oversight

Federal Power: PMA Rate Impacts, by Service Area

Published by the Government Accountability Office on 1999-01-28.

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

                 United States General Accounting Office

GAO              Report to Congressional Requesters




January 1999
                 FEDERAL POWER
                 PMA Rate Impacts, by
                 Service Area




GAO/RCED-99-55
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-281758

      January 28, 1999

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

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

      The federal government has played a significant role in the development of
      electricity markets. Primarily in the 1930s, the federal government began
      to market electricity after the Congress authorized the construction of
      dams and established major water projects. These projects are managed
      for multiple purposes—for example, providing water for irrigation, flood
      control, water supplies, navigation, and recreation. Federal agencies also
      generate electricity at about 130 hydropower plants located at the water
      projects, providing about 5 percent of the nation’s electricity supply.1 To
      provide this power to many parts of rural America, the government
      established power marketing administrations (PMA) to sell the power that
      is not used for projects’ other purposes.2 Rural America is now electrified.
      In the last Congress, proposals were introduced that would have required
      the government to sell the PMA-related hydropower assets.

      To aid in congressional deliberations on the future role of the PMAs, as
      requested we are providing a PMA-by-PMA analysis of the potential rate
      changes that would likely be experienced by preference customers3 who
      buy power from three of the PMAs if the power is sold at market rates.4

      1
        This power excludes that which is provided by the Tennessee Valley Authority (TVA)—a multipurpose
      independent federal corporation. Among other activities, TVA generates and markets power, which it
      sells in most of Tennessee and parts of Alabama, Georgia, Kentucky, Mississippi, North Carolina, and
      Virginia.
      2
       These PMAs include the Southeastern Power Administration, Southwestern Power Administration,
      and Western Area Power Administration. In addition, the Bonneville Power Administration
      (Bonneville), the oldest and the largest in terms of total revenues, operates in the Pacific Northwest.
      Finally, the projects constituting the Alaska Power Administration, the smallest PMA, were fully
      divested in October 1997 and August 1998.
      3
       Preference customers are cooperatives and public bodies, such as municipal utilities, irrigation
      districts, and military installations.
      4
       Recently, we issued Federal Power: Regional Effects of Changes in PMAs’ Rates (GAO/RCED-99-15,
      Nov. 16, 1998). That report provides state-by-state information on (1) the extent to which preference
      customers’ rates may change if market rates are charged, (2) the areas the three PMAs’ preference
      customers report serving, and (3) the incomes in these areas and the extent to which they are rural or
      urban.



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             More specifically, we identify potential changes in preference customers’
             rates and the share of total state power consumption for each state served
             by the Southeastern Power Administration (Southeastern), the
             Southwestern Power Administration (Southwestern), and the Western
             Area Power Administration (Western).5


             Now that nearly all households in America have electricity, some believe
Background   that the Department of Energy’s (DOE) PMAs have completed their mission
             of providing electricity to rural America and that the PMA-related
             hydropower assets6 should be divested, particularly since greater
             competition exists in the electricity industry. Other options would be to
             (1) maintain the status quo regarding the ownership and operation of the
             government’s hydropower assets or (2) improve how the federal assets are
             managed and operated, such as charging rates for power based on
             competition (market rates).7 The PMAs sold wholesale power to their
             preference customers at average rates that, from 1990 through 1995, were
             from 40 to 50 percent below the rates nonfederal utilities charged.8
             Although preference customers generally purchase most of their power
             from sources other than the PMAs and, as a result, pay market rates for that
             power, concerns have been raised that a change in PMAs’ ownership or the
             means by which they establish rates could increase rates and could
             adversely affect the rural or poorer areas they serve.

             Our analyses identify how much preference customers’ rates would likely
             change if market rates are charged. To do this, we assumed that a
             customer would pay a rate equal to the average rate it paid for wholesale
             power from sources other than the PMA(s) in 1995. We then estimated how
             each preference customer’s rate change would affect the rates paid by its
             residential end-users. To do this, we assumed that the preference
             customer would pass the rate change on proportionally to its end-users.

