses are included in appendixes VI, VII, and VIII, respectively. We

                     7
                     Bonneville Power Administration: Borrowing Practices and Financial Condition (GAO/AIMD-94-67BR,
                     Apr. 19, 1994).



                     Page 24                                                       GAO/RCED-97-48 Federal Power
Chapter 1
Introduction




met with officials of the Department of Defense, including the Corps’
Director of Hydropower Operations and the Director of Operations,
Construction, and Readiness. Defense stated that our report provided a
good assessment of the issues related to the “very complex and
controversial” subject. Defense also provided clarifying comments that we
incorporated into our report as appropriate. For example, Defense stated
that the report needed to be revised to acknowledge that the Corps has
improved the generating availability of its hydropower plants in its South
Atlantic Division (Atlanta, Georgia) to over 90 percent for fiscal year 1996.




Page 25                                           GAO/RCED-97-48 Federal Power
Chapter 2

Profile of the PMAs


                 While differing in size, scope, and assets, Southeastern, Southwestern, and
                 Western all are responsible for selling hydropower primarily to preference
                 customers—publicly owned utilities and state and federal agencies. These
                 customers vary in size and in the quantity of electricity they purchase. The
                 PMAs have a close working relationship with the Corps and the Bureau
                 because, with a few exceptions, the Bureau and the Corps are responsible
                 for operating the hydropower plants and for ensuring that electricity is
                 generated subject to the other multiple purposes of each federal water
                 project. This relationship is based in part on written documents and also
                 on flexible arrangements that recognize the variability associated with
                 water.


                 The PMAs generally market power to publicly owned utilities and to state
PMAs Differ in   and federal agencies located within their service areas. The three PMAs in
Service Areas,   our study market power in 30 states from 103 hydropower plants and a
Customers, and   coal-fired power plant.1 Figure 2.1 shows the service areas for each PMA
                 and appendix III lists the hydropower projects from which the PMAs
Assets           market power. As described below, the PMAs differ in several ways,
                 including the sizes of their service areas, the number of customers served,
                 and the types of assets owned.2




                 1
                  Southwestern and Western both sell power in Kansas and Texas.
                 2
                  Unless otherwise noted, we used fiscal year 1994 data as reported by the PMAs in their annual
                 reports. We also used calendar year 1994 data on total sales and revenues for PMA customers from the
                 Energy Information Administration (EIA). The EIA’s data were the most recent at the time of our
                 review.



                 Page 26                                                          GAO/RCED-97-48 Federal Power
                                                Chapter 2
                                                Profile of the PMAs




Figure 2.1: Map of the Service Areas of Southeastern, Southwestern, and Western


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                                                            SEPA           Southeastern Power Administration
                                                            SWPA           Southwestern Power Administration
                                                            WAPA           Western Area Power Administration



                                                           AAAA  A
                                                           AAAA
                                                           AAAAAAA Both Western and Southwestern market power in Kansas.
                                                           AAAA


                                                Source: Developed by GAO from data provided by the PMAs.




                                                In fiscal year 1994, Western marketed power to 637 customers in Arizona,
                                                California, Colorado, Nebraska, New Mexico, North Dakota, South
                                                Dakota, Utah, and parts of Iowa, Kansas, Minnesota, Montana, Nevada,




                                                Page 27                                                             GAO/RCED-97-48 Federal Power
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Texas, and Wyoming.3 Western’s power is largely generated from 56
hydropower plants.4 They have an existing capacity of 9,808 megawatts
(MW) operated mostly by the Bureau.5 Western owns 16,727 miles of
transmission line. In fiscal year 1994, its revenues from power sales were
about $658 million, based on about 36.1 billion kilowatt-hours (kWh) of
energy sold. Although about 60 percent of Western’s sales are to
municipalities, cooperatives, and public utility districts, about 6 percent of
its sales are to irrigation districts (see table 2.1). Most of the remaining
power sales are to state and federal agencies and investor-owned utilities
(IOU).

Southwestern, serving Arkansas, Kansas, Louisiana, Missouri, Oklahoma,
and part of Texas, marketed power to 62 customers in fiscal year 1994.6
Southwestern’s power is generated from 24 hydropower plants operated
by the Corps with an existing capacity of 2,051 MW. Southwestern’s
revenues from power sales in fiscal year 1994 were about $98 million,
based on sales of about 6.6 billion kWh. Over 95 percent of Southwestern’s
sales are to municipal utilities and cooperatives (see table 2.1).
Southwestern also owns 1,380 miles of transmission lines.

Southeastern, serving Alabama, Georgia, Kentucky, Mississippi, South
Carolina, Tennessee, Virginia, and West Virginia, as well as parts of
Florida, Illinois, and North Carolina, sold power to 294 customers in fiscal
year 1994. Southeastern’s power is generated from 23 hydropower plants
operated by the Corps with an existing capacity of 3,092 MW.
Southeastern’s revenues from power sales in fiscal year 1994 were about
$156 million, based on sales of about 7.9 billion kWh. Southeastern sold
57 percent of its power to municipalities and cooperatives. The remainder
went to federal agencies and public utility districts (see table 2.1). Because
Southeastern owns no transmission lines, it relies upon other utilities for
transmission services.



3
 The number of customers does not include sales to the Bureau of Reclamation or interdepartmental
sales.
4
 Western currently markets power from 47 hydropower projects operated by the Bureau, 6 operated by
the Corps, 2 operated by the International Boundary and Water Commission, and 1 operated by the
Provo River Water User’s Association but co-owned by Western. Western lists the Bureau’s Lewiston
hydropower plant as part of the Trinity plant. Western also markets power from a coal-fired plant
operated by the Salt River Project.
5
 A watt is the basic unit used to measure electric power. A kilowatt (kW) is 1 thousand watts. A
kilowatt hour (kWh) is equal to 1 kilowatt of power applied for 1 hour. One thousand kW are one
megawatt (MW), and 1,000 kWh are one megawatt-hour (MWh).
6
The 62 customers do not include the utilities that buy power from the Kansas Municipal Energy
Agency and the Louisiana Electric Power Authority.
Page 28                                                           GAO/RCED-97-48 Federal Power
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Table 2.1: Electricity Purchased From
Each PMA by Customer Type, Fiscal       Customer Types           Southeasterna        Southwestern              Western           Average
Year 1994                               Municipal utilities                  17.2%               26.5%              26.6%                 25.2%
                                        Cooperatives                         39.7%               70.7%              21.7%                 30.8%
                                        Public utility                        0.4%                0.0%              11.5%                  8.3%
                                        districts
                                        Investor-owned                        0.0%                0.0%                7.3%                 5.2%
                                        utilities
                                        Federal agencies                     42.8%b               2.8%                5.9%                11.1%
                                                                                                        c
                                        State agencies                        0.0%                0.0%              17.4%                 12.5%
                                        Irrigation districts                  0.0%                0.0%                6.1%                 4.4%
                                        Other                                 0.0%                0.0%                3.6%                 2.6%
                                        Totald                              100.0%             100.0%              100.0%            100.0%
                                        MWh (thousands)                   7,541.6            6,579.6             36,067.2         50,188.4
                                        a
                                         Because Southeastern’s fiscal year 1994 annual report does not identify customers by class, our
                                        sales total includes only those customers that we could classify using EIA’s Form 861 database.
                                        As a result, our total is about 5 percent smaller than the sales total for all customers that
                                        Southeastern presents in its annual report.
                                        b
                                         Most of the power that Southeastern sold to federal agencies was sold to the Tennessee Valley
                                        Authority which, in turn, sold the power to its distributors—110 municipal utilities and 50
                                        cooperatives.
                                        c
                                          In actuality, 0.02 percent of Southwestern’s power was sold to state agencies. The amount was
                                        omitted from the table because of rounding.
                                        d
                                            Because of rounding, the amounts may not total to 100 percent.



                                        Source: Developed by GAO from data provided by the PMAs.




                                        While the preference customers of PMAs are publicly owned utilities and
Preference Customers                    state and federal agencies that generally purchase small amounts of
of PMAs Vary Greatly                    electricity, they vary greatly.


The Types and Size of                   The types of customers served by Southeastern, Southwestern, and
Customers Vary                          Western vary both in terms of type and size. They include municipalities
                                        and cooperatives; public utility districts; irrigation districts; federal
                                        agencies, including military and laboratory installations; and state
                                        agencies. Some customers are utilities that are among the largest in the
                                        nation, while others are among the smallest. Some customers generate
                                        much of the electricity they transmit to their customers, while others only
                                        transmit electricity they buy from other sources.




                                        Page 29                                                              GAO/RCED-97-48 Federal Power
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For all three PMAs, municipalities and cooperatives are by far the most
prevalent customers, accounting together for about two-thirds of all
customers. Public utility districts and irrigation districts together account
for about 8 percent of customers, while federal agencies, including
military and laboratory facilities, account for about 7 percent. State
agencies account for about 5 percent of all customers and IOUs account for
about 3 percent. Figure 2.2 depicts the composition of customers for each
PMA.




Page 30                                           GAO/RCED-97-48 Federal Power
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                                        Profile of the PMAs




Figure 2.2: Composition of the PMAs’ Customers

Southwestern




                                                  Western




Southeastern




                                        Page 31               GAO/RCED-97-48 Federal Power
                         Chapter 2
                         Profile of the PMAs




                         Source: GAO’s analysis of data provided by EIA and the PMAs’ 1994 annual reports.




The Size of Preference   The PMAs’ preference customers also vary in size.7 As shown in fig. 2.3,
Customers Also Varies    about two-thirds (67 percent) of Western’s preference customers are small
                         utilities. About 6 percent of Western’s preference customers are in the
                         medium category and another 6 percent are large. About half (47 percent)
                         of Southwestern’s preference customers are small utilities. However,
                         almost one-third (30 percent) of Southwestern’s preference customers are
                         large. In contrast, almost half (47 percent) of Southeastern’s preference
                         customers are medium-sized utilities.




                         7
                          We measured size by the number of MWh each preference customer delivered to its end-users from all
                         sources in fiscal year 1994. We categorized size as follows: “small” = 0 to 100,000 MWh; “medium” =
                         more than 100,000 to 500,000 MWh; “large” = more than 500,000 MWh. We discussed these categories
                         with the National Rural Electric Cooperative Association and American Public Power Association.



                         Page 32                                                         GAO/RCED-97-48 Federal Power
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                                    Profile of the PMAs




Figure 2.3: Sizes of the PMAs’
Preference Customers, Fiscal Year   Percentage of each PMA’s customers
1994                                70             67


                                    60


                                    50        47              47


                                    40
                                         34
                                                                                     30
                                    30
                                                                   23
                                                                                19
                                    20


                                    10
                                                                         6                 6


                                     0

                                           Small              Medium             Large
                                           Customer size (MWh)



                                                    Southeastern

                                                    Southwestern

                                                    Western



                                    Note: Totals may not add to 100 percent due to rounding.


                                    Source: Developed by GAO from data provided by EIA and the PMAs’ 1994 annual reports.




Most Customers Purchase             The preference customers of the three PMAs also vary in terms of the
Small Amounts of                    quantity of electricity purchased. As shown in figure 2.4, although a few
Electricity Annually                customers purchase large quantities of electricity from PMAs, most
                                    purchase smaller quantities. For example, in fiscal year 1994, about
                                    83 percent of the preference customers purchased 50,000 MWh or less from
                                    the PMAs and over 90 percent purchased less than 100,000 MWh. The PMAs
                                    also sell to a few larger customers (about 1 percent of their customers
                                    each buy over 1,000,000 MWh).




                                    Page 33                                                      GAO/RCED-97-48 Federal Power
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Figure 2.4: Sizes of Customers’
Purchases From Each PMA, Fiscal   100      Percentage of each PMA’s customers
                                           93
Year 1994
                                      90

                                      80              78


                                      70         67

                                      60

                                      50

                                      40

                                      30
                                                                                    21
                                      20
                                                                      10   10              11
                                      10
                                                                 5
                                                                                2                  0     2     2
                                       0

                                            0—50               >50—100            >100—1000            >1000
                                            Customers’ purchases (MWh in thousands)



                                                       Southeastern

                                                       Southwestern

                                                       Western



                                  Source: Developed by GAO from data provided by EIA and the PMAs’ 1994 annual reports.




Most Preference                   Most preference customers obtain the majority of their electricity from
Customers Obtain the              sources other than the PMAs. As shown in figure 2.5, about 75 percent of
Majority of Their                 the PMAs’ preference customers purchase less than half of their total
                                  electricity from the PMAs.8 In addition, over 60 percent of the preference
Electricity From Sources          customers receive no more than 25 percent of their electricity from the
Other Than PMAs                   PMAs. Because the PMAs have a limited quantity of power for sale that must
                                  be allocated among many preference customers, these customers must
                                  obtain most of their electricity from other sources.

                                  However, the PMAs differ in how much they provide as a percentage of
                                  their customers’ total needs for electricity. About 99 percent of
                                  Southeastern’s preference customers purchase no more than 25 percent of
                                  their electricity from the PMA. In contrast, Western supplies more than half

                                  8
                                   These figures do not include preference customers who do not report to EIA their purchases of
                                  electricity from other sources.



                                  Page 34                                                          GAO/RCED-97-48 Federal Power
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of the electricity to over 40 percent of its preference customers.
Southwestern, on the other hand, supplies no more than 25 percent of the
electricity used by most of its preference customers. Yet, it also supplies
over 20 percent of its preference customers with at least 75 percent of
their electricity.

PMA  officials and representatives of preference customers maintain that
the total portion of electricity the PMAs supply to them does not accurately
portray the PMAs’ importance because the PMAs primarily provide power to
them during periods of peak demand when electricity from other sources
is in relatively short supply. Therefore, measuring the customers’ reliance
on the PMAs in terms of their purchases of electric energy (measured in
kWh) does not accurately capture the situation of some preference
customers, particularly those of Southeastern and Southwestern, that rely
more on the PMAs to meet their peak demands for electricity. These
customers may use electricity from the PMAs more for meeting peak
demands than for providing normal baseload electricity. In response,
representatives of IOUs contend that most preference customers could
purchase this electricity from other sources.




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Figure 2.5: Power Purchases From
PMAs by Public Power Customers as a   Percentage of each PMA’s preference customers
Percentage of Their Total Power       100      99
Obtained From All Sources, Fiscal
Year 1994                                 90

                                          80

                                          70

                                          60
                                                    51
                                          50

                                          40
                                                         33
                                          30                                                    25
                                                                             25
                                                                                                                21
                                          20                            18                                             16
                                                                                           11
                                          10
                                                                   1                  0                    0
                                           0

                                                0—25%               >25—50%             >50—75%            >75%
                                                PMA’s share of preference customers’ total power purchases



                                                         Southeastern

                                                         Southwestern

                                                         Western



                                      Note: Totals may not add to 100 percent due to rounding.


                                      Source: GAO’s analysis of data provided by EIA and the PMAs.




                                      In fiscal year 1994, the PMAs sold power at a wholesale rate that was about
PMAs Sell Power at a                  one-half of the wholesale rates offered by other utilities. For example, the
Lower Wholesale Cost                  combined average revenue earned per kWh sold by the three PMAs in our
Than Other Utilities                  study was about 1.8 cents compared with a national rate of about 3.5 cents
                                      for IOUs and about 3.9 cents for publicly owned generating utilities (POG).9


                                      9
                                       EIA cautions that the average revenue per kWh sold should not be used as a substitute for the price of
                                      power. The price that any one utility charges another for wholesale energy reflects numerous
                                      transaction-specific factors, including the fee charged for reserving a portion of capacity, the fee for
                                      the energy actually delivered, and the fee for the use of the hydropower-generating facilities. These
                                      fees are influenced by such factors as time of delivery, quantity of energy, and the reliability of supply.
                                      Also, all three PMAs use power repayment studies to set their rates. Southeastern sets a rate for each
                                      of its four different systems, Southwestern generally sets a rate for its entire service area but also sets
                                      a separate rate for two separate generating facilities, and Western sets a rate for each of its “projects.”



                                      Page 36                                                               GAO/RCED-97-48 Federal Power
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In fiscal year 1994, Southeastern’s average revenue of about 2.0 cents per
kWh compared with wholesale rates of about 4.2 cents per kWh for IOUs
and about 5.3 cents for POGs in the region in which Southeastern serves
power.10 In fiscal year 1994, Southwestern received average revenues of
about 1.5 cents per kWh. In comparison, IOUs’ average revenues per kWh
ranged from about 2.6 to 4.5 cents per kWh, while POGs’ average revenues
per kWh ranged from 3.5 to 4.1 cents per kWh in the region in which
Southwestern sells power. In fiscal year 1994, Western received average
revenues of about 1.8 cents per kWh for its electricity. In contrast, IOUs
received average revenues ranging from about 2.7 to 3.5 cents per kWh
and POGs’ average revenue ranged from about 3.3 to 4.1 cents per kWh in
the region in which Western sells power.

According to a PMA official, because of the low rates PMAs offer, the PMAs
have informal waiting lists of prospective preference customers that want
to buy their power. Although Western is implementing a program to set
aside some existing capacity to serve new customers, becoming a new PMA
customer is difficult because few customers are willing to give up their
power allocations from a PMA and almost no new federal hydropower
plants will be coming on line in the foreseeable future.




10
  We used the reliability council regions defined by the North American Electric Reliability Council as
the basis for revenue comparisons.



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Figure 2.6: Average Revenue Earned
Per KWh Sold by PMAs, Regional           6   Cents per kWh
Investor-Owned Utilities, and Publicly
                                                         5.3
Owned Generating Utilities, 1994
                                         5

                                                   4.2
                                         4                                                      3.7
                                                                             3.5          3.5


                                         3
                                                                       2.7


                                             2.0
                                         2                                          1.8
                                                                 1.5


                                         1



                                         0

                                               SEPA/SERC           SWPA/SPP           WAPA/WSCC
                                               PMA/NERC region



                                                          PMA

                                                          IOU

                                                          POG



                                         a
                                           SEPA/SERC - Southeastern/Southeastern Electric Reliability Council; SWPA/SPP
                                         -Southwestern/Southwest Power Pool; WAPA/WSCC - Western/Western Systems Coordinating
                                         Council; NERC - North American Electric Reliability Council.
                                         b
                                          Average revenues per kWh sold can fluctuate throughout the year, depending on the availability
                                         of water—for instance from 1.2 to 2.8 cents per kWh for Southwestern.


                                         Source: GAO’s analysis of data provided by EIA, the PMAs’ 1994 annual reports, and the American
                                         Public Power Association.