             5
              We focused our examination on Southeastern, Southwestern, and Western. Bonneville is not covered
             by this report; Bonneville’s preference customers rely significantly on its power, which could cause
             rate increases that would not be comparable to those of the other PMA’s customers.
             6
             Power marketed by the PMAs is generally produced by facilities owned and operated by the
             Department of the Interior’s Bureau of Reclamation and the U.S. Army Corps of Engineers.
             7
              Our report Federal Power: Options for Selected Power Marketing Administrations’ Role in a Changing
             Electricity Industry (GAO/RCED-98-43, Mar. 6, 1998) identifies options that the Congress and other
             policymakers could pursue to address concerns about the PMAs’ role in restructured markets or to
             manage them in a more businesslike fashion. Among other options, the report discusses divestiture
             and its potential impact on preference customers by individual PMA. DOE believes that market rates
             would not necessarily be charged if a PMA is divested to a public entity.
             8
              Many of these preference customers resell the power that they purchase from the PMAs to industrial,
             commercial, and/or residential end-users.



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                       In general, a preference customer’s potential rate increase depends
Results in Brief       primarily on what portion of its total power comes from the PMA and how
                       close the PMA’s rate is to the market rates. Significant variation exists
                       among the PMAs and among states if these PMAs begin to charge market
                       rates for the power they market—most rate increases would likely be
                       relatively small, although some would likely be larger. Overall, slightly
                       more than two-thirds of the preference customers that purchase power
                       directly from Southeastern, Southwestern, and Western would likely see
                       relatively small or no rate increases if these PMAs begin to charge market
                       rates for the power they market.

                   •   Almost all of Southeastern’s preference customers would likely see
                       relatively small rate increases of up to one-half cent per kilowatthour
                       (kWh)9 on rates that in 1995 typically ranged from 3.5 to 6.0 cents per kWh.
                       Most of these preference customers would likely see increases of less than
                       one-tenth cent per kWh. If the preference customers served by
                       Southeastern pass the higher rates on proportionally to their residential
                       end-users, most end-users would see their monthly electricity bill increase
                       by less than $1, while the maximum increase in their electricity bill would
                       range in most states between $1 and $8, depending on the state.
                   •   Most of Southwestern’s preference customers would likely see relatively
                       small rate increases of up to one-half cent per kWh on rates that in 1995
                       typically ranged between 1.5 and 3.5 cents per kWh. In turn, in most cases,
                       residential end-users that receive power from Southwestern’s preference
                       customers would see their electricity bill increase by less than $3 a month.
                   •   Preference customers who receive power from Western would likely see a
                       variety of rate increases on rates that typically ranged from 1.5 to 4.0 cents
                       per kWh. In some states, more than three-quarters of the preference
                       customers would likely see relatively small increases of less than one-half
                       cent per kWh. In these states, residential end-users served by most
                       preference customers would see rate increases of less than $2.50 in their
                       monthly electricity bill. In contrast, a number of preference customers in
                       some other states would likely see average rate increases that exceed 1.5
                       cents per kWh. For more than three-quarters of these preference
                       customers, their residential end-users would pay about $11 to $24 more
                       per month for electricity.

                       Generally, of the total power consumed in a state, the portion provided by
                       the three PMAs is small. For example, in 1995, the PMAs provided 5 percent
                       or less of the total power consumption in 22 of the 29 states in our

                       9
                        A watt is the basic unit used to measure electric power. A watthour is equal to a watt of power applied
                       for 1 hour. A kilowatthour is 1,000 watthours.



                       Page 3                                                             GAO/RCED-99-55 Federal Power
                           B-281758




                           analysis. The share for three states, however, exceeded 10 percent—with
                           the share for South Dakota being about 23 percent. The average for the 29
                           states was 2 percent.


                           We found that most rate increases for Southeastern’s customers would
Southeastern Power         likely be relatively small and that the three PMAs provided small portions of
Administration             power to those states served by Southeastern.


Most Rate Increases for    As shown in figure 1, most of Southeastern’s preference customers would
Southeastern’s Customers   likely see relatively small rate increases if they pay market rates for PMA
Would Likely Be Small      power.10 Specifically, almost all of Southeastern’s preference customers
                           would likely see average rate increases of up to one-half cent per kWh on
                           rates that in 1995 typically ranged from 3.5 to 6.0 cents per kWh. Most of
                           these preference customers would likely see increases of less than
                           one-tenth cent per kWh. If the preference customers served by
                           Southeastern pass the higher rates on proportionally to their residential
                           end-users, most end-users would see their monthly electricity bill increase
                           by less than $1, while the maximum increase in their electricity bill would
                           range in most states between $1 and $8, depending on the state.

                           Figure 1 also shows that in nearly every state Southeastern serves, at least
                           85 percent of the preference customers would likely see relatively small
                           rate increases. Slightly more than half of the PMA’s preference customers
                           would likely see increases of less than one-tenth cent per kWh. The only
                           relatively large rate increase for a preference customer served by
                           Southeastern would likely be in Illinois, which has one preference
                           customer.




                           10
                             In our analysis, the increases that we considered relatively small (0.5 cent per kWh or less), moderate
                           (from greater than 0.5 cent up to 1.5 cents), and relatively large (greater than 1.5 cents) represent
                           amounts above the average rates that preference customers paid for power from all sources (both
                           PMAs and others) in 1995. The increases represent the difference between these average rates and
                           what preference customers would likely have to pay if they purchased all of their power at market
                           rates. For example, if a preference customer of Southeastern paid a combined rate of 3.5 cents per
                           kWh for power from the PMA and other sources in 1995 and paid 3.9 cents for power from non-PMA
                           sources, we assumed the customer’s rates would likely rise from 3.5 to 3.9 cents—a relatively small
                           increase of 0.4 cent—if it had to pay market rates for all of its power. Our calculation of the increase in
                           a residential end-user’s monthly electricity bill represents the amount of the preference customer’s
                           increase times the average monthly consumption of electricity by residential end-users in the
                           preference customer’s state.



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Figure 1: Potential Changes in Preference Customers’ Rates and PMAs’ Share of Total Power Consumption in Each State
Served by Southeastern


                                                                                100%
                                                            IL

                                                                                                                             100%
                                                                                            WV
                                                                                                       VA
                                                                                KY

                                          100%                                                         NC
                                                                        TN
                                                                                                                             100%
                                                                                            SC

                                                                                       GA
                                                            MS             AL                                         100%



                                      100%                                                                  99%         1%


                                                                                                  FL


                                                          96%
                                                                         4%
                                                                                 87%

                                                                                            13%

                    Estimated increase in preference customers' rates (cents/kWh)                PMAs' share of total state power consumption
                                 Relatively small, 0.5 cent (or one-half cent) or less                 0 - 2.5%
                                 Moderate, greater than 0.5 cent to 1.5 cents                          >2.5 - 5%
                                Relatively large, greater than 1.5 cents                               >5% - 10%
                                                                                                       >10% - 20%
                                                                                                       >20% - 30%
                                                                                                       Areas not in Southeastern's service area
                                                                                                       States not in GAO's analysis
                  Notes: PMA power as a share of the total power consumed in each state includes all power purchased from Southeastern, Southwestern,
                  and/or Western but excludes power the PMAs sold to state-owned and federally owned preference customers.

                  The thicker black lines in the figure show the boundary of Southeastern's service territory.

                  The circles for five of the nine states--Kentucky, Mississippi, North Carolina, South Carolina, and Virginia--are colored entirely white
                  because all preference customers in those states would likely see relatively small rate increases of 0.5 cent per kWh or less. The circle for
                  Illinois is colored entirely dark blue because that state's one preference customers would likely see a relatively large rate increase.

                  We did not include Tennessee in our analysis because that state is served by TVA--a unique, federally owned utility. We were unable to
                  design a methodology to incorporate TVA in our rate analysis. We did not include West Virginia in our analysis because Southeastern did
                  not sell power to preference customers in that state in 1995.

                  Source: Developed by GAO from an analysis of data provided by the Energy Information Administration and Southeastern's,
                  Southwestern's, and Western's 1995 annual reports.