                                         Many factors contribute to the PMAs’ ability to sell electricity at generally
                                         lower rates than other neighboring utilities. Importantly, their electricity is
                                         primarily generated from hydropower plants, making their power
                                         generally less expensive than other sources of power because it has no
                                         fuel cost. In addition, because most of these hydropower plants were built
                                         when construction costs were lower than more recent construction, the
                                         PMAs have lower imbedded costs to recover through their rates. Also, as
                                         we discussed in our 1996 report, their rates do not fully recover all of the
                                         costs associated with production of power. In some cases, the PMAs are not




                                         Page 38                                                         GAO/RCED-97-48 Federal Power
                           Chapter 2
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                           required to recover some costs (for example, certain environmental costs
                           and the full costs of federal pensions and postretirement health benefits)
                           because of specific legal provisions or because the DOE implementing
                           order excludes the costs or is not specific about them.11 Also, unlike IOUs,
                           the PMAs do not pay federal income taxes nor do they set their rates to earn
                           a profit. In addition, while the PMAs in our study do not have to build new
                           capacity to meet future demand, IOUs have an obligation to serve all
                           existing and future customers in their service areas. Therefore, they must
                           build new generating capacity and recover the associated capital costs
                           through their rates. This requirement could result in higher rates for IOUs,
                           depending on the cost to increase this capacity.


                           The PMAs have a close working relationship with the Bureau and the
PMAs Work Closely          Corps, which operate and control the hydropower plants and ensure that
With the Bureau and        hydropower is generated subject to the other multiple purposes of federal
the Corps                  water projects. These relationships are based on written documents and
                           on flexible arrangements. The PMAs market power subject to the
                           parameters of these written agreements and flexible arrangements. The
                           flexible arrangements allow the operating agencies to balance a project’s
                           multiple purposes, even if this reduces power production. For example,
                           releasing water in the late summer to improve oxygen levels downstream
                           to benefit fisheries reduces the capacity to generate electricity.


The Bureau and the Corps   In allocating water among a project’s multiple purposes, the Bureau and
Manage the Operation of    the Corps arbitrate among the competing purposes for water. The Bureau
Federal Water Projects     operates primarily in the West and manages water in federal water
                           projects mostly for irrigation. The Corps manages water mostly for flood
                           control and navigation. The Bureau and the Corps also provide water for
                           fish and wildlife habitat enhancement, municipal and industrial supplies,
                           recreation, and water quality improvement.

                           How much electricity the PMAs can sell is subject to the Bureau’s and the
                           Corps’ control of the water. How the Bureau and the Corps control the
                           water, in turn, is affected not only by the multiple purposes of a project
                           but by the interests of outside stakeholders. For instance, under
                           provisions of the Clean Water Act, state agencies issue water quality
                           certificates that affect how federal dams are operated and the amount and
                           timing of water that can be released from a reservoir. Moreover, compacts


                           11
                            Power Marketing Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities
                           (GAO/AIMD-96-145, Sept. 19, 1996).



                           Page 39                                                         GAO/RCED-97-48 Federal Power
                           Chapter 2
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                           to apportion water among states affect the availability of water for various
                           purposes. The Bureau and the Corps must also frequently consider state
                           environmental laws when managing water resources. For instance, in
                           operating the Central Valley Project (CVP) in California, the Bureau follows
                           a decision by the California State Water Resources Board that directs the
                           CVP and the state water project to meet the state’s standards for fish
                           habitat and water quality, such as the salinity standards for the San
                           Francisco Bay area. To accomplish these standards, the Bureau and the
                           management of the state water project operate under an agreement that
                           describes how water supplies should be shared and who would be
                           responsible for environmental issues. For example, under one aspect of
                           this agreement, the Bureau would be responsible for about 75 percent of
                           the fish and wildlife habitat and water quality responsibilities in some
                           cases.


Operating Agencies and     The Bureau or the Corps and the PMAs interact when planning the
the PMAs Interact When     management of a river system, so that releases of water, which are
Planning Management of a   frequently accomplished through the generating turbines of a hydropower
                           plant, can be timed to maximize the use of water for the sale of
River System               hydropower. Western and Bureau officials in Salt Lake City, Utah;
                           Sacramento, California; and Billings, Montana; for example, explained that
                           the Bureau prepares annual operating plans that are updated monthly. In
                           January of each year, the Bureau completes the first surveys of mountain
                           snow. By entering the resulting data into its model, the Bureau makes
                           preliminary predictions about run-offs and annual hydrological conditions.
                           Western, water users, environmentalists, and other stakeholders then meet
                           to review the 12-month operating plan. The Bureau updates the plan
                           monthly as new hydrologic information becomes available. For each
                           month in a rolling 12-month period, the annual operating plan contains the
                           following information by reservoir, dam, and hydropower plant: water
                           inflows, water levels, projected water releases, projected water deliveries,
                           and estimated power generation by each hydropower plant according to
                           the maintenance schedule and planned outages. Based on information
                           about hydrology, reservoir levels, and the demand for water, the Bureau
                           issues daily water orders that fine tune water releases and water
                           movements to accommodate the project’s multiple purposes. The staff of
                           the Bureau’s control center and Western’s power dispatchers coordinate
                           water releases so water is released through the turbines to maximize the
                           value of the power generated within the parameters defined by the other
                           multiple purposes of the project.




                           Page 40                                          GAO/RCED-97-48 Federal Power
Chapter 3

The Objectives of a Federal Divestiture Will
Shape General Decisions About a Sale

                            The general process governments use to divest their assets is composed of
                            many decisions. In reviewing domestic and international divestiture
                            experiences, we found a successful divestiture begins with a definition of
                            the sale’s objectives, which typically include (1) reducing or eliminating
                            the government’s presence in an activity that some view as best left to the
                            private sector and (2) improving the government’s fiscal situation.1 Both of
                            these objectives have been advanced by those who favor the federal
                            government’s divestiture of its hydropower assets. However, those who
                            oppose divesting these assets argue that there are advantages stemming
                            from the government’s current hydropower activities and question
                            whether divesting the federal hydropower assets, including the PMAs,
                            would actually improve the government’s fiscal position.

                            Once a decision has been made to divest certain federal assets, the
                            underlying objectives will shape the sales process. In particular, they will
                            shape the general decisions about which specific assets are sold, what
                            conditions and liabilities will transfer with those assets, and how to
                            implement the sale.


                            A successful divestiture of government assets generally starts with
Reducing or                 defining the objectives of a sale. Divestiture proposals have been
Eliminating the             motivated by two broad objectives, typically in conjunction with one
Government’s                another: (1) to reduce or eliminate the government’s presence in an
                            industry that is viewed as best left to the private sector and (2) to improve
Presence in the             the government’s fiscal position.
Private Sector and
Lowering the Deficit
Are Common
Objectives for Selling
Government Assets
One Typical Objective Is    International experience with divestitures suggests that one common
Reducing or Eliminating     objective for divesting government assets was a belief that certain
the Federal Presence in a   functions being provided by the government would be more efficiently
                            undertaken by the private sector. Some proponents believe this premise is
Largely Private Sector      true in the context of federal hydropower assets, because they believe the
Activity
                            1
                             We reviewed experiences with divestiture in five countries—Canada, France, Mexico, New Zealand,
                            and the United Kingdom. Each of these governments reported that it viewed increasing economic
                            efficiency as a major objective of their divestiture programs. Budget Issues: Privatization/Divestiture
                            Practices in Other Nations (GAO/AIMD-96-23, Dec. 15, 1995).



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    federal government should not be involved in generating, transmitting, and
    marketing electricity in wholesale markets. They maintain the following:

•   The historical justification for the federal presence in the electricity
    industry—to provide electricity at the lowest practicable cost to regions
    that were too remote or sparsely populated to be served by
    investor-owned utilities (IOUs)—is outmoded. The entire nation has
    become electrified; new technologies, such as the gas-fired turbine,
    generate electricity at relatively low capital costs; and nonutility
    generators, such as independent power producers, now generate and sell
    power in wholesale electricity markets that have become increasingly
    competitive. In addition, the 1992 Energy Policy Act required that a utility
    make its transmission lines accessible to other utilities (called “open
    transmission access”), thus enabling customers to obtain electricity from a
    variety of competing utilities.2 As the market has become increasingly
    open, spot and futures markets in bulk power have grown and power
    marketers and brokers now offer services so wholesale customers can buy
    the cheapest power available.3
•   The tax advantages and other subsidies the PMAs receive give them unfair
    advantages over their competitors. As we recently reported, federal
    hydropower is cheaper than wholesale power sold by IOUs and publicly
    owned generating utilities, in part because hydropower has no fuel cost,
    but also because the PMAs have received low-interest financing and have
    flexible repayment terms.4
•   If federal hydropower assets are sold, the private sector would operate
    these assets more efficiently. Proponents believe that the federal agencies
    do not adequately operate, maintain, and repair these assets. As we
    recently testified, the government’s capital planning and budgeting
    systems do not enable federal agencies to fulfill these responsibilities
    adequately.5 Furthermore, according to proponents, the private sector

    2
     This act authorized FERC to order utilities (including PMAs) to provide wholesale transmission
    services, upon application, to any electric utility, federal power marketing agency, or any person
    generating electric energy. In 1996, FERC issued Order 888, requiring all public utilities to file open
    access transmission tariffs so that eligible customers are not required to seek transmission services on
    a case-by-case basis. Since the PMAs are not public utilities as defined under section 201(e) of the
    Federal Power Act, they are not required to file open access transmission tariffs. However, as
    transmitting utilities, they still may be required to provide transmission services to any applicant on a
    case-by-case basis.
    3
     Spot markets involve transactions for the immediate delivery of a commodity. Futures markets
    determine current prices for the delivery of a product at some specified future date.
    4
     Power Marketing Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities
    (GAO/AIMD-96-145, Sept. 19, 1996).
    5
     Federal Power: Outages Reduce the Reliability of Hydroelectric Power Plants in the Southeast
    (GAO/T-RCED-96-180, July 25, 1996).



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                              would make better decisions about maintenance and investment because
                              the decisions would be based on market signals rather than the federal
                              government’s appropriations and budget cycles.6 In responding to a draft
                              of our report, Corps officials pointed out that, in some instances, the
                              Corps’ efforts to better operate, maintain, and repair its hydropower plants
                              have paid off, and they cited that the Corps’ South Atlantic Division
                              (Atlanta, Georgia) has improved the generating availability of its
                              hydropower plants to over 90 percent for fiscal year 1996.7 PMA officials
                              added that not all federal hydropower assets in all regions of the nation
                              exhibit these problems.


Another Objective in          International experience also suggests that asset divestitures have been
Divesting Federal Assets Is   typically motivated by a desire to reduce the government’s debt or deficit.
Improving the                 This can include reducing the size or activities of the government. Some
                              policymakers propose selling the federal hydropower assets to improve
Government’s Fiscal           the federal government’s fiscal position: They believe the cost of the
Situation                     federal hydropower program exceeds its value to the government because,
                              among other reasons, the rates the PMAs charge do not recover all of the
                              costs associated with generating, transmitting, and marketing electricity. If
                              the government would sell these assets, the lump-sum payments would
                              reduce the federal government’s current borrowing requirements. The
                              government would also save money on the annual appropriations that
                              would no longer be needed for the three PMAs and the operating agencies
                              for operating, maintaining, and repairing those assets. While the U.S.
                              Treasury would no longer receive annual revenues from the sale of federal
                              hydropower, proponents of divestiture believe that the sales proceeds the
                              federal government would receive from the divestiture and the reduced
                              government expenditures would more than offset the forgone revenues
                              from electricity sales.8 Some proponents also contend that a divestiture
                              would eliminate any subsidies to PMA ratepayers.




                              6
                               It is important to note that many opponents of divestiture, including some preference customers,
                              concur that the Bureau and the Corps do not adequately operate, maintain, and repair the federal
                              hydropower assets. Some of these customers now support up-front financing of capital repairs for
                              these assets, greater involvement by customers in planning and financing capital repairs, and
                              contracting out these responsibilities to the private sector or to the preference customers themselves
                              while the federal government retains ownership of the assets.
                              7
                               In fiscal year 1995, the availability of these hydropower plants was 87 percent.
                              8
                               Bureau officials note that certain hydropower revenues accrue to and are expended from revolving
                              funds, such as the one associated with the Colorado River Storage Project.


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However, assessing the full financial impact on the government from a sale
of hydropower assets requires that other indirect costs to the government
also be considered. Furthermore, assessing the full financial impact
requires examining a variety of revenue and expenditure components,
expressing these in present value terms that reflect their timing as well as
magnitude, and addressing underlying uncertainties through sensitivity
analyses.9 For instance, the government would incur transactions
costs—associated with preparing for and carrying out a divestiture—if it
sells the assets. These costs could be significant, particularly in the case of
a large-scale public stock offering.10 Additionally, a variety of labor costs,
such as providing severance packages to terminated employees of the
PMAs and/or operating agencies, and other costs associated with the
disposition of their pension and postretirement benefits would need to be
accounted for.11 Furthermore, a divestiture could create more regulatory
responsibilities, and the costs of meeting those increased responsibilities
would have to be considered a cost of the divestiture if those costs would
not have been incurred otherwise and would be borne by the government.12


Proponents contend that some of these additional costs may be offset by
the additional tax revenues the federal government would receive from
sales of electricity if the PMAs and related hydropower assets were sold to
IOUs or independent power producers. The Edison Electric Institute (the
trade association of IOUs and a strong advocate of divesting federal
hydropower assets) maintains that, if the three PMAs in our study were sold
to private utilities, the present value of potential federal income taxes on
purchasers and bond buyers could equal about $1 billion.13 However, these
taxes may reduce how much a potential purchaser would offer for the
PMAs by an amount approximately equal to the tax liabilities. Thus,

9
 Examines how the result of a calculation is affected by changes in the variables used.
10
 For example, as reported in the press, selling the United States Enrichment Corporation could yield
sales proceeds estimated between $1.5 billion and $2 billion, but it could have transactions costs of
$60 million to $100 million.
11
  Federal agencies do not pay the full cost of these benefits currently and, depending on the terms of a
divestiture, the government could continue to bear the residual costs. We reported that the cumulative
unrecovered Civil Service Retirement System pension and costs for postretirement health benefit for
the three PMAs totaled an estimated $436 million as of September 30, 1995. Power Marketing
Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities
(GAO/AIMD-96-145, Sept. 19, 1996).
12
 If FERC is the selected regulatory authority, then the additional costs of licensing and regulating
divested hydropower assets would be recovered through FERC’s fees, subject to congressional action.
13
  Although PMAs make some payments in lieu of taxes, officials from the Edison Electric Institute
stated that IOUs pay an average of 8 cents on every dollar earned in federal taxes, while the PMAs,
being federal entities, are tax-exempt.



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                            counting the expected additional tax revenues without considering the
                            offsetting effect on the expected sales price would overstate the financial
                            benefits of the sale.

                            Finally, it is important to note that the budgetary treatment of a sale of
                            federal assets does not reflect the full, long-term financial impact of the
                            sale on the Treasury. For example, current budget rules use a 5-year
                            budget window for scoring government revenues and expenditures.14
                            Many observers believe that this period is not long enough to evaluate an
                            asset sale in which lump-sum sales proceeds are compared to changes in
                            expenditure and revenue streams that may continue for up to 50 years. In
                            addition, without legislative change, the sales proceeds from a divestiture
                            could not be used to finance new spending or offset revenue losses.
                            Furthermore, the congressional committees that have jurisdiction over the
                            entities being sold could not count the sales proceeds toward the deficit
                            reduction goals specified under the Budget Enforcement Act of 1990, as
                            amended. This means the committees could not use the proceeds to offset
                            additional expenditures within their budget allocation. However, because
                            the sales proceeds would flow directly to the Treasury, the proceeds
                            would reduce the government’s overall borrowing requirements.


Many Question the Need to   Those who favor the government’s current role in providing hydropower
Divest Federal              maintain that the debate about divesting hydropower assets should also
Hydropower Assets           consider many other effects. They point to long-standing federal policies
                            to use federal water projects to help develop local and regional economies
                            and the importance of the revenue the government receives from the sale
                            of hydropower. For example, as an “aid to irrigation,” power revenue is
                            counted on to repay about 70 percent of the federal government’s
                            (nominal) capital investment in irrigation facilities at federal water
                            projects in the West. Parties that favor continued government ownership
                            argue that the sale of federal hydropower promotes competition. They also
                            assert that private-sector generation and marketing of hydropower
                            formerly provided by the PMAs would lead to greater monopoly power in
                            the electricity industry and higher rates to consumers, especially those in
                            remote rural, low-income areas. In addition, the opponents of the sale
                            believe that the PMAs’ electric rates are not subsidized and that, if the
                            federal government sold its hydropower assets, the taxpayer would lose a
                            steady stream of revenues that over time would exceed their selling price.



                            14
                             Scoring is the process of estimating the budgetary effects of legislation and comparing them to limits
                            set in the budget resolution or legislation.



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                              Once a decision has been made to divest, then additional decisions would
The Divestiture of            be needed to answer several broad questions. For instance, what specific
Federal Assets                assets would be divested? What associated conditions and liabilities would
Requires Several              be transferred? And, what methods would be used to value and sell the
                              assets? The final sales proceeds would depend on just what decisions
General Decisions             would be made.


The Specific Assets to Be     As we found in our review of divestitures in other nations, an important,
Sold Would Need to Be         initial decision in a divestiture involves determining which assets to sell. In
Identified                    this regard, federal hydropower assets could be grouped in several
                              different ways. First, a PMA itself could be sold, including any transmission
                              assets and/or the right to sell the hydropower generated at the Bureau’s or
                              the Corps’ hydropower plants. In a second alternative, a PMA, including its
                              transmission assets and its right to sell power, as well as the Bureau’s or
                              the Corps’ powerplants could be divested. In a third, more complicated
                              alternative, a PMA and all of the aforementioned items as well as the
                              remaining assets related to the water projects (e.g., the dams and the
                              reservoirs) could be divested.

                              An alternative to selling an entire PMA and any related hydropower assets
                              could be to package the assets of a specific project for sale. For instance,
                              Bureau officials in Sacramento, California, opined that the Central Valley
                              Project could be sold to the state of California because the project is
                              contained fully in that state and complements the existing water project
                              that is managed by the state. Another option could be to sell all the federal
                              hydropower plants on a river system together to preserve operating
                              efficiencies because the releases of water from upstream facilities to
                              downstream ones could be more easily coordinated under one-party
                              ownership—an important consideration for flood control and other water
                              management purposes.


Trade-Offs Between            Along with defining the specific assets to be divested, policymakers would
Liabilities to Be             have to consider the explicit and implicit liabilities borne by the
Transferred or Restrictions   government and which of those liabilities to transfer to a buyer. As a
                              policy matter, the government may want to retain certain liabilities
on Divestiture and the Bids   associated with the assets being divested or place specific restrictions on
Received Would Need to        their postdivestiture use of these assets. However, policymakers would
Be Considered                 need to consider that assets that are sold with many or relatively onerous
                              restrictions (from the viewpoint of a prospective purchaser) or assets that
                              are in poor condition are correspondingly less attractive and would likely



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result in lower sales proceeds than otherwise. While the government may
still choose to place restrictions or to assign or retain certain liabilities, the
financial consequences in terms of the sale price should be assessed.