                                                        Page 5                                                                                  GAO/RCED-99-55 Federal Power
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                           As we discuss in our March and November 1998 reports, it is important to
                           remember that in many cases where rate increases would likely be
                           relatively large, the preference customers paid about 1 to 1.5 cents per
                           kWh in 1995 for PMA power. These rates on average were about 2.5 to 3
                           cents per kWh lower than what utilities paid in the private market
                           nationwide. Conversely, in many cases where rate increases would likely
                           be relatively small, that is, one-half cent per kWh or less, preference
                           customers generally paid rates close to the market rates.

                           Also, a preference customer’s rate increase also depends on what portion
                           of its total power comes from the PMA(s). Generally, the less a preference
                           customer relies on PMA power, the lower the rate increase would likely be.
                           In contrast, a preference customer that purchases a large portion of its
                           power from a PMA is more likely to experience a larger increase.
                           Notwithstanding, DOE officials noted that the amounts of power that
                           customers purchase may be deemed more significant than our
                           categorization suggests because in many cases the power purchased from
                           the PMAs is provided at times of peak demand.

PMAs Provided Small        The likely rate increases if the preference customers pay market rates for
Portions of Power to       PMA power would usually affect a small portion of the power consumed in

States Served by           each state, as shown by the coloring of the states in figure 1.11 For states in
                           our analysis that are served by Southeastern, the three PMAs provided less
Southeastern               than 1.8 percent of the total power consumed in each state.


                           We found that about half of Southwestern’s customers would likely see
Southwestern Power         relatively small rate increases but that others’ increases would likely be
Administration             larger. Also, the three PMAs provided small portions of power to the states
                           served by Southwestern.


About Half of              As shown in figure 2, most of Southwestern’s preference customers would
Southwestern’s Customers   likely see relatively small rate increases of up to one-half cent per kWh on
Would Likely See           rates that typically ranged between 1.5 and 3.5 cents per kWh. In turn,
                           residential end-users that receive power from most of Southwestern’s
Relatively Small Rate      preference customers would see their electricity bill increase by less than
Increases, but Others’     $3 a month. However, in Oklahoma, 79 percent of the preference
Would Likely Be Larger     customers would likely see larger increases that exceed 1.5 cents per kWh.
                           For most of these customers, their residential end-users would see

                           11
                            Collectively, the three PMAs provided 5 percent or less of the total power consumption in 22 of the
                           29 states in our analysis. The average for the 29 states was 2 percent.



                           Page 6                                                             GAO/RCED-99-55 Federal Power
B-281758




monthly increases of about $22. Most of these customers paid less than 1.5
cents per kWh—less than half the 1995 national average market rate—and
purchased all of their power from Southwestern. Taken together,
Southwestern’s preference customers would likely experience higher rate
increases than Southeastern’s customers but lower increases than
Western’s.




Page 7                                          GAO/RCED-99-55 Federal Power
                                                         B-281758




Figure 2: Potential Changes in Preference Customers’ Rates and PMAs’ Share of Total Power Consumption in Each State
Served by Southwestern

                                                                                                                    73%



                                                                                                                                27%
                                         86%

                                                        14%                                                                        57%
                                                                                    KS               MO

                                                                                                                                             14%
                                                                                                                                   29%
                                                                                    OK                AR


                                                                                                                                               5%
                                                                                                                                                 16%
                                                                                     TX
                                                                                                      LA                            79%


                                                                                                                             80%
                                                                                                         33%
                                                                                                                                           20%

                                                                                             50%            17%


           Estimated increase in preference customers' rates (cents/kWh)                      PMAs' share of total state power consumption
                         Relatively small, 0.5 cent (or one-half cent) or less                       0 - 2.5%
                         Moderate, greater than 0.5 cent to 1.5 cents                                >2.5 - 5%
                         Relatively large, greater than 1.5 cents                                    >5% - 10%
                                                                                                     >10% - 20%
                                                                                                     >20% - 30%
                                                                                                     Areas not in Southwestern's service area

         Notes: PMA power as a share of the total power consumed in each state includes all power purchased from Southeastern, Southwestern, and/or
         Western but excludes power the PMAs sold to state-owned and federally owned preference customers.

         In 1995, some preference customers in Kansas, Missouri, and Texas purchased power from Southwestern, while others purchased power from
         Western. This figure shows potential rate increases in these states for customers purchasing power only from Southwestern.

         The thicker black line in the figure shows the boundary of Southwestern's service territory. Portions of Kansas are also within Western's service territory.

         Source: Developed by GAO from an analysis of data provided by the Energy Information Administration and Southeastern's, Southwestern's, and
         Western's 1995 annual reports.




                                                         Page 8                                                                        GAO/RCED-99-55 Federal Power
                           B-281758




PMAs Also Provided Small   As with Southeastern, the likely rate increases in states served by
Portions of Power to       Southwestern would usually affect a small portion of the power consumed
States Served by           in each state. For states in our analysis served by Southwestern, the three
                           PMAs provided small portions of the total power consumed—ranging from
Southwestern               about 0.6 percent to 4.1 percent.


                           We found that Western’s customers would likely see a variety of rate
Western Area Power         increases if market rates are charged. Also, the three PMAs provided larger
Administration             portions of power to some states served by Western than they did for
                           states served by Southeastern and Southwestern.


Western’s Preference       As shown in figure 3, preference customers who receive power from
Customers Would Likely     Western would likely see a variety of rate increases on rates that typically
See a Variety of Rate      ranged from 1.5 to 4.0 cents per kWh in 1995. In California, Colorado, and
                           Nebraska, for example, more than three-quarters of the preference
Increases                  customers would likely see relatively small increases of less than one-half
                           cent per kWh. In these states, residential end-users served by most
                           preference customers would see rate increases of less than $2.50 in their
                           monthly electricity bill. At least 25 percent of the preference customers in
                           several states served by Western, including Arizona, Montana, and New
                           Mexico, would likely experience average rate increases from greater than
                           one-half cent up to 1.5 cents per kWh. Finally, a large number of
                           preference customers in several states, including Iowa, Minnesota, and
                           South Dakota, would likely experience rate increases that exceed 1.5 cents
                           per kwh. For more than three-quarters of these preference customers,
                           their residential end-users would pay about $11 to $24 more per month for
                           electricity.




                           Page 9                                           GAO/RCED-99-55 Federal Power
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Figure 3: Potential Changes in Preference Customers’ Rates and PMAs’ Share of Total Power Consumption in Each State
Served by Western

                                                67%                                                    32%               79%
                                                                        39%          17%
                                                                                                             8%
                                       43%                                           44%                                        7%
                                                        33%                                      60%
                                                                                                                               14%

                              29%                                            MT
                                          29%                                                     ND                      31%         22%
                                                                                                                  MN
                                 33%
                                                                                                  SD
                    35%                                                         WY                                               46%
                                                                                                                    IA
                               33%
                                                       NV                                         NE                             45%
                                                                       UT
                      100%                                                           CO           KS
                                              CA
                                                                                                                         20%
                                                                                                                                     35%
                       79%
                                                                  AZ
                                  6%                                            NM
                                                                                                                               100%
                               15%
                                                                                            TX
                              87%                        44%
                                                                       64%
                                            13%
                                                                12%
                                                   44%                              9%
                                                                                                                         100%
                                                                                  27%


           Estimated increase in preference customers' rates (cents/kWh)                               PMAs' share of total state power consumption
                      Relatively small, 0.5 cent (or one-half cent) or less                                  0 - 2.5%
                      Moderate, greater than 0.5 cent to 1.5 cents                                           >2.5 - 5%
                         Relatively large, greater than 1.5 cents                                            >5% - 10%
                                                                                                             >10% - 20%
                                                                                                             >20% - 30%
                                                                                                             Areas not in Western's service area
    Notes: PMA power as a share of the total power consumed in each state includes all power purchased from Southeastern, Southwestern, and/or Western but
    excludes (1) power the PMAs sold to state-owned and federally owned preference customers and (2) any power purchased from Bonneville.

    In 1995, some preference customers in Kansas, Missouri, and Texas purchased power from Western, while others purchased power from Southwestern. This figure
    shows potential rate increases in these states for customers purchasing power only from Western.

    In 1995, Western sold power to one customer in Missouri. That customer's rates would likely see a relatively small increase if market rates are charged. In 1995,
    Western also sold power to one customer in Wisconsin, which represented less than 0.01 percent of the state's total power consumption. That customer's rates would
    likely see a moderate increase if market rates are charged.