Many combinations of assets and liabilities could be grouped for sale.
Both defining and valuing the specific liabilities that the federal
government could retain are important because the government may be in
a better position to bear certain risks. In general, the government could
receive larger sales proceeds by retaining certain liabilities because a
purchaser could substantially discount its bid if the purchaser would
assume the financial risks associated with those liabilities. For instance, in
the proposed divestiture of the United States Enrichment Corporation
(USEC), the government would retain liability for the environmental
cleanup associated with the prior production of enriched uranium.
According to a contractor’s report, decontamination and decommissioning
activities at uranium enrichment plants could cost as much as $17.4 billion
in 1994 constant dollars. The PMAs are liable for environmental cleanup
associated with use of polychlorinated biphenyls and other hazardous
waste. While no precise estimates have been made, these liabilities could
total many millions of dollars.

Assets that are in better operating condition are more likely to receive
larger bids than assets in poor condition. We testified recently that federal
hydropower plants in the Southeast have experienced significant outages
and that these outages occur because of the age of the plants and the way
they have been operated. If these hydropower assets were to be sold
without reducing the current backlog of necessary maintenance, bids
would be lowered. However, a 1995 World Bank review of international
experience with divestitures found that in preparing a government
enterprise for divestiture, a government should generally refrain from
making new investments to expand or improve that enterprise because
any increase in sales proceeds is not likely to exceed the value of those
investments.

Imposing restrictions on operating the assets could also reduce the value
to potential buyers. For instance, significant restrictions on using water to
generate hydropower at the Glen Canyon Dam have been implemented to
protect a variety of natural and cultural resources that are located
downstream. According to the Bureau, these restrictions reduced the
dam’s generating capacity by an amount exceeding 400 MW, even though
total energy production over the course of a day or a season will be largely




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                        unchanged.15 It is almost certain that a new owner of the Glen Canyon
                        Dam would continue to bear the responsibility to operate the dam’s
                        hydropower plants according to these restrictions. As a practical matter,
                        bids by prospective purchasers of the rights to market hydropower
                        produced at Glen Canyon Dam would presumably reflect the diminished
                        revenue potential. Thus, the government would incur much of the financial
                        cost associated with the current restrictions in the form of reduced
                        proceeds from the sales, just as the government would continue to bear
                        this cost if its continued ownership and operation of the dam were
                        maintained. Moreover, uncertainty about the extent of such restrictions
                        likewise increases the uncertainty of expected future revenues and would
                        likely reduce proceeds from the sale.

                        In previous deliberations over divesting federal hydropower assets,
                        including the PMAs, policymakers debated the desirability of ensuring
                        regional control of divested federal hydropower assets. While a decision to
                        limit bidders on particular assets to certain geographic areas would foster
                        a goal of local or regional control of those assets, it could reduce the
                        proceeds from the sale if other potentially interested buyers were
                        precluded from making offers. For example, in the divestiture of the
                        Alaska Power Administration—the only PMA to be offered for sale—an
                        overriding concern was to protect the PMA’s ratepayers from possible
                        increases in electricity rates. This concern led decisionmakers to restrict
                        the eligibility of bidders to only ones from within the state. It also led
                        decisionmakers to accept a sales price approximating the present value of
                        future principal and interest payments that the Treasury would have
                        received instead of establishing the price by selling the assets in an open,
                        more competitive fashion to the highest bidder.


The Specific Sales      The objectives underlying a divestiture help determine the most
Mechanism and Process   appropriate sales method. For example, if a divestiture were largely
Need to Be Determined   motivated by fiscal considerations—with an emphasis on sales
                        proceeds—an appropriate sales mechanism would involve some form of
                        competitive bidding and tend to place few restrictions on the number or
                        identity of bidders.16 Alternatively, if the major motivation were a desire to

                        15
                         Essentially, the restrictions reduce the amount of electricity that can be produced during peak
                        periods, when it is more valuable, and increase the amount of electricity produced during off-peak
                        periods.
                        16
                         In general, because bids would likely increase with more bidders, restrictions on the number of
                        bidders would likely lead to smaller sales proceeds. In many divestitures, governments have
                        considered whether to exclude foreign bidders, the trade-off being between sales proceeds and the
                        development of domestic institutions. Some restrictions would likely be warranted, such as those that
                        would preclude frivolous bids.



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    transfer operations to the private sector—with an emphasis on a smooth
    transfer—the government could choose to negotiate a sales price with a
    selected buyer.

    In general, we have supported the principle that the federal government
    should seek the full market value in selling its assets. Sales methods that
    allow for competitive bidding are more likely to generate this result and
    lead to the transfer of assets to those buyers who value them most highly.
    A World Bank survey of international experiences with divestiture
    indicates that open bidding among competitors is preferable to sales that
    rely on negotiations with selected bidders because the former method
    offers less opportunity for favored buyers to receive special treatment at
    the taxpayers’ expense.

    In practice, the size of the assets to be sold, in terms of value and scale of
    enterprise, has influenced the type of sales process used. Trade sales and
    public stock offerings are general processes, with trade sales used more
    often to sell smaller enterprises or assets, and public offerings used to sell
    larger ones. Also, within each type, sales can be organized using
    competitive bidding methods or negotiations. A brief description of these
    processes follows:

•   “Trade sales” draw on the idea that an existing set of businesses
    competing in the relevant line of business (or trade) are likely to offer
    more and higher bids for the assets.17 Three key attributes of the PMAs and
    the electricity industry may lend themselves to a trade sale: (1) The PMAs
    and related hydropower assets are part of an established industry with
    capital market connections experienced in the valuation, grouping, and
    sale of electricity-generating assets. (2) Sales of significant
    electricity-generating assets are not unusual. (3) There would likely be
    several bidders for at least large portions of the PMAs and their related
    assets, depending on how those assets are grouped for sale. A trade sale
    can be a negotiated sales process between the government and a buyer or
    can be accomplished using an auction to determine both the sales price of
    the asset or assets as well as the buyer or buyers.
•   Stock offerings have been used domestically, most recently in the sale of
    Conrail in 1987, as well as internationally to divest large public enterprises.
    This method of sale would most likely require creating a government
    corporation or corporations out of the PMAs and their associated assets.
    Some of these assets could be grouped for sale, and some could be

    17
     As a practical matter, no reason exists to restrict bidders to the relevant trade, even though the term
    suggests that many potential purchasers would be drawn from the “trade” or related industries.



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excluded from the sale, depending on the policy trade-offs discussed. In
the case of some federal water projects, for example, the government
could decide to retain control of the dam and reservoir to satisfy
increasingly significant restrictions on the use of water because of
concerns about the environment or endangered species. The stock of the
government corporation would be subsequently sold through standard
financial market methods, such as a private placement through
negotiations between particular investors and the government or through
a sale to the general public by using competitive bidding.

In cases where auction methods might be selected to sell government
assets, recent government experience indicates the importance of
carefully choosing the specific format for an auction. That is, a policy
decision to choose a competitive auction format requires making many
subsequent decisions to define the specific rules leading to an appropriate
operational auction. For example, the Federal Communications
Commission has chosen to auction the leases of electromagnetic spectrum
licenses for use in mobile communications. While generating a large
amount of revenue was a less important goal than achieving an efficient
geographic allocation of spectrum licenses to communications firms, the
auctions generated more revenue than had been predicted by some
potential bidders, according to auction analysts. In large part, the success
of these auctions was due to careful consideration of the auction format
and the identification of particular problematic features of auctions of
similar assets in other countries.18

Most domestic and international divestitures have relied on private capital
market firms as consultants and managers because of their frequent
experience with complicated and high-valued transactions governing the
transfer of assets in the private sector. Particularly in the case of public
offerings but also for trade sales, the government would likely incur
substantial costs to prepare its assets for sale or to pay for services
performed by its financial advisers. For example, in the sale of Conrail, the
government employed a variety of financial advisers and, in a key role, a
prominent law firm with expertise in a variety of fields, including tax and
employment law.



18
  For instance, although New Zealand in 1990 and Australia in 1993 sold portions of the
electromagnetic spectrum using auction formats that were fairly well understood in many contexts,
these formats presented problems in the more complicated framework characterizing the allocation of
spectrum licenses. For a discussion of spectrum auction issues, see R. Preston McAfee and John
McMillan, “Analyzing the Airwaves Auction,” Journal of Economic Perspectives, Winter 1996, pp.
159-175.



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Within the government, a variety of possible divestiture management
options exist to guide the divestiture process and implement the decisions
that must be made. In the Conrail divestiture, the Department of
Transportation was primarily responsible for managing the sale. In the
ongoing Alaska Power Administration sale, DOE is the lead agency. In our
review of the USEC divestiture, we recommended that the Secretary of the
Treasury lead the privatization process because that official will not be
affected by the privatization and the Secretary’s mission is clearly defined
in terms of protecting taxpayers’ general interests.




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Hydropower Would Need to Be Addressed
Before a Sale
                      Besides the general decisions that arise from any complex divestiture,
                      many specific issues related to federal hydropower would need to be
                      addressed before a divestiture of federal hydropower assets could be
                      completed. These issues include the multiple purposes of federal water
                      projects; the existing contractual obligations and liabilities of the PMAs, the
                      Bureau, and the Corps; the future responsibility for environmental
                      liabilities and protecting endangered species, which already constrain the
                      operations of many projects; the rights and concerns of Native Americans;
                      and the future regulatory treatment of the hydropower assets. The
                      potential effects on wholesale and retail electric rates, including potential
                      regional economic effects, would also need to be considered. Although
                      determining how wholesale rates would be affected by a divestiture is
                      difficult, the impacts would be influenced by the extent to which
                      customers buy a large portion of their power from the PMAs and the
                      prevailing wholesale rates in the regional market. The impact on retail
                      rates and any regional economic impacts would depend on the extent to
                      which a PMA’s customers would absorb any cost increases or pass them on
                      to their retail customers.

                      A divestiture of hydropower assets would require time and resources.
                      However, complex issues have arisen and been successfully addressed in
                      transfers of assets in the private sector. For example, for nonfederal
                      facilities, balancing the multiple purposes of the water projects has been
                      historically managed through FERC’s licensing process. In addition, when
                      FERC decreased its regulation of the natural gas industry and the industry
                      restructured itself, thousands of new contracts were negotiated and
                      rewritten.


                      The purposes and the management of federal water projects are guided by
The Impact of a       many statutes, including federal water management and reclamation
Divestiture on        statutes generally applicable to all projects, specific authorizing and
Balancing Water       appropriations statutes for individual projects, and environmental
                      protection statutes. Many federal projects serve multiple purposes, such as
Projects’ Multiple    fish and wildlife habitat protection, flood control, hydropower generation,
Purposes Would Need   irrigation, municipal and industrial water uses, navigation, recreation, and
                      water quality improvements. Unless the legislation that authorized a
to Be Addressed       divestiture exempted the water projects from these laws, the statutory
                      provisions would continue to affect how the new owners would manage
                      the projects and how much electricity the new owners could generate. See
                      appendix II for a description of relevant federal statutes.




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As described in chapter 2, under current arrangements the Bureau and the
Corps manage the allocation of water in federal water projects to balance
their multiple purposes. The uses of the water are sometimes
complementary and sometimes competitive with one other. For example,
water is stored in and is released from the reservoir to provide for
recreation, but its release through the turbines could be scheduled to
generate electricity in a way that is intended to maximize revenues. In
contrast, Western’s office in Billings, Montana,1 forecasts decreases in
power revenues in the long-term because water, which would otherwise
be used to generate electricity, will increasingly be used for irrigation and
other purposes.2 In its fiscal year 1995 repayment study, Western predicted
that revenues from the sale of hydropower could decrease from about
$253 million in 2001 to about $213 million (in constant 1995 dollars) in
fiscal year 2080 for the Pick-Sloan Program.

Under authorizing legislation, such as the Flood Control Act of 1944 and
the various reclamation acts, the Bureau and the Corps enjoy some
latitude in managing water for various purposes. These agencies’ role in
arbitrating between multiple uses becomes especially visible during times
of drought.3 For example, according to Western officials, during the
drought of the late 1980s and early 1990s, water was increasingly assigned
to irrigation. As a result, power generation suffered significantly in
Western’s service area. The role of the Bureau and the Corps has also
become increasingly important as population and economic growth have
intensified the competition over how water is used. For example,
competition for water is now emerging even in areas with abundant
rainfall, such as the Southeast. For several years, Alabama, Florida, and
Georgia have been contesting the uses of water on two river basins in the
Southeast (the Alabama-Coosa-Tallapoosa and the
Apalachicola-Chattahoochee-Flint) that are managed by the Corps.
Georgia, which contains the headwaters of the waterways in question,
needs increased water supplies to provide for the growing population of
the Atlanta area, as well as for farming and industry. Florida is concerned
about the effects of water levels on its barging industries. It is also

1
 The eastern and western divisions of Western’s Pick-Sloan program market power from the Bureau’s
and the Corps’ hydropower projects (3,102 MW) on the upper-Missouri River and its tributaries.
2
 According to Bureau officials, the vast majority of planned irrigation projects in the Pick-Sloan
Program will likely not be completed because they are infeasible and not cost-effective. See Federal
Power: Recovery of Federal Investment in Hydropower Facilities in the Pick-Sloan Program
(GAO/T-RCED-96-142, May 2, 1996).
3
 According to Interior, interstate water compacts, such as the Colorado River Compact, and
international water delivery requirements are also important factors related to the management of
water that would affect potential divestitures.



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                              Before a Sale




                              concerned about upstream pollution because water from the
                              Chattahoochee and other rivers flows into Apalachicola Bay—a rich
                              source of shellfish and shrimp. Alabama is also concerned about the
                              cumulative impacts of potential water resource actions. In the 1980s, the
                              Corps, responding to requests from several Georgia communities for
                              additional water withdrawals from reservoirs, planned to reallocate water
                              away from generating hydropower to increase the water supply. In June
                              1990, Alabama sued the Corps, challenging the adequacy of documentation
                              about the environmental impacts of those reallocations and the Corps’
                              procedures for operating its reservoirs. However, in January 1992, after
                              Alabama put aside the lawsuit, the governors of the three states signed an
                              agreement with the Corps to work together through a study to resolve
                              their issues. This study is projected to be completed in December 1997.


Postdivestiture Role of the   The ability of the Bureau and the Corps to continue to balance the
Bureau and the Corps          purposes of a water project after a divestiture would depend largely on the
Would Depend on the           types of assets that were being sold. If only the PMA and its transmission
                              assets were divested, then the Bureau and the Corps would continue to
Assets Divested               control how water is allocated, used, and released, because they would
                              continue to own and operate the dams, the powerplants, and the
                              reservoirs. According to Bureau, Corps, and PMA officials, the impact of
                              such a divestiture on the operation of a water project and its multiple
                              purposes would be manageable because the buyer would have to dispatch
                              and market power subject to the Bureau’s and the Corps’ continued
                              presence and decisions about water releases. However, the Bureau and
                              the Corps would have to deal with a nonfederal entity with different
                              incentives than the former PMA, which was a fellow government agency
                              that understood the need to operate so as to meet multiple public
                              purposes.

                              If the PMA, its transmission assets, and the Bureau’s and the Corps’
                              hydropower plants were sold, then the Bureau and the Corps would retain
                              ownership of the dams and the reservoirs and would continue to plan and
                              manage the water. However, because water is released through both the
                              spillways (which would continue under the Bureau’s or the Corps’ control)
                              and the powerplant (which would be controlled by the nonfederal buyer),
                              a nonfederal entity would have some measure of operational control over
                              how and when water would be released. Bureau, Corps, and PMA officials
                              explained that the operating agencies would have to be more vigilant than
                              they have been when dealing with the buyer of the PMA and the
                              powerplants.



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                         If the PMA, its transmission assets, the powerplants, the dams, and the
                         reservoirs were sold, the Bureau and the Corps would no longer be
                         responsible for managing how water is used and balancing the projects’
                         multiple purposes. As discussed later in this chapter, in this case a
                         regulatory agency, such as FERC, would have to consider the projects’
                         purposes when licensing and regulating postdivestiture hydropower
                         production and other activities at a divested project.4 FERC officials noted
                         that nonfederal water projects licensed by the commission also have
                         multiple purposes that must be accommodated.


                         The irrigation function at federal water projects presents issues for
Irrigation Is a Unique   divestitures that differ from the other project purposes.5 Specifically, as of
Public Purpose That      September 30, 1995, power revenues were scheduled to pay for about $1.5
Would Significantly      billion to recoup the federal capital investment for completed federal
                         irrigation facilities.6 This amount is to be repaid for periods of up to 60
Affect Some              years for individual irrigation projects.7 Under current repayment
Divestitures             practices, this debt is to be repaid without interest, and repayment of the
                         debt can be deferred until the end of the repayment period.8 Moreover,
                         according to the Bureau’s officials, because capital expenditures on
                         irrigation facilities are expected to continue to increase for renovating and
                         replacing existing facilities as well as constructing new ones, the total
                         amount of “irrigation assistance” could also increase over time. However,
                         most planned irrigation projects likely will not be completed because they
                         are infeasible and not cost-effective. If Western, the related federal water
                         projects, or irrigation projects within Western’s service area were sold to
                         nonfederal entities, the issue of how this federal investment in irrigation
                         would be repaid would have to be addressed.



                         4
                          According to FERC officials, FERC would likely license and regulate any divestiture that involves the
                         sale or transfer of the powerplant.
                         5
                          Among the three PMAs in our study, only Western transmits and markets power from federal water
                         projects that provide for irrigation. Bonneville, too, has such projects.
                         6
                          According to Bureau officials, revenues from the sale of federal hydropower are scheduled to repay
                         about 70 percent of the total federal capital investment in completed irrigation projects. For the
                         Colorado River Storage Project, the Bureau and Western estimate the amount to be about 95 percent.
                         7
                          Under the principle of “aid to irrigation,” the Secretary of the Interior determines the amount of
                         federal capital investment in completed irrigation projects that irrigators can afford to repay. Most of
                         the remainder is assigned to be repaid through revenues from the sale of federally marketed electric
                         power. As of September 30, 1995, only $32 million of the outstanding irrigation debt had been repaid.
                         8
                          Because of the application of these repayment practices, the present value of the $1.5 billion may be
                         viewed as very small.