    The thicker black line in the figure shows the boundary of Western's service territory. The portion of Kansas within Western's service territory is also included in
    Southwestern's service territory.

    The circles for 3 of the 15 states--Kansas, Nevada, and Texas--are colored entirely white because all preference customers in those states would likely see relatively
    small rate increases of 0.5 cent per kWh or less.

    Source: Developed by GAO from an analysis of data provided by the Energy Information Administration and Southeastern's, Southwestern's, and Western's 1995
    annual reports.



                                                            Page 10                                                                        GAO/RCED-99-55 Federal Power
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                       We found that the portions of PMA power consumed in some states served
PMAs Provided Larger   by Western were larger than those for states served by Southeastern and
Portions of Power to   Southwestern. As shown in figure 3, the share of total state power
Some States Served     consumption for states served by Western was small. It was as small as
                       about 0.6 percent for Texas. The share for three states, however, exceeded
by Western             10 percent—with the share in South Dakota being nearly 23.3 percent.


                       We discussed the facts in this report with DOE’s Power Marketing Liaison
Agency Comments        Office, which represents Southeastern, Southwestern, and Western.
                       Officials of that office, including its Assistant Administrator, stated that
                       their comments fall into three general areas.12 They stated that they
                       believe that our data sources are flawed, that the data we used do not
                       reflect today’s market situation, and that average rates are not a good
                       proxy for specific PMA power services. Specifically, DOE officials
                       commented that their primary concern with our report was their belief
                       that we relied on incomplete and/or inaccurate data. Our analyses used
                       data reported annually by the PMAs to the Secretary of Energy and by the
                       preference customers to the Energy Information Administration. These
                       data describe the operating and financial condition of the PMAs as well
                       preference customers’ electricity purchases in the wholesale market and
                       are the best data available. DOE officials also commented that using 1995
                       data does not reflect today’s market situation because PMAs’ rates have
                       recently declined. Comparable data for 1996 or later were not available at
                       the time of our analyses; however, we see no evidence that the PMAs’ rates
                       have fallen more than rates in the wholesale market. Industry experts state
                       that market rates for wholesale power have also declined since 1995 and
                       will fall farther. If market rates fall more than the PMAs’ rates, our
                       estimates of rate increases will prove to be overstated. Finally, DOE
                       officials commented that average rates are not a good proxy for specific
                       power services from PMAs. We acknowledge that average revenue per kWh
                       (total revenues/total electricity sales) is an imperfect indicator of
                       electricity rates because it combines the costs of several types of services;
                       however, we believe it is a strong, broad indicator of the relative power
                       production costs of the PMAs compared to those of investor-owned utilities
                       and publicly owned generators.




                       12
                        DOE officials stated that they had no new comments but reiterated some of their previous concerns
                       with our data sources, which they raised for our November 1998 report. See app. V of
                       GAO/RCED-99-15, pp. 94-105.



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              To estimate any potential rate changes if market rates are charged (after a
Scope and     divestiture of the PMAs or otherwise), we calculated how much, in cents
Methodology   per kWh, each preference customer13 paid, on average, for power
              purchased from (1) all sources, including the PMAs, and (2) sources other
              than the PMAs, including the wholesale market, in 1995.14 Then, we took the
              difference between these two, considering the latter to be the market rate.
              To calculate how much preference customers paid for the PMA power, we
              obtained data from Southeastern’s, Southwestern’s, and Western’s fiscal
              year 1995 annual reports. Then, to determine how much each preference
              customer paid for the power it purchased from other sources, we used the
              “sales for resale” databases compiled by DOE’s Energy Information
              Administration. In cases in which the Energy Information Administration’s
              data lacked the volumes of wholesale power the customers purchased
              from non-PMA sources, the amounts the customers paid for power, or both,
              we assumed the customer paid a rate equal to the average market rate paid
              by customers of the same type for wholesale power in the customer’s
              state. To estimate how much each preference customer’s rates would
              likely change if it paid market rates for PMA power, we assumed that the
              customer would pay a rate equal to the average rate it paid for wholesale
              power from sources other than the PMA(s) in 1995. We used this
              assumption because, for example, it is likely that in the period
              immediately after a divestiture, the new owners of the PMAs’ assets would
              charge the prevailing market rates for wholesale power in the area.
              Finally, we compared the average rate each preference customer paid for
              all of its power in 1995 with the rate the customer paid for the power it
              purchased from sources other than the PMA(s). The difference in these two
              rates represents our estimate in cents per kWh of each customer’s
              potential change in average rates if it paid market rates for the power it
              purchased from the PMA(s). After estimating how much preference
              customers’ rates would likely change, we analyzed the rate changes by
              state. To provide context for the rate changes, we estimated how each
              preference customer’s rate change would affect the rates paid by its
              residential end-users. We assumed that (1) the preference customer would
              pass the rate change on proportionally to its end-users and (2) that each