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                      Hydropower is used at some federal projects within Western’s service area
                      to power the pumps that move water from the reservoirs and the canals to
                      the fields. In recent years, as much as about 30 percent of all electricity
                      generated by the Bureau’s hydropower plants in California’s Central Valley
                      Project (CVP) has been used for this “project pumping.” Moreover, at some
                      federal irrigation projects, the rate that has been charged for “project
                      pumping” electricity has been far below the rate that has been charged for
                      commercial uses. According to Bureau officials, at the Eastern Division of
                      the Pick-Sloan Program, the average rate per kWh sold in fiscal year 1995
                      was about 1.5 cents per kWh, while the rate for project pumping was only
                      about 0.2 cents per kWh. Any divestiture would need to clarify whether the
                      new owners would be required to provide power for irrigation below the
                      rates paid by other customers. If the dams and the reservoirs were sold,
                      then the government would have to negotiate arrangements to
                      accommodate the use of water for irrigation.


                      As agencies of the federal government, the PMAs, the Bureau, and the
The Government’s      Corps have entered into a wide range of legally binding contracts in
Contractual           conducting the generation, transmission, and marketing of hydropower.
Obligations Must Be   Until the specific terms of a divestiture proposal and the accompanying
                      legislation are known, identifying possible complications that could delay
Recognized            or otherwise affect the sale will be difficult. However, even if the
                      legislation establishes the transferability of these contractual obligations,
                      stakeholders might be able to delay or complicate the divestiture process
                      by filing lawsuits. Although we did not review the thousands of contracts
                      and other agreements that could be affected by a divestiture, according to
                      Bureau and PMA officials, some of the government’s current contracts do
                      not address the transfer of the government’s contractual obligations after a
                      divestiture.

                      Historical precedence exists in the energy sector for addressing extensive
                      and complex contractual obligations. For example, after FERC ordered the
                      restructuring of the natural gas industry, thousands of new contracts were
                      written. FERC Order 636, which was issued in 1992, required, among other
                      things, that all interstate pipeline companies restructure their tariffs,
                      services, rates, and contracts and separate or “unbundle” their gas
                      transportation and storage arrangements. To conform to this order, gas
                      pipeline companies negotiated about 3,800 new contracts with their
                      customers.




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Selling Power to           One of the PMAs’ most important contractual obligations is selling power to
Preference Customers Is    their “preference customers.” The PMAs market hydropower on a
an Important Contractual   wholesale basis at the lowest possible rates, consistent with sound
                           business practices.9 The three PMAs in our study have contracts to sell
Obligation                 power to over 990 customers at cost-of-service rates ranging from about
                           1.5 cents to about 2.0 cents per kWh.10 Although these rates may increase
                           in the future, they are significantly lower than the average national
                           wholesale rates of 3.4 cents per kWh for IOUs and about 4.0 cents for
                           publicly owned generating utilities.

                           Currently, the PMAs are renewing their power contracts. Western has
                           extended its contracts in the Pick-Sloan Program through 2020 and is
                           proposing 20-year extensions of power contracts at other projects.
                           According to PMA officials, it is unclear whether a buyer of a PMA would
                           have to continue selling power at low rates to preference customers and, if
                           so, for how long. If a PMA were divested, its contractual obligations with its
                           customers could be assigned in whole or in part to the buyer.11


Various Interconnection    In addition to power contracts, the PMAs have entered into
and Transmission           interconnection, transmission, and right-of-way contracts and agreements
Contracts and Agreements   that make them a vital part of regional power grids. For example, in
                           addition to power contracts with 83 customers, Western’s office in
Tie PMAs Into Regional     Folsom, California,12 has numerous contracts and agreements for
Grids                      providing transmission and interconnection services, for buying power
                           from utilities in the Pacific Northwest, for delivering power to irrigation
                           projects via the transmission grid of another utility, and for acquiring
                           rights-of-way and easements along transmission lines. Western has a key
                           contract with the Pacific Gas and Electric Company (PG&E), first signed in
                           1967, that integrates the operations of the PMA and the company. Under
                           this complex contract, Western provides peaking capability to PG&E in


                           9
                           Rates are set under the Flood Control Act of 1944, the Reclamation Project Act of 1939, and 58 Fed.
                           Reg. 59716.
                           10
                             These rates are average PMA-wide rates that do not apply to all projects from which the PMAs market
                           power. For example, although Western’s average revenue rate per kWh in fiscal year 1994 was about
                           1.8 cents per kWh, the composite firm rate for the Central Valley Project (CVP) in California, from
                           which Western markets power, was about 3.0 cents per kWh. Pursuant to Western’s rate process in
                           1995, Western reduced the CVP’s composite firm rate to about 2.3 cents per kWh for fiscal year 1996.
                           11
                            Any divestiture proposal would need to consider the need to amend the various laws requiring
                           preference in the sale of federal power for public bodies and cooperatives.
                           12
                            Western’s Folsom office markets power from the Bureau’s CVP, which has a generating capacity of
                           about 2,000 MW.



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                           exchange for firm power services;13 PG&E also delivers 880 MW to Western’s
                           preference customers. Moreover, to bring more power to its system,
                           Western also owns part of the Pacific Northwest-Southwest Intertie and an
                           interest in the California-Oregon Transmission Project, which allows
                           Western to transmit power from the Bonneville Power Administration,
                           Pacific Corp, and other utilities in the Pacific Northwest.

                           Although Southeastern has no transmission assets, it has 17 contracts with
                           regional utilities (including regional IOUs, state public power agencies, and
                           electric cooperatives) to transmit power that is generated by hydropower
                           plants the Corps operates. These contracts differ in the services provided,
                           cancellation provisions, and customers served. Seven of the utilities,
                           including the Tennessee Valley Authority (TVA), provide both
                           transmission and ancillary services. These contracts are described in
                           appendix IV.


The Bureau and the Corps   Because of the number and complexity of their contracts and agreements,
Also Have Many Contracts   the Bureau and the Corps were unable to provide us with information
and Agreements             related to every contract and agreement they have implemented at the
                           offices we visited. However, Bureau and Corps officials provided us with
                           information to illustrate the number and types of contracts and other
                           agreements that would have to be assigned or terminated if a project’s
                           dam and/or reservoir were divested. For instance, in Southeastern’s
                           service area, the Corps has over 5,100 agreements for such things as
                           easements for roads and utilities; leases for public parks, agriculture, and
                           concessions; and licenses for fish and wildlife management. See appendix
                           IV for a description of these contracts and agreements. Likewise, the
                           Bureau’s Great Plains Region in Billings, Montana, has over 2,200
                           contracts and agreements, which include the Bureau’s 580 right-of-use
                           permits for such things as agricultural leases and permits concerning
                           buffers, buildings, crops, drainage, and weed control. See appendix V for a
                           description of these contracts and agreements.




                           13
                            Firm power refers to the power or the capacity that is intended to be available at all times during a
                           period covered by a commitment, even under adverse conditions.



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                           According to FERC officials, concerns about environmental impacts have
Environmental Issues       begun to affect the generation of hydropower. The uncertainties about the
Would Impact the           federal government’s future responsibilities in funding and implementing
Government’s Ability       actions to mitigate environmental impacts would greatly affect the
                           divestiture of any hydropower assets. Other types of generating capacity,
to Divest Hydropower       including coal-fired and nuclear powerplants, have also faced
Assets                     environmental and related constraints that have required costly
                           mitigations.14


Mitigating Environmental   The desire to mitigate any potential negative effects of water projects on
Damages Has Resulted in    the environment, especially on the habitat of endangered and threatened
Forgone Power Revenues     species, is increasingly constraining the ability of the Bureau and the
                           Corps, as well as nonfederal entities, to generate hydropower, especially
                           during hours of peak demand. Because of these restrictions, the PMAs have
                           forgone power revenues of millions of dollars since the late 1980s.

                           In an example affecting Southeastern, the South Carolina Department of
                           Wildlife and Marine Resources sued the Corps in 1988, alleging violations
                           of the National Environmental Policy Act of 1969 at the Richard B. Russell
                           Dam. The Russell project has eight hydropower units with a combined
                           capacity of 600 MW—four conventional hydropower units (the last of
                           which came into commercial operation in 1986) and four pumpback units
                           (which have never been in commercial operation).15 The U.S. District
                           Court for the District of South Carolina found that the Corps had violated
                           the National Environmental Policy Act by failing to complete an
                           environmental impact statement (EIS) and issued an injunction against the
                           installation and operation of the pumpback units. However, the Court of
                           Appeals for the Fourth Circuit partially reversed the district court and
                           allowed the Corps to install the pumpback units but not operate them until
                           another EIS had been completed. This supplemental EIS was completed and
                           a settlement agreement was negotiated that allowed environmental



                           14
                             Since the 1970s, the generation of electricity by using nuclear fuel or burning coal has been affected
                           by concerns about the associated environmental impacts. In the aftermath of the accident at the
                           nuclear powerplant on Three Mile Island in 1979, the Nuclear Regulatory Commission and state
                           regulators have increased their oversight of nuclear power plants, thereby increasing the financial risk
                           to utilities and billions of additional dollars to comply with their new requirements. In addition, the
                           enactment of legislation, such as the Clean Air Act, has resulted in costly retrofits to coal-fired
                           powerplants or the burning of cleaner coal.
                           15
                            The pumpback units are designed to allow water, after it has passed through hydropower generating
                           units, to be pumped back into the reservoir during periods of low demand for electricity. Then, the
                           water can be used to produce power during periods of high demand for electricity. These units pose an
                           environmental concern because the turbines may kill fish while operating in the pumping mode.



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                              testing. According to Southeastern, the PMA has lost power revenues of
                              about $36.1 million per year since 1994 because of the shutdown.

                              In another example that affects Western, the obligation to protect
                              endangered species has had a significant impact on the CVP’s operations.
                              Bureau officials said that, in response to the Endangered Species Act, the
                              U.S. Fish and Wildlife Service listed the winter run of the Chinook salmon
                              as endangered. According to these officials, to protect the needs of the
                              salmon, the Bureau has restricted the use of the five hydropower units at
                              the CVP’s Shasta powerplant. They added that since 1987 these restrictions
                              have resulted in additional costs of about $50 million to purchase power to
                              meet Western’s contractual obligations.

                              According to officials from the Bureau, FERC, and the PMAs, as well as from
                              environmentalist groups and trade associations, environmental
                              restrictions on water usage to generate power will likely continue in the
                              future. The effects will continue to include lost power revenues or,
                              conversely, increased costs to procure alternative power supplies. For
                              example, waterflow restrictions that are included under the preferred
                              alternative of the final EIS of the Glen Canyon Dam could result in lost
                              generating capacity of 442 MW in the winter and 470 MW in the summer.
                              According to the Bureau, the cost to replace the lost capacity is about
                              $44.2 million per year. The preferred alternative, also known as the
                              “modified low fluctuating flow” alternative, features river flows that are
                              substantially reduced from historic levels, including flows that vary for
                              purposes of maintaining the habitat.16 The benefit of these modifications in
                              managing water use include enhanced fish habitat and protection of
                              endangered or listed species.


Current and Future            Defining who would be responsible for mitigating the environmental
Environmental Issues          impacts associated with federal water projects after a divestiture is a
Would Affect the Ability of   crucial issue that would have to be addressed when policymakers define
                              the terms and conditions of the transaction. If only the PMA (including the
the Government to Divest      transmission assets) and/or the federal powerplants were divested, then
Hydropower Assets             the government’s responsibilities would generally remain the same, unless




                              16
                                Bureau of Reclamation: An Assessment of the Environmental Impact Statement on the Operations of
                              the Glen Canyon Dam (GAO/RCED-97-12, Oct. 2, 1996).



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specified otherwise in the divestiture legislation.17 If the government were
to sell the dams and reservoirs, however, the responsibilities and costs of
actions to mitigate environmental impacts would need to be allocated or
reassigned.

Moreover, with new and more comprehensive actions to mitigate
environmental impacts, the uncertainty surrounding the availability of
power would also need to be addressed. These actions frequently entail
restrictions on releases of water to generate electricity or potentially
significant, but unknown, future costs to mitigate environmental impacts.
If the PMA and/or powerplants were divested, then uncertainty about the
amount of power available for marketing could lower the price that buyers
would be willing to pay or discourage some potential buyers from
submitting bids. Likewise, if the dams and the reservoirs were divested,
uncertainty about the amount of power that could be generated as well as
uncertainty over the costs of future environmental mitigations could
likewise lower the bids or discourage some prospective buyers from
bidding. In addition, the existence of more competitive electric markets
would also affect the attractiveness of purchasing the federal hydropower
assets.

Alternatively, if the government assumes some of the future liability for
the costs of actions to mitigate environmental impacts, taxpayers may be
forced to bear a significant, but currently unknown, future liability.
Moreover, according to officials of DOE’s PMA liaison office, because
environmental laws could require an EIS, testing, and cleanup when federal
property is sold, additional costs to sell the federal hydropower assets
could be incurred. In addition, PMA and Bureau officials stated that, in
some cases, actions to mitigate environmental impacts are ongoing and
would have to be considered in a divestiture of certain federal hydropower
facilities.18




17
  FERC notes that if the powerplant were divested, but the dam and reservoir remained in the hands of
the Bureau or the Corps, it could still be appropriate to impose constraints on the powerplant’s
operations beyond those already imposed by the Bureau or the Corps. For instance, FERC’s operating
license could require the powerplant operator to cease its operations during hot periods to maintain
the appropriate water temperature and dissolved oxygen levels.
18
 For example, according to PMA officials, Western has committed to ongoing environmental
mitigations related to transmission lines, communications sites, and other facilities.



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                       Various rights and concerns of Native Americans would have to be
The Rights and         addressed in a proposal to divest federal hydropower assets. These issues
Concerns of Native     include (1) their water rights, (2) their claims to surplus federal property,
Americans Would        (3) the need to address rights-of-way for PMA transmission lines across
                       their lands, and (4) the government’s responsibilities under the Native
Affect a Divestiture   American Graves Protection and Repatriation Act to safeguard their
                       cultural artifacts. In addition, according to Western officials, the PMA is
                       reserving some of its capacity for Native American tribal entities that are
                       expected to become new preference customers.

                       The rights of Native Americans to water must be considered in a
                       divestiture. Several Native American tribal entities hold reserved water
                       rights with senior priority dates (for example, from time immemorial or
                       the 1850s or 1860s) on river systems with federal water projects. Many of
                       these entities have reserved water rights that have yet to be quantified and
                       have water uses that have yet to be determined. The amounts of water
                       associated with these rights and the manner in which the rights are
                       exercised would likely affect hydropower operations and the distribution
                       of power revenues. For example, according to Bureau officials, one legal
                       settlement with tribes of the Fort Peck Reservation, Montana, included
                       rights to about 1 million acre-feet of water from the Missouri River.

                       Other potential claims of Native Americans would affect a divestiture of
                       PMAs and related hydropower assets. For example, under federal
                       legislation, excess federal real property in Oklahoma is subject to transfer
                       to the Secretary of the Interior in trust for Oklahoma Native American
                       tribal entities. According to Southwestern officials, this legislation would
                       complicate a divestiture, although the extent of potential claims by Native
                       Americans under this legislation is difficult to determine because of the
                       lack of information about the prior ownership of lands on which the
                       federal assets are located. According to PMA officials, the PMAs have 880
                       miles of transmission lines located on rights-of-way that traverse the lands
                       of Native American tribal entities. In the event of a divestiture of a PMA’s
                       transmission assets, if the Native Americans agreed to a transfer of these
                       rights-of-way to a buyer, they could expect compensation. Finally, under
                       the Native American Graves Protection and Repatriation Act, certain
                       Native American cultural artifacts found on federal locations must be
                       returned to the relevant Native American tribal entity. Corps officials
                       responsible for managing federal water projects from which Southwestern
                       markets power explained that they have been involved in numerous cases
                       in the past several years involving this law.




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                       Providing federal hydropower to Native Americans would also affect a
                       divestiture. According to Bureau and Western officials, in part because the
                       federal government has a trust responsibility with Native American tribal
                       entities and because those entities are expected to become new
                       preference customers, Western is entering into a process to reallocate the
                       power it will sell to its current and future customers. For example, it is
                       setting aside at least 4 percent of its existing hydropower capacity at the
                       Pick-Sloan Program for Native Americans and other new customers.
                       Western is also changing its rules concerning power reallocations to make
                       it easier for Native American tribal entities to buy federal power. These
                       obligations would complicate a divestiture because they would involve
                       selling power to new preference customers and extending existing
                       contracts—for example, for 20 years (until the year 2020) at the Pick-Sloan
                       Program.


                       Before a sale could be completed, the regulatory treatment of the divested
Licensing and          hydropower assets would need to be addressed. While many options for
Regulating Divested    regulating the operations of divested hydropower assets exist, including
Hydropower Assets      regulatory regimes that could be established by federal, state, or regional
                       authorities, FERC currently licenses the operation of nonfederal
Would Introduce        hydropower assets. With the proper resources, FERC officials believe they
Uncertainty Into the   could license and regulate divested hydropower assets. They stated that
                       the Bureau and the Corps have been able to accommodate emerging issues
Divestiture Process    at federal water projects, such as environmental restrictions on water
                       uses, with more flexibility than FERC’s quasi-judicial licensing process.
                       They also stated that the Commission’s limited flexibility and the timing of
                       its actions on licensing stem from the authority of other federal and state
                       agencies to attach conditions to the license. Currently, FERC primarily
                       regulates the reasonableness of wholesale rates charged by the PMAs and
                       does not provide more detailed oversight of them and the Bureau’s and the
                       Corps’ assets and operations.

                       According to FERC officials, the extent of its regulation after a divestiture
                       would depend upon the specific assets divested. A FERC operating license
                       would not be needed if only the PMA’s assets (its right to market
                       hydropower and, in the case of Southwestern and Western, also the
                       transmission facilities) were divested because the operating agencies
                       would continue to own and operate the powerplants. The operating
                       agencies would continue to manage the water as in the past and the
                       existing restrictions would likely remain in effect. The buyer would market




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the power subject to the same conditions as the former PMA—subject to
the existing purposes of the water project.

If a divestiture included the powerplants, the new owner would then be
required to obtain a FERC operating license, unless the requirement for
FERC’s licensing and regulatory activities were specifically exempted by
legislation. Licensing a divested hydropower plant could take a long time;
FERC’s licensing process averages 2.5 years but it has taken as long as 10 to
15 years. In granting an operating license for a hydropower plant, FERC is
required to weigh the plant’s impact on such “nondevelopmental values”
as the environment and recreation. The licensing action involves such
numerous studies as the powerplant’s impact on fish, plant, and wildlife
species; water use and quality; and any nearby cultural and archeological
resources. Moreover, the government of each affected state would
perform a water quality certification. In addition, to accommodate any
“nondevelopmental values,” FERC could restrict the use of water for
generating electricity, resulting in hydropower generating units that have
been “derated”—that is, their generating capacity has been reduced. For
example, according to studies by the Electric Power Research Institute,19
from 1984 to 1989, 16 hydropower plants that had been relicensed were
actually derated while 8 powerplants increased their capacity. FERC
officials cautioned that if the powerplant, dam, and reservoir were sold,
then FERC’s licensing process could revisit the management and uses of the
water and possibly change the available electric-generating capacity. The
uncertainty regarding the length of time to complete FERC’s licensing
process as well as the amount of generating capacity after licensing is
completed could reduce the number and amounts of bids for the
resources. However, if the new owners of a hydropower plant were
allowed to operate the plant without a FERC license, they would have a
competitive advantage against other operators who are subject to FERC’s
licensing requirements.

A congressional bill introduced on July 23, 1996, contained provisions that
would have provided an operating license with a 10-year term for divested
hydropower assets. The owners would then have been subject to a FERC
license. In congressional testimony in 1995 regarding divestiture of the
PMAs, the Chair of the FERC suggested that divestiture legislation specify an
automatic grant of the 10-year operating license and require that the
divested powerplants continue to operate according to the preexisting



19
  The Electric Power Research Institute is the research entity of the electric utility industry.



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                         operating agreements.20 Following a divestiture, FERC would then subject
                         the facility to the normal FERC licensing procedure.

                         According to FERC officials, FERC would be able to regulate divested
                         multipurpose federal hydropower assets because the Commission already
                         has this responsibility for 1,000 nonfederal hydropower facilities. They
                         said that most nonfederal hydropower plants have widespread impacts
                         and multiple uses because their associated dams and reservoirs store
                         water, thereby affecting water upstream, downstream, and across state
                         lines. However, to handle numerous divestitures or complicated
                         divestitures of federal hydropower assets, FERC would need to request
                         congressional authority to add new personnel and resources.


                         Precisely determining how the sale of the PMAs would affect the rates
Effects of Divestiture   charged to customers is difficult. Some of the PMAs’ customers have
on Wholesale Power       expressed concerns that a divestiture of the PMAs could lead to significant
Rates Would Vary         rate increases, while some industry analysts have contended that rate
                         increases would be small for most customers. However, some analysts
Among PMAs’              believe that certain customers would be more likely to see larger rate
Customers                increases than others. These customers are those who currently (1) buy a
                         higher percentage of their total power from a PMA than others do, (2) pay
                         rates for a PMA’s power that are significantly lower than the market rates in
                         the region in which the PMA sells power, and (3) have few or no
                         alternatives for buying power elsewhere at relatively low rates. According
                         to PMA and industry officials, many of these customers are smaller ones
                         located in geographically remote areas. Other factors, such as increasing
                         competition in the wholesale market or mandated limits on rate increases
                         could mitigate the rate increases for these customers. The change in retail
                         rates to end-users (i.e., residential, industrial, and commercial customers)
                         would depend on how much rates increase for the preference customers
                         that serve them. However, the extent to which preference customers pass
                         these increases on to end-users could be affected or mitigated by such
                         things as their ability to increase operating efficiency.




                         20
                          Testimony of Elizabeth Moler, Chair, FERC, before the Subcommittee on Energy and Power,
                         Committee on Commerce, U.S. House of Representatives. Privatization of the Federal Power
                         Marketing Administrations (House Report 104-46, July 19, 1995).



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Reliance on PMAs for       According to some industry analysts, preference customers who buy a
Power Would Affect Which   higher percentage of their power from the PMAs would be more likely to
Preference Customers       experience greater postdivestiture rate increases than those who buy a
                           lower percentage. (Most PMA preference customers buy power from the
Experience the Greater     PMA as well as from other sources, as shown in ch. 2.) For example, if a
Rate Increases             customer buys 90 percent of its power from the PMA and the buyer of that
                           PMA increases the former PMA’s rates by 50 percent, the preference
                           customer would see its overall rate for power from all sources increase by
                           about 41 percent, if all other factors were held constant.21 In contrast, if a
                           preference customer buys only 10 percent of its power from the PMA, it
                           would see its overall rate for wholesale power from all sources increase by
                           about 3 percent.

                           Because preference customers differ in how much they use the PMAs for
                           their power, they will not be affected equally by a divestiture. As we
                           mentioned in chapter 2, almost all (99 percent) of Southeastern’s
                           customers purchase less than one-quarter of their total power from that
                           PMA. In contrast, Western provides over 40 percent of its preference
                           customers with more than half of their power. Therefore, if other factors
                           would remain constant, we expect that Western’s customers would
                           generally experience larger average rate increases than customers served
                           by Southeastern.


The Difference Between     Some industry analysts believe that, after a divestiture, the buyer of a PMA
Prevailing Market Rates    would charge rates that conform to the prevailing market rate for
and Each PMA’s Rates       wholesale power in the geographic region in which the PMA sells power.22
                           As discussed in chapter 2, these prevailing market rates are now
Would Affect Rate          significantly more than the rates the PMAs charge their customers. Thus,
Increases                  the difference between what a PMA currently charges its customers and the
                           regional market rate could determine how much a buyer would increase
                           its rates after its sale. The lower the PMA’s current rate (relative to the
                           existing market rate), the greater the rate increase would be.

                           However, the differences between a PMA’s rates and market rates for
                           wholesale power vary across a PMA’s service area. For example, according
                           to our previously cited September 1996 report, the difference between the
                           average wholesale market rates of IOUs and Southwestern’s rates vary

                           21
                            The overall rate means the blended, weighted average rate for power that the preference customer
                           pays for power purchased from the PMA and all of its other wholesale suppliers.
                           22
                            FERC officials noted that if a buyer were subject to FERC’s jurisdiction, the buyer would have to
                           obtain its approval before changing to market-based rates.



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                            across its service area. In one part of Southwestern’s service area, its rates
                            were 1.18 cents per kWh less than the average wholesale rates of IOUs,
                            while in another part of Southwestern’s service area, its rates were 3 cents
                            per kWh less than the average wholesale rates of IOUs. As a result,
                            preference customers in different regions would experience different rate
                            increases in the event of a divestiture.


Access to Alternate Power   Those geographically remote preference customers that would not have
Suppliers Would Affect      access to many alternate suppliers of electricity after a divestiture would
Rate Increases              be the most susceptible to rate increases that would exceed competitive
                            market rates. Conversely, if a preference customer could purchase power
                            at competitive rates from other sources, the buyer of a PMA would be less
                            likely to raise its rates.23

                            Representatives of the Edison Electric Institute maintain that because the
                            wholesale market is competitive, very few preference customers will lack
                            access to alternate suppliers following a divestiture. They believe that,
                            after a PMA is divested, preference customers who relied heavily on that
                            PMA will be able to buy power from independent power producers, energy
                            brokers, or energy marketers at a relatively low cost. In addition, they
                            contend that many municipal and cooperative utilities already are
                            competitive participants in the wholesale market. However,
                            representatives of PMAs and their preference customers believe that having
                            access to alternate supplies of electricity is not enough. They note that
                            even in cases where preference customers may buy most of their
                            electricity from alternate sources, these customers often rely on the PMA
                            for power during hours of peak demand, particularly in regions in which
                            Southeastern and Southwestern sell power. Having access to inexpensive
                            power during times of peak demand is important to these customers
                            because typically power sold to meet this demand is more expensive than
                            power sold at other times.

                            Finally, the ongoing deregulation and restructuring of the electric utility
                            industry contributes to the difficulty of assessing the potential impacts of a
                            divestiture. Wholesale electric markets are becoming increasingly
                            competitive, offering preference customers and other utilities the
                            opportunity to buy from more than one supplier of wholesale power. This

                            23
                              In a competitive market, a buyer of a PMA could charge an isolated preference customer rates that
                            equal the market rate in the nearest geographic region in which power is available, plus transmission
                            charges. If the buyer tried to charge more than that, the customer could obtain the power from another
                            source; however, some customers have access to wholesale power markets only through transmission
                            lines operated by the PMAs.



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                             trend creates additional uncertainty about any potential rate impacts from
                             a divestiture.


Changes in Wholesale         Following a divestiture, the retail rates paid by residential, commercial,
Rates Would Primarily        and industrial consumers would reflect the changes in rates experienced
Determine the Retail Rates   by the preference customers who serve them. For example, retail
                             customers served by preference customers who buy most of their power
                             from the PMA may see significantly higher rate increases than retail
                             customers who buy their power from preference customers that buy a
                             smaller percentage of their total power from the divested PMA.

                             However, in many cases, determining how preference customers would
                             change the retail rates after a sale of federal hydropower assets would be
                             difficult. For example, in competitive markets, some preference customers
                             may be able to avoid passing on increased costs to their retail customers
                             by increasing their operational efficiency. Alternatively, preference
                             customers may choose to reallocate these rate increases from one
                             customer class to another—for example, from industrial end-users to
                             residential end-users—to keep operating costs low at industrial facilities.


Changes in Wholesale         The degree to which a regional economy would be affected by the
Power Rates and Water        divestiture of a PMA would depend mostly on several factors—the regional
Allocations Would            economy’s reliance on that PMA’s power, the amount of change in overall
                             retail electric rates, the importance of electricity in the regional economy,
Determine the Regional       and the extent to which water allocations from the former federal water
Economic Impact              projects would be changed. Limited available studies have shown the
                             economic impacts of a rate change by the PMAs to be minor on industrial
                             and residential customers because preference customers have relied on
                             power from PMAs for only a small portion of their total power and
                             electricity has been a relatively small portion of the cost of doing business
                             for most commercial enterprises and industries as well as a small portion
                             of household expenditures.24 But regional economies that rely on such
                             electricity-intensive industries as primary metals and chemicals would see
                             the greatest amount of economic harm from any rate increases after a
                             divestiture. According to officials of the Electricity Consumers Resource




                             24
                              Allison, T., P. Griffes, and B.K. Edwards. Regional Economic Impacts of Changes in Electricity Rates
                             Resulting From Western Area Power Administration’s Power Marketing Alternatives. Chicago, Illinois:
                             Argonne National Laboratory, Mar. 1995.



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Council (ELCON),25 the cost of electricity for such industries as aluminum
smelters, glass, and chemicals can reach from 30 percent to 40 percent of
production costs. For example, in response to TVA’s double-digit rate
increases of the 1970s, industries in its service area ceased their
operations and in some cases relocated to where electrical rates were
lower. TVA’s annual sales to industrial customers declined from about
25 billion kWh in 1979 to 16 billion kWh in 1993.26

Regional economies that rely heavily on water and water-dependent
industries (e.g., in which farming relies extensively on irrigation) would
also be affected by changes in water allocations after a divestiture.
Depending on the terms of the preexisting contracts and the divestiture
legislation, if the dam and reservoir were divested, then the purposes
served by the federal water projects and associated water allocations
could change. For example, FERC’s operating license could include, subject
to existing laws, a condition that more water be used for environmental
purposes and less for hydropower.




25
 ELCON is the national association of large industrial electric consumers. Its members buy about 4
percent of the nation’s electricity.
26
 Tennessee Valley Authority: Financial Problems Raise Questions About Long-term Viability
(GAO/AIMD/RCED-95-134, Aug. 17, 1995).


Page 69                                                           GAO/RCED-97-48 Federal Power
Appendix I

Objectives, Scope, and Methodology


                             In response to divestiture proposals, on January 18, 1996, 39 Members of
                             Congress requested that we examine the issues related to the divestiture
                             of the power marketing administrations (PMA) and related federal
                             hydropower assets. On March 1, 1996, we received a separate request
                             letter from another Member of Congress. We agreed to report on the
                             issues related to divesting the federal hydropower assets, including the
                             PMAs; however, we did not evaluate whether or not the PMAs and federal
                             hydropower assets should be divested. We agreed to provide information
                             on (1) the Southeastern, Southwestern, and Western Area Power
                             Administrations, including their similarities and differences, and their
                             interactions with the agencies that operate federal water projects (mostly,
                             the Bureau of Reclamation, referred to as “the Bureau” and the U.S. Army
                             Corps of Engineers, referred to as “the Corps”); (2) the main objectives
                             and general decisions involved in divesting federal assets, along with how
                             these objectives and decisions apply to federal hydropower assets; and
                             (3) the specific issues related to hydropower that should be addressed
                             before a divestiture of the PMAs. As requested, we included in our study
                             only Southeastern, Southwestern, and Western, which jointly sold about
                             1.6 percent of the nation’s total electricity in fiscal year 1995. We did not
                             include the Bonneville Power Administration because it has a unique
                             financial situation1 or the Alaska Power Administration because it is being
                             divested.


Providing Information on     To provide information on the similarities and the differences between the
the PMAs, Including          PMAs, we obtained information for fiscal year 1994 regarding the Bureau’s

Similarities, Differences,   and the Corps’ capacity to generate hydropower as well as the PMAs’
                             (1) sales of electricity in kilowatt hours (kWh), (2) revenues from the sale
and Interactions With        of power in fiscal year 1994, and (3) revenues per kWh sold. We also
Agencies That Operate        obtained data on how much power each customer purchased from the PMA
Federal Water Projects       and from other sources. We obtained data on the Bureau’s and the Corps’
                             capacity to generate electricity and the PMAs’ electricity sales and revenues
                             that came from the PMAs’ fiscal year 1994 annual reports. The data on the
                             customers’ sales and revenues came from the Energy Information
                             Administration (EIA) for calendar year 1994—the most recent EIA data that
                             were available at the time of our review. Although the PMAs had published
                             their fiscal year 1995 annual reports, we used data from the previous fiscal


                             1
                              As we reported in Bonneville Power Administration: Borrowing Practices and Financial Condition
                             (GAO/AIMD-94-67BR, Apr. 19, 1994), Bonneville faces significant operating and financial risks because
                             of its heavy reliance on borrowing, recent operating losses, and various uncertainties. The efforts to
                             improve Bonneville’s financial condition could cause increases in its electric rates, thus narrowing the
                             gap between Bonneville’s rates and the costs of alternative sources of power and encouraging some
                             Bonneville customers to buy power from other sources.



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                           year because this information was more comparable to the EIA data. We
                           also relied on data that had been collected and analyzed for two recent
                           GAO reports: Power Marketing Administrations: Cost Recovery, Financing,
                           and Comparison to Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19, 1996) and
                           Federal Electric Power: Operating and Financial Status of DOE’s Power
                           Marketing Administrations (GAO/RCED/AIMD-96-9FS, Oct. 13, 1995).

                           To obtain information on the working interactions between the PMAs and
                           the Bureau and the Corps, we interviewed agency officials at various field
                           offices of the Bureau, the Corps, Western, Southeastern, and
                           Southwestern. These officials described in detail how the PMAs interact
                           with the Bureau and/or the Corps to write the operating plans and manuals
                           for their river systems and water projects, to update annual and monthly
                           operating plans, and to dispatch and schedule power generation on a
                           continuous basis. We also discussed the documents that guide the
                           planning and operational interactions between the PMAs and the Bureau or
                           the Corps—for example, the Bureau’s annual operating plan for the
                           Colorado River Storage Project and the Corps’ master manual for the
                           Missouri River.


Examining the Main         To examine the objectives and general decisions of a potential divestiture
Objectives and General     of federal assets, such as federal hydropower assets, we consulted officials
Decisions Involved in      from the Congressional Budget Office, the Office of Management and
                           Budget, the Edison Electric Institute, and the EOP Group, Inc. We also
Divesting Federal Assets   contacted national representatives of the PMAs’ preference customers—the
                           American Public Power Association and the National Rural Electric
                           Cooperatives Association—to discuss potential policy tradeoffs that any
                           divestiture of federal hydropower assets would have to weigh. To the
                           extent possible, we relied on work we had previously performed, such as
                           our study related to the divestiture of the United States Enrichment
                           Corporation.2 We also monitored the federal government’s efforts to sell
                           the Alaska Power Administration and efforts by other countries to
                           “privatize” state-owned industries.




                           2
                            Uranium Enrichment: Process to Privatize the U.S. Enrichment Corporation Needs to Be
                           Strengthened (GAO/RCED-95-245, Sept. 14, 1995).



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Examining the Specific        To examine the specific factors that would have to be addressed if
Factors That Would Have       Southeastern, Southwestern, and Western were divested as well as any
to Be Addressed in a          related hydropower assets, we interviewed officials from various
                              organizations, including the following in the Washington, D.C., area: the
Divestiture of Federal        American Public Power Association, the Edison Electric Institute, EOP
Hydropower Assets             Group, Inc., the National Hydropower Association, and the National Rural
                              Electric Cooperatives Association. We also contacted the following federal
                              agencies in the Washington, D.C., area: the Bureau, the Corps, the
                              Congressional Budget Office, the PMA Liaison Office in the Department of
                              Energy, the Federal Energy Regulatory Commission, and the Office of
                              Management and Budget.

                              We performed detailed work at field locations of the PMAs, the Bureau, and
                              the Corps, which manage the marketing and generation of federal
                              hydropower. We interviewed agency officials and obtained and analyzed
                              documentation, such as authorizing, environmental, and related
                              legislation; regulations pertaining to power commitments and water
                              allocations; repayment schedules; contracts and agreements (both power
                              and nonpower); and environmental impact and related studies. The
                              specific offices and locations we visited were as follows:

                          •   the Southeastern Power Administration, in Elberton, Georgia. Because the
                              Corps generates power that Southeastern markets, we also performed
                              work at the Corps’ district offices in Nashville, Tennessee; Mobile,
                              Alabama; and Savannah, Georgia.
                          •   the Southwestern Power Administration, in Tulsa, Oklahoma. Because the
                              Corps generates the power that Southwestern markets, we also contacted
                              the Corps’ district office in Tulsa .
                          •   the Western Area Power Administration’s headquarters in Golden,
                              Colorado and its regional office in Folsom, California. We also visited the
                              Bureau’s offices in Billings, Montana, Salt Lake City, Utah, and
                              Sacramento, California. These three offices administer the generation of
                              power from the Pick-Sloan (Upper Missouri River Basin) Program,
                              Colorado River Storage Project, and Central Valley Project, respectively.
                              Bureau officials agreed that we selected the appropriate offices.
                              Collectively, these offices accounted for over 70 percent of both Western’s
                              electricity sales and the revenues from those sales in fiscal year 1995.

                              To examine the concerns of the PMAs’ preference customers about the
                              potential impacts of divestitures, we contacted such groups as the
                              Southeastern Federal Power Customers, Inc. (for Southeastern); the
                              Southwestern Power Resources Association (for Southwestern); the



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Objectives, Scope, and Methodology




Midwest Electric Consumers Association (for Western’s power generated
from the Pick-Sloan Program); and the Colorado River Energy Distributors
Association (for Western’s power generated from the Colorado River
Storage Project).