              13
                We estimated potential rate increases for the preference customers that the PMAs listed in their 1995
              annual reports. These customers buy power directly from the PMAs. We did not include utilities that
              indirectly buy PMA power through direct preference customers, such as generation and transmission
              cooperatives and municipal joint action agencies.
              14
               For this report, we based our work on an existing database developed for an earlier GAO report,
              GAO/RCED-98-43, which compiled information on 1995 purchases. Our analyses for both reports used
              data reported annually by the PMAs to the Secretary of Energy and by the preference customers to the
              Energy Information Administration. As of November 1998, when we completed our analyses,
              comparable data for 1996 or later were not available, according to DOE’s Energy Information
              Administration.



              Page 12                                                            GAO/RCED-99-55 Federal Power
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state’s residential end-users would consume a quantity of electricity equal
to the average residential consumption for that state in 1995, according to
the Energy Information Administration.15

To calculate the share of total state power consumption provided by the
PMAs, we added the power provided by any of the three PMAs to those
preference customers included in our analysis and divided that sum by the
total state power consumption in 1995, as reported by the Energy
Information Administration.16

It is important to note that our analysis included only those customers that
purchased power directly from the PMAs. It is also important to note that
because our estimates of potential rate increases are based on market
rates in 1995, our methodology is conservative. If prices for wholesale
power decline in the future, as many industry analysts and DOE officials
believe they will, customers’ rate increases generally will be smaller than
our estimates. We conducted our review from November 1998 through
January 1999 in accordance with generally accepted government auditing
standards.


As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from the
date of this letter. At that time, we will send copies to appropriate House
and Senate committees and subcommittees; interested Members of the
Congress; the Administrators of Southeastern, Southwestern, and Western;
and other interested parties. We will also make copies available to others
upon request.




15
  A more detailed discussion of our scope and methodology is contained in GAO/RCED-99-15.
16
  See Electric Sales and Revenue 1995 (DOE/EIA-0540 (95), Dec. 1996).



Page 13                                                            GAO/RCED-99-55 Federal Power
B-281758




If you have any questions or need additional information, please contact
me on (202) 512-3841. Major contributors to this report were Peg Reese,
Charles Hessler, Lynne Goldfarb, and Daren Sweeney.




Susan D. Kladiva
Associate Director, Energy,
  Resources, and Science Issues




Page 14                                         GAO/RCED-99-55 Federal Power
Page 15   GAO/RCED-99-55 Federal Power
Related GAO Products


              Federal Power: Regional Effects of Changes in PMAs’ Rates (GAO/RCED-99-15,
              Nov. 16, 1998).

              Federal Power: Options for Selected Power Marketing Administrations’
              Role in a Changing Electricity Industry (GAO/RCED-98-43, Mar. 6, 1998).

              Federal Electricity Activities: The Federal Government’s Net Cost and
              Potential for Future Losses (GAO/AIMD-97-110 and 110A, Sept. 19, 1997).

              Federal Power: Issues Related to the Divestiture of Federal Hydropower
              Resources (GAO/RCED-97-48, Mar. 31, 1997).

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

              Federal Electric Power: Operating and Financial Status of DOE’s Power
              Marketing Administrations (GAO/RCED/AIMD-96-9FS, Oct. 13, 1995).




(141275)      Page 16                                           GAO/RCED-99-55 Federal Power
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