We also discussed possible rate increases and regional economic impacts
that could occur after a divestiture. To examine this issue, we contacted
officials from the American Public Power Association, the Edison Electric
Institute, the National Rural Cooperatives Association, and the PMAs.


We conducted our review from May 1996 through February 1997 in
accordance with generally accepted government auditing principles. We
provided a draft of this report to DOE (including the PMAs’ liaison office),
the Department of the Interior (including the Bureau), FERC, and the
Department of Defense (including the Corps). DOE, Interior, and FERC
provided written comments which are included in appendixes VI, VII, and
VIII, respectively, along with our responses. We met with officials of the
Department of Defense, including the Corps’ Director of Hydropower
Operations and the Director of Operations, Construction, and Readiness.
Defense also provided clarifying comments that we incorporated into our
report as appropriate.




Page 73                                           GAO/RCED-97-48 Federal Power
Appendix II

Selected Federal Statutes Affecting the
Management of Federal Water Projects and
Their Hydropower Assets
                                          The management of federal water projects by the Bureau and the Corps is
                                          guided by many federal statutes, including federal reclamation and water
                                          management statutes that are generally applicable to all water projects,
                                          specific authorization and appropriation statutes for individual projects,
                                          and environmental statutes. The effects of these laws on the management
                                          of a water project and its hydropower assets after a divestiture, as well as
                                          on legal liabilities retained by the government or assigned to the buyer,
                                          depend on the specific terms and conditions of the divestiture legislation,
                                          the provisions of the related statutes in question, the types of assets
                                          divested by the government (for instance, only the PMA or, alternatively,
                                          the PMA and the generating assets and/or the dam and the reservoir), and
                                          other issues. The three tables in this appendix describe some of the
                                          statutes that agency officials stated could affect a divestiture proposal,
                                          including legislation that applies to the Bureau and the Corps related to
                                          the generation of hydropower (table II.1), environmental legislation that
                                          affects hydropower generation (table II.2), and legislation that would
                                          affect the issuance of a FERC operating license that could be required if the
                                          powerhouse and/or dam and reservoir were sold (table II.3). All of the
                                          tables exclude project-specific legislation.


Table II.1: Key Hydropower-Related Legislation
Legislation                                            Key components


Reclamation Act of 1902                                Establishes irrigation in the West as a national policy and authorizes the
                                                       Secretary of the Interior to locate, construct, operate, and maintain works
                                                       for the storage, diversion, and development of water for the reclamation
                                                       of arid and semi-arid lands in the western states.
Town Sites and Power Development Act of 1906           Authorizes the Secretary of the Interior to lease surplus power or power
                                                       privileges, provided that the lease does not impair the efficiency of the
                                                       irrigation project.
River and Harbor Act of 1909                           Authorizes the Secretary of War to acquire land owned and developed by
                                                       power companies at the St. Marys River Falls in Michigan and to revoke
                                                       their water power “licenses.”

                                                       Authorizes the Secretary of War to lease water power rights at St. Marys
                                                       River Falls for a “just and reasonable” compensation.
River and Harbor Act of 1912                           Authorizes the Secretary of the Army, upon recommendation of the Chief
                                                       of Engineers, to provide in any authorized dam for navigation such
                                                       foundations, sluices, and other works as may be considered desirable for
                                                       future water power development.
Flood Control Act of 1917                              Requires that the Corps’ surveys of projects for flood control and
                                                       mitigation at rivers and harbors include comprehensive studies of
                                                       watershed development, including water power.
                                                                                                                       (continued)




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                                     Selected Federal Statutes Affecting the
                                     Management of Federal Water Projects and
                                     Their Hydropower Assets




Legislation                                        Key components
Federal Power Act of 1920                          Created the Federal Power Commission (now the Federal Energy
                                                   Regulatory Commission or FERC) and authorizes it to issue licenses to
                                                   nonfederal entities to construct and operate hydropower facilities.

                                                   Requires the Corps to participate with FERC in the review and approval of
                                                   nonfederal hydropower projects to assess their impact on navigation of
                                                   nonfederal hydropower development.
River and Harbor Act of 1927                       Authorizes new surveys on the development of flood control, water
                                                   power, and navigation.
Boulder Canyon Project Act of 1928                 Authorizes Arizona, California, and Nevada to enter into a compact to
                                                   apportion the lower Colorado River.
Bonneville Project Act of 1937                     Creates the Bonneville Power Administration to market federal power in
                                                   the Pacific Northwest. Requires that preference be given to public bodies
                                                   and cooperatives in the sale of electric energy generated at the project.
Flood Control Act of 1938                          Authorizes the Corps to install generating facilities for future power use at
                                                   federal dams when approved by the Secretary of the Army on the
                                                   recommendation of the Chief of Engineers and the Federal Power
                                                   Commission (now FERC).
Reclamation Project Act of 1939                    Limits sales of power to 40 years.

                                                   Sets forth general principles for setting rates.

                                                   Describes preference in the sale of power.

                                                   Prohibits marketing of electricity that would impair the efficiency of the
                                                   project for irrigation purposes.
                                                                                                                     (continued)




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                                             Selected Federal Statutes Affecting the
                                             Management of Federal Water Projects and
                                             Their Hydropower Assets




Legislation                                                Key components
Flood Control Act of 1944                                  Formalizes the relationship between the Corps and the power marketing
                                                           agencies (PMA), and establishes the relationship between the PMAs and
                                                           their preference customers.

                                                           Requires that the management of surplus electric power generated at the
                                                           Corps’ facilities be delivered to the Secretary of the Interior (now the
                                                           Secretary of Energy) who shall transmit and dispose of such power so as
                                                           to encourage the most widespread use at the lowest possible rates to
                                                           consumers consistent with sound business principles.

                                                           Designates public bodies and cooperatives as “preference customers” in
                                                           the distribution of federal power marketed by the PMAs.

                                                           Declares that the policy of the Congress is to recognize the rights and the
                                                           interests of the states in water resource development and requires
                                                           consultation and coordination with affected states.

                                                           Authorizes the Corps to build and maintain facilities for recreational
                                                           activities in reservoir areas.

                                                           Authorizes the Corps to supply reservoir water for municipal and
                                                           industrial purposes. The Corps can do so only when water in a reservoir
                                                           is considered surplus to amounts needed for authorized purposes,
                                                           provided that no contracts for municipal and industrial water shall
                                                           adversely affect existing lawful uses of such water.

                                                           Provides that the Corps’ reservoirs may include irrigation as a purpose in
                                                           17 western states.

                                                           Authorizes construction of dams on the Missouri River.
Water Supply Act of 1958                                   Authorizes the Bureau or the Corps to include storage capacity for
                                                           municipal and industrial water supply purposes when building or
                                                           enlarging reservoirs under their jurisdiction.
Fish and Wildlife Coordination Act of 1958                 Provides that fish and wildlife conservation receive equal consideration
                                                           and be coordinated with other project purposes.
Flood Control Act of 1965                                  Permits the Secretary of the Army, with the approval of the Congressional
                                                           Public Works Committee, to authorize water resource development
                                                           projects costing $15 million or less.
River and Harbor and Flood Control Act of 1968             Authorizes the Corps to reimburse nonfederal public bodies for work
                                                           performed on previously authorized water resource projects. In addition
                                                           to cash payments, the act authorizes the Corps to reimburse nonfederal
                                                           bodies through federal credits against local water resource cooperation
                                                           requirements. To qualify for reimbursement, nonfederal bodies must enter
                                                           into agreements with the Corps prior to reimbursement. The agreements
                                                           must specify the terms of reimbursement, which is subject to a federal
                                                           cap for each project.
                                                                                                                            (continued)




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                                                 Appendix II
                                                 Selected Federal Statutes Affecting the
                                                 Management of Federal Water Projects and
                                                 Their Hydropower Assets




Legislation                                                    Key components
River and Harbor and Flood Control Act of 1970                 Provides for the publication of guidelines to ensure that federal agencies
                                                               evaluate the possible adverse economic, social, and environmental
                                                               effects of a water resource project so that their final decisions are made
                                                               in “the best overall public interest.”

                                                               Expresses congressional intent that the objectives of a water resource
                                                               project include enhancing national and regional economic development
                                                               as well as environmental protection and improvement.

                                                               Requires that each nonfederal interest enter into a written agreement with
                                                               the Secretary of the Army to furnish its required cooperation for any water
                                                               resources project before the Corps begins constructing it.
Federal Columbia River Transmission System Act                 Authorizes Bonneville Power Administration to issue revenue bonds.
Water Resources Development Act of 1976                        Requires the Corps to study efficient methods of using hydropower at the
                                                               Corps’ water resource development projects.

                                                               Establishes the Alaska Hydroelectric Power Development Fund to study
                                                               and develop the Corps’ hydropower facilities in Alaska.
Department of Energy Organization Act of 1977                  Created the Department of Energy (DOE), transferred federal
                                                               responsibility for the four existing PMAs from the Department of the
                                                               Interior to the DOE, and created an additional PMA—the Western Area
                                                               Power Administration.
Public Utility Regulatory Policies Act of 1978                 Encourages cogeneration and small power production by requiring
                                                               electric utilities to offer to purchase electric energy from cogeneration
                                                               and small power production facilities at reasonable rates which do not
                                                               discriminate against these facilities.

                                                               Provides for simplified and expeditious licensing procedures under the
                                                               Federal Power Act for small hydropower projects in connection with
                                                               existing dams.
Pacific Northwest Electric Power Planning and Conservation Authorizes Bonneville Power Administration to plan for and acquire
Act                                                        additional power resources.

                                                               Requires federal agencies responsible for managing, operating, or
                                                               regulating hydropower facilities on the Columbia River to provide
                                                               “equitable treatment” for fish and wildlife with the other purposes for
                                                               which these facilities are managed and operated.
Crude Oil Windfall Profit Tax of 1980                          Provides tax incentives to small-scale hydropower producers.
Water Resources Development Act of 1986                        Requires nonfederal interests to bear all costs associated with new
                                                               development of hydropower at the Corps’ facilities.

                                                               Requires nonfederal interests to contribute 50 percent of the cost of
                                                               preauthorization feasibility studies for new hydropower at federal facilities.
Electric Consumers Protection Act of 1986                      Amends the Federal Power Act to remove preference for applications by
                                                               states and municipalities in relicensing actions and gives equal
                                                               consideration to nonpower purposes (e.g., energy conservation, fish,
                                                               recreation, and wildlife) in comparison to power purposes when making
                                                               licensing decisions.
                                                                                                                                 (continued)




                                                 Page 77                                                    GAO/RCED-97-48 Federal Power
                                             Appendix II
                                             Selected Federal Statutes Affecting the
                                             Management of Federal Water Projects and
                                             Their Hydropower Assets




Legislation                                                Key components
Water Resources Development Act of 1990                    Defines operation and maintenance activities in connection with
                                                           hydropower facilities at the Corps’ projects to be inherently governmental
                                                           functions.
Energy Policy Act of 1992                                  Encourages open transmission of electricity by allowing wholesale
                                                           electricity customers, such as municipal distributors, to purchase
                                                           electricity from any supplier, even if that power must be transmitted over
                                                           lines owned by another utility—referred to as “wheeling of power.” FERC
                                                           can compel a utility to transmit electricity generated by another utility into
                                                           its service area for resale.
Water Resources Development Act of 1996                    Authorizes the Secretary of the Army to increase the efficiency of energy
                                                           production or the capacity of a hydropower generating facility at a Corps’
                                                           water resources project if the Secretary determines that the increase is
                                                           economically justified and financially feasible; will not result in any
                                                           significant adverse environmental impacts; will not involve major
                                                           structural or operational changes in the project; and will not adversely
                                                           affect the use, management or protection of existing federal, state, or
                                                           tribal water rights.

                                                           Requires the Secretary of the Army to provide affected state, tribal, and
                                                           federal agencies a copy of the proposed determinations before
                                                           proceeding with a proposed uprating and to respond to any comments
                                                           that these agencies submit.


Table II.2: Key Environmental Legislation Affecting Hydropower Generation
Title of Legislation                                     Key components


National Historic Preservation Act of 1966                 Requires federal agencies to consider the effect on any property listed or
                                                           eligible for listing on the National Register of Historic Places before
                                                           authorizing or funding any project.
Wild and Scenic Rivers Act of 1968                         Establishes a national wild and scenic rivers system.

                                                           Prohibits federal agencies from assisting any water resources project that
                                                           would have “a direct and adverse effect on the values for which such
                                                           river was established.”

                                                           Prohibits licensing under the Federal Power Act of hydropower projects
                                                           on or directly affecting any river included in the national wild and scenic
                                                           rivers system.
National Environmental Policy Act of 1969                  Establishes a broad federal policy on environmental quality.

                                                           Requires federal agencies to prepare “environmental impact statements”
                                                           for proposed major federal actions significantly affecting the quality of the
                                                           human environment.
Endangered Species Act of 1973                             Requires all federal agencies (in consultation with the Secretary of the
                                                           Interior or Secretary of Commerce) to carry out programs to conserve
                                                           endangered and threatened species, and to ensure that their actions do
                                                           not jeopardize the continued existence of listed species or destroy or
                                                           adversely affect critical habitats of listed species.
                                                                                                                              (continued)




                                             Page 78                                                    GAO/RCED-97-48 Federal Power
                                             Appendix II
                                             Selected Federal Statutes Affecting the
                                             Management of Federal Water Projects and
                                             Their Hydropower Assets




Title of Legislation                                       Key components
Resource Conservation and Recovery Act of 1976             Provides for management of hazardous waste.

                                                           Requires facilities that treat, store, or dispose of hazardous waste to
                                                           obtain a permit and take corrective action to clean up hazardous waste
                                                           contamination.

                                                           Provides for regulation of underground petroleum storage tanks.
Toxic Substances Control Act                               Provides for regulation of hazardous chemicals.

                                                           Requires the Environmental Protection Agency to issue regulations
                                                           prescribing methods for the disposal of polychlorinated biphenyls.
Comprehensive Environmental Response, Compensation,        Provides for the cleanup of hazardous substances.
and Liability Act of 1980
                                                           Requires federal agencies that intend to terminate operations on real
                                                           property to identify those portions of the property that are not
                                                           contaminated by hazardous waste or petroleum products.
Clean Water Act of 1977                                    Establishes a national goal of eliminating pollutant discharges into
                                                           navigable U.S. waters and provides policy goals to make federal waters
                                                           safe for fish, shellfish, wildlife, and recreation.

                                                           Requires the Environmental Protection Agency to enter into interagency
                                                           agreements with the Secretaries of Agriculture, the Army, and the Interior
                                                           to provide maximum utilization of federal laws to maintain water quality
                                                           through appropriate implementation of area-wide waste treatment
                                                           management plans.

                                                           Provides for federal facility compliance with all federal, state, interstate,
                                                           and local requirements respecting the control and abatement of water
                                                           pollution in the same manner and extent as any nongovernmental entity.

                                                           Requires nonfederal projects to have a section 401 state water quality
                                                           certification or waiver before FERC can issue a license.

                                                           Under section 404, projects that discharge dredged or fill material into
                                                           “the waters of the U.S.” must have a permit from the Corps.
Fish and Wildlife Conservation Act of 1980                 Encourages federal agencies to use their statutory and administrative
                                                           authority to conserve and promote wildlife conservation of nongame fish
                                                           and wildlife and their habitats.




                                             Page 79                                                     GAO/RCED-97-48 Federal Power
                                             Appendix II
                                             Selected Federal Statutes Affecting the
                                             Management of Federal Water Projects and
                                             Their Hydropower Assets




Table II.3: Legislation With Which FERC Licensing Actions Must Comply
Title of Legislation                                     Key components
Federal Power Act                                            Pursuant to Part I of this Act, as amended, FERC issues licenses to
                                                             nonfederal hydropower projects. Before licensing any project, FERC must
                                                             find the project to be best adapted to a comprehensive plan for
                                                             improving or developing a waterway or waterways for beneficial public
                                                             purposes and be satisfied that the project meets the various other
                                                             requirements of Part I.

Electric Consumers Protection Act                            Requires FERC to include in any license issued under the Federal Power
                                                             Act appropriate conditions to protect, mitigate damages to, and enhance
                                                             fish and wildlife based on recommendations from federal and state fish
                                                             and wildlife agencies.
Fish and Wildlife Coordination Act                           Requires FERC to consult with the U.S. Fish and Wildlife Service and the
                                                             National Marine Fisheries Service before acting on a license application.
National Historic Preservation Act                           Requires FERC, before licensing a project, to consider the project’s
                                                             effects on any site, structure, or object included in, or eligible to be
                                                             included in, the National Register of Historic Places and to afford the
                                                             Advisory Council on Historic Preservation an opportunity to comment.
Wild and Scenic Rivers Act                                   Bars FERC from licensing hydropower projects on or directly affecting
                                                             river segments designated as, or selected for study for possible inclusion
                                                             in, the National Wild and Scenic Rivers System.
National Environmental Policy Act                            Requires FERC to analyze the potential environmental effects of a
                                                             proposed action and of reasonable alternatives.
Coastal Zone Management Act                                  Bars the licensing of a project within or affecting a state’s coastal zone,
                                                             unless the state concurs with the applicant’s certification of consistency
                                                             with the state’s approved coastal zone management program.
Endangered Species Act of 1973                               Requires FERC to ensure that licensing actions do not jeopardize the
                                                             continued existence of listed species or destroy or adversely affect their
                                                             critical habitats.
Clean Water Act                                              Section 401 requires a project to have a state water quality certification,
                                                             or waiver, before FERC can issue a license.

                                                             Section 404 requires a project, that necessitates construction of a dam or
                                                             placement of fill in U.S. waters, have a permit from the Corps.
American Indian Religious Freedom Act                        Requires FERC to avoid unnecessary interference with traditional
                                                             religious practices of Native Americans.
Energy Policy Act of 1992                                    Sections 1701(b), 2401, 2402, and 2403 define fishways, require future
                                                             FERC licensees on public lands to obtain rights-of-way permits from the
                                                             Bureau of Land Management or the Forest Service, limit hydropower
                                                             projects in the National Park System, and authorize FERC to permit the
                                                             preparation of environmental analysis documents by FERC-approved
                                                             contractors paid by the applicant.
Pacific Northwest Electric Power Planning and Conservation Requires FERC to provide “equitable treatment” to fish and wildlife; take
Act                                                        into account “to the fullest extent practicable” the Northwest Power and
                                                           Conservation Planning Council’s fish and wildlife program; and consult
                                                           and coordinate, to the “greatest extent practicable,” actions with other
                                                           relevant agencies.
Wilderness Act                                               Bars the licensing of projects within designated wilderness areas.



                                             Page 80                                                      GAO/RCED-97-48 Federal Power
Page 81   GAO/RCED-97-48 Federal Power
Appendix III

Hydropower Projects From Which the PMAs
Market Power


                                                           Nameplate           Fiscal year
               Operating   Hydropower      Generating        capacity             of initial
                                                        a
               Agency      project              units     (megawatts)           operation


               Southeastern
               Corps       Allatoona               3            74.0                  1950
                           Buford                  3            86.0                  1957
                           Carters                 4           500.0                  1975
                           J. Strom                7           280.0                  1953
                           Thurmond
                           Walter F.               4           130.0                  1963
                           George
                           Hartwell                5           344.0                  1962
                           Robert F.               4            68.0                  1975
                           Henry
                           Millers Ferry           3            75.0                  1970
                           West Point              3            73.0                  1975
                           Richard B.              4           300.0                  1984
                           Russelle
                           John H. Kerr            7           204.0                  1953
                           Philpott                3            14.0                  1952
                           Stonewall               1              0.3                 1994
                           Jacksonf
                           Barkley                 4           130.0                  1966
                           J. Percy                1            28.0                  1970
                           Priest
                           Cheatham                3            36.0                  1959
                           Cordell Hull            3           100.0                  1973
                           Old Hickory             4           100.0                  1957
                           Center Hill             3           135.0                  1950
                           Dale Hollow             3            54.0                  1948
                           Wolf Creek              6           270.0                  1951
                           Laurel                  1            61.0                  1976
                           Jim Woodruff            3            30.0                  1957
               Subtotal                           82         3,092.3
               Southwestern
               Corps       Beaver                  2           112.0                  1965
                           Blakely                 2            75.0                  1956
                           Mountain
                           Broken Bow              2           100.0                  1970




               Page 82                                        GAO/RCED-97-48 Federal Power
                                        Appendix III
                                        Hydropower Projects From Which the PMAs
                                        Market Power




                                    Authorized purposes
r                 Fish                                                                                Reservoir
 l                and      Flood                                         Water Water              Storagec      Surfaced
n Hydropower   wildlife   control   Navigation    Recreation Irrigation quality supply Otherb   (acre-feet)      (acres)



0         X          X         X            X             X                  X      X             670,000         19,201
7         X          X         X            X             X                  X      X           2,554,000         47,182
5         X          X                      X             X                  X                    472,800          3,880
3         X
                     X         X            X             X                  X      X           3,850,000         71,100
3         X
                     X                      X             X                  X                  1,028,100         45,181
2         X          X         X            X             X                  X      X           3,439,000         55,950
5         X
                               X            X             X                                       234,200         13,300
0         X                    X            X             X                                       331,800         17,201
5         X          X         X            X             X                  X                    711,000         25,864
4         X
                     X         X                          X                  X      X           1,488,200         26,653
3         X          X         X                          X                  X      X           3,293,600         83,200
2         X          X         X                          X                  X      X             318,300          4,060
4
                     X         X                          X                  X      X      X        74,650         3,470
6         X          X         X            X             X                  X                  2,082,000         93,430
0         X
                     X         X                          X                  X                    652,000         22,720
9         X          X                      X             X                  X                    104,000          7,450
3         X          X                      X             X                  X                    310,900         12,200
7         X          X                      X             X                  X                    545,000         22,500
0         X          X         X                          X                  X                  2,092,000         23,060
8         X          X         X                          X                  X      X           1,706,000         30,990
          X          X         X                          X                  X                  6,089,000         63,530
6         X          X         X                          X                  X                    435,600          6,060
7         X          X                      X             X                  X                    367,320         38,850



5         X          X         X                          X                         X           1,952,000         31,700
6         X
                               X                          X                                     3,761,500         48,300
0         X          X         X                          X                  X      X           1,602,000         18,000
                                                                                                              (continued)



                                        Page 83                                            GAO/RCED-97-48 Federal Power
Appendix III
Hydropower Projects From Which the PMAs
Market Power




                                             Nameplate           Fiscal year
Operating   Hydropower     Generating          capacity             of initial
                                          a
Agency      project             units       (megawatts)           operation
            Bull Shoals              8           340.0                  1953
            Clarence                 2            58.0                  1985
            Cannon
            Dardanelle               4           124.0                  1965
            DeGray                   2            68.0                  1972
            Denison                  2            70.0                  1945
            Eufaula                  3            90.0                  1965
            Ft. Gibson               4            45.0                  1953
            Greers Ferry             2            96.0                  1964
            Harry S.                 2            53.3                  1982
            Truman g
            Keystone                 2            70.0                  1968
            Narrows                  3            25.5                  1950
            Norfolk                  2            80.6                  1944
            Ozark                    5           100.0                  1973
            Robert D.                2              7.4                 1989
            Willis
            Robert S.                4           110.0                  1971
            Kerr
            Sam Rayburn              2            52.0                  1966
            Stockton                 1            45.2                  1973
            Table Rock               4           200.0                  1959
            Tenkiller                2            39.1                  1954
            Ferry
            Webbers                  3            60.0                  1974
            Falls
            Whitney                  2            30.0                  1955
Subtotal                            67         2,051.0
Western
Corps       Fort Peck                5           218.0                  1943
            Garrison                 5           546.0                  1956
            Big Bend                 8           538.0                  1965
            Fort Randall             8           387.0                  1954
            Gavins Point             3           122.0                  1956
            Oahe                     7           786.0                  1962
Bureau      Hoover                  19         2,079.0                  1936
            Judge                    2           154.0                  1963
            Francis Carr




Page 84                                         GAO/RCED-97-48 Federal Power
                                        Appendix III
                                        Hydropower Projects From Which the PMAs
                                        Market Power




                                    Authorized purposes
r                 Fish                                                                                Reservoir
 l                and      Flood                                         Water Water              Storagec      Surfaced
n Hydropower   wildlife   control   Navigation    Recreation Irrigation quality supply Otherb   (acre-feet)      (acres)
3         X                    X                          X                                      5,408,000         71,240
5         X
                     X         X            X             X                  X      X            1,428,000         38,400
5         X                                 X             X                                       486,200          34,700
2         X                    X            X             X                         X            1,377,000         23,800
5         X                    X                          X                         X            9,300,000        144,000
5         X          X         X            X             X                         X            5,000,000        147,960
3         X                    X                          X                                      1,284,400         51,000
4         X          X         X                          X                         X            2,844,000         40,480
2         X
                     X         X                          X                                      8,120,000        209,300
8         X          X         X            X             X                         X            2,593,000         54,300
0         X                    X                          X                                       407,900           9,820
4         X          X         X                          X                                      1,983,000         30,700
3         X          X         X                          X                                       148,400          11,100
9         X
                     X         X                          X                                       306,400          13,700
          X
                     X         X            X             X                         X            1,735,000         43,800
6         X          X         X            X             X                         X            5,610,000        142,700
3         X          X         X            X             X                  X      X            1,674,000         38,288
9         X          X         X                          X                                      3,462,000         52,250
4         X
                               X                          X                         X            1,342,660         20,800
4         X
                     X                      X             X                                       760,000          10,900
5         X          X         X                          X                         X            2,100,400         49,820



3         X          X         X            X             X         X        X      X           18,700,000        249,000
6         X          X         X            X             X         X        X      X           23,900,000        382,000
5         X          X         X            X             X         X        X      X            1,900,000         61,000
4         X          X         X            X             X         X        X      X            5,600,000        102,000
6         X          X         X            X             X         X        X      X             492,000          32,000
2         X          X         X            X             X         X        X      X           23,300,000        373,000
6         X                    X            X                       X               X      X    29,775,000        162,700
3         X
                                                                    X                               14,700           750
                                                                                                              (continued)


                                        Page 85                                            GAO/RCED-97-48 Federal Power
Appendix III
Hydropower Projects From Which the PMAs
Market Power




                                             Nameplate           Fiscal year
Operating   Hydropower       Generating        capacity             of initial
                                          a
Agency      project               units     (megawatts)           operation
            Folsom                   3           199.0                  1955
            Keswick                  3           117.0                  1949
            New Melones              2           300.0                  1979
            Nimbus                   2            14.0                  1955
            O’Neill                  6            25.0                  1967
            W. R. Gianelli           8           202.0                  1968
            Shasta                   7           539.0                  1944
            Spring Creekh            2           180.0                  1964
            Trinity                  3           140.0                  1964
            Mount Elbert             2           200.0                  1981
            Big                      1              5.0                 1959
            Thompson
            Estes                    3            45.0                  1950
            Flatiron                 3            95.0                  1954
            Green                    2            26.0                  1943
            Mountain
            Marys Lake               1              8.0                 1951
            Pole Hill                1            38.0                  1954
            Yellowtail               4           250.0                  1966
            Alcova                   2            36.0                  1955
            Boysen                   2            15.0                  1952
            Buffalo Bill             3            18.0                  1995
            Fremont                  2            67.0                  1960
            Canyon
            Glendo                   2            38.0                  1958
            Guernsey                 2              6.0                 1927
            Heart                    1              5.0                 1948
            Mountain
            Kortes                   3            36.0                  1950
            Pilot Butte              2              2.0                 1925
            Seminoe                  3            51.0                  1939
            Shoshone                 1              3.0                 1995
            Canyon Ferry             3            50.0                  1953
            Davis                    5           240.0                  1951
            Parker                   4           120.0                  1942
            Glen Canyon              8         1,288.0                  1964
            Blue Mesa                2            86.0                  1967




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                                        Appendix III
                                        Hydropower Projects From Which the PMAs
                                        Market Power




                                    Authorized purposes
r                 Fish                                                                                Reservoir
 l                and      Flood                                         Water Water              Storagec      Surfaced
n Hydropower   wildlife   control   Navigation    Recreation Irrigation quality supply Otherb   (acre-feet)      (acres)
5         X          X         X                          X         X               X            1,010,000         11,400
9         X          X                                                                     X        23,772           640
9         X                                                         X                            2,420,000         12,500
5         X                                                                                X         8,800           540
7         X                                                         X                               56,430          2,250
8         X                                                         X                            2,040,000         13,000
4         X                    X            X             X         X               X            4,552,090         29,743
4         X          X                                    X                                X      241,000           3,220
4         X                                               X         X                            2,447,650         16,535
          X                                                                                         11,143           279
9         X
                                                                    X                                Canal         Canal
0         X                                                         X                      X           927            42
4         X                                                         X                               Tunnel         Tunnel
3         X
                                                                    X                             153,639           2,130
          X                                                         X                               Tunnel         Tunnel
4         X                                                         X                                3,068           185
6         X          X         X                                    X                            1,328,360         17,300
5         X                                                         X                             184,405           2,471
2         X                    X                                    X                             952,432          22,166
5         X                                                         X               X             646,565           8,324
0         X
                               X                                    X               X            1,016,507         22,064
8         X                    X                                    X                             789,402          12,400
7         X                                                         X                               45,612          2,375
8         X
                                                                                                          i             i
                                                                    X               X
0         X                                                                                          4,739            83
5         X                                                         X                                Canal         Canal
9         X                                                         X                            1,017,279         20,291
                                                                                                          i             i
5         X                                                         X               X
3         X          X         X                                    X               X            2,051,519         35,181
          X                                                         X                      X     1,818,300         28,200
2         X                    X                                                    X             646,200          20,400
4         X          X         X            X             X         X        X      X      X    27,000,000        160,784
7         X          X         X            X             X         X        X      X      X      940,800           9,180
                                                                                                              (continued)



                                        Page 87                                            GAO/RCED-97-48 Federal Power
Appendix III
Hydropower Projects From Which the PMAs
Market Power




                                             Nameplate           Fiscal year
Operating   Hydropower     Generating          capacity             of initial
                                          a
Agency      project             units       (megawatts)           operation
            Crystal                  1            28.0                  1978
            Flaming                  3           152.0                  1963
            Gorge
            McPhee                   1              1.0                 1993
            Morrow Point             2           173.0                  1970
            Towaoc                   1            11.0                  1993
            Upper Molina             1              9.0                 1962
            Lower Molina             1              5.0                 1962
            Elephant                 3            28.0                  1940
            Butte
            Fontenelle               1            10.0                  1968
            Stampede                 2              4.0                 1987
            Spirit                   1              5.0                 1995
            Mountain
            Lewistonj                1              0.3                 1964
        k
IBWC        Amistad                  2              66l                 1983
        k                                             l
IBWC        Falcon                   3              32                  1954
PRWUAm      Deer Creek               2              5.0                 1958
Subtotal                           180         9,803.4
Total                              329        14,946.7




Page 88                                         GAO/RCED-97-48 Federal Power
                                        Appendix III
                                        Hydropower Projects From Which the PMAs
                                        Market Power




                                    Authorized purposes
r                 Fish                                                                                Reservoir
 l                and      Flood                                         Water Water              Storagec    Surfaced
n Hydropower   wildlife   control   Navigation    Recreation Irrigation quality supply Otherb   (acre-feet)    (acres)
8         X          X         X            X             X         X        X      X      X        26,000            301
3         X
                     X         X            X             X         X        X      X      X    3,788,700          42,040
3         X          X         X            X             X         X        X      X      X      381,100           4,469
0         X          X         X            X             X         X        X      X      X      117,165             817
3         X                                                         X                               Tunnel         Tunnel
2         X          X                                              X               X             Pipeline        Pipeline
2         X          X                                              X               X             Pipeline        Pipeline
0         X
                               X                          X         X               X      X    2,110,304          36,897
8         X          X         X            X             X         X        X      X      X      345,400           8,058
7         X          X         X                                                    X             227,000           3,450
5         X
                                                                                                          i              i
                                                                    X               X
4         X          X                                                                     X        14,660            750
3         X                    X                          X                                X    5,535,000          89,000
4         X                    X                                                           X    3,978,000         115,400
8         X                                               X         X               X             152,570           2,683




                                        Page 89                                            GAO/RCED-97-48 Federal Power
Appendix III
Hydropower Projects From Which the PMAs
Market Power




a
  According to DOE, hydropower facilities routinely operate at levels that exceed nameplate
capacity. Nameplate capacity is the rating of a generator under specified conditions as
designated by the manufacturer.
b
    Other authorized purposes include reregulation, water conservation, and low-flow augmentation.
c
    Total reservoir storage at highest controlled water surface.
d
    Water surface at total storage.
e
    Four additional units at the Richard B. Russell project are being tested.
f
 The Stonewell Jackson project has a single 300-kilowatt station service unit; excess power is
marketed by Southeastern.
g
 The Harry S. Truman project has six units installed, and four are commercially operable. The
remaining units are scheduled to return to service by July 1997 and December 1998,
respectively.
h
  Spring Creek uses the Whiskeytown Reservoir as a forebay. Spring Creek Debris Dam has no
powerplant. A forebay is a reservoir from which water is taken to run equipment, such as a
turbine.
i
    Heart Mountain, Shoshone, and Spirit Mountain are supplied from the Buffalo Bill Reservoir.
j
    Primarily used as station service for Lewiston Fish Hatchery.
k
 The International Boundary and Water Commission (IBWC) operates the Falcon and Amistad
projects, which are international storage projects located on the Rio Grande River between Texas
and Mexico. The power output is divided evenly between the United States and Mexico.
l
    U.S. share (50 percent) of plant capacity.
m
    Operated by the Provo River Water Users’ Association (PRWUA) for the Bureau.



Source: U. S. Army Corps of Engineers, Bureau of Reclamation, and Western Area Power
Administration.




Page 90                                                               GAO/RCED-97-48 Federal Power
Appendix IV

Contracts of the Southeastern Power
Administration and the Corps of Engineers
in Southeastern’s Service Area

Contract                      Number             Term                                  Notes
Sale of power to preference   269                127 contracts with customers          Southeastern has allocated
customers                                        served through Southern Company,      power to 303 preference
                                                 Municipal Electric Authority of       customers or to entities directly
                                                 Georgia, Oglethorpe Power             serving preference customers.
                                                 Corporation, South Carolina           269 customers have individual
                                                 Electric and Gas, and South           contracts with Southeastern
                                                 Carolina Public Service Authority     and rely on Southeastern to
                                                 transmission lines are 20-year        arrange transmission.
                                                 contracts that become evergreen
                                                 (self-renewing) with 2-year           Other customers provide their
                                                 cancellation notices.                 own transmission or receive
                                                                                       their allocations through
                                                 85 customers served through           cooperatives or associations
                                                 Virginia Power Company,               that act as agents for the
                                                 Appalachian Power Company,            customers.
                                                 Carolina Power and Light
                                                 Company, and Florida Power
                                                 Corporation transmission lines have
                                                 evergreen contracts with
                                                 cancellation notices ranging from
                                                 60 days to 3 years.

                                                 45 contracts with customers served
                                                 through Duke Power Company
                                                 transmission lines are being
                                                 renegotiated.

                                                 12 preference customers served by
                                                 Kentucky Utilities Company have
                                                 20-year contracts that become
                                                 evergreen with 3-year cancellation
                                                 notices.
Sale of power to preference   8                  Contract with South Carolina Public   Customers buy Southeastern
customers that provide                           Service Authority is an evergreen     power for their own use or for
transmission services                            contract with a cancellation notice   distribution to their retail
                                                 of 60 days for Southeastern and 90    customers and transmit power
                                                 days for the authority.               over their own lines or arrange
                                                                                       transmission over another
                                                 The Tennessee Valley Authority        utility’s lines. TVA provides
                                                 (TVA) has an evergreen contract       both transmission and ancillary
                                                 with a 3-year cancellation notice.    services; the others provide
                                                                                       only transmission.
                                                 Contracts with Alabama Electric
                                                 Cooperative, South Mississippi
                                                 Electric Power Association, East
                                                 Kentucky Power Cooperative,
                                                 Southern Illinois Power
                                                 Cooperative, Dalton (Georgia), and
                                                 Henderson (Kentucky) are 20-year
                                                 contracts that become evergreen
                                                 with 2- or 3-year cancellation
                                                 notices.
                                                                                                            (continued)


                                       Page 91                                         GAO/RCED-97-48 Federal Power
                                              Appendix IV
                                              Contracts of the Southeastern Power
                                              Administration and the Corps of Engineers
                                              in Southeastern’s Service Area




Contract                             Number                         Term                                    Notes
Sale of power to entities that act   5                              Contracts with Big Rivers Electric      Southeastern does not have
as agents for preference                                            Corporation, South Mississippi          individual contracts with the 36
customers                                                           Power Association, Municipal            preference customers
                                                                    Energy Agency of Mississippi, and       represented by these agents.
                                                                    Central Electric Power Cooperative
                                                                    (2 contracts) are 20-year contracts
                                                                    that become evergreen with 2- or
                                                                    3-year cancellation notices.
Sale of power to nonpreference       2                              Florida Power Corporation has an        These contracts are for the
customers                                                           evergreen contract with a 2-year        sale of excess power from the
                                                                    cancellation notice.                    Woodruff and Stonewall
                                                                                                            Jackson projects.
                                                                    Monongahela Power Company has
                                                                    a 10-year (minimum) contract that
                                                                    becomes evergreen in 2004 with a
                                                                    2-year cancellation notice.
Transmission and ancillary           7                              Contract with the Southern              This contract contains an
services                                                            Company, renegotiated in 1996, is       assignability clause that
                                                                    a 10-year contract that becomes         requires FERC’s approval of
                                                                    evergreen with a 2-year                 any sale, assignment, or
                                                                    cancellation notice.                    transfer of the contract.

                                                                    Contracts with Virginia Power       Carolina Power and Light
                                                                    Company, Appalachian Power          Company has two contracts.
                                                                    Company, South Carolina Electric
                                                                    and Gas, and Carolina Power and
                                                                    Light Company are evergreen with
                                                                    cancellation notices ranging from 1
                                                                    to 3 years.

                                                                    Contract with Duke Power
                                                                    Company is being renegotiated.
Transmission services only           2                              Contracts with Oglethorpe Power         These contracts do not include
                                                                    Corporation and Municipal Electric      ancillary services.
                                                                    Authority of Georgia are 20-year
                                                                    contracts that become evergreen
                                                                    with 2-year cancellation notices.
Rehabilitation of power plants       17                             Terms vary from 1996 to 2003,           These are current and planned
                                                                    depending on the power plant.           contracts between the Corps
                                                                                                            of Engineers and contractors
                                                                                                            to rehabilitate six power plants
                                                                                                            at an estimated cost of about
                                                                                                            $201 million.
Water supply contracts               26                             Terms vary                              These entities have contracts
                                                                                                            with the Corps of Engineers to
                                                                                                            purchase water from federal
                                                                                                            reservoirs.
Total                                336

                                              Source: Southeastern Power Administration and U.S. Army Corps of Engineers.




                                              Page 92                                                       GAO/RCED-97-48 Federal Power
    Appendix IV
    Contracts of the Southeastern Power
    Administration and the Corps of Engineers
    in Southeastern’s Service Area




    In addition, Southeastern and the Corps have the following arrangements:

•   On December 31, 1996, Southeastern and Kentucky Utilities Company
    executed a new contract for power sold to 12 municipal customers in the
    Kentucky Utilities system. This is a 10-year contract that turns evergreen
    after June 30, 2007, with a 3-year cancellation notice requirement.
•   Southeastern buys power to operate various pumpback units at the Corps’
    hydropower plants.
•   Southeastern has net billing arrangements with Florida Power
    Corporation, Alabama Electric Cooperative, South Carolina Public Service
    Authority, and TVA, whereby Southeastern “nets” the costs of purchase
    power from power sales.
•   Southeastern’s contract with TVA includes a capacity interruption credit
    arrangement. If Southeastern cannot meet its capacity requirements, it
    gives TVA a credit for the capacity not available.
•   Southeastern has Memorandums of Understanding (MOU) which serve as
    operating agreements with the Corps and TVA.
•   The Corps has 5,194 outgrants including easements for roads and utilities,
    public park leases, agricultural leases, commercial concession leases, fish
    and wildlife management licenses, and various personnel privileges.
•   The Corps has issued thousands of land-use permits as part of its
    Shoreline Management Program, including private and community dock
    permits as well as land activity permits.




    Page 93                                          GAO/RCED-97-48 Federal Power
Appendix V

Illustrative Contractual Obligations and
Agreements: Bureau of Reclamation, Great
Plains Region, Billings, Montana

Area office        Type of contract              Number   Term                       Notes


Eastern Colorado   Power contracts               25       Variable                   With water users (including
                                                                                     reclamation projects and
                                                                                     Native Americans) for
                                                                                     project pumping
                                                 580      Variable                   Agricultural leases and
                                                                                     permits for buildings,
                                                                                     buffers, crops, drainage,
                                                                                     weed control, etc.
                                                 57       Variable                   With other federal and state
                                                                                     agencies for such things as
                                                                                     recreation and reservoir
                                                                                     operations
                   Water service and             65       Water service - 40 years Provide water supplies and
                   repayment contracts                    Distribution - in perpetuity distribution services, and
                                                                                       repayment of the federal
                                                                                       investment
                   Temporary water service 32             1 to 5 years               Short-term water supplies
                   contracts                                                         for such purposes as dust
                                                                                     abatement, emergencies,
                                                                                     and road construction
                   Subtotal                      759
Montana            Cabin permits                 265      5 years and more           With nonfederal parties for
                                                                                     in-holdings on Bureau lands
                   Concession contracts          3        10 years and more
                   Garbage contracts             2        Annual
                   Law enforcement               2        5 years, renewable
                   agreements                             subject to budget
                                                          availability
                   Road maintenance              1        Indefinite
                   contract
                   Memorandum of                 1        Indefinite
                   Understanding (MOU)
                   with the Bureau of
                   Land Management for
                   management assistance
                   MOU with the Montana          1        Indefinite
                   Department of Fish,
                   Wildlife, and Parks for
                   management of wildlife
                   area
                   Cooperative          1                 Indefinite
                   management agreement
                   with National Park
                   Service for joint
                   government camping
                   area
                                                                                                      (continued)


                                       Page 94                                    GAO/RCED-97-48 Federal Power
                                 Appendix V
                                 Illustrative Contractual Obligations and
                                 Agreements: Bureau of Reclamation, Great
                                 Plains Region, Billings, Montana




Area office   Type of contract             Number                     Term                           Notes
              Water service and            13                         Water service - 40 years
              repayment contracts                                     Distribution - in
                                                                      perpetuity
              Temporary water service 61                              1 year
              contracts
              Subtotal                     350
Wyoming       Permits and agreements       1,013                      Variable                       Includes leases;
                                                                                                     interagency agreements for
                                                                                                     recreation, game, and fish;
                                                                                                     and permits for cabins
              Temporary water service 20                              1 year
              contracts
              Water service and            68                         Water service - 40 years
              repayment contracts                                     Distribution - in perpetuity
              Subtotal                     1,101
Total                                      2,210

                                 Source: The Bureau of Reclamation’s Great Plains Region, Billings, Montana.




                                 Page 95                                                         GAO/RCED-97-48 Federal Power
Appendix VI

Comments From the Department of Energy


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 96   GAO/RCED-97-48 Federal Power
                 Appendix VI
                 Comments From the Department of Energy




See comment 1.




See comment 2.




                 Page 97                                  GAO/RCED-97-48 Federal Power
                 Appendix VI
                 Comments From the Department of Energy




See comment 3.




See comment 4.




See comment 5.




See comment 6.




                 Page 98                                  GAO/RCED-97-48 Federal Power
                 Appendix VI
                 Comments From the Department of Energy




See comment 7.




See comment 8.




See comment 9.




                 Page 99                                  GAO/RCED-97-48 Federal Power
                  Appendix VI
                  Comments From the Department of Energy




See comment 10.




See comment 11.




See comment 12.




See comment 13.




                  Page 100                                 GAO/RCED-97-48 Federal Power
                  Appendix VI
                  Comments From the Department of Energy




See comment 14.




                  Page 101                                 GAO/RCED-97-48 Federal Power
Appendix VI
Comments From the Department of Energy




The following are GAO’s comments on DOE’s letter dated February 18, 1997.

1. We believe that our presentation of positions regarding divestitures is
balanced. In forming this discussion, we contacted organizations that
favored (for example, the Edison Electric Institute) and that opposed (for
example, the American Public Power Association) the divestiture of
federal hydropower assets. In our study, we used statements and
publications from both proponents and opponents of divestiture of these
assets. Our purpose in including international experiences with
divestitures was to focus on some important, common factors that have
motivated divestitures, instead of examining the outcomes of divestitures
in specific nations or of specific enterprises.

2. We agree with DOE that an evaluation of divestiture impacts on various
groups as well as on the U.S. Treasury should be an integral part of any
debate of the pros and cons of divesting federal hydropower assets.
However, we did not revise the report based on this comment. As agreed
with the congressional requestors and as noted in chapter 1, the purpose
of this report was to discuss issues that need to be addressed, if and when
a decision is made to divest the federal hydropower assets. The evaluation
of whether or not these assets should be privatized and the discussion of
the specific benefits and costs of such a divestiture were outside the scope
of our review.

3. We agree that the federal transmission system is a valuable asset now
and would be in the event of a divestiture. However, the report already
contains information regarding the PMAs’ transmission assets and services
to regional utilities. In addition, as suggested by DOE, we expanded chapter
4 to address, among other things, Western’s investment in the
California-Oregon Transmission Project and the Pacific
Northwest-Southwest Intertie as well as Western’s important contract with
the Pacific Gas and Electric Company for transmission services and
peaking and firming power.

4. DOE states that proposed divestitures of federal hydropower assets are
part of a larger, ongoing debate about the role of public power in a
changing electric utility industry. DOE believes that our report should
address the impact of a divestiture on this ongoing debate. We did not
revise the report because such an evaluation was beyond the scope of our
review.




Page 102                                         GAO/RCED-97-48 Federal Power
Appendix VI
Comments From the Department of Energy




5. We revised chapter 3 to reflect DOE’s statement that problems in
maintaining and repairing federal hydropower assets were experienced in
the Southeast, but perhaps not elsewhere. The report was also revised to
state that the availability of the Corps of Engineers’ hydropower plants in
the Southeast has improved.

6. Although DOE agrees with the report that the delays the government has
experienced in divesting the Alaska Power Administration illustrate the
problems that could be encountered in divesting the other, larger, PMAs,
DOE suggests that we should “draw more lessons from this experience.”
However, in our view, the executive summary and chapter 1 of this report
draw sufficient lessons from the Alaska experience. In addition, large
sections of this report, particularly in chapter 4, illustrate many problems
that could affect the divestiture of the remaining PMAs.

7. According to DOE, nonfederal water projects regulated by FERC may not
be comparable to federal ones, because federal multipurpose water
projects generally do not have hydropower generation as their main
purpose whereas nonfederal projects do. However, we did not revise the
report because FERC officials noted that (1) nonfederal water projects, like
federal ones, have widespread impacts upstream and downstream and
serve a variety of purposes and (2) the FERC license accommodates
purposes that include hydropower as well as such others as fish and
wildlife habitat enhancement, recreation, and water quality improvement.
According to FERC officials, because federal water projects are sufficiently
comparable to nonfederal ones, FERC’s licensing process could
successfully accommodate the purposes of federal projects.

8. DOE suggests that resolution of transmission line easements,
rights-of-way, and land issues deserves greater emphasis, particularly in
cases where PMA transmission lines cross the lands owned by other federal
agencies (many of these rights are in perpetuity and nontransferable) and
private owners (many of these rights will revert to the original landowner).
However, we believe that our report, in chapter 4 and in appendix IV
adequately addressed the issue highlighted by DOE. In addition, chapter 4
has been revised in response to comments from DOE to reflect the
importance of addressing the transferability of transmission line
rights-of-way across the lands of Native American tribal entities.

9. We agree that the section on Native American rights and concerns
should be expanded to address rights-of-way across lands of Native
American tribal entities. We have revised chapter 4 accordingly.



Page 103                                          GAO/RCED-97-48 Federal Power
Appendix VI
Comments From the Department of Energy




10. We agree that the report should be revised to clarify (1) the basis for
setting the PMAs’ rates and (2) that rates are not low for some projects and
can vary during the year. We have made appropriate revisions to the
executive summary, chapter 2, and chapter 4.

11. We agree that the report should be revised to note that the divestiture
of a PMA’s assets could require an environmental impact statement to
comply with the National Environmental Policy Act. Therefore, we have
revised chapter 4.

12. DOE notes that certain federal hydropower assets could become
“stranded” once retail competition arrives because they would be unable
to produce power at competitive market rates. In response, buyers could
choose to bid on other, more valuable assets (“cherry-picking”), thereby
leaving the government with less competitive, less valuable assets. DOE
adds that the cherry-picking of valuable assets could be minimized by the
way assets could be grouped for sale. We agree that some federal
hydropower assets could be “stranded” and difficult to sell. The price that
a prospective buyer would be willing to pay might not be determined by
the book value of an asset. Rather, the price a buyer would be willing to
pay would depend on a variety of factors, such as the price at which the
power could be sold under given market conditions. We disagree that by
grouping federal hydropower assets for sale in a certain way, the
government would likely obtain a higher price. Though the grouping of
assets would be important (as discussed in chapter 3), we disagree that
the underlying value of these assets could be fundamentally altered and
raised to the book value by merely packaging the assets for sale in a
certain way.

13. DOE said our report is silent on the treatment of federal employees after
a divestiture; however, chapter 3 states that a variety of labor-related
issues would need to be considered in the event of a divestiture, including
the possibility of severance packages. It also notes that the costs of these
issues would need to be considered to assess the impact on the
government of a divestiture.

14. Because we agree that the impact of increased deregulation and
restructuring on potential divestitures should be recognized, we revised
the executive summary and chapter 4.




Page 104                                          GAO/RCED-97-48 Federal Power
Appendix VII

Comments From the Department of the
Interior

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 105   GAO/RCED-97-48 Federal Power
Appendix VII
Comments From the Department of the
Interior




Page 106                              GAO/RCED-97-48 Federal Power
Appendix VII
Comments From the Department of the
Interior




Page 107                              GAO/RCED-97-48 Federal Power
Appendix VII
Comments From the Department of the
Interior




The following are GAO’s comments on Interior’s letter dated February 20,
1997.

1. We agree with Interior about the importance of identifying the assets
that would be considered for sale—for example, the
hydropower-generating assets that are owned by the Bureau and the
Corps. We also agree that the existence of these assets would make a
divestiture more complex by adding such issues as how to coordinate
integrated facilities and manage the competing demands on these
multipurpose facilities. Therefore, we have added text in the executive
summary explaining that the PMAs own the right to market electricity as
well as the transmission lines (except for Southeastern), while the Bureau
and the Corps own the hydropower generation assets. Our report already
explains some of the complexities involved in divesting only the PMA; the
PMA and the Bureau’s and the Corps’ hydropower-generating assets; and
the PMA, the hydropower-generating assets, and the remaining assets of the
federal water projects (e.g., dams and reservoirs).

2. We agree that the PMAs do not generate electricity but only transmit and
market the electricity generated by hydropower plants that are owned and
operated by other agencies (i.e., the Bureau and the Corps). As stated in
our response for comment 1, we have clarified this point in the executive
summary. Regarding the Bureau’s point that PMA electricity is “surplus,” we
have revised both the executive summary and chapter 1 to state that the
generation of hydropower by the Bureau and the Corps and the sale of this
electricity by the PMAs is affected by the availability and use of water for
the other purposes of federal water projects. We addressed the laws
describing the agencies’ use of electricity for project purposes in a
footnote to chapter 1.

3. We did not revise the executive summary as suggested by Interior to
mention that both the Bureau and the Corps have preexisting and
long-term contractual obligations for water delivery that take precedence
over hydropower purposes. Preexisting contractual obligations are already
discussed as a separate issue in the executive summary and in chapter 4.
In addition, water delivered for municipal and industrial water uses as well
as for irrigation—contained in preexisting long-term contracts—are also
mentioned in the executive summary and in chapter 4 as issues that would
need to be considered in the event of a divestiture of federal hydropower
assets.




Page 108                                         GAO/RCED-97-48 Federal Power
Appendix VII
Comments From the Department of the
Interior




4. Because we agree with Interior that the role of the Bureau and the
Corps in balancing water among federal water project purposes becomes
especially significant during a drought, we revised chapter 4. In addition,
we agree that a divestiture would need to consider interstate water
compacts and international requirements for water deliveries. We added a
footnote to chapter 4 to recognize this comment.

5. We revised the executive summary and chapter 4 as suggested by
Interior to expand on the rights and concerns of Native Americans as well
as the Secretary of the Interior’s trust responsibility.

6. We disagree with Interior’s comment that the report needs to be
clarified regarding irrigation assistance because the report addresses
irrigation assistance adequately. For example, the executive summary
clearly discusses the issue and states that the $1.5 billion federal
investment in irrigation facilities is scheduled to be recovered through
power revenues.

7. Although Interior suggests that our report should more clearly address
the issue of revolving funds, we did not make substantive revisions in this
regard. The issue of revolving funds is a complex one that merits its own
review—in particular, the budgetary treatment of these funds after a
divestiture. However, we added a footnote in chapter 3 to recognize the
existence of these funds.

8. Similar to DOE’s comment number 14, the Bureau states that our report
pays insufficient attention to the current deregulation and restructuring of
the electric utility industry and its impact on customers as it relates to a
potential divestiture. We revised our report in both the executive summary
and in chapter 4 to address the Bureau’s comment about these changes in
the electric utility industry.




Page 109                                          GAO/RCED-97-48 Federal Power
Appendix VIII

Comments From the Federal Energy
Regulatory Commission

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 110   GAO/RCED-97-48 Federal Power
Appendix VIII
Comments From the Federal Energy
Regulatory Commission




Page 111                           GAO/RCED-97-48 Federal Power
Appendix VIII
Comments From the Federal Energy
Regulatory Commission




Page 112                           GAO/RCED-97-48 Federal Power
Appendix VIII
Comments From the Federal Energy
Regulatory Commission




The following are GAO’s comments on the letter of the Federal Energy
Regulatory Commission (FERC), dated February 24, 1997:

In its comments, FERC stated that the report provided an “excellent
overview of the matters that would need to be addressed” in divesting the
federal hydropower assets. FERC also provided a number of clarifications.
We agreed with all of those clarifications and incorporated all of them into
our report. For example, in response to FERC’s comments, we added a
footnote in chapter 3 to explain how the PMAs could be affected by FERC’s
open transmission access order (Order 888). Furthermore, we clarified in
chapter 4 that FERC’s limited flexibility in licensing hydropower projects, as
described in the report, stems from the authority of other federal and state
agencies to attach mandatory conditions to a FERC license.




Page 113                                          GAO/RCED-97-48 Federal Power
Appendix IX

Major Contributors to This Report


                        Mehrzad Nadji, Project Manager
Resources,              Jeanine M. Brady, Communications Analyst
Community, and          Stephen Brown, Economist
Economic                Ernie Hazera, Evaluator
                        Margaret Reese, Advisor
Development             John H. Skeen, III, Managing Editor
Division, Washington,   Daren Sweeney, Evaluator
D.C.
                        Doreen S. Feldman, Assistant General Counsel
Office of the General   Kathleen A. Gilhooly, Senior Attorney
Counsel
                        Philip Amon, Evaluator
Atlanta Regional        Martha Vawter, Evaluator
Office
                        Daniel Feehan, Evaluator
Denver Regional
Office




(307341)                Page 114                                       GAO/RCED-97-48 Federal Power
